Letter to
Shareholders
August 16, 1994
Dear Shareholder:
It has been a difficult six months for utility stocks, and for the mutual
funds that invest in them. The main reason? The Federal Reserve moved
decisively to raise short-term interest rates and U.S. electric utility
investors reacted by selling in anticipation of falling returns for this
sector. We're pleased to report, however, that the Prudential Utility Fund has
produced above-average performance in this difficult environment.
The Market and The Fund
During the six months ended June 30, 1994, the S&P Utility Index declined
8.4%, far more than the broad stock market which is down 3.4% through June 30.
The steepest declines were seen in March and May, but electric utility stock
prices have fallen steadily all year. Your Prudential Utility Fund has held up
considerably well during this turmoil.
What Happened To U.S. Electric Utility Stocks?
First of all, interest rates have risen about 130 basis points so far this
year. U.S. electric utility stocks, with their typically high dividend payout,
are often viewed as substitutes for bonds. As such, they closely track the
30-year Treasury bond. Rising yields on long-term Treasuries -- from a low of
5.8% in mid-October of last year to 7.6% on June 30 -- deeply hurt utility
stocks. That's only part of the story, though. At the same time, the U.S.
electric utility industry, like most mature industries, has begun to face some
painful long-term structural changes. There are three major trends now
underway:
- - Deregulation is causing increased competition among electric utilities. The
National Energy Power Act of 1992 spawned deregulation in the electric
utility industry and some utilities that used to enjoy a monopoly now face
increased competition. While deregulation will eventually encourage more
efficient and lower cost power generation, it may also lower returns for the
entire industry.
- - Regulators are lowering the amount of profit that
utilities can reap. In the heady 1980s, an average utility company's return
on equity was 15%. Today, it is closer to 12%.
- - Historical dividend growth rates seem unlikely to continue. Utilities
currently pay out slightly more than 80% of their earnings as dividends.
Increased competition will likely reduce earnings growth rates and lead to
minimal dividend growth rates given today's high dividend payout rates.
-3-
<PAGE>
(CHART)
Fund Strategy
Focus on Natural Gas Stocks. The prospects for natural gas stocks remain
positive, as natural gas companies benefit from higher gas prices and
increasing demand for gas as a cleaner-burning, low cost fuel alternative.
We currently hold approximately 30% of the Fund in natural gas pipeline and
distribution stocks, including British Gas and U.S. interstate pipeline
companies Sonat and Panhandle Eastern.
Emphasis on Communications Issues. As the big long-distance telephone service
providers move into the local telephone arena, we see opportunities for
investors to profit. In addition, many telephone companies are taking
advantage of growth in cellular communications and technology.
Telecommunications issues currently comprise approximately 25% of Fund assets,
including Sprint, AT&T, and NYNEX. In addition to being on the forefront of
new technology, these firms are entering into ventures with foreign telephone
companies, which we feel will expand their markets and benefit their
operations.
Foreign Stocks Continue to Play a Significant Role. Currently, about one-fifth
of the Fund is invested in non-U.S. issues, concentrated primarily in electric
utilities. These include Iberdrola (Spain), Companhia Energetica de Minas
(Brazil) and Evn Energ Versorg (Austria), and telecommunications firms, such
as STET (Italy).
We believe some non-U.S. utilities have greater long-term growth potential
than comparable U.S. companies for several reasons. Foreign utilities have not
historically been subject to the difficult regulatory and competitive
environment that U.S. firms now face. Growing demand for electric, telephone
and natural gas services abroad helps support our position.
Additionally, privatization of non-U.S. utilities overseas has created some
attractively priced opportunities. We have bought several non-U.S. utilities we
feel are values, like: Telefonos de Mexico, Telefonica de Espana and Telebras
(Brazil); and electric utilities Oester Elektrizita (Austria) and National
Power (U.K.).
The Next Few Years: A Highly Segmented Utility Market
With long-term interest rates near 10-year lows and inflation at fairly
modest levels, the investment environment in the mid-1990s will likely be very
different from that of the mid-1980s. Stock market returns over the next few
years are expected to be lower than in many recent years. (Remember that in a
low inflation environment, nominal returns do not need to be as high in order
to provide attractive real returns.)
-4-
<PAGE>
Traditional Utilities. The same holds true for utility stocks, which face a
considerably harsher environment today than ten years ago. Because of this, we
have to agree with many analysts who have sounded the warning bell on largely
non-diversified electric utilities, the backbone of the U.S. utility market.
These stocks have suffered over the past six months. We may buy some of
them again simply because their prices are so low, but we don't see them as
attractive investments over the longer term. Indeed, we expect these stocks to
provide single-digit returns at best over the next few years.
New Directions. The good news is we are more optimistic about other areas of
the utility market. Natural gas stocks continue to benefit from increased
demand for this "cleaner-burning" fuel. Telecommunications stocks, despite
vulnerability earlier this year when the high profile merger talks between
Bell Atlantic and TCI collapsed, still present the most direct way to
capitalize on the fast-growing cellular communications industry.
Foreign stocks may present the most exciting opportunities of all. World
power consumption is expected to increase exponentially in coming years, with
most of that demand coming from outside of North America. Less government
regulation and fewer competitors in these foreign markets only increase their
attractiveness.
In short, the world will always use the electric, gas, and telephone
services that utility companies provide. Indeed, many parts of the world find
themselves needing these services at a significantly faster pace than just a
few years ago. The Prudential Utility Fund will continue seeking investment
opportunities in this ever-changing industry. We are glad you are part of this
process with us.
Sincerely,
Lawrence C. McQuade
President
Warren E. Spitz
Portfolio Manager
-5-
<PAGE>
(PHOTO)
David Kiefer
Management Update
New Co-Portfolio Manager
We are pleased to announce that David A. Kiefer has joined Warren E. Spitz
as co-portfolio manager of the Prudential Utility Fund.
For the past two years David has been Warren's chief assistant with the
$4.3 billion portfolio, and he has overseen selection of most of the Fund's
growing portfolio of global utility stocks. In this role, David has travelled
extensively, investigating companies worldwide. In recognition of his solid
results, Prudential named David as co-portfolio manager earlier this year.
David graduated from Princeton University with a B.S. in civil engineering,
and he completed an M.B.A. at Harvard University. He also has been awarded the
certified financial analyst designation. David joined The Prudential in 1986
and, after working in the real estate division, he joined the company's
PruPower division, which specializes in private placement loans to utilities
and power companies.
* * * * *
Expanded Investment Objective
As the result of a proxy vote, we are also pleased to inform you that
effective August 1, 1994, the definition of utility companies used in the
Fund's objective has been expanded to include gas pipeline, telecommunications,
water and cable companies in addition to electric, gas and telephone companies.
-6-
<PAGE>
PRUDENTIAL UTILITY FUND Portfolio of Investments
June 30, 1994 (Unaudited)
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
LONG-TERM INVESTMENTS--96.7%
Common Stocks--92.3%
Communications--26.7%
1,500,000 Airtouch Communications,
Inc.*.................. $ 35,437,500
621,800 Ameritech Corp........... 23,783,850
582,200 AT&T Corp................ 31,657,125
1,050,000 BCE, Inc................. 33,993,750
755,200 BellSouth Corp........... 46,633,600
8,200,000 British
Telecommunications PLC
(ADR) (United
Kingdom)............... 46,590,186
1,722,400 GTE Corp................. 54,255,600
1,175,000 MTC Electronic
Technologies, Ltd.*.... 5,140,625
2,403,300 NYNEX Corp............... 91,024,987
1,500,000 Pacific Telesis Group.... 46,312,500
330,000 Rochester Telephone
Corp................... 7,466,250
17,700,000 SIP (Italy).............. 44,340,376
2,719,200 Southern New England
Telecommunications
Corp................... 82,935,600
3,769,300 Sprint Corp.............. 131,454,337
19,500,000 STET (Italy)............. 60,175,752
1,241,700 Tele Danmark (ADR)
(Denmark)*............. 30,576,863
1,346,000 Telebras (ADR)
(Brazil)............... 52,494,000
2,550,000 Telefonica de Espana
(ADR) (Spain).......... 102,637,500
2,508,600 Telefonos de Mexico (ADR)
(Mexico)............... 140,168,025
1,713,700 U.S. West, Inc........... 71,761,188
--------------
1,138,839,614
--------------
Electric Power--35.9%
1,008,927 AES Corp................. 18,917,381
335,500 Boston Edison Co......... 8,806,875
1,000,000 California Energy,
Inc.*.................. 16,500,000
681,800 Central Hudson Gas &
Electric Co............ 17,897,250
1,033,400 Central Louisiana
Electric Co............ 24,284,900
1,241,600 Central Maine Power
Co..................... $ 14,278,400
5,200,000 China Light & Power Co.,
Ltd. (Hong Kong)....... 26,572,827
910,200 Cincinnati Gas & Electric
Co..................... 19,796,850
3,700,000 CMS Energy Corp.......... 77,237,500
2,804,600 Commonwealth Edison
Co..................... 63,804,650
1,960,160 Companhia Energetica de
Minas (ADR)
(Brazil)*.............. 36,507,980
17,779,000 Consolidated Electric
Power Co.*............. 28,521,090
63,200 Destec Energy, Inc.*..... 632,000
2,000,600 Detroit Edison Co........ 49,514,850
1,396,900 DPL, Inc................. 27,588,775
613,700 DQE, Inc................. 18,180,863
896,300 Eastern Utilities
Assoc.................. 20,726,937
1,710,200 El Paso Electric
Co.*/**................ 3,420,400
1,247,700 Empresa Nacional de
Electricidad (ADR)
(Spain)................ 55,990,537
4,137,602 Entergy Corp............. 102,405,649
300,000 Enersis (ADR)............ 6,337,500
381,000 Evn Energ Versorg
(Austria).............. 46,692,097
2,373,800 General Public Utilities
Corp................... 62,312,250
9,831,000 Iberdrola (Spain)........ 69,165,824
3,351,700 Illinova Corp............ 62,844,375
887,600 Kansas City Power & Light
Co..................... 17,197,250
89,600 Kenetech Corp.*.......... 1,635,200
2,425,000 Long Island Lighting
Co..................... 43,043,750
6,000,000 National Power PLC
(United Kingdom)*...... 40,103,610
1,724,100 New York State Electric &
Gas Corp............... 40,947,375
1,458,000 Niagara Mohawk Power
Corp................... 22,052,250
1,018,200 NIPSCO Industries,
Inc.................... 30,036,900
2,173,900 Northeast Utilities
Co..................... 47,282,325
770,000 Oester Elektrizita
(Austria).............. 44,110,449
</TABLE>
-7- See Notes to Financial Statements.
<PAGE>
<PAGE>
PRUDENTIAL UTILITY FUND
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
Electric Power (cont'd)
2,711,900 Peco Energy Co........... $ 71,526,362
2,303,400 Pinnacle West Capital
Corp................... 37,718,175
1,253,100 PowerGen PLC
(United Kingdom)....... 9,496,255
2,612,400 PSI Resources, Inc....... 55,186,950
274,100 Public Service Co. of
Colorado............... 7,160,863
2,057,000 Public Service Co. of
New Mexico*............ 23,655,500
1,089,800 Public Service Enterprise
Group.................. 28,334,800
921,200 Rochester Gas & Electric
Corp................... 20,036,100
1,098,100 Sithe Energies, Inc.*.... 12,765,413
3,845,800 Southern Co.............. 72,108,750
7,841,200 Tucson Electric Power
Co.*................... 23,523,600
115,000 United Illuminating
Co..................... 3,780,625
--------------
1,530,640,262
--------------
Natural Gas--29.7%
283,650 Bay State Gas Co......... 6,807,600
3,105,600 British Gas PLC (ADR)
(United Kingdom)....... 128,882,400
450,000 Burlington Resources,
Inc.................... 18,618,750
3,826,275 Coastal Corp............. 103,309,425
2,500,000 Columbia Gas System,
Inc.*/**............... 67,500,000
117,600 Eastern Enterprises,
Inc.................... 2,690,100
1,714,000 El Paso Natural Gas
Co..................... 55,276,500
500,000 Energen Corp............. 10,437,500
903,300 Enron Corp............... 29,583,075
3,202,900 ENSERCH Corp............. 46,041,688
1,500,000 Equitable Resources,
Inc.................... 51,562,500
690,300 KN Energy, Inc........... 15,359,175
351,800 MCN Corp................. 14,072,000
810,600 NICOR, Inc............... 21,379,575
3,148,000 Noram Energy Corp........ 18,888,000
700,000 Oryx Energy Co........... 10,500,000
3,544,300 Pacific Enterprises...... 70,442,963
4,822,800 Panhandle Eastern
Corp................... 95,250,300
117,600 Providence Energy
Corp................... 1,911,000
1,880,400 Questar Corp.,........... $ 60,877,950
3,593,300 Sonat, Inc............... 110,493,975
990,000 Sonat Offshore Drilling,
Inc.................... 19,305,000
205,400 Southwest Gas Corp....... 3,697,200
802,500 Talisman Energy, Inc.*... 15,814,950
521,800 Tejas Power Corp.*....... 5,348,450
7,700,000 TransCanada Pipelines,
Ltd. (Canada).......... 91,186,042
1,916,300 Transco Energy Co........ 31,139,875
2,200,000 Westcoast Energy, Inc.... 32,450,000
4,396,450 Williams Cos., Inc....... 125,848,381
161,150 Yankee Energy System,
Inc.................... 4,028,750
--------------
1,268,703,124
--------------
Real Estate
52,500 Charles E. Smith
Residential Realty,
Inc.................... 1,345,312
--------------
Total common stocks
(cost
$3,647,420,582)........ 3,939,528,312
--------------
Preferred Stocks--0.2%
Electric Power
El Paso Electric Co.**
7,000 $8.24.................... 486,500
10,300 $8.44.................... 715,850
5,700 $8.95.................... 396,150
440,000 Kenetech Corp.,
(Convertible), $2.18... 8,910,000
--------------
Total preferred stocks
(cost $10,036,421)..... 10,508,500
--------------
<CAPTION>
Principal
Amount
(000) Bonds--4.2%
- ----------
Communications
MTC Electronic Technologies, Ltd.,
$ 2,250 8.00%, 7/31/03........... 1,518,750
--------------
</TABLE>
-8- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL UTILITY FUND
<TABLE>
<CAPTION>
Principal Value
Amount Description (Note 1)
(000)
<C> <S> <C>
Electric Power--1.6%
Arkansas Power & Light
Co.,
$ 5,000 10.00%, 2/1/20........... $ 5,275,500
Cincinnati Gas & Electric
Co.,
6,500 9.70%, 6/15/19........... 6,313,385
10,000 10.20%, 12/1/20.......... 10,905,500
Cleveland Electric
Illumination Co.,
10,000 9.375%, 3/1/17........... 9,039,300
Commonwealth Edison Co.,
10,000 9.625%, 7/1/19........... 10,052,600
Niagara Mohawk Power
Corp.,
10,000 9.50%, 3/1/21............ 10,116,900
Ohio Edison Co.,
10,000 9.75%, 7/15/19........... 9,879,500
Texas Utilities Co.,
5,000 9.75%, 5/1/21............ 5,361,900
--------------
66,944,585
--------------
Natural Gas--2.6%
Arkla, Inc.,
20,000 10.00%, 11/15/19......... 21,000,000
Burlington Resources,
Inc.,
10,000 8.50%, 10/1/01........... 10,360,100
15,000 9.125%, 10/1/21.......... 15,939,450
Coastal Corp.,
5,000 8.125%, 9/15/02.......... 4,863,550
15,000 9.625%, 5/15/12.......... 15,926,400
Columbia Gas System,
Inc.,*/**
2,500 10.25%, 5/1/99........... 3,025,000
1,031 10.25%, 8/1/11........... 1,268,130
1,000 10.50%, 6/1/12........... 1,220,000
8,180 10.15%, 11/1/13.......... 9,938,700
Oryx Energy Co.,
2,000 9.50%, 11/1/99........... 1,975,240
1,000 7.50%, 5/15/14........... 856,250
Transcontinental Gas
PipeLine,
$ 11,000 8.875%, 9/15/02.......... $ 10,780,000
Williams Cos., Inc.,
15,000 8.875%, 9/15/12.......... 15,265,350
--------------
112,418,170
--------------
Total bonds
(cost $181,264,645).... 180,881,505
--------------
Total long-term
investments
(cost
$3,838,721,648)........ 4,130,918,317
--------------
SHORT-TERM INVESTMENTS--3.0%
Commercial Paper--0.4%
First Union National Bank
of North Carolina,
16,173 4.438%, 7/1/94
(cost $16,173,000)....... 16,173,000
--------------
Repurchase Agreement--2.6%
Joint Repurchase Agreement Account,
110,754 4.257%, 7/1/94
(cost $110,754,000; Note
5)..................... 110,754,000
--------------
Total short-term
investments
(cost $126,927,000)...... 126,927,000
--------------
Total Investments--99.7%
(cost $3,965,648,648;
Note 4)................ 4,257,845,317
Other assets in excess of
liabilities--0.3%...... 11,387,763
--------------
Net Assets--100%......... $4,269,233,080
--------------
--------------
</TABLE>
- ---------------
*Non-income producing securities.
**Issuer in bankruptcy.
ADR--American Depository Receipt.
-9- See Notes to Financial Statements.
<PAGE>
<PAGE>
PRUDENTIAL UTILITY FUND
Statement of Assets and Liabilities
(Unaudited)
<TABLE>
<CAPTION>
Assets June 30, 1994
--------------
<S> <C>
Investments, at value (cost $3,965,648,648)................. $4,257,845,317
Foreign currency, at value (cost 1,015,856)................. 1,011,634
Cash........................................................ 21,872
Dividends and interest receivable........................... 26,035,876
Receivable for investments sold............................. 4,037,865
Receivable for Fund shares sold............................. 2,806,121
Deferred expenses and other assets.......................... 136,855
--------------
Total assets............................................ 4,291,895,540
--------------
Liabilities
Payable for Fund shares reacquired.......................... 14,512,310
Distribution fee payable.................................... 3,451,671
Management fee payable...................................... 1,457,695
Payable for investments purchased........................... 1,260,000
Withholding taxes payable................................... 1,129,864
Accrued expenses and other liabilities...................... 850,920
--------------
Total liabilities....................................... 22,662,460
--------------
Net Assets.................................................. $4,269,233,080
--------------
--------------
Net assets were comprised of:
Common stock, at par...................................... $ 4,869,754
Paid-in capital in excess of par.......................... 3,531,999,219
--------------
3,536,868,973
Undistributed net investment income....................... 392,152,957
Accumulated net realized gain on investments.............. 47,994,519
Net unrealized appreciation on investments and foreign
currencies............................................. 292,216,631
--------------
Net assets, June 30, 1994................................. $4,269,233,080
--------------
--------------
Class A:
Net asset value and redemption price per share
($281,046,050 / 31,986,726 shares of common stock
issued and outstanding)................................. $8.79
Maximum sales charge (5.25% of offering price)............ .49
--------------
Maximum offering price to public.......................... $9.28
--------------
--------------
Class B:
Net asset value, offering price and redemption price
per share ($3,988,187,030 / 454,988,662 shares of
common stock issued and outstanding).................... $8.77
--------------
--------------
</TABLE>
See Notes to Financial Statements.
-10-
<PAGE>
PRUDENTIAL UTILITY FUND
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended
June 30,
Net Investment Income 1994
-------------
<S> <C>
Income
Dividends (net of foreign
withholding taxes of
$2,427,170)..................... $ 86,574,631
Interest.......................... 11,773,203
-------------
Total income.................... 98,347,834
-------------
Expenses
Distribution fee--Class A......... 384,869
Distribution fee--Class B......... 21,816,524
Management fee.................... 9,264,331
Transfer agent's fees and
expenses.......................... 3,472,000
Custodian's fees and expenses..... 405,000
Reports to shareholders........... 289,000
Registration fees................. 131,000
Insurance......................... 68,000
Audit fee......................... 31,000
Legal fees........................ 26,000
Directors' fees................... 23,000
Miscellaneous..................... 23,477
-------------
Total expenses.................. 35,934,201
-------------
Net investment income............... 62,413,633
-------------
Realized and Unrealized Gain (Loss)
on Investments and Foreign Currency
Transactions
Net realized gain on:
Security transactions............. 47,034,189
Foreign currency transactions..... 79,998
-------------
47,114,187
-------------
Net change in unrealized
appreciation/depreciation on:
Securities........................ (489,983,314)
Foreign currencies................ (294,730)
-------------
(490,278,044)
-------------
Net loss on investments and foreign
currencies........................ (443,163,857)
-------------
Net Decrease in Net Assets
Resulting from Operations........... $(380,750,224)
-------------
-------------
</TABLE>
PRUDENTIAL UTILITY FUND
Statement of Changes in Net Assets
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
Increase (Decrease) June 30, December 31,
in Net Assets 1994 1993
-------------- --------------
<S> <C> <C>
Operations
Net investment
income.............. $ 62,413,633 $ 110,658,076
Net realized gain on
investment and
foreign currency
transactions...... 47,114,187 215,901,385
Net change in
unrealized
appreciation/
depreciation of
investments and
foreign
currencies........ (490,278,044) 257,763,558
-------------- --------------
Net increase
(decrease) in net
assets resulting
from operations... (380,750,224) 584,323,019
-------------- --------------
Net equalization
credits
(debits).......... (30,590,482) 95,670,312
-------------- --------------
Dividends and distributions (Note 1)
Dividends from net
investment income
Class A........... (4,852,644) (8,808,902)
Class B........... (50,624,166) (99,427,992)
-------------- --------------
(55,476,810) (108,236,894)
-------------- --------------
Distributions from
net
realized gains
Class A........... (1,472,294) (13,264,520)
Class B........... (20,951,434) (189,046,028)
-------------- --------------
(22,423,728) (202,310,548)
-------------- --------------
Fund share transactions (Note 5)
Net proceeds from
shares
subscribed........ 298,369,619 1,512,896,194
Net asset value of
shares issued to
shareholders in
reinvestment of
dividends and
distributions..... 64,732,328 260,462,818
Cost of shares
reacquired.......... (696,867,923) (689,440,495)
-------------- --------------
Net increase
(decrease) in net
assets from Fund
share
transactions...... (333,765,976) 1,083,918,517
-------------- --------------
Total increase
(decrease).......... (823,007,220) 1,453,364,406
Net Assets
Beginning of period... 5,092,240,300 3,638,875,894
-------------- --------------
End of period......... $4,269,233,080 $5,092,240,300
-------------- --------------
-------------- --------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
-11-
<PAGE>
<PAGE>
PRUDENTIAL UTILITY FUND
Notes to Financial Statements
(Unaudited)
Prudential-Bache Utility Fund, Inc., doing business as Prudential Utility
Fund (the ``Fund''), is registered under the Investment Company Act of 1940 as
a diversified, open-end management investment company. Its investment objective
is to seek high current income and moderate capital appreciation through
investment in equity and debt securities of utility companies, principally
electric, gas and telephone companies. The ability of issuers of certain debt
securities held by the Fund to meet their obligations may be affected by
economic developments in a specific industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting poli-
cies followed by the Fund in the preparation of
its financial statements.
Securities Valuation: Investments traded on a national securities exchange are
valued at the last reported sales price on the primary exchange on which they
are traded. Securities traded in the over-the-counter market (including
securities listed on exchanges whose primary market is believed to be
over-the-counter) and listed securities for which no sale was reported on that
date are valued at the mean between the last reported bid and asked prices.
Short-term securities which mature in more than 60 days are valued based on
current market quotations. Short-term securities which mature in 60 days or
less are valued at amortized cost.
In connection with repurchase agreements with U.S. financial institutions,
it is the Fund's policy that its custodian or designated subcustodians, as the
case may be under triparty repurchase agreements, takes possession of the
underlying collateral securities, the value of which exceeds the principal
amount of the repurchase transaction, including accrued interest. If the seller
defaults and the value of the collateral declines or if bankruptcy proceedings
are commenced with respect to the seller of the security, realization of the
collateral by the Fund may be delayed or limited.
All securities are valued as of 4:15 P.M., New York time.
Foreign Currency Translation: The books and records of the Fund are maintained
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on
the following basis:
(i) market value of investment securities, other assets and liabilities--at
the closing daily rate of exchange;
(ii) purchases and sales of investment securities, income and expenses--at
the rate of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange
rates and market values at the close of the period, the Fund does not isolate
that portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of securities held at the end of the period. Similarly, the Fund does not
isolate the effect of changes in foreign exchange rates from the fluctuations
arising from changes in the market prices of portfolio securities sold during
the period.
Net realized gains on foreign currency transactions of $79,998 represents net
foreign exchange gains from sales and maturities of short-term securities,
disposition of foreign currency, gains or losses realized between the trade and
settlement dates of security transactions, and the difference between amounts of
dividends, interest and foreign withholding taxes recorded on the Fund's books
and the US dollar equivalent amounts actually received or paid. Net currency
gains and losses from valuing foreign currency denominated assets, except
portfolio securities, and liabilities at period end exchange rates are reflected
as a component of unrealized appreciation on foreign currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin as a result of,
among other factors, the possibility of political and economic instability and
the level of governmental supervision and regulation of foreign securities
markets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
and currencies are calculated on the identified cost basis. Dividend income is
recorded on the ex-dividend date; interest income is recorded on the accrual
basis. The Fund amortizes discounts on purchases of portfolio securities as
adjustments to interest income.
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.
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 loss carryforwards. Dividends and distributions are recorded
on the ex-dividend date.
-12-
<PAGE>
Income distributions 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 shares
of common stock, equivalent on a per share basis to the amount of undistributed
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 its shareholders. Therefore, no
federal income tax provision is required.
Withholding taxes on foreign dividends have been provided for in accordance
with the Fund's understanding of the applicable country's tax rules and rates.
Reclassification of Capital Accounts: The Fund accounts for and reports
distributions to shareholders in accordance with Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies. The
effect of applying this statement was to increase undistributed net investment
income by $79,998 and decrease accumulated net realized gain on investments by
$79,998 for realized foreign currency gains incurred during the period. Net
investment income, net realized gains and net assets were not affected by this
change.
Note 2. Agreements The Fund has a management
agreement with Prudential
Mutual Fund Management, Inc. (``PMF''). Pursuant to this agreement, PMF has
responsibility for all investment advisory services and supervises the
subadviser's performance of such services. Pursuant to a subadvisory agreement
between PMF and 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 cost of 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 .60% of the Fund's average daily net assets up to $250 million,
.50% of the next $500 million, .45% of the next $750 million, .40% of the next
$500 million, .35% of the next $2 billion, .325% of the next $2 billion and
.30% of the average daily net assets of the Fund in excess of $6 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 Prudential Securities Incorporated (``PSI''), which
acts as distributor of the Class B shares of the Fund (collectively, the
``Distributors''). To reimburse the Distributors for their expenses incurred in
distributing and servicing the Fund's Class A and B shares, the Fund, pursuant
to plans of distribution, pays the Distributors a reimbursement, accrued daily
and payable monthly.
Pursuant to the Class A Plan, the Fund reimburses PMFD for its expenses with
respect to Class A shares at an annual rate of up to .30 of 1% of the average
daily net assets of the Class A shares. Such expenses under the Class A Plan
were .25 of 1% of the average daily net assets of the Class A shares for the
six months ended June 30, 1994. PMFD pays various broker-dealers including PSI
and Pruco Securities Corporation (``Prusec''), affiliated broker-dealers, for
account servicing fees and other expenses incurred by such broker-dealers.
Pursuant to the Class B Plan, the Fund reimburses PSI for its distribution
related expenses with respect to Class B shares at an annual rate of up to 1%
of the average daily net assets of the Class B shares.
The Class B distribution expenses include commission credits for payments of
commissions and account servicing fees to financial advisers and an allocation
for overhead and other distribution related expenses, interest and/or carrying
charges, the cost of printing and mailing prospectuses to potential investors
and of advertising incurred in connection with the distribution of shares.
The Distributors recover the distribution expenses and service fees incurred
through the receipt of reimbursement payments from the Fund under the plans and
the receipt of initial sales charges (Class A only) and contingent deferred
sales charges (Class B only) from shareholders.
PMFD has advised the Fund that it has received approximately $895,000 in
front-end sales charges resulting from sales of Class A shares during the six
months ended June 30, 1994. From these fees, PMFD paid such sales charges to
dealers (PSI and Prusec) which in turn paid commissions to salespersons and
incurred other distribution costs.
With respect to the Class B Plan, at any given time, the amount of expenses
incurred by PSI in distributing the Fund's shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total reimbursement
-13-
<PAGE>
<PAGE>
made by the Fund pursuant to the Class B Plan. PSI advised the Fund that for
the six months ended June 30, 1994, it received approximately $4,010,000 in
contingent deferred sales charges imposed upon redemptions by certain
shareholders. PSI, as distributor, has also advised the Fund that at June 30,
1994, the amount of distribution expenses incurred by PSI and not yet reimbursed
by the Fund or recovered through contingent deferred sales charges approximated
$31,150,000. This amount may be recovered through future payments under the
Class B Plan or contingent deferred sales charges.
In the event of termination or noncontinuation of the Class B Plan, the Fund
would not be contractually obligated to pay PSI, as distributor, for any
expenses not previously reimbursed under the Class B Plan or recovered through
contingent deferred sales charges.
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 six months ended June 30, 1994, the Fund incurred
fees of approximately $2,765,000 for the services of PMFS. As of June 30, 1994,
approximately $462,000 of such fees were due to PMFS. Transfer agent fees and
expenses in the Statement of Operations also include certain out-of-pocket
expenses paid to non-affiliates.
For the six months ended June 30, 1994, PSI earned approximately $211,300 in
brokerage commissions from portfolio transactions executed on behalf of the
Fund.
Note 4. Portfolio Purchases and sales of invest-
Securities ment securities, other than
short-term investments, for the six months ended
June 30, 1994, were $500,443,049 and $419,298,504, respectively.
The federal income tax basis of the Fund's investments at June 30, 1994 was
$3,965,648,648 and, accordingly, net unrealized appreciation for federal income
tax purposes was $291,162,534 (gross unrealized appreciation--$480,340,953;
gross unrealized depreciation--$189,178,419).
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 June 30, 1994, the Fund had a 11.6% undivided interest in the
repurchase agreements in the joint account. The undivided interest for the Fund
represented $110,754,000 in principal amount. As of such date, each repurchase
agreement in the joint account and the collateral therefor was as follows:
Goldman, Sachs & Co., 4.30%, in the principal amount of $300,000,000,
repurchase price $300,035,833, due 7/1/94. The value of the collateral
including accrued interest is $306,000,136.
Merrill Lynch, Pierce, Fenner & Smith, Inc., 4.15%, in the principal amount
of $232,000,000, repurchase price $232,026,744, due 7/1/94. The value of the
collateral including accrued interest is $236,645,037.
Nomura Securities International, 4.25%, in the prin-
cipal amount of $275,000,000, repurchase price $275,032,465, due 7/1/94. The
value of the collateral including accrued interest is $280,500,174.
Smith Barney, Inc., 4.35%, in the principal amount of $150,000,000,
repurchase price $150,018,125, due 7/1/94. The value of the collateral
including accrued interest is $153,000,285.
Note 6. Capital The Fund offers both Class A
and Class B shares. Class A
shares are sold with a front-end sales charge of up to 5.25%. 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. Both classes of shares
have equal rights as to earnings, assets and voting privileges except that each
class bears different distribution expenses and has exclusive voting rights
with respect to its distribution plan.
There are 2 billion shares of $.01 par value per share common stock
authorized. Transactions in shares of common stock for the six months ended
June 30, 1994 and the fiscal year ended December 31, 1993 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------ ---------- --------------
<S> <C> <C>
Six months ended June 30,
1994:
Shares sold................... 5,925,440 $ 55,681,691
Shares issued in reinvestment
of dividends and
distributions............... 636,103 5,840,514
Shares reacquired............. (9,219,950) (86,780,642)
---------- --------------
Net decrease in shares
outstanding................. (2,658,407) $ (25,258,437)
---------- --------------
---------- --------------
</TABLE>
-14-
<PAGE>
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------ ---------- --------------
<S> <C> <C>
Year ended December 31, 1993:
Shares sold................... 14,181,284 $ 187,214,286
Shares issued in reinvestment
of dividends and
distributions............... 1,885,228 20,510,338
Shares issued as a result of 2
for 1 stock split........... 14,410,831 --
Shares reacquired............. (7,054,589) (86,988,577)
---------- --------------
Net increase in shares
outstanding................. 23,422,754 $ 120,736,047
---------- --------------
---------- --------------
</TABLE>
<TABLE>
<CAPTION>
Class B
- ----------------------------
<S> <C> <C>
Six months ended June 30,
1994:
Shares sold................. 28,428,600 $ 242,687,928
Shares issued in
reinvestment of dividends
and distributions......... 7,083,826 58,891,814
Shares reacquired........... (71,403,109) (610,087,281)
----------- --------------
Net decrease in shares
outstanding............... (35,890,682) $ (308,507,539)
----------- --------------
----------- --------------
Year ended December 31,
1993:
Shares sold................. 111,930,241 $1,325,681,912
Shares issued in
reinvestment of dividends
and distributions......... 24,343,642 239,952,480
Shares issued as a result of
2 for 1 stock split....... 216,583,756 --
Shares reacquired........... (53,929,305) (602,451,918)
----------- --------------
Net increase in shares
outstanding............... 298,928,334 $ 963,182,474
----------- --------------
----------- --------------
</TABLE>
Note 7. Contingency On October 12, 1993, a law-
suit was instituted against the
Fund, PMF, PIC, PSI and certain current and former directors of the Fund. The
suit was brought on behalf of the Fund and purportedly on behalf of a class of
shareholders who purchased their shares prior to 1985. The plaintiff sought
damages on behalf of the Fund under Section 36(b) of the Investment Company Act
(the ``Act'') in an unspecified amount for alleged excessive management and
distribution fees paid to PMF and PSI. The complaint also challenges the
Alternative Purchase Plan (the ``Plan'') that was implemented in January 1990
pursuant to a shareholder vote and that provided for the creation of two
classes of Fund shares. The plaintiff, on behalf of the purported class, sought
damages and equitable relief under the Act and state common law against the
Fund, PMF, PSI and certain named directors of the Fund to change the
classification of the shares of the class and to compel a further vote on the
Plan. On August 5, 1994, the United States District Court for the Southern
District of New York dismissed all of the claims in the complaint except 1) the
claims under Section 36(b) of the Act for excessive fees and 2) the state law
claim for breach of fiduciary duty in connection with the adoption of the Plan.
Although the outcome of this litigation cannot be predicted at this time, the
defendants believe they have meritorious defenses to the claims remaining and
intend to defend this action vigorously. In any case, management does not
believe that the outcome of this action is likely to have a material adverse
effect on the Fund's financialposition and results of operations.
Note 8. Subsequent On July 19, 1994, a meeting
Event of the shareholders of the
Fund was held at which time
the shareholders approved among other things, a) amendments to the Fund's
Articles of Incorporation to permit a conversion feature for Class B shares to
Class A shares after seven years, b) amendments to the Class A and Class B
distribution plans, under which the distribution plans became compensation
rather than reimbursement plans, c) modifications to the Fund's investment
objective, d) elimination or amendment of certain investment restrictions, e)
amendment to various investment policies, f) amendment to the management
agreement to reduce the management fee, and g) a change in the Fund's name from
Prudential-Bache Utility Fund, Inc. to Prudential Utility Fund, Inc. These
amendments were effective August 1, 1994.
-15-
<PAGE>
PRUDENTIAL UTILITY FUND
Financial Highlights
(Unaudited)
<TABLE>
<CAPTION>
Class A
----------------------------------------------------- Class B
January 22, --------------------------------------------------------
Six Months Years Ended 1990(D)(D) Six Months
PER SHARE Ended December 31, Through Ended Years Ended December 31,
OPERATING June 30, ------------------------ December 31, June 30, ------------------------------------------
PERFORMANCE: 1994 1993 1992 1991 1990 1994 1993 1992 1991 1990 1989**
----------- ------ ------ ------ ------------ ----------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset
value,
beginning of
period....... $ 9.72 $ 8.97 $ 8.72 $ 7.63 $ 8.65* $ 9.69 $ 8.96 $ 8.71 $ 7.63 $ 9.17 $ 7.31
----------- ------ ------ ------ ------ ----------- ------ ------ ------ ------ ------
Income from
investment
operations:
Net investment
income....... .16 .33 .38 .39 .36 .12 .24 .31 .32 .31 .36
Net realized
and unrealized
gains (losses)
on investment
and foreign
currency
transactions... (.89) 1.12 .45 1.10 (.38)* (.88) 1.12 .46 1.10 (.91) 2.30
----------- ------ ------ ------ ------ ----------- ------ ------ ------ ------ ------
Total from
investment
operations... (.73) 1.45 .83 1.49 (.02)* (.76) 1.36 .77 1.42 (.60) 2.66
----------- ------ ------ ------ ------ ----------- ------ ------ ------ ------ ------
Less
distributions:
Dividends from
net
investment
income....... (.15) (.29) (.34) (.39) (.40) (.11) (.22) (.28) (.33) (.34) (.36)
Distributions
from net
realized
gains........ (.05) (.41) (.24) (.01) (.60) (.05) (.41) (.24) (.01) (.60) (.44)
----------- ------ ------ ------ ------ ----------- ------ ------ ------ ------ ------
Total
distributions. (.20) (.70) (.58) (.40) (1.00) (.16) (.63) (.52) (.34) (.94) (.80)
----------- ------ ------ ------ ------ ----------- ------ ------ ------ ------ ------
Net asset
value, end of
period....... $ 8.79 $ 9.72 $ 8.97 $ 8.72 $ 7.63 $ 8.77 $ 9.69 $ 8.96 $ 8.71 $ 7.63 $ 9.17
----------- ------ ------ ------ ------ ----------- ------ ------ ------ ------ ------
----------- ------ ------ ------ ------ ----------- ------ ------ ------ ------ ------
TOTAL
RETURN#...... (7.64)% 16.28% 9.88% 19.95% (0.11)%* (8.06)% 15.27% 9.02% 19.01% (6.48)% 37.17%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end
of period
(000,000).... $281 $337 $201 $111 $73 $3,988 $4,756 $3,438 $2,818 $2,395 $2,306
Average net
assets
(000,000).... $310 $287 $149 $85 $51 $4,399 $4,308 $3,027 $2,529 $2,315 $2,037
Ratios to
average net
assets:
Expenses,
including
distribution
fees....... .84%(D) .80% .81% .87% .97%(D) 1.59%(D) 1.60% 1.61% 1.67% 1.73% 1.46%
Expenses,
excluding
distribution
fees....... .59%(D) .60% .61% .67% .77%(D) .59%(D) .60% .61% .67% .74% .73%
Net
investment
income...... 3.37%(D) 3.16% 4.14% 4.69% 4.78%(D) 2.62%(D) 2.36% 3.34% 3.89% 3.94% 4.19%
Portfolio
turnover
rate......... 9% 24% 24% 38% 53% 9% 24% 24% 38% 53% 75%
</TABLE>
- ---------------
* Restated.
** Based on average month-end shares outstanding.
(D) Annualized.
(D)(D) Commencement of offering of Class A shares.
# 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 return for periods of less than one full year are
not annualized.
See Notes to Financial Statements.
-16-
