Rule 497(c)
File No. 2-72097
PRUDENTIAL UTILITY FUND, INC.
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PROSPECTUS DATED AUGUST 1, 1994
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Prudential Utility Fund, Inc. (the Fund) is an open-end, diversified 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. Utility companies include electric, gas, gas pipeline,
telephone, telecommunications, water and cable companies. In normal
circumstances, the Fund intends to invest at least 80% of its assets in such
securities. The Fund may also purchase and sell options on equity securities and
stock index options, futures contracts and options thereon, forward foreign
currency exchange contracts, and options on foreign currencies pursuant to
limits described herein. 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.
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 August 1, 1994, which information is
incorporated herein by reference (is legally considered a part of this
Prospectus) and is available without charge upon request to the Fund at the
address or telephone number noted above.
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Investors are advised to read this Prospectus and retain it for future
reference.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION 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.
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FUND HIGHLIGHTS
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The following summary is intended to highlight certain information
contained in this Prospectus and is qualified in its entirety by the more
detailed information appearing elsewhere herein.
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WHAT IS PRUDENTIAL UTILITY FUND, INC.?
Prudential Utility 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 to seek high current income and moderate
capital appreciation. It seeks to achieve this objective by investing primarily
in equity and debt securities of utility companies. Utility companies include
electric, gas, gas pipeline, telephone, telecommunications, water and cable
companies. There can be no assurance that the Fund's objective will be achieved.
See "How the Fund Invests--Investment Objective and Policies" at page 7.
RISK FACTORS AND SPECIAL CHARACTERISTICS
The Fund may invest up to 30% of its total assets in foreign securities.
Investing in securities of foreign companies and countries involves certain
considerations and risks not typically associated with investing in securities
of domestic companies. See "How the Fund Invests--Investment Objective and
Policies--Foreign Securities" at page 7.
In addition, the Fund may engage in various hedging and income enhancement
strategies, including purchasing and selling options on equity securities, stock
index options, futures contracts and options thereon, forward foreign currency
exchange contracts, and options on foreign currencies pursuant to limits
described herein. 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--Risks of Hedging and Income Enhancement
Strategies" at page 12.
WHO MANAGES THE FUND?
Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the Manager
of the Fund and is currently compensated for its services at an annual rate of
.60 of 1% of the Fund's average daily net assets up to and including $250
million, .50 of 1% of the next $500 million, .45 of 1% of the next $750 million,
.40 of 1% of the next $500 million, .35 of 1% of the next $2 billion, .325 of 1%
of the next $2 billion and .30 of 1% of the excess over $6 billion of the Fund's
average daily net assets. As of June 30, 1994, PMF served as manager or
administrator to 66 investment companies, including 37 mutual funds, with
aggregate assets of approximately $47 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 13.
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 14.
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2
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WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares. The minimum subsequent investment is $100
for 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 19 and "Shareholder Guide--Shareholder Services"
at page 28.
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 16 and "Shareholder Guide--How to Buy Shares of the Fund" at page 19.
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 20.
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 23.
HOW ARE 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 17.
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3
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FUND EXPENSES
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<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES+ CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- --------------
<S> <C> <C> <C>
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 1% on
year, decreasing by redemptions
1% annually to 1% in made within
the fifth and sixth one year of
years and 0% the purchase
seventh year*
Redemption Fees ............................ None None None
Exchange Fees .............................. None None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets) CLASS A CLASS B CLASS C**
------- ------- ---------
<S> <C> <C> <C>
Management Fees ............................ .40% .40% .40%
12b-1 Fees ................................. .25++ 1.00 1.00
Other Expenses ............................. .20 .20 .20
--- ---- ----
Total Fund Operating Expenses .............. .85% 1.60% 1.60%
=== ==== ====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
YOU WOULD PAY THE FOLLOWING EXPENSES ON A $1,000
INVESTMENT, ASSUMING (1) 5% ANNUAL RETURN AND
(2) REDEMPTION AT THE END OF EACH TIME PERIOD:
CLASS A .................................. $58 $76 $95 $150
CLASS B .................................. $66 $80 $97 $160
CLASS C** ................................ $26 $50 $87 $190
YOU WOULD PAY THE FOLLOWING EXPENSES ON THE SAME
INVESTMENT, ASSUMING NO REDEMPTION:
CLASS A .................................. $58 $76 $95 $150
CLASS B .................................. $16 $50 $87 $160
CLASS C** ................................ $16 $50 $87 $190
</TABLE>
The above example with respect to Class A and Class B shares is based on
restated data for the Fund's fiscal year ended December 31, 1993. The above
example with respect to Class C shares is based on expenses expected to have
been incurred if Class C shares had been in existence during the fiscal year
ended December 31, 1993. 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.
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* 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 fiscal year ended December 31,
1993.
+ 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
the Fund rather than on a per shareholder basis. Therefore, long-term
shareholders of the Fund may pay more in total sales charges than the
economic equivalent of 6.25% of such shareholders' investment in such
shares. See "How the Fund is Managed--Distributor."
++ Although the Class A 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, 1994. Total operating expenses without
such limitation would be .90%. See "How the Fund Is Managed--Distributor."
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4
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FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS A SHARES)
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The following financial highlights have been audited by Price Waterhouse,
independent accountants, whose report thereon was unqualified. This information
should be read in conjunction with the financial statements and the notes
thereto, which appear in the Statement of Additional Information. The following
financial highlights contain selected data for a Class A share of common stock
outstanding, total return, ratios to average net assets and other supplemental
data for each of the periods indicated. The information is based on data
contained in the financial statements. No Class C shares were outstanding during
the periods indicated.
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<TABLE>
<CAPTION>
CLASS A
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JANUARY 22, 1990++
YEAR ENDED DECEMBER 31, THROUGH
------------------------------------- DECEMBER 31,
1993 1992 1991 1990
-------- ------ -------- ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:*
Net asset value, beginning of period .................... $ 8.97 $ 8.72 $ 7.63 $ 8.65**
------- ------ ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income ................................... .33 .38 .39 .36
Net realized and unrealized gains
(losses) on investment and foreign
currency transactions ................................. 1.12 .45 1.10 (.38)**
------ ------ ------ ------
Total from investment operations ........................ 1.45 .83 1.49 (.02)**
------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends from net investment income .................... (.29) (.34) (.39) (.40)
Distributions from net realized gains ................... (.41) (.24) (.01) (.60)
------ ------ ------ ------
Total distributions ..................................... (.70) (.58) (.40) (1.00)
------ ------ ------ ------
Net asset value, end of period .......................... $ 9.72 $ 8.97 $ 8.72 $ 7.63
====== ====== ====== ======
TOTAL RETURN+++ ......................................... 16.28% 9.88% 19.95% (0.11)%**
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000,000) ..................... $337 $201 $111 $ 73
Ratios to average net assets:
Expenses, including distribution fees ................... .80% .81% .87% .97%+
Expenses, excluding distribution fees ................... .60% .61% .67% .77%+
Net investment income ................................... 3.16% 4.14% 4.69% 4.78%+
Portfolio turnover rate ................................. 24% 24% 38% 53%
<FN>
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* Restated to reflect 2 for 1 stock split paid July 6, 1993 to shareholders
of record July 2, 1993.
** Restated.
+ Annualized.
++ 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 returns for periods of less than one full year are not
annualized.
</FN>
</TABLE>
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5
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FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS B SHARES)
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The following financial highlights for each of the five years ended December 31,
1993 have been audited by Price Waterhouse, independent accountants, whose
report thereon was unqualified. This information should be read in conjunction
with the financial statements and the notes thereto, which appear in the
Statement of Additional Information. The following financial highlights contain
selected data for a Class B share of common stock outstanding, total return,
ratios to average net assets and other supplemental data for each of the periods
indicated. The information is based on data contained in the financial
statements. No Class C shares were outstanding during the periods indicated.
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<TABLE>
<CAPTION>
CLASS B
----------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
1993 1992 1991 1990 1989** 1988(b) 1987 1986 1985 1984(a)+
---- ---- ---- ---- ------ ------- ---- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:*
Net asset value,
beginning of year .... $ 8.96 $ 8.71 $ 7.63 $ 9.17 $ 7.31 $ 6.29 $ 7.39 $ 6.44 $5.62 $ 5.04
------ ------ ------ ------ ------ ------ ------ ------ ----- ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income ............... .24 .31 .32 .31 .36 .33 .33 .32 .53 .85(d)
Net realized and
unrealized gains
(losses) on investment
and foreign currency
transactions ......... 1.12 .46 1.10 (.91) 2.30 1.07 (.93) 1.69 1.16 .96
------ ------ ------ ------ ------ ------ ------ ------ ----- ------
Total from investment
operations ........... 1.36 .77 1.42 (.60) 2.66 1.40 (.60) 2.01 1.69 1.81
------ ------ ------ ------ ------ ------ ------ ------ ----- ------
LESS DISTRIBUTIONS
Dividends from net
investment income .... (.22) (.28) (.33) (.34) (.36) (.33) (.33) (.29) (.43) (.82)
Distributions from
net realized gains ... (.41) (.24) (.01) (.60) (.44) (.05)+++ (.17) (.77) (.44) (.41)
------ ------ ------ ------ ------ ------ ------ ------ ----- ------
Total distributions ... (.63) (.52) (.34) (.94) (.80) (.38) (.50) (1.06) (.87) (1.23)
------ ------ ------ ------ ------ ------ ------ ------ ----- ------
Net asset value,
end of year .......... $ 9.69 $ 8.96 $ 8.71 $ 7.63 $ 9.17 $ 7.31 $ 6.29 $ 7.39 $6.44 $5.62
====== ====== ====== ====== ====== ====== ====== ====== ===== ======
TOTAL RETURN++ ........ 15.27% 9.02% 19.01% (6.48)% 37.17% 22.74% (8.65)% 32.52% 33.30% 38.68%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end
of year (000,000) .... $4,756 $3,438 $2,818 $2,395 $2,306 $1,584 $1,390 $1,521 $339 $ 98
Ratios to average
net assets:
Expenses, including
taxes and interest (c) 1.60% 1.61% 1.67% 1.73% 1.46% 1.56% 1.53% 1.42% 1.13% (2.50)%(d)
Expenses, including
taxes but excluding
interest (c) ......... 1.60% 1.61% 1.67% 1.73% 1.46% 1.56% 1.53% 1.42% 1.13% (3.08)%(d)
Expenses, excluding
taxes and interest (c) 1.60% 1.61% 1.67% 1.73% 1.46% 1.56% 1.63% 1.42% 1.13% 1.15%(d)
Expenses, excluding
distribution fees,
taxes and interest (c) .60% .61% .67% .74% .73% .76% .80% .74% .93% 1.15%(d)
Net investment income . 2.36% 3.34% 3.89% 3.94% 4.19% 4.44% 4.69% 4.41% 6.70% 13.35%
Portfolio turnover .... 24% 24% 38% 53% 75% 66% 65% 49% 39% 122%
<FN>
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* Restated to reflect 2 for 1 stock split paid to shareholders of record July
2, 1993.
** Based on average month-end shares outstanding.
+ Restated to reflect 2 for 1 stock split paid to shareholders of record
November 19, 1984.
++ 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.
+++ Full amount of 1988 distribution represents a distribution from paid-in
capital.
(a) On August 24, 1984, the shareholders of the Fund approved a change in the
Fund's objective (to high current income and moderate capital appreciation)
and tax status (to a "regulated investment company" under the Internal
Revenue Code).
(b) Prudential Mutual Fund Management, Inc. succeeded Prudential Securities
Incorporated as manager of the Fund May 2, 1988.
(c) Because of the adoption of a plan of distribution effective on July 1, 1985
and an amended and restated plan of distribution effective January 22,
1990, and the changes noted in footnote (b), historical expenses and ratios
of expenses to average net assets are not necessarily indicative of future
expenses and related ratios. See "How the Fund is Managed--Distributor."
(d) Net of reimbursement.
</FN>
</TABLE>
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6
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HOW THE FUND INVESTS
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INVESTMENT OBJECTIVE AND POLICIES
THE FUND'S INVESTMENT OBJECTIVE IS TO SEEK HIGH CURRENT INCOME AND MODERATE
CAPITAL APPRECIATION THROUGH INVESTMENT IN EQUITY AND DEBT SECURITIES OF UTILITY
COMPANIES. UTILITY COMPANIES INCLUDE ELECTRIC, GAS, GAS PIPELINE, TELEPHONE,
TELECOMMUNICATIONS, WATER AND CABLE COMPANIES. IN NORMAL CIRCUMSTANCES, THE FUND
INTENDS TO INVEST AT LEAST 80% OF ITS ASSETS IN SUCH SECURITIES. THERE CAN BE NO
ASSURANCE THAT SUCH OBJECTIVE WILL BE ACHIEVED. It is anticipated that the Fund
will invest primarily in common stocks of utility companies that the investment
adviser believes have the potential for high expected return; however, the Fund
may invest primarily in preferred stocks and debt securities of utility
companies when it appears that the Fund will be better able to achieve its
investment objective through investments in such securities, or when the Fund is
temporarily in a defensive position. Moreover, should extraordinary conditions
affecting such sectors or securities markets as a whole warrant, the Fund may
temporarily be primarily invested in money market instruments.
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 MAY INVEST IN DEBT SECURITIES OF UTILITY COMPANIES when the Fund
is temporarily in a defensive position or when it appears that the Fund will be
better able to achieve its investment objective through investment in such
securities. The Fund may invest its net assets in debt securities rated
investment grade by a nationally recognized statistical rating organization
(NRSRO), such as Standard & Poor's Ratings Group (S&P) or Moody's Investors
Service (Moody's) or, if unrated, determined by the investment adviser to be of
comparable quality. The term "investment grade" refers to securities rated
within the four highest quality grades by S&P, Moody's or another NRSRO.
Securities rated Baa by Moody's or BBB by S&P, although considered to be
investment grade, lack outstanding investment characteristics and, in fact, have
speculative characteristics. Lower rated securities are subject to greater risk
of loss of principal and interest. Debt securities may 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).
THE FUND MAY INVEST UP TO 30% OF ITS TOTAL ASSETS IN SECURITIES OF FOREIGN
ISSUERS, WHICH MAY INVOLVE ADDITIONAL RISKS. See "Foreign Securities" below. The
Fund may also invest in American Depositary Receipts, which are receipts issued
by an American bank or trust company evidencing ownership of underlying
securities issued by a foreign issuer. American Depositary Receipts are not
considered foreign securities for purposes of the 30% limitation.
AS A RESULT OF THE FUND'S CONCENTRATION OF ITS INVESTMENTS, IT IS SUBJECT
TO RISKS ASSOCIATED WITH THE UTILITY INDUSTRY. Among these are inflationary and
other cost increases in fuel and other operating expenses, high interest costs
on borrowings needed for capital construction programs, including compliance
with environmental regulations, and changes in the regulatory climate.
The Fund anticipates that, due to short-term trading and the use of
options, its portfolio turnover rate may exceed 100%, although the rate is not
expected to exceed 200%. See "Investment Objective and Policies--Portfolio
Turnover" in the Statement of Additional Information.
FOREIGN SECURITIES
THE FUND MAY INVEST UP TO 30% OF ITS TOTAL ASSETS IN FOREIGN SECURITIES. In
many instances, foreign debt securities may provide higher yields but may be
subject to greater fluctuations in price 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 exchange rate
fluctuations, political, social or economic instability of the country of issue,
diplomatic
7
<PAGE>
developments which could affect the assets of the Fund held in foreign
countries, and the possible imposition of exchange controls, withholding taxes
on dividends or interest payments, confiscatory taxes or expropriation. There
may be less government supervision and regulation of foreign securities
exchanges, brokers and listed companies than exists in the United States,
foreign brokerage commissions and custody fees are generally higher than those
in the United States, and foreign security settlements will in some instances be
subject to delays and related administrative uncertainties. The Fund will
probably have greater difficulty in obtaining or enforcing a court judgment
abroad than it would have doing so within the United States. Less information
may be publicly available about a foreign company than about a domestic company,
and foreign companies may not be subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to domestic
companies. In addition, foreign securities markets have substantially less
volume than the New York Stock Exchange and securities of some foreign companies
are less liquid and more volatile than securities of comparable U.S. companies.
Although the foreign companies in which the Fund may invest will be
providing products and services substantially similar to domestic companies in
which the Fund has and may invest, the utility companies of many major
countries, such as the United Kingdom, Spain and Mexico, have only recently
substantially increased investor ownership (including ownership by U.S.
investors) and, as a result, have only recently become subject to adversarial
rate-making procedures. In addition, certain foreign utilities are experiencing
demand growth at rates greater than economic expansion in their countries or
regions. These factors as well as those associated with foreign issuers
generally may affect the future values of foreign securities held by the Fund.
HEDGING AND INCOME ENHANCEMENT STRATEGLES
THE FUND MAY ALSO ENGAGE IN VARIOUS PORTFOLIO STRATEGIES, INCLUDING
DERIVATIVES, TO REDUCE CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO
ENHANCE INCOME. THESE STRATEGIES INCLUDE (1) THE PURCHASE AND WRITING (I.E.,
SALE) OF PUT AND CALL OPTIONS ON EQUITY SECURITIES AND ON STOCK INDICES, (2) THE
PURCHASE AND SALE OF LISTED STOCK AND BOND INDEX FUTURES AND OPTIONS THEREON AND
(3) THE PURCHASE AND SALE OF OPTIONS ON FOREIGN CURRENCIES AND FUTURES CONTRACTS
ON FOREIGN CURRENCIES AND OPTIONS THEREON. THE FUND MAY ENGAGE IN THESE
TRANSACTIONS ON U.S. OR FOREIGN SECURITIES EXCHANGES OR, IN THE CASE OF EQUITY
AND STOCK INDEX OPTIONS, IN THE OVER-THE-COUNTER MARKET. THE FUND MAY ALSO
PURCHASE AND SELL FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. 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 they are consistent with its investment objective and
policies. See "Investment Objective and Policies" in the Statement of Additional
Information.
OPTIONS TRANSACTIONS
OPTIONS ON EQUITY SECURITIES. THE FUND MAY PURCHASE AND WRITE (I.E., SELL)
PUT AND CALL OPTIONS ON EQUITY SECURITIES THAT ARE TRADED ON SECURITIES
EXCHANGES, ON NASDAQ (NASDAQ OPTIONS) OR IN THE OVER-THE- COUNTER MARKET (OTC).
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.
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THE FUND WILL WRITE ONLY "COVERED" CALL OPTIONS. 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 is also
covered if the Fund holds, on a share-for-share basis, a call on the same
security as the call written by the Fund 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
volatility of the underlying security, the remaining term of the option, supply
and demand and interest rates.
THE FUND MAY ALSO 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 as described below.
OPTIONS ON STOCK INDICES. THE FUND MAY ALSO PURCHASE AND WRITE (I.E., SELL)
PUT AND CALL OPTIONS ON STOCK INDICES TRADED ON SECURITIES EXCHANGES, ON NASDAQ
OR IN THE OVER-THE-COUNTER MARKET. Such options may include options on
non-utility companies. Options on stock indices are similar to options on stock
except that, rather than the right to take or make delivery of a stock at a
specified price, an option on a stock index gives the holder the right in return
for premium paid to receive, upon exercise of the option, an amount of cash if
the closing level of the 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. Unlike
stock options, all settlements are in cash, and gain or loss depends on price
movements in the underlying market generally (or in a particular industry or
segment of the market) rather than price movements in individual securities.
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, in whole 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--Limitations on Purchase and Sale of Stock and Bond Index Futures and
Options Thereon" in the Statement of Additional Information.
OPTIONS ON FOREIGN CURRENCIES. THE FUND IS PERMITTED TO PURCHASE AND WRITE
PUT AND CALL OPTIONS ON FOREIGN CURRENCIES AND ON FUTURES CONTRACTS ON FOREIGN
CURRENCIES TRADED ON SECURITIES EXCHANGES OR BOARDS OF TRADE (FOREIGN AND
DOMESTIC) FOR HEDGING PURPOSES IN A MANNER SIMILAR TO THAT IN WHICH FORWARD
FOREIGN CURRENCY EXCHANGE CONTRACTS AND FUTURES CONTRACTS ON FOREIGN CURRENCIES
WILL BE EMPLOYED. Options on foreign currencies and on futures contracts on
foreign currencies are similar to options on stock, except that the Fund has the
right to take or make delivery of a specified amount of foreign currency, rather
than stock.
THE FUND MAY PURCHASE AND WRITE OPTIONS TO HEDGE THE FUND'S PORTFOLIO
SECURITIES DENOMINATED IN FOREIGN CURRENCIES. If there is a decline in the
dollar value of a foreign currency in which the Fund's portfolio securities are
denominated, the dollar value of such securities will decline even though the
foreign currency value remains the same. To hedge against the decline of the
foreign currency, the Fund may purchase put options on futures contracts on such
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foreign currency. If the value of the foreign currency declines, the gain
realized on the put option would offset, in whole or in part, the adverse effect
such decline would have on the value of the portfolio securities. Alternatively,
the Fund may write a call option on a futures contract on the foreign currency.
If the value of the foreign currency declines, the option would not be exercised
and the decline in the value of the portfolio securities denominated in such
foreign currency would be offset in part by the premium the Fund received for
the option.
If, on the other hand, the investment adviser anticipates purchasing a
foreign security and also anticipates a rise in the value of such foreign
currency (thereby increasing the cost of such security), the Fund may purchase
call options on the foreign currency. The purchase of such options could offset,
at least partially, the effects of the adverse movements of the exchange rates.
Alternatively, the Fund could write a put option on the currency and, if the
exchange rates move as anticipated, the option would expire unexercised.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
THE FUND MAY ENTER INTO FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS TO
PROTECT THE VALUE OF ITS PORTFOLIO AGAINST FUTURE CHANGES IN THE LEVEL OF
CURRENCY EXCHANGE RATES. A forward contract on foreign currency is an obligation
to purchase or sell a specific currency at a future date, which may be any fixed
number of days agreed upon by the parties from the date of the contract at a
price set on the date of the contract. These contracts are traded in the
interbank market conducted directly between currency traders (typically large
commercial banks) and their customers. A forward contract generally has no
deposit requirements, and no commissions are charged for such trades.
The Fund may not use forward contracts to generate income, although the use
of such contracts may incidentally generate income. There is no limitiation on
the value of forward contracts into which the Fund may enter. However, the
Fund's dealings in forward contracts will be limited to hedging involving either
specific transactions or portfolio positions. Transaction hedging is the
purchase or sale of a forward contract with respect to specific receivables or
payables of the Fund generally arising in connection with the purchase or sale
of its portfolio securities and accruals of interest or dividends receivable and
Fund expenses. Position hedging is the sale of a foreign currency with respect
to portfolio security positions denominated or quoted in that currency. The Fund
will not speculate in forward contracts. The Fund may not position hedge with
respect to a particular currency for an amount greater than the aggregate market
value (determined at the time of making any sale of a forward contract) of
securities held in its portfolio denominated or quoted in, or currently
convertible into, such currency.
When the Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, or when the Fund anticipates the receipt in a
foreign currency of dividends or interest payments on a security which it holds,
the Fund may desire to "lock in" the U.S. dollar price of the security or the
U.S. dollar equivalent of such dividend or interest payment, as the case may be.
By entering into a forward contract for a fixed amount of dollars for the
purchase or sale of the amount of foreign currency involved in the underlying
transaction, the Fund will be able to protect itself against possible loss
resulting from an adverse change in the relationship between the U.S. dollar and
the subject foreign currency during the period between the date on which the
security is purchased or sold, or on which the dividend or interest payment is
declared, and the date on which such payments are made or received.
Additionally, when the investment adviser believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, the Fund may enter into a forward contract, for a fixed amount of
dollars, to sell the amount of foreign currency approximating the value of some
or all of the portfolio securities of the Fund denominated in such foreign
currency. Requirements under the Internal Revenue Code of 1986, as amended
(Internal Revenue Code) for qualification as a regulated investment company may
limit the Fund's ability to engage in transactions in forward contracts. See
"Taxes" in the Statement of Additional Information.
FUTURES TRANSACTIONS
STOCK AND BOND INDEX FUTURES. THE FUND MAY USE LISTED STOCK AND BOND INDEX
FUTURES TRADED ON A COMMODITIES EXCHANGE OR BOARD OF TRADE FOR HEDGING, INCOME
ENHANCEMENT AND RISK MANAGEMENT PURPOSES.
A STOCK OR BOND 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 OR BOND
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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--Futures Contracts and
Options Thereon" in the Statement of Additional Information.
THE FUND MAY NOT PURCHASE OR SELL STOCK INDEX FUTURES IF, IMMEDIATELY
THEREAFTER, THE SUM OF THE AMOUNT OF AGGREGATE INITIAL MARGIN DEPOSITS ON THE
FUND'S EXISTING FUTURES POSITIONS AND PREMIUMS PAID FOR RELATED OPTIONS WOULD
EXCEED 5% OF THE LIQUIDATION VALUE OF THE FUND'S TOTAL ASSETS.
OPTIONS ON STOCK AND BOND INDEX FUTURES. THE FUND MAY ALSO PURCHASE AND
WRITE OPTIONS ON STOCK AND BOND INDEX FUTURES FOR HEDGING, INCOME ENHANCEMENT
AND RISK MANAGEMENT PURPOSES. In the case of options on stock or bond index
futures, the holder of the option pays a premium and receives the right, upon
exercise of the option at a specified price during the option period, to assume
a position in a stock or bond index futures contract (a long position if the
option is a call and 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 or bond 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 or bond 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.
FUTURES CONTRACTS ON FOREIGN CURRENCIES. THE FUND IS PERMITTED TO BUY AND
SELL FUTURES CONTRACTS ON FOREIGN CURRENCIES (FUTURES CONTRACTS) SUCH AS THE
EUROPEAN CURRENCY UNIT, AND PURCHASE AND WRITE OPTIONS THEREON FOR HEDGING
PURPOSES. A European Currency Unit is a basket of specified amounts of the
currencies of certain member states of the European Economic Community, a
Western European economic cooperative organization including, inter alia,
France, Germany, The Netherlands and the United Kingdom. The Fund will engage in
transactions in only those futures contracts and options thereon that are traded
on a commodities exchange or a board of trade. A "sale" of a futures contract on
foreign currency means the assumption of a contractual obligation to deliver the
specified amount of foreign currency at a specified price in a specified future
month. A "purchase" of a futures contract means the assumption of a contractual
obligation to acquire the currency called for by the contract at a specified
price in a specified future month. At the time a futures contract is purchased
or sold, the Fund must allocate cash or securities as a deposit payment (initial
margin). Thereafter, the futures contract is valued daily and the payment of
"variation margin" may be required, resulting in the Fund's paying or receiving
cash that reflects any decline or increase, respectively, in the contract's
value, a process known as "mark to market."
THE FUND'S SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON DEPENDS
UPON THE INVESTMENT ADVLSER'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. The use of these instruments will hedge only
the currency risks associated with investments in foreign securities, not market
risks. Certain futures exchanges or boards of trade have established daily
limits on the amount that the price of a futures contract or option 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
stocks or bonds in an advantageous manner and the market declines, the Fund
might incur 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 thereon at any particular time. See
"Investment Objective and Policies--Limitations on the Purchase and Sale of
Stock and Bond Index Futures and Options Thereon" in the Statement of Additional
Information.
THE FUND'S ABILITY TO ENTER INTO FUTURES CONTRACTS AND OPTIONS THEREON MAY
ALSO BE LIMITED BY THE REQUIREMENTS OF THE INTERNAL REVENUE CODE FOR
QUALIFICATION AS A REGULATED INVESTMENT COMPANY.
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RISKS OF HEDGING AND INCOME ENHANCEMENT STRATEGIES
PARTICIPATION IN THE OPTIONS OR FUTURES MARKETS AND IN CURRENCY EXCHANGE
TRANSACTIONS 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 prediction of movements in the direction of the securities, foreign
currency 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, foreign currency 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 currency markets; (2) imperfect
correlation between the price of options and futures contracts and options
thereon and movements in the prices of the securities or currencies being
hedged; (3) the fact that skills needed to use these strategies are different
from those needed to select portfolio securities; (4) the possible absence of a
liquid secondary market for any particular instrument at any time; (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
BORROWING AND SECURITIES LENDING
The Fund may also 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 or for the clearance of transactions. The
Fund may pledge up to 20% of its total assets to secure these borrowings.
The Fund does not presently intend to lend securities except to the extent
that the entry into repurchase agreements may be considered such lending. See
"Investment Objective and Policies--Borrowing" and "Investment Objective and
Policies--Lending of Securities" in the Statement of Additional Information.
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 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.
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 security. 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 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
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in a joint repurchase account with other investment companies managed by PMF
pursuant to an order of the Securities and Exchange Commission (SEC). See
"Investment Objective and Policies--Repurchase Agreements" in the Statement of
Additional Information.
ILLIQUID SECURITIES
The Fund may invest up to 5% 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 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 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."
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 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, 1993, the Fund's total expenses as a
percentage of average net assets for the Fund's Class A and Class B shares were
.80% and 1.60%, respectively. See "Financial Highlights." No Class C shares were
outstanding during the fiscal year ending December 31, 1993.
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 .60 OF 1% OF THE FUND'S AVERAGE DAILY NET
ASSETS UP TO AND INCLUDING $250 MILLION, .50 OF 1% OF THE NEXT $500 MILLION, .45
OF 1% OF THE NEXT $750 MILLION, .40 OF 1% OF THE NEXT $500 MILLION, .35 OF 1% OF
THE NEXT $2 BILLION, .325 OF 1% OF THE NEXT $2 BILLION AND .30 OF 1% OF THE
EXCESS OVER $6 BILLION OF THE FUND'S AVERAGE DAILY NET ASSETS. PMF was
incorporated in May 1987 under the laws of the State of Delaware. For the fiscal
year ended December 31, 1993, the Fund paid management fees to PMF of .40% of
the Fund's average net assets.
As of June 30, 1994, PMF served as the manager of 37 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator of 29 closed-end investment companies. These companies have
aggregate assets of approximately $47 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.
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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 pursuant to the Management Agreement and supervises PIC's
performance of such services.
The current portfolio managers of the Fund are Warren E. Spitz and David A.
Kiefer, CFA. Mr. Spitz is a Managing Director and Mr. Kiefer is a Senior
Portfolio Manager of Prudential Investment Advisors, a unit of PIC. Mr. Kiefer
is responsible for day-to-day management and stock selection for the Fund under
the supervision of Mr. Spitz, who remains responsible for overall portfolio
strategy and sector positioning for the Fund. Mr. Spitz has managed the Fund's
portfolio since he joined PIC in 1987. Mr. Spitz also serves as the portfolio
manager of the Prudential Equity Income Fund and Prudential Series Fund High
Dividend Stock Portfolio. Mr. Kiefer joined PIC in 1992 as an equity analyst for
the Fund. Prior thereto, he attended business school and worked as a utility
analyst for a Prudential subsidiary for two years.
PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance
Company of America (Prudential), a major diversified insurance and financial
services company.
On October 12, 1993, a lawsuit was instituted against the Fund, PMF, PIC,
Prudential Securities Incorporated, and certain current and former directors of
the Fund. The suit was brought by plaintiffs both derivatively on behalf of the
Fund and purportedly on behalf of the class of shareholders who purchased their
shares prior to 1985. The plaintiffs seek damages on behalf of the Fund in an
unspecified amount for alleged excessive management and distribution fees. The
complaint also challenges the Alternative Purchase Plan that was implemented in
January 1990 pursuant to a shareholder vote and that provided for the creation
of two classes of shares. The plaintiffs, on behalf of the purported class, seek
damages and equitable relief against the Fund and the named directors to change
the classification of the shares of the class and to compel a further vote on
such plan. The defendants believe they have meritorious defenses to the claims
asserted in the complaint 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.
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.
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 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, the Distributor will retain
its full fees and realize a profit.
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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 ASSET VALUE 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, 1994.
For the fiscal year ended December 31, 1993, PMFD received payments of
$573,660 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, 1993, PMFD also received
approximately $5,755,000 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, 1993, Prudential Securities incurred
distribution expenses of approximately $60,556,900 under the Class B Plan and
received $43,080,963 from the Fund under the Class B Plan. In addition,
Prudential Securities received approximately $4,330,000 in contingent deferred
sales charges from redemptions of Class B shares during this period. No Class C
shares were outstanding during the fiscal year ended December 31, 1993.
For the fiscal year ended December 31, 1993, the Fund paid distribution
expenses of .20% and 1.00% of the average net assets of the Class A and Class B
shares, respectively. The Fund records all payments made under the Plans as
expenses in the calculation of net investment income. No Class C shares were
outstanding during the fiscal year ended December 31, 1993. Prior to the date of
this Prospectus, 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 which
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. governing maximum sales charges. See "Distributor" in
the Statement of Additional Information.
15
<PAGE>
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 per share of the three classes 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.
- --------------------------------------------------------------------------------
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
16
<PAGE>
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.
TAXATION OF SHAREHOLDERS
All dividends out of net investment income, together with distributions of
net short-term capital 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 such to the shareholders, whether or not
reinvested and regardless of the length of time a shareholder has owned his or
her shares. The maximum long- term capital gains rate for individual
shareholders is 28%. 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 December 31 of the calendar year in which
such dividends occur. 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 received by corporate shareholders are eligible for a
dividends-received deduction of 70% to the extent the Fund's income is derived
from qualified dividends received by the Fund from domestic corporations.
Dividends attributable to foreign dividends, interest income, capital gain, net
income and gain or loss from other sources are not
17
<PAGE>
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 be treated as long-term
capital gain or loss if the shares have been held for more than one year and
otherwise as short-term capital gain or loss. 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.
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 dividend, capital gain distributions and redemption
proceeds payable to individuals and certain noncorporate shareholders who fail
to furnish correct tax identification numbers on IRS Form W-9 (or IRS Form W-8
in the case of certain foreign shareholders) or 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 U.S.
withholding tax at the 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 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 paid in
the same amount for each class of shares. See "How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES BASED ON
THE 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. 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 have received 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. If you hold shares through Prudential Securities, you
should contact your financial adviser to elect to receive dividends and
distributions in cash.
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.
18
<PAGE>
- --------------------------------------------------------------------------------
GENERAL INFORMATION
- --------------------------------------------------------------------------------
DESCRIPTION OF COMMON STOCK
THE FUND WAS INCORPORATED IN MARYLAND ON APRIL 29, 1981. THE FUND IS
AUTHORIZED TO ISSUE 2 BILLION SHARES OF COMMON STOCK, $.01 PAR VALUE PER SHARE,
DIVIDED INTO THREE CLASSES, DESIGNATED CLASS A, CLASS B AND CLASS C COMMON
STOCK, WHICH CONSISTS OF 566,666,666 SHARES OF CLASS A COMMON STOCK, 866,666,667
SHARES OF CLASS B COMMON STOCK AND 566,666,667 SHARES OF CLASS C COMMON STOCK.
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 may determine.
The Board of Directors may increase or decrease the number of authorized
shares without the approval of shareholders. Shares of the Fund, when issued,
are fully paid, nonassessable, fully transferable and redeemable at the option
of the holder. Shares are also redeemable at the option of the Fund under
certain circumstances 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 Class B shares, there are no conversion, preemptive or
other subscription rights. In the event of liquidation, each share 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 of the
information set forth in the Registration Statement filed by the Fund with the
SEC under the Securities Act. Copies of the Registration Statement may be
obtained at a reasonable charge from the SEC or may be examined, without charge,
at the office of the SEC in Washington, D.C.
- --------------------------------------------------------------------------------
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
19
<PAGE>
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. See "Shareholder Services" below.
THE PURCHASE PRICE IS THE NAV PER SHARE NEXT DETERMINED FOLLOWING RECEIPT
OF AN ORDER BY THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE
WHICH, AT YOUR OPTION, MAY BE IMPOSED EITHER (I) AT THE TIME OF PURCHASE (CLASS
A SHARES) OR (II) ON A DEFERRED BASIS (CLASS B OR CLASS C SHARES). 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.
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 Utility 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 Utility 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
of the public offering price being charged at reduced for certain purchases
a rate 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 approximately seven years after
of the amount invested or the purchase
redemption proceeds; declines to
zero after six years
Class C Maximum CDSC of 1% of the lesser 1% Shares do not convert to another
of the amount invested or the class
redemption proceeds on
redemptions made within one year
of purchase
</TABLE>
20
<PAGE>
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.
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 purchase
alternative 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 and Class C shares for the higher
cumulative annual distribution-related fees on those shares to exceed the
initial sales charge plus cumulative annual distribution-related fees on Class A
shares. This does not take into account the time value of money, which further
reduces the impact of the higher Class B or Class C distribution-related fees 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.
21
<PAGE>
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.
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 members. 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.
Prudential Retirement Accumulation Program 401(k) Plan. Class A shares may
be purchased at net asset value, with a waiver of the initial sales charge, by
or on behalf of participants in the Prudential Retirement Accumulation Program
401(k) Plan for which the Transfer Agent or Prudential Securities provides
recordkeeping services (PruRap Plan) provided that (i) for existing plans, the
plan has existing assets of $1 million or more, as measured on the last business
day of the month, invested in shares of Prudential Mutual Funds (excluding money
market funds other than those acquired pursuant to the exchange privilege) held
at the Transfer Agent or Prudential Securities and (ii) for new plans, the plan
initially invests $1 million or more in shares of non- money market Prudential
Mutual Funds or has at least 1,000 eligible employees or members.
Prudential Vista Program. Class A shares are offered at net asset value to
certain qualified employee retirement benefit plans under Section 401 of the
Internal Revenue Code, for which Prudential Defined Contribution Services serves
as the recordkeeper provided that such plan is also participating in the
Prudential Vista Program (PruVista Plan), and provided further that (i) for
existing plans, the plan has existing assets of at least $1 million and at least
100 eligible employees or members, and (ii) for new plans, the plan has at least
500 eligible employees or members. The term "existing assets" for this purpose
includes transferable cash and GICs (guaranteed investment contracts) maturing
within 4 years.
22
<PAGE>
Special Rules Applicable to Retirement Plans. After a Benefit Plan or the
PruRap or PruVista Plan qualifies to purchase Class A shares at NAV, all
subsequent purchases will be made at NAV.
Miscellaneous 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) on which no deferred sales load, fee or other charge was
imposed on redemption 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 purchased upon the reinvestment of dividends and distributions.
See "Purchase and Redemption of Fund Shares--Reduction and Waiver of Initial
Sales Charges--Class A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one
of the deferred sales charge alternatives is the NAV per share 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 PER SHARE 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.
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
23
<PAGE>
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 described 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.
30-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of the Fund at the NAV next
determined after the order is received, which must be within 30 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 not generally 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 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
24
<PAGE>
any redemption by you which reduces the current value of your Class B or Class C
shares of the Fund 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 purchased through
reinvestment of dividends or distributions are not subject to a CDSC. The amount
of any CDSC will be paid to and retained by the Distributor. See "How the Fund
is Managed-- Distributor" and "Waiver of the Contingent Deferred Sales
Charges--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares."
The following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:
Contingent Deferred Sales
Charge as a Percentage
Year Since Purchase of Dollars Invested or
Payment Made Redemption Proceeds
------------ -------------------
First ................................... 5.0%
Second .................................. 4.0%
Third ................................... 3.0%
Fourth .................................. 2.0%
Fifth ................................... 1.0%
Sixth ................................... 1.0%
Seventh ................................. None
In determining whether a CDSC is applicable to a redemption, the
calculation will be made in a manner that results in the lowest possible rate.
It will be assumed that the redemption is made first of amounts representing
shares acquired pursuant to the reinvestment of dividends and distributions;
then of amounts representing the increase in net asset value above the total
amount of payments for the purchase of Fund shares made during the preceding six
years (five years for shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares purchased six years prior to the
redemption; 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 decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
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
25
<PAGE>
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
commencing in or about February 1995. Conversions will be effected at relative
net asset value without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated
26
<PAGE>
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
for 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 described above will not be implemented and,
consequently, the first conversion of Class B shares will not occur before
February 1995, but as soon thereafter as practicable. At that time all amounts
representing Class B shares then outstanding beyond the applicable conversion
period will automatically convert to Class A shares together with all shares or
amounts representing Class B shares acquired through the automatic reinvestment
of dividends and distributions then held in your account.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service that (i) 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) 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 OF THE FUND 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 that shares were held in a money market fund. Class B and
Class C shares may not be exchanged into money market funds other than the
Prudential Special Money Market Fund. 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
27
<PAGE>
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. Commencing in or about February 1995, 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 of the Fund, you
can take advantage of the following additional services and privileges:
*AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Fund at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold 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
28
<PAGE>
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" above.
*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 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 is 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.
29
<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 Fund 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 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
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
A-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
an offer by the Fund or by the Distributor to
sell or a solicitation of an offer to buy any of
the securities offered hereby in any
jurisdiction to any person to whom it is
unlawful to make such offer in such
jurisdiction.
- ------------------------------------------------
TABLE OF CONTENTS
Page
----
FUND HIGHLIGHTS.............................. 2
Risk Factors and Special Characteristics .. 2
FUND EXPENSES................................ 4
FINANCIAL HIGHLIGHTS......................... 5
HOW THE FUND INVESTS......................... 7
Investment Objective and Policies.......... 7
Hedging and Income Enhancement Strategies.. 8
Other Investments and Policies............. 12
Investment Restrictions.................... 13
HOW THE FUND IS MANAGED...................... 13
Manager.................................... 13
Distributor................................ 14
Portfolio Transactions..................... 16
Custodian and Transfer and
Dividend Disbursing Agent................ 16
HOW THE FUND VALUES ITS SHARES............... 16
HOW THE FUND CALCULATES PERFORMANCE.......... 16
TAXES, DIVIDENDS AND DISTRIBUTIONS........... 17
GENERAL INFORMATION.......................... 19
Description of Common Stock................ 19
Additional Information..................... 19
SHAREHOLDER GUIDE............................ 19
How to Buy Shares of the Fund.............. 19
Alternative Purchase Plan.................. 20
How to Sell Your Shares.................... 23
Conversion Feature - Class B Shares........ 26
How to Exchange Your Shares................ 27
Shareholder Services....................... 28
THE PRUDENTIAL MUTUAL FUND FAMILY............A-1
- ------------------------------------------------
MF150A 440133D
- ------------------------------------------------
Class A: 743911-20-8
CUSIP Nos.: Class B: 743911-10-9
Class C: 743911-30-7
- ------------------------------------------------
PRUDENTIAL
UTILITY
FUND, INC.
PRUDENTIAL MUTUAL FUNDS (LOGO)
BUILDING YOUR FUTURE
ON OUR STRENGTH(SM)
PROSPECTUS
August 1, 1994
<PAGE>
Rule 497(c)
File No. 2-72097
PRUDENTIAL UTILITY FUND, INC.
Statement of Additional Information
August 1, 1994
Prudential Utility Fund, Inc. (the Fund), is an open-end, diversified
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. "Utility companies" include electric, gas, gas
pipeline, telephone, telecommunications, water and cable companies. In normal
circumstances, the Fund intends to invest at least 80% of its assets in such
securities. It is anticipated that the Fund will invest primarily in common
stocks of utility companies that the Subadviser believes have the potential for
high expected return; however, the Fund may invest primarily in preferred stocks
and debt securities of utility companies when it appears that the Fund will be
better able to achieve its investment objective through investments in such
securities, or when the Fund is temporarily in a defensive position. Moreover,
should extraordinary conditions affecting such sectors or securities markets as
a whole warrant, the Fund may temporarily be primarily invested in money market
instruments. There can be no assurance that the Fund's investment objective will
be achieved. See "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.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Fund's Prospectus dated August 1, 1994, 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 19
Investment Objective and Policies .............. B-2 7
Investment Restrictions ........................ B-11 13
Directors and Officers ......................... B-13 13
Manager ........................................ B-15 13
Distributor .................................... B-16 14
Portfolio Transactions and Brokerage ........... B-18 16
Purchase and Redemption of Fund Shares ......... B-19 19
Shareholder Investment Account ................. B-22 19
Net Asset Value ................................ B-25 16
Taxes .......................................... B-26 17
Performance Information ........................ B-27 16
Custodian and Transfer and Dividend
Disbursing Agent and Independent Accountants B-28 16
Financial Statements ........................... B-30 -
Report of Independent Accountants .............. B-40 -
- --------------------------------------------------------------------------------
MF105B
<PAGE>
GENERAL INFORMATION
At a special meeting held on July 19, 1994, shareholders approved an
amendment to the Fund's Articles of Incorporation to change the Fund's name from
Prudential-Bache Utility Fund, Inc. to Prudential Utility Fund, Inc.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to seek high current income and moderate
capital appreciation through investment in equity and debt securities of utility
companies. "Utility companies" include electric, gas, gas pipeline, telephone,
telecommunications, water and cable companies. In normal circumstances, the Fund
intends to invest at least 80% of its assets in such securities. There can be no
assurance that the Fund's investment objective will be achieved. It is
anticipated that the Fund will invest primarily in common stocks of utility
companies that the Subadviser believes have the potential for high expected
return; however, the Fund may invest primarily in preferred stocks and debt
securities of utility companies when it appears that the Fund will be better
able to achieve its investment objective through investments in such securities,
or when the Fund is temporarily in a defensive position. Moreover, should
extraordinary conditions affecting such sectors or securities markets as a whole
warrant, the Fund may temporarily be primarily invested in money market
instruments.
BORROWING
The Fund may borrow money for temporary, extraordinary or emergency
purposes or for the clearance of transactions. Such borrowings may not exceed
20% of the value of the Fund's total assets when the loan is made. The Fund may
pledge up to 20% of its total assets to secure such borrowings.
OPTIONS ON EQUITY SECURITIES
The Fund may purchase put options only on equity securities held in its
portfolio and write call options on such securities only if they are covered,
and such call options must remain covered so long as the Fund is obligated as a
writer. The Fund has undertaken with certain state securities commissions that,
so long as shares of the Fund are registered in those states, it will not (a)
write puts having aggregate exercise prices greater than 25% of net assets; or
(b) purchase (i) put options on stocks not in the Fund's portfolio, (ii) put
options on stock indices or (iii) call options on stocks or stock indices if,
after such purchase, the aggregate premiums paid for such options currently
owned would exceed 10% of the Fund's net assets; provided, however, that the
Fund could purchase put options on stocks held by the Fund if after such
purchase the aggregate premium paid for such options does not exceed 20% of the
Fund's total assets.
The Fund may purchase put and call options and write covered call options
on equity securities traded on securities exchanges, on NASDAQ or in the
over-the-counter market (OTC options).
The Fund may purchase and write put and call options on stock indices
traded on securities exchanges, on NASDAQ or in the over-the-counter market.
CALL OPTIONS ON STOCK. The Fund may, from time to time, write call options
on its portfolio securities. The Fund may write only call options which are
"covered," meaning that the Fund either owns the underlying security 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 currently
held in its portfolio. In addition, the Fund will not permit the call to become
uncovered prior to the expiration of the option or termination through a closing
purchase transaction as described below. If the Fund writes a call option, the
purchaser of the option has the right to buy (and the Fund has the obligation to
sell) the underlying security at the exercise price throughout the term of the
option. The amount paid to the Fund by the purchaser of the option is the
"premium." The Fund's obligation to deliver the underlying security against
payment of the exercise price would terminate either upon expiration of the
option or earlier if the Fund were to effect a "closing purchase transaction"
through the purchase of an equivalent option on an exchange. There can be no
assurance that a closing purchase transaction can be effected.
The Fund would not be able to effect a closing purchase transaction after
it had received notice of exercise. In order to write a call option, the Fund is
required to comply with the rules of The Options Clearing Corporation and the
various exchanges with respect to collateral requirements. The Fund may not
purchase call options on individual stocks except in connection with a closing
purchase transaction. It is possible that the cost of effecting a closing
purchase transaction may be greater than the premium received by the Fund for
writing the option.
PUT OPTIONS ON STOCK. The Fund may also purchase put and call options. If
the Fund purchases a put option, it has the option to sell a given security at a
specified price at any time during the term of the option. If the Fund purchases
a call option, it has the option to buy a security at a specified price at any
time during the term of the option.
B-2
<PAGE>
Purchasing put options may be used as a portfolio investment strategy when
the investment adviser perceives significant short-term risk but substantial
long-term appreciation for the underlying security. The put option acts as an
insurance policy, as it protects against significant downward price movement
while it allows full participation in any upward movement. If the Fund is
holding a security which it feels has strong fundamentals, but for some reason
may be weak in the near term, it may purchase a put on such security, thereby
giving itself the right to sell such security at a certain strike price
throughout the term of the option. Consequently, the Fund will exercise the put
only if the price of such security falls below the strike price of the put. The
difference between the put's strike price and the market price of the underlying
security on the date the Fund exercises the put, less transaction costs, will be
the amount by which the Fund will be able to hedge against a decline in the
underlying security. If during the period of the option the market price for the
underlying security remains at or above the put's strike price, the put will
expire worthless, representing a loss of the price the Fund paid for the put,
plus transaction costs. If the price of the underlying security increases, 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 for which the put may be sold
prior to its expiration.
STOCK INDEX OPTIONS
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, any combination of cash, cash equivalents or
"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.
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, one or more "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.
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 obligations equal in value to the difference. In addition,
when the Fund writes a call on an index which is in-the-money at the time the
call is written, the Fund will segregate with its Custodian or pledge to the
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 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 securities exchange or listed 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 on
the same index 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 in a
segregated account with its Custodian, it will not be subject to the
requirements described in this paragraph.
FUTURES CONTRACTS AND OPTIONS THEREON
STOCK AND BOND INDEX FUTURES. The Fund will purchase and sell stock and
bond index futures contracts as a hedge against changes resulting from market
conditions in the values of securities which are held in the Fund's portfolio or
which it intends to purchase or when they are economically appropriate for the
reduction of risks inherent in the ongoing management of the Fund. In instances
involving the purchase of stock or bond index futures contracts by the Fund, an
amount of cash, cash equivalents and U.S. Government securities, equal to the
market value of the futures contracts, will be deposited in a segregated account
with the Fund's Custodian and/or in a margin account with a broker to
collateralize the position and thereby insure that the use of such futures is
unleveraged.
Pursuant to the requirements of the Commodity Exchange Act, 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 thereon.
OPTIONS ON STOCK AND BOND INDEX FUTURES CONTRACTS. In the case of options
on stock or bond index futures, the holder of the option pays a premium and
receives the right, upon exercise of the option at a specified price during the
option period, to assume a position in a stock or bond index futures contract (a
long position if the option is a call and a short position if the option is a
put). If
B-3
<PAGE>
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 or bond 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 or bond 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.
LIMITATIONS ON THE PURCHASE AND SALE OF STOCK OPTIONS, OPTIONS ON INDICES, AND
STOCK AND BOND INDEX FUTURES AND OPTIONS THEREON
Under regulations of the Commodity Exchange Act, investment companies
registered under the Investment Company Act of 1940, as amended (the Investment
Company Act), 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
and options thereon for any other purpose to the extent that the aggregate
initial margin and option premiums do not exceed 5% of the liquidation value of
the Fund's total assets.
RISKS OF TRANSACTIONS IN STOCK OPTIONS. Writing of options involves the
risk that there will be no market in which to effect a closing transaction. An
exchange traded option 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
exchange-traded options for which there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange will
exist for any particular option, or at any particular time, and for some options
no secondary market on an exchange may exist. In such event it might not be
possible to effect closing transactions in particular exchange-traded options,
with the result that the Fund would have to exercise its options in order to
realize any profit and would incur brokerage commissions upon the exercise of
call options and upon the subsequent disposition of underlying securities
acquired through the exercise of call options or upon the purchase of underlying
securities for the exercise of put options. If the Fund as a covered call option
writer is unable to effect a closing purchase transaction in a secondary market,
it will not be able to sell the underlying security until the option expires or
it delivers the underlying security upon exercise.
In the case of OTC options, it is not possible to effect a closing
transaction in the same manner as exchange-traded options because a clearing
corporation is not interposed between the buyer and seller of the option. 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 with which the Fund originally wrote the OTC option.
Any such cancellation, if agreed to, may require the Fund to pay a premium to
the counterparty. 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 cover until the option expires or is exercised or different cover is
substituted. Alternatively, the Fund could write an OTC call option to, in
effect, close an existing OTC call option or write an OTC put option to close
its position on an OTC put option. However, the Fund would remain exposed to
each counterparty's credit risk on the put or call until such option is
exercised or expires. There is no guarantee that the Fund will be able to write
put or call options, as the case may be, that would effectively close an
existing position. In the event of insolvency of the counterparty, the Fund may
be unable to liquidate an OTC option.
The Fund may also 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 or bond indices in the
over-the-counter market.
As discussed above, an OTC option is a direct contractual relationship with
another party. Consequently, in entering into OTC options, the Fund will be
exposed to the risk that the counterparty will default on, or be unable to
complete, due to bankruptcy or otherwise, its obligation on the option. In such
an event, the Fund may lose the benefit of the transaction. The value of an OTC
option to the Fund is dependent upon the financial viability of the
counterparty. If the Fund decides to enter into transactions in OTC options, the
Subadviser will take into account the credit quality of counterparties in order
to limit the risk of default by the counterparty.
The staff of the Securities and Exchange Commission (SEC) has taken the
position that purchased OTC options and the assets used as "cover" for written
OTC options are illiquid securities unless the Fund and the counterparty have
provided for the
B-4
<PAGE>
Fund, at the Fund's election, to unwind the OTC option. The exercise of such an
option ordinarily would involve the payment by the Fund of an amount designed to
reflect the counterparty's economic loss from an early termination, but does
allow the Fund to treat the assets used as "cover" as "liquid."
RISKS OF OPTIONS ON INDICES. The Fund's purchase and sale of options on
indices will be subject to risks described above under "Risks of Transactions in
Stock Options." In addition, 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 security, whether the Fund will
realize a gain or loss on the purchase or sale of an option on an index depends
upon movements in the level of prices in the market in which the securities
comprising the index are traded generally or in an industry or market segment
rather than movements in the price of a particular security. Accordingly,
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 market generally or of a particular industry. This requires different skills
and techniques than predicting changes in the price of individual securities.
The investment adviser currently uses such techniques in conjunction with the
management of other mutual funds.
Index prices may be distorted if trading of certain securities included in
the index is interrupted. Trading in index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number of
securities 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, may be unable to exercise an option it holds, which could
result in substantial losses to the Fund. It is the Fund's policy to purchase or
write options only on indices which include a number of securities sufficient to
minimize the likelihood of a trading halt in the index, such as the S&P 100 or
S&P 500 index option.
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 that
the risk in connection with these transactions is no greater than the risk in
connection with options on stocks.
SPECIAL RISKS OF WRITING CALLS ON INDICES. Because exercises of index
options are settled in cash, a call writer such as the Fund 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.
However, the Fund will write call options on indices only under the
circumstances described above under "Stock Index Options."
Price movements in the Fund's portfolio probably will not correlate
precisely with movements in the level of a particular index and, therefore, the
Fund bears the risk that the price of the securities held by the Fund may not
increase as much as the index. In such an event, the Fund would bear a loss on
the call which is not completely offset by movements in the price of the Fund's
portfolio. It is also possible that the index may rise when the price of the
Fund's portfolio does not rise. If this occurred, the Fund would experience a
loss on the call which is not offset by an increase in the value of its
portfolio and might also experience a loss in its portfolio. However, because
the value of a diversified portfolio will, over time, tend to move in the same
direction as the market, movements in the value of the Fund in the opposite
direction as the market would be likely to occur for only a short period or to a
small degree.
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 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 or bond 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 close 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-5
<PAGE>
SPECIAL RISKS OF PURCHASING PUTS AND CALLS ON INDICES. If the Fund holds an
index option and exercises it before final determination of the closing index
value for that day, it runs the risk that the level of the underlying index may
change before closing. If such a change causes the exercised option to fall
out-of-the-money, the Fund will be required to pay the difference between the
closing index value and the exercise price of the option (times the applicable
multiple) to the assigned writer. Although the Fund may be able to minimize this
risk by withholding exercise instructions until just before the daily cutoff
time or by selling rather than exercising an option when the index level is
close to the exercise price, it may not be possible to eliminate this risk
entirely because the cutoff times for index options may be earlier than those
fixed for other types of options and may occur before definitive closing index
values are announced.
RISKS OF TRANSACTIONS IN OPTIONS ON STOCK AND BOND INDEX FUTURES. There are
several risks in connection with the use of options on stock and bond index
futures contracts as a hedging device. The correlation between the price of the
futures contract and the movements in the index may not be perfect. Therefore, a
correct forecast of interest rates and other factors affecting markets for
securities may still not result in a successful hedging transaction.
Futures prices often are extremely volatile so successful use of options on
stock or bond index futures contracts by the Fund is also subject to the ability
of the Fund's investment adviser to predict correctly movements in the direction
of markets, changes in supply and demand, interest rates, international
political and economic policies, and other factors affecting the stock and bond
markets generally. For example, if the Fund has hedged against the possibility
of a decrease in an index which would adversely affect the price of securities
in its portfolio and the price of such securities increases instead, then 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 need to sell securities to meet such
requirements at a time when it is disadvantageous to do so. Such sales of
securities may be, but will not necessarily be, at increased prices which
reflect the rising market.
The hours of trading of options on stock or bond index futures contracts
may not conform to the hours during which the Fund may trade the underlying
securities. To the extent the futures markets close before the securities
markets, significant price and rate movements can take place in the securities
markets that cannot be reflected in the futures markets.
Options on stock and bond index futures contracts are highly leveraged and
the specific market movements of the contract underlying an option cannot be
predicted. Options on futures must be bought and sold on exchanges. Although the
exchanges provide a means of selling an option previously purchased or of
liquidating an option previously written by an offsetting purchase, there can be
no assurance that a liquid market will exist for a particular option at a
particular time. If such a market does not exist, the Fund, as the holder of an
option on futures contracts, would have to exercise the option and comply with
the margin requirements for the underlying futures contract to realize any
profit, and if the Fund were the writer of the option, its obligation would not
terminate until the option expired or the Fund was assigned an exercise notice.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Since investments in foreign companies will usually involve currencies of
foreign countries, and since the Fund may hold funds in bank deposits in foreign
currencies, the value of the assets of the Fund as measured in U.S. dollars may
be affected favorably or unfavorably by changes in foreign currency rates and
exchange control regulations, and the Fund may incur costs in connection with
conversions between various currencies. The Fund will conduct its foreign
currency exchange transactions on a spot (i.e., cash) basis at the spot rate
prevailing in the foreign currency exchange market, or through entering into
forward contracts to purchase or sell foreign currencies. A forward foreign
currency exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. A forward contract generally has no deposit requirement, and no
commissions are charged at any stage for such trades.
Forward foreign currency exchange contracts are traded in the interbank
market conducted directly between currency traders (usually large commercial
banks) and their customers. They are not traded on exchanges regulated by the
CFTC or SEC. As a result, many of the protections afforded to exchange
participants will not be available.
The Fund may enter into forward foreign currency exchange contracts in
several circumstances. When the Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, or when the Fund
anticipates the receipt in a foreign currency of dividends or interest payments
on a security which it holds, the Fund may desire to "lock-in" the U.S. dollar
price of the security or the U.S. dollar equivalent of such dividend or interest
payment, as the case may be. By entering into a forward contract for a fixed
amount of dollars for the purchase or sale of the amount of foreign currency
involved in the underlying transactions, the Fund will be able to protect itself
against a possible loss resulting from an adverse change in the relationship
between the U.S. dollar and the subject foreign currency during the period
between the date on which the security is purchased or sold, or on which the
dividend or interest payment is declared, and the date on which such payments
are made or received.
B-6
<PAGE>
Additionally, when the investment adviser believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, the Fund may enter into a forward contract for a fixed amount of
dollars, to sell the amount of foreign currency approximating the value of some
or all of the Fund's portfolio securities denominated in such foreign currency.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the forward
contract is entered into and the date it matures. The projection of short-term
currency market movement is extremely difficult and the successful execution of
a short- term hedging strategy is highly uncertain. The Fund will not enter into
such forward contracts or maintain a net exposure to such contracts where the
consummation of the contracts would obligate the Fund to deliver an amount of
foreign currency in excess of the value of the Fund's portfolio securities or
other assets denominated in that currency. Under normal circumstances,
consideration of the prospect for currency parities will be incorporated into
the long-term investment decisions made with regard to overall diversification
strategies. However, the Fund believes that it is important to have the
flexibility to enter into such forward contracts when it determines that the
best interests of the Fund will thereby be served. The Fund's Custodian will
place cash or liquid equity or debt securities into a segregated account of the
Fund in an amount equal to the value of the Fund's total assets committed to the
consummation of forward foreign currency exchange contracts. If the value of the
securities placed in the segregated account declines, additional cash or
securities will be placed in the account on a daily basis so that the value of
the account will equal the amount of the Fund's commitments with respect to such
contracts.
The Fund generally will not enter into a forward contract with a term of
greater than one year. At the maturity of a forward contract, the Fund may
either sell the portfolio security and make delivery of the foreign currency, or
it may retain the security and terminate its contractual obligation to deliver
the foreign currency by purchasing an "offsetting" contract with the same
currency trader obligating it to purchase, on the same maturity date, the same
amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the contract. Accordingly, it
may be necessary for the Fund to purchase additional foreign currency on the
spot market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency that the Fund is obligated
to deliver and if a decision is made to sell the security and make delivery of
the foreign currency.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. Should forward
prices decline during the period between the Fund's entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Fund will
realize a gain to the extent that the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should forward
contract prices increase, the Fund will suffer a loss to the extent that the
price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
The Fund's dealing in forward foreign currency exchange contracts will be
limited to the transactions described above. Of course, the Fund is not required
to enter into such transactions with regard to its foreign currency-denominated
securities. It also should be realized that this method of protecting the value
of the Fund's portfolio securities against a decline in the value of a currency
does not eliminate fluctuations in the underlying prices of the securities which
are unrelated to exchange rates. It simply establishes a rate of exchange which
one can achieve at some future point in time. Additionally, although such
contracts tend to minimize the risk of loss due to a decline in the value of the
hedged currency, at the same time, they tend to limit any potential gain which
might result should the value of such currency increase.
Although the Fund values its assets daily in terms of U.S. dollars, it does
not intend physically to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. It will do so from time to time, and investors should
be aware of the costs of currency conversion. Although foreign exchange dealers
do not charge a fee for conversion, they do realize a profit based on the
difference (the spread) between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
OPTIONS ON FOREIGN CURRENCIES
Instead of purchasing or selling futures or forward currency exchange
contracts, the Fund may attempt to accomplish similar objectives by purchasing
put or call options on currencies either on exchanges or in over-the-counter
markets or by writing put options or covered call options on currencies. A put
option gives the Fund the right to sell a currency at the exercise price until
the option expires. A call option gives the Fund the right to purchase a
currency at the exercise price until the option expires. Both options serve to
insure against adverse currency price movements in the underlying portfolio
assets designated in a given currency. Currency options traded on U.S. or other
exchanges may be subject to position limits which may limit the ability of the
Fund to fully hedge its positions by purchasing such options.
B-7
<PAGE>
The Fund may hedge against the risk of a decrease or increase in the U.S.
dollar value of a foreign currency denominated security which the Fund owns or
intends to acquire by purchasing or selling options contracts, futures contracts
or options thereon with respect to a foreign currrency other than the foreign
currency in which such security is denominated, where the values of such
different currencies (vis-a-vis the U.S. dollar) historically have a high degree
of positive correlation.
RISK OF TRANSACTIONS IN EXCHANGE TRADED OPTIONS
An 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 will exist for any
particular option, or at any particular time, and for some options no secondary
market on an exchange or otherwise may exist. In such event it might not be
possible to effect closing transactions in particular options, with the result
that the Fund would have to exercise its options in order to realize any profits
and would incur brokerage commissions upon the exercise of call options and upon
the subsequent disposition of underlying currencies acquired through the
exercise of call options or upon the purchase of underlying currencies for the
exercise of put options. If the Fund, as a covered call option writer, is unable
to effect a closing purchase transaction in a secondary market, it will not be
able to sell the underlying currency until the option expires or it delivers the
underlying currency upon exercise.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an 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; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or a clearing
corporation may not at all times be adequate to handle current trading or
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options), in which event the secondary
market on that exchange (or in the class or series of options) would cease to
exist, although outstanding options on that exchange that had been issued by a
clearing corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms. There is no assurance that higher
than anticipated trading activity or other unforeseen events might not, at
times, render certain of the facilities of any of the clearing corporations
inadequate, and thereby result in the institution by an exchange of special
procedures which may interfere with the timely execution of customers' orders.
The Fund intends to purchase and sell only those options which are cleared by a
clearinghouse whose facilities are considered to be adequate to handle the
volume of options transactions.
RISKS OF OPTIONS ON FOREIGN CURRENCIES
Options on foreign currencies involve the currencies of two nations and,
therefore, developments in either or both countries can affect the values of
options on foreign currencies. Risks include those described in the Prospectus
under "How the Fund Invests--Hedging and Income Enhancement Strategies,"
including government actions affecting currency valuation and the movements of
currencies from one country to another. The quality of currency underlying
option contracts represents odd lots in a market dominated by transactions
between banks; this can mean extra transaction costs upon exercise. Options
markets may be closed while round-the-clock interbank currency markets are open.
This can create price and rate discrepancies.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS ON FOREIGN CURRENCIES
There are several risks in connection with the use of futures contracts as
a hedging device. Due to the imperfect correlation between the price of futures
contracts and movements in the currency or group of currencies, the price of a
futures contract may move more or less than the price of the currencies being
hedged. Therefore, a correct forecast of currency rates, market trends or
international political trends by the Manager or Subadviser may still not result
in a successful hedging transaction.
Although the Fund will purchase or sell futures contracts only on exchanges
where there appears to be an adequate secondary market, there is no assurance
that a liquid secondary market on an exchange will exist for any particular
contract or at any particular time. Accordingly, there can be no assurance that
it will be possible, at any particular time, to close a futures position. In the
event the Fund could not close a futures position and the value of such position
declined, the Fund would be required to continue to make daily cash payments of
variation margin. There is no guarantee that the price movements of the
portfolio securities denominated in foreign currencies will, in fact, correlate
with the price movements in the futures contracts and thus provide an offset to
losses on a futures contract. Currently, futures contracts are available on the
Australian Dollar, British Pound, Canadian Dollar, French Franc, Japanese Yen,
Swiss Franc, German Mark and Eurodollar.
Successful use of futures contracts by the Fund is also subject to the
ability of the Fund's Manager or Subadviser to predict correctly movements in
the direction of markets and other factors affecting currencies generally. For
example, if the Fund has
B-8
<PAGE>
hedged against the possibility of an increase in 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 need 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.
The hours of trading of futures contracts may not conform to the hours
during which the Fund may trade the underlying securities. To the extent that
the futures markets close before the securities markets, significant price and
rate movements can take place in the securities markets that cannot be reflected
in the futures markets.
OPTIONS ON FUTURES CONTRACTS ON FOREIGN CURRENCIES
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
exercise 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 a 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 cash balance in the writer's futures margin account which
represents the amount by which the market price of the futures contract, at
exercise, exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract. Currently options are
available with futures contracts on the Australian Dollar, British Pound,
Canadian Dollar, French Franc, Japanese Yen, Swiss Franc, German Mark and
Eurodollar.
The holder or writer of an option may terminate its position by selling or
purchasing an option of the same series. There is no guarantee that such closing
transactions can be effected.
LIMITATIONS ON PURCHASE AND SALE OF OPTIONS ON FOREIGN CURRENCIES AND FUTURES
CONTRACTS ON FOREIGN CURRENCIES
The Fund will write put options on foreign currencies and futures contracts
on foreign currencies only if they are covered by segregating with the Fund's
Custodian an amount of cash or short-term investments equal to the aggregate
exercise price of the puts. The Fund will not (a) write puts having aggregate
exercise prices greater than 25% of total net assets; or (b) purchase (i) put
options on currencies or futures contracts on foreign currencies or (ii) call
options on foreign currencies if, after any such purchase, the aggregate
premiums paid for such options would exceed 10% of the Fund's total net assets.
The Fund intends to engage in futures contracts and options on futures
contracts as a hedge against changes in the value of the currencies to which the
Fund is subject or to which the Fund expects to be subject in connection with
futures purchases. The Fund also intends to engage in such transactions when
they are economically appropriate for the reduction of risks inherent in the
ongoing management of the Fund.
POSITION LIMITS
Transactions by the Fund in futures contracts and options will be subject
to limitations, if any, established by each of the exchanges, boards of trade or
other trading facilities (including NASDAQ) governing the maximum number of
options 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 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 through one or more
brokers. Thus, the number of futures contracts and options which the Fund may
write or purchase may be affected by the futures contracts and options written
or purchased by other investment advisory clients of the investment adviser. An
exchange, board of trade or other trading facility may order the liquidation of
positions found to be in excess of these limits, and it may impose certain other
sanctions.
REPURCHASE AGREEMENTS
The Fund may, on occasion, enter into repurchase agreements, wherein the
seller agrees to repurchase a security from the Fund at a mutually agreed-upon
time and price. The period of maturity is usually quite short, possibly
overnight or a few days, although it may extend over a number of months. The
resale price is in excess of the purchase price, reflecting an agreed-upon rate
of return effective for the period of time the Fund's money is invested in the
security. The Fund's repurchase agreements will at all times be fully
collateralized in an amount at least equal to the purchase price, including
accrued interest earned on the underlying securities. The instruments held as
collateral are valued daily, and if the value of instruments declines, the Fund
will require additional collateral. If the seller defaults and the value of the
collateral securing the repurchase agreement declines, the Fund may
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<PAGE>
incur a loss. The Fund participates in a joint repurchase account with other
investment companies managed by Prudential Mutual Fund Management, Inc. (PMF)
pursuant to an order of the SEC.
DEFENSIVE STRATEGY
When conditions dictate a defensive strategy, the Fund may invest in money
market instruments, including commercial paper of domestic corporations,
certificates of deposit, bankers' acceptances and other obligations of domestic
banks (including foreign branches), and obligations issued or guaranteed by the
U.S. Government, its instrumentalities or its agencies. Investments in foreign
branches of domestic banks may be subject to certain risks, including future
political and economic developments, the possible imposition of withholding
taxes on interest income, the seizure or nationalization of foreign deposits and
foreign exchange controls or other restrictions. The Fund may also invest in
short-term municipal obligations, such as tax, bond and revenue anticipation
notes, construction loan and project financing notes and tax- exempt commercial
paper. When cash may be available only for a few days, it may be invested by the
Fund in repurchase agreements until such time as it may otherwise be invested or
used for payment of obligations of the Fund. See "Repurchase Agreements."
PORTFOLIO TURNOVER
The Fund expects that its portfolio turnover rate may exceed 100%, although
such rate is not expected to exceed 200%. The portfolio's turnover rate is
computed by dividing the lesser of portfolio purchases or sales (excluding all
securities whose maturities at acquisition were one year or less) by the average
value of the portfolio. High portfolio turnover involves correspondingly greater
brokerage commissions and other transaction costs, which are borne directly by
the Fund.
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 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.
The Fund does not intend to lend its securities during the coming year.
ILLIQUID SECURITIES
The Fund may not invest more than 5% 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 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
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
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<PAGE>
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The investment adviser anticipates that the
market for certain restricted securities such as institutional commercial paper
and foreign previously government-owned utility company securities will expand
further as a result of this new 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.
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. A fundamental policy
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities. As defined in the Investment Company Act,
a majority of the Fund's outstanding voting securities 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 any security (other than obligations of the U.S. Government,
its agencies, or instrumentalities) if as a result with respect to 75% of the
Fund's total assets, more than 5% of the Fund's total assets (taken at current
value) would then be invested in securities of a single issuer; the Fund will
concentrate its investments in utility stocks as described under "Investment
Objective and Policies."
2. 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,
futures contracts, options on futures contracts, forward foreign currency
exchange contracts or options on currencies is not considered the purchase of a
security on margin.
3. Make short sales of securities or maintain a short position, unless at
all times when a short position is open it owns an equal amount of such
securities or securities convertible into or exchangeable, without payment of
any further consideration, for securities of the same issue as, and equal in
amount to, the securities sold short, and unless not more than 25% of the Fund's
net assets (taken at current value) is held as collateral for such sales at any
one time.
4. Issue senior securities, borrow money or pledge its assets, except that
the Fund may borrow up to 20% of the value of its total assets (calculated when
the loan is made) for temporary, extraordinary or emergency purposes or for the
clearance of transactions. The Fund may pledge up to 20% of the value of its
total assets to secure such borrowings. For purposes of this restriction,
obligations of the Fund to Directors pursuant to deferred compensation
arrangements, the purchase and sale of securities on a when-issued or delayed
delivery basis, the purchase and sale of options, futures contracts, options on
futures contracts, forward foreign currency exchange contracts and options on
currencies and collateral arrangements with respect to the purchase and sale of
options, futures contracts, options on futures contracts, forward foreign
currency exchange contracts and options on currencies are not deemed to be the
issuance of a senior security or the pledge of assets.
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 (taken at current value) invested in securities of
companies (including predecessors) less than three years old.
B-11
<PAGE>
7. Buy or sell commodities or commodity contracts, or real estate or
interests in real estate, except that the Fund may purchase and sell options,
futures contracts, options on futures contracts, forward foreign currency
exchange contracts and options on currencies and securities which are secured by
real estate and securities of companies which invest or deal in real estate.
8. 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.
9. Make investments for the purpose of exercising control or management.
10. Invest in securities of other investment companies, except by purchases
in the open market involving only customary brokerage commissions and as a
result of which not more than 5% of its total assets (taken at current value)
would be invested in such securities, or except as part of a merger,
consolidation or other acquisition.
11. Invest in interests in oil, gas or other mineral exploration or
development programs, although it may invest in the common stocks of companies
which invest in or sponsor such programs.
12. Make loans, except through (i) the purchase of bonds, debentures,
commercial paper, corporate notes and similar evidences of indebtedness of a
type commonly sold privately to financial institutions, (ii) the lending of its
portfolio securities, as described under "Investment Objective and
Policies--Lending of Securities" and (iii) repurchase agreements. (The purchase
of a portion of an issue of securities described under (i) above distributed
publicly, whether or not the purchase is made on the original issuance, is not
considered the making of a loan.)
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.
The Fund's policy with respect to put and call options is not a fundamental
policy and may be changed without shareholder approval. See "Investment
Objective and Policies."
It is also a policy of the Fund, which may be changed without shareholder
approval, not to purchase any voting security of any electric or gas utility
company (as defined by the Public Utility Holding Company Act of 1935) if as a
result the Fund would then hold 5% or more of the outstanding voting securities
of such company.
In order to comply with certain State "blue sky" restrictions, the Fund
will not as a matter of operating policy:
(1) make investments which are not readily marketable if at the time of
investment more than 15% of its total assets would be committed to such
investments, including illiquid securities and foreign securities which are not
listed on an exchange;
(2) invest in oil, gas and mineral leases;
(3) invest more than 2% of its assets in options, financial futures or
stock index futures, other than hedging positions or positions that are covered
by cash or securities;
(4) invest in real estate limited partnerships;
(5) purchase the securities of any one issuer if, to the knowledge of the
Fund, any officer or director of the Fund or the Manager or Subadviser 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;
(6) 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;
(7) invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, or securities of
issuers which are restricted as to disposition, if more than 15% of its total
assets would be invested in such securities. This restriction shall not apply to
mortgage-backed securities, asset-backed securities or obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities; and
(8) invest more than 5% of its total assets in securities of unseasoned
issuers, including their predecessors, which have been in operation for less
than three years, and in equity securities of issuers which are not readily
marketable.
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DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE FUND DURING PAST 5 YEARS
- ---------------- ------------- ----------------------
<S> <C> <C>
Robert R. Fortune 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 Temporary Investment Fund, Inc., Independence
New York, NY Square Income Securities Inc. and Portfolios for Diversified
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 Director Marketing and Management Consultant.
c/o Prudential Mutual Fund
Management, Inc.
One Seaport Plaza
New York, NY
*Harry A. Jacobs, Jr. Director Senior Director (since January 1986) of Prudential Securi-
One Seaport Plaza ties Incorporated (Prudential Securities); formerly Interim
New York, NY Chairman and Chief Executive Officer of PMF (June-
September 1993), 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 Center for National Policy, The First Australia Fund, Inc.,
The First Australia Prime Income Fund, Inc., The Global Government
Plus Fund, Inc. and The Global Yield Fund, Inc.; Trustee of
The Trudeau Institute.
*Lawrence C. McQuade President and Vice Chairman of PMF (since 1988); Managing
One Seaport Plaza Director Director, Investment Banking, Prudential Securities
New York, NY (1988-1991); Director of Quixote Corporation (since Febru-
ary 1992) and BUNZL, PLC (since June 1991); formerly,
Director of Crazy Eddie Inc. (1987-1990) and Kaiser Tech.,
Ltd. and Kaiser Aluminum and Chemical Corp. (March 1987-
November 1988); formerly Executive Vice President and
Director of W.R. Grace & Company; President and Director
of The Global Government Plus Fund, Inc., The Global Yield
Fund, Inc. and The High Yield Income Fund, Inc.
Thomas A. Owens, Jr. Director Consultant; Director of EMCORE Corporation.
c/o Prudential Mutual Fund
Management, Inc.
One Seaport Plaza
New York, NY
*Richard A. Redeker Director President, Chief Executive Officer and Director (since October
One Seaport Plaza 1993), PMF; Executive Vice President, Director and
New York, NY Member of Operating Committee (since October 1993),
Prudential Securities; Director (since October 1993) of Prudential
Securities Group, Inc.; formerly Senior Executive Vice President
and Director of Kemper Financial Services, Inc. (September 1978-
September 1993); Director of The Global Government Plus Fund, Inc.
and The High Yield Income Fund, Inc.
- ------------
* "Interested" director, as defined in the Investment Company Act, by reason
of his affiliation with Prudential Securities or PMF.
B-13
<PAGE>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE FUND DURING PAST 5 YEARS
- ---------------- ------------- ----------------------
Merle T. Welshans Director Adjunct Professor of Finance, Washington University (since
c/o Prudential Mutual Fund July 1983); prior thereto, Vice President-Finance, Union
Management, Inc. Electric Company; Trustee, Olympic Trust.
One Seaport Plaza
New York, NY
Robert F. Gunia Vice President Chief Administrative Officer (since July 1990), Director
One Seaport Plaza (since January 1989) and Executive Vice President,
New York, NY Treasurer and Chief Financial Officer (since June 1987)
of PMF; Senior Vice President (since March 1987) of Prudential
Securities; Vice President and Director (since May 1989) of
The Asia Pacific Fund, Inc.
Susan C. Cote Treasurer and Senior Vice President of PMF; Senior Vice President
One Seaport Plaza Principal Financial and (since January 1992) and Vice President (January 1986-
New York, NY Accounting Officer December 1991) of Prudential Securities.
S. Jane Rose 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 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>
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.
As described above, certain of the disinterested Directors of the Fund are
affiliated with certain utility companies, and one Director is a financial
consultant who may advise utility clients. In such capacities, these Directors
may have access to non-public information regarding certain utility companies or
the utility industry generally which they will be under an obligation not to
disclose to the Fund. In connection with their review of the Fund's investment
program, Directors will not disclose or consider non-public information relating
to portfolio investments. It is also the policy of the Fund not to invest in
securities of any utility company with which any Director is affiliated.
The Fund pays each of its Directors who is not an affiliated person of PMF
annual compensation of $9,000, 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 such agreement, the Fund accrues
daily the amount of Directors' fees 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.
As of June 17, 1994, the Directors and officers of the Fund, as a group,
owned less than 1% of the outstanding common stock of the Fund.
As of June 17, 1994, Prudential Securities was record holder of 14,757,459
Class A shares (or 46% of the outstanding Class A shares) and 198,006,258 Class
B shares (or 43% of the outstanding Class B shares) of the Fund. In the event of
any meetings of
B-14
<PAGE>
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, comprise
the Prudential Mutual Funds. See "How the Fund is Managed" in the Prospectus. As
of June 30, 1994, PMF managed and/or administered open-end and closed-end
management investment companies with assets of approximately $47 billion.
According to the Investment Company Institute, as of April 30, 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 .60 of 1% of the Fund's average daily net assets up to and
including $250 million, .50 of 1% of the next $500 million, .45 of 1% of the
next $750 million, .40 of 1% of the next $500 million, .35 of 1% of the next $2
billion, .325 of 1% of the next $2 billion and .30 of 1% of the excess over $6
billion of the Fund's average daily net assets. The fee is computed daily and
payable monthly. Prior to August 1, 1994, the management fee, with respect to
net assets in excess of $2 billion, was .35 of 1% of the Fund's average daily
net assets. However, for the period from October 1, 1993 through July 31, 1994,
the Manager agreed to waive a portion of its management fee with respect to
assets in excess of $2 billion so that the annual fee received by the Manager
was as follows: .35 of 1% of the Fund's average daily net assets between $2
billion and $4 billion, .325 of 1% of average daily net assets between $4
billion and $6 billion and .30 of 1% of average daily net assets in excess of $6
billion. 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 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, 1993. 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
B-15
<PAGE>
member, (h) the cost of stock certificates representing shares of the Fund, (i)
the cost of fidelity and liability insurance, (j) the fees and expenses involved
in registering and maintaining registration of the Fund and of its shares with
the SEC, registering the Fund and qualifying its shares under state securities
laws, including the preparation and printing of the Fund's registration
statements and prospectuses for such purposes, (k) allocable communications
expenses with respect to investor services and all expenses of shareholders' and
Directors' meetings and of preparing, printing and mailing reports, proxy
statements and prospectuses to shareholders in the amount necessary for
distribution to the shareholders, (l) litigation and indemnification expenses
and other extraordinary expenses not incurred in the ordinary course of the
Fund's business and (m) distribution fees.
The Management Agreement provides that PMF will not be liable for any error
of judgment or for any loss suffered by the Fund in connection with the matters
to which the Management Agreement relates, except a loss resulting from willful
misfeasance, bad faith, gross negligence or reckless disregard of duty. The
Management Agreement provides that it will terminate automatically if assigned,
and that it may be terminated without penalty by either party upon not more than
60 days' nor less than 30 days' written notice. The Management Agreement will
continue in effect for a period of more than two years from the date of
execution only so long as such continuance is specifically approved at least
annually in conformity with the Investment Company Act. The Management Agreement
was last approved by the Board of Directors of the Fund, including a majority of
the Directors who are not parties to the contract or interested persons of any
such party as defined in the Investment Company Act on June 1, 1994 and by
shareholders of the Fund on July 19, 1994.
For the years ended December 31, 1993, 1992 and 1991, PMF received
management fees of $18,383,363, $13,493,919 and $11,523,432, respectively.
PMF has entered into the Subadvisory Agreement with PIC (the Subadviser), a
wholly-owned subsidiary of The Prudential Insurance Company of America
(Prudential). The Subadvisory Agreement provides that PIC will furnish
investment advisory services in connection with the management of the Fund. In
connection therewith, PIC is obligated to keep certain books and records of the
Fund. PMF continues to have responsibility for all investment advisory services
pursuant to the Management Agreement and supervises PIC's performance of such
services. PIC is reimbursed by PMF for the reasonable costs and expenses
incurred by PIC in furnishing those services.
The Subadvisory Agreement was last approved by the Board of Directors,
including a majority of the Directors who are not parties to such 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 29, 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 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 1993, Institutional Investor ranked
Prudential the largest institutional money manager of the 300 largest money
management organizations in the United States as of December 31, 1992.
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, 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 February 8, 1989 and 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
B-16
<PAGE>
Rule 12b-1 Directors, at a meeting called for the purpose of voting on each
Plan, approved the continuance of the Plans and Distribution Agreements and
approved modifications of the Fund's Class A and Class B Plans and Distribution
Agreements to conform them with 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/or the maintenance of shareholder accounts (service fee) and (ii) total
distribution fees (including the service fee of .25 of 1%) may not exceed .30 of
1%. 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 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 the Class A and Class B shareholders, and the Class B
Plan, as amended, was approved by the 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, 1993, PMFD received
payments of $573,660 under the Class A Plan as reimbursement of expenses related
to the distribution of Class A shares. 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, 1993, PMFD also
received $5,755,000 in initial sales charges.
CLASS B PLAN. For the fiscal year ended December 31, 1993, the Distributor
received $43,080,963 from the Fund under the Class B Plan. It is estimated that
the Distributor incurred aggregate distribution expenses of approximately
$60,566,900 on behalf of the Fund during this period. It is estimated that of
the latter amount approximately .4% ($250,700) was spent on printing and mailing
of prospectuses to other than current shareholders; 34.1% ($20,622,100) 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;
2.2% ($1,330,500) on interest and/or carrying charges; and 63.3% ($38,363,600)
on the aggregate of (i) commission credits to Prudential Securities branch
offices for payments of commissions to financial advisers (32.4% or $19,652,700)
and (ii) an allocation of overhead and other branch office distribution-related
expenses (30.9% or $18,710,900). 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 coordinators to promote the sale of Fund shares, and (d)
other incidental expenses relating to branch promotion of Fund sales.
Prudential Securities also receives the proceeds of contingent deferred
sales charges paid by holders of Class B shares upon certain redemptions of
Class B shares. See "Shareholder Guide--How to Sell Your Shares--Contingent
Deferred Sales Charges" in the Prospectus. For the fiscal year ended December
31, 1993, the Distributor received approximately $4,330,000 in contingent
deferred sales charges.
CLASS C PLAN. Prudential Securities 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. Prior to the date of this Statement of
Additional Information, no distribution expenses were incurred under the Class C
Plan.
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 the Rule 12b-1 Directors shall be committed to the Rule 12b-1 Directors.
B-17
<PAGE>
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 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 included in
the calculation of the 6.25% limitation. The annual asset-based sales charge on
Class B 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.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for decisions to buy and sell securities for the
Fund, the selection of brokers and dealers to effect the transactions and the
negotiation of brokerage commissions, if any. The term "Manager" as used in this
section includes the Subadviser. Purchases and sales of securities on a
securities exchange are effected through brokers who charge a commission for
their services. Orders may be directed to any broker 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 account without a stated
commission, although the price of the security usually includes a profit to the
dealer. In underwritten offerings, securities are purchased at a fixed price
which includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. On occasion, certain money
market instruments may be purchased directly from an issuer, in which case no
commissions or discounts are paid. The Fund will not deal with Prudential
Securities or any affiliate in any transaction in which Prudential Securities or
any affilate 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 of the Fund, the Manager is
required to give primary consideration to obtaining the most favorable price and
efficient execution. This means that the Manager will seek to execute each
transaction at a price and commission, if any, which provides the most favorable
total cost or proceeds reasonably attainable in the circumstances. While the
Manager generally seeks reasonably competitive spreads or commissions, the Fund
will not necessarily be paying the lowest spread or commission available. Within
the framework of the policy of obtaining most favorable price and efficient
execution, the Manager will consider research and investment services provided
by brokers or dealers who effect or are parties to portfolio transactions of the
Fund, the Manager or the Manager's other clients. Such research and investment
services are those which brokerage houses customarily provide to institutional
investors and include statistical and economic data and research reports on
particular companies and industries. Such services are used by the Manager in
connection with all of its investment activities, and some of such services
obtained in connection with the execution of transactions for the Fund may be
used in managing other investment accounts. Conversely, brokers or dealers
furnishing such services may be selected for the execution of transactions of
such other accounts, whose aggregate assets are far larger than those of the
Fund, and the services furnished by such brokers or dealers may be used by the
Manager in providing investment management for the Fund. Commission rates are
established pursuant to negotiations with the broker or dealer based on the
quality and quantity of execution services provided by the broker or dealer in
the light of generally prevailing rates. The Manager's policy is to pay higher
commission rates 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 the best price and execution. The Manager is authorized to pay higher
commissions on brokerage transactions for the Fund to brokers or dealers 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 and dealers 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
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<PAGE>
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 in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. This standard would
allow Prudential Securities (or any affiliate) to receive no more than the
remuneration which would be expected to be received by an unaffiliated broker in
a commensurate arm's-length transaction. Furthermore, the Board of Directors of
the Fund, including a majority of the 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) under
the Securities Exchange Act of 1934, Prudential Securities may not retain
compensation for effecting transactions on a national securities exchange for
the Fund unless the Fund has expressly authorized the retention of such
compensation. Prudential Securities must furnish to the Fund at least annually a
statement setting forth the total amount of all compensation retained by
Prudential Securities from transactions effected for the Fund during the
applicable period. Brokerage transactions with Prudential Securities (or any
affiliate) are also subject to such fiduciary standards as may be imposed upon
Prudential Securities (or such affiliate) by applicable law.
Transactions in options by the Fund will be subject to limitations
established by each of the exchanges governing the maximum number of options
which may be written or held by a single investor or group of investors acting
in concert, regardless of whether the options are written or held on the same or
different exchanges or are written or held in one or more accounts or through
one or more brokers. Thus, the number of options which the Fund may write or
hold may be affected by options written or held by the Manager and other
investment advisory clients of the Manager. An exchange may order the
liquidation 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, 1993.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1993 DECEMBER 31, 1992 DECEMBER 31, 1991
----------------- ----------------- -----------------
<S> <C> <C> <C>
Total brokerage commissions paid by the Fund ........... $4,408,907 $3,874,696 $3,084,779
Total brokerage commissions paid to
Prudential Securities ................................ 366,575 455,706 370,000
Percentage of total brokerage commissions paid to
Prudential Securities ................................ 8.3% 11.8% 12.0%
</TABLE>
The Fund effected approximately 8.5% of the total dollar amount of its
transactions involving the payment of commissions through Prudential Securities
during the year ended December 31, 1993. Of the total brokerage commissions paid
during that period, $3,566,805 (80.9%) were paid to firms which provide
research, statistical or other services to PMF. PMF has not separately
identified the 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 (the Class A shares)
or (ii) on a deferred basis (the 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 are sold at a maximum sales charge of 5% and Class
B* and Class C* shares are sold at net asset value. Using the Fund's net asset
value at December 31, 1993, the maximum offering price of the Fund's shares is
as follows:
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<PAGE>
Class A
- -------
Net asset value and redemption price per Class A share ......... $ 9.72
Maximum sales charge (5% of offering price) .................... .51
-------
Maximum offering price to public ............................... $ 10.23
=======
Class B
- -------
Net asset value, offering price and redemption
price per Class B share* ..................................... $ 9.69
=======
Class C
- -------
Net asset value, offering price and redemption
price per Class C share* ..................................... $ 9.69
=======
- ------------
* Class B and Class C shares are subject to a contingent deferred sales
charge on certain redemptions. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus. Class C
shares did not exist on December 31, 1993.
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
shareholder 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 available to investors (or a
related group of eligible investors) who enter into a written Letter of Intent
providing for the purchase, within a thirteen- month period, of shares of the
Fund and shares of other
B-20
<PAGE>
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.
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. 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.
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 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. If the goal is exceeded in
an amount which qualifies for a lower sales charge, a price adjustment is made
by refunding to the purchaser the amount of excess sales charge, if any, paid
during the thirteen-month period. 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.
<TABLE>
<CAPTION>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
- ------------------ ----------------------
<S> <C>
Death A copy of the shareholder's death certificate or, in the case of
a trust, a copy of the grantor's death certificate, plus a copy of the
trust agreement identifying the grantor.
Disability-An individual will be A copy of the Social Security Administration award letter or a letter from
considered disabled if he or she is a physician on the physician's letterhead stating that the shareholder
unable to engage in any substantial (or, in the case of a trust, the grantor) is permanently disabled. The
gainful activity by reason of any letter must also indicate the date of disability.
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) A copy of the distribution form from the custodial firm indicating (i) the
Custodial Account date of birth of the shareholder and (ii) that the shareholder is over age
59-1/2 and is taking a normal distribution--signed by the shareholder.
Distribution from Retirement Plan A letter signed by the plan administrator/trustee indicating the reason
for the distribution.
Excess Contributions A letter from the shareholder (for an IRA) or the plan
administrator/trustee on company letterhead indicating the amount of the
excess and whether or not taxes have been paid.
</TABLE>
The Transfer Agent reserves the right to request such additional documents
as it may deem appropriate.
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
B-21
<PAGE>
$500,000. For example, if you purchase $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%
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 shares of the Fund, 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
shareholder 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 5 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 dividend or
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.
B-22
<PAGE>
The following money market funds participate in the Class A Exchange
Privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets
Prudential Tax-Free Money Fund
CLASS B AND CLASS C. Shareholders of the Fund may exchange their Class B
and Class C shares for Class B and Class C shares, respectively, of certain
other Prudential Mutual Funds and shares of Prudential Special Money Market
Fund, a money market fund. No CDSC will be payable upon such exchange, but a
CDSC may be payable upon the redemption of the Class B and Class C shares
acquired as a result of 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
an eligible money market fund without imposition of any CDSC at the time of
exchange. Upon subsequent redemption from such money market fund or after
re-exchange into the Fund, such shares will be subject to the CDSC calculated by
excluding the time such shares were held in the money market fund. In order to
minimize the period of time in which shares are subject to a CDSC, shares
exchanged out of the money market fund will be exchanged on the basis of their
remaining holding periods, with the longest remaining holding periods being
transferred first. In measuring the time period shares are held in a money
market fund and "tolled" for purposes of calculating the CDSC holding period,
exchanges are deemed to have been made on the last day of the month. Thus, if
shares are exchanged into the Fund from a money market fund during the month
(and are held in the Fund at the end of the month), the entire month will be
included in the CDSC holding period. Conversely, if shares are exchanged into a
money market fund prior to the last day of the month (and are held in the money
market fund on the last day of the month), the entire month will be excluded
from the CDSC holding period. For purposes of calculating the seven-year holding
period applicable to the Class B conversion feature, the time period during
which Class B shares were held in a money market fund will be excluded.
At any time after acquiring shares of other funds participating in the
Class B or Class C exchange privilege, the shareholder may again exchange those
shares (and any reinvested dividends and distributions) for Class B or Class C
shares of the Fund, respectively, without subjecting such shares to any CDSC.
Shares of any fund participating in the Class B or Class C exchange privilege
that were acquired through reinvestment of dividends or distributions may be
exchanged for Class B or Class C shares of other funds, respectively, without
being subject to any CDSC.
Additional details about the Exchange Privilege and prospectuses for each
of the Prudential Mutual Funds are available from the Fund's Transfer Agent,
Prudential Securities or Prusec. The Exchange Privilege may be modified,
terminated or suspended on sixty days' notice, and any fund, including the Fund,
or the Distributor, has the right to reject any exchange application relating to
such fund's shares.
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
B-23
<PAGE>
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.
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
automaticially 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 the 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
B-24
<PAGE>
for use by both self-employed individuals and corporate employers. These plans
permit either self-direction of accounts by participants, or a pooled account
arrangement. Information regarding the establishment of these plans, the
administration, custodial fees and other details are available from Prudential
Securities or the Transfer Agent.
Investors who are considering the adoption of such a plan should consult
with their own legal counsel or tax adviser with respect to the establishment
and maintenance of any such plan.
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.
TAX-DEFERRED COMPOUNDING(1)
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
------------- -------- --------
10 years $ 26,165 $ 31,291
15 years 44,675 58,649
20 years 68,109 98,846
25 years 97,780 157,909
30 years 135,346 244,692
- ------------
(1) The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated. Earnings in
the IRA account will be subject to tax when withdrawn from the account.
NET ASSET VALUE
Under the Investment Company Act, the Board of Directors is responsible for
determining in good faith the fair value of securities of the Fund.
The net asset value per share is the net worth of the Fund (assets,
including securities at value, minus liabilities) divided by the number of
shares outstanding. Net asset value is calculated separately for each class. The
value of investments listed on a national securities exchange, other than
options on stock indices, is based on the last sale prices as of the close of
the New York Stock Exchange (which is currently 4:00 P.M., New York time), or,
in the absence of recorded sales, at the average of readily available closing
bid and asked prices on such exchange. Unlisted securities are valued at the
average of the quoted bid and asked prices in the over-the-counter market.
Options on stocks and stock indices traded on national securities exchanges are
valued at the last sales price at the close of options trading on such exchanges
(which is currently 4:10 P.M., New York time). Securities or other assets for
which market quotations are not readily available are valued by appraisal at
their fair value as determined in good faith under procedures established by and
under the general supervision and responsibility of the Fund's Board of
Directors.
Short-term investments which mature in more than 60 days are valued based
on current market quotations, and short-term securities which mature in 60 days
or less are valued at amortized cost, unless such valuation is determined not to
represent fair value by the Board of Directors.
The Fund will compute its net asset value once daily at 4:15 P.M., New York
time, on eash 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. The New York Stock Exchange is closed on the
following holidays: New Year's Day, President's 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
B-25
<PAGE>
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 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 is qualified and intends to remain qualified as a regulated
investment company under Subchapter M of the Internal Revenue Code. In order to
qualify as a regulated investment company, the Fund must, among other things,
(a) derive at least 90% of its 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) derived with respect to
its business of investing in such securities or currencies; (b) derive less than
30% of its annual gross income from gains from the sale or other disposition of
securities held less than three months; and (c) diversify its holdings so that,
at the end of each fiscal quarter, (i) at least 50% of the market value of the
Fund's assets is represented by cash, U.S. Government securities and other
securities limited, in respect of any one issuer, to an amount not greater than
5% of the market value of the Fund's assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its assets
is invested in the securities of any one issuer (other than U.S. Government
securities).
As a regulated investment company, the Fund will not be subject to federal
income tax on its net investment income and capital gains, if any, that it
distributes to its shareholders, provided that it distributes to shareholders
each year at least 90% of its net investment income and short-term capital gains
in excess of net long-term capital losses, if any. The Fund intends to
distribute to its shareholders all such income and any gains. The Board of
Directors of the Fund will determine at least once a year whether to distribute
any net long-term capital gains in excess of any net short-term capital losses.
In determining amounts of capital gains to be distributed, any capital loss
carryovers from prior years will be offset against capital gains.
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 income tax will be considered to
have been distributed by year-end. In addition, dividends declared in October,
November and December payable to shareholders of record on a specified date in
October, November and December 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 the calendar year in which declared. 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 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. 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 stock will generally be treated as gains and losses
from the sale of stock. For federal income tax purposes, when call options which
the Fund has written expire unexercised, the premiums received by the Fund give
rise to short-term capital gains at the time of expiration. When a call written
by the Fund is exercised, the selling price of the stock is increased by the
amount of the premium, and the gain or loss on the sale of stock becomes
long-term or short-term depending on the stock's holding period. Certain futures
contracts and options 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 fair
market value on the last day of the Fund's fiscal year. Any gain or loss
recognized on these deemed sales of these futures contracts and options will be
treated 60% as long-term capital gain or loss, and the remainder will be treated
as short-term capital gain or loss. In some cases the Fund may be required to
defer the recognition of losses on sales of securities or the sale, lapse or
other termination of options to the extent of any unrealized gain on related
positions held by the Fund.
The "straddle" provisions of the Internal Revenue Code may also affect the
taxation of the Fund's transactions in options on securities, stock index
futures and options on futures, and limit the deductibility of any loss from the
disposition of a position to the amount of the unrealized gain on any offsetting
position. Further, any position in the straddle (e.g., a put option acquired by
the Fund) may affect the holding period of the offsetting position for purposes
of the 30% of gross income test described above, and accordingly, the Fund's
ability to enter into straddles and dispose of the offsetting positions may be
limited.
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.
B-26
<PAGE>
A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of the Fund.
The per share dividends on Class B and Class C shares 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."
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. Prior to purchasing shares of the Fund,
therefore, the investor should carefully consider the impact of dividends or
capital gains distributions which are expected to be or have been announced.
Dividends and distributions may also be subject to state and local taxes.
PERFORMANCE INFORMATION
AVERAGE ANNUAL TOTAL RETURN. The Fund may 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.
Average annual total return is computed according to the following formula:
P(1 + T)^n = ERV
Where: P = a hypothetical initial payment of $1,000.
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
$1,000 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 period
ended December 31, 1993 and the period January 22, 1990 (commencement of
offering of Class A shares) through December 31, 1993 was 10.18% and 9.90%,
respectively. The average annual total return for Class B shares for the one,
five and ten year periods ended on December 31, 1993 was 10.27%, 13.79% and
18.06%, respectively. During these periods, no Class C shares were outstanding.
See "How the Fund Calculates Performance" in the Prospectus.
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 $1,000.
ERV = Ending Redeemable Value at the end of the 1, 5 or 10 year
periods (or fractional portion thereof) of a hypothetical
$1,000 payment 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 period ended
December 31, 1993 and the period January 22, 1990 (commencement of offering of
Class A shares) through December 31, 1993 was 16.28% and 53.10%, respectively.
The aggregate total return for Class B shares for the one, five and ten year
periods ended on December 31, 1993 was 15.27%, 91.83% and 426.88%, respectively.
During these periods, no Class C shares were outstanding.
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
B-27
<PAGE>
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.
The Fund's 30-day yields for the period ended December 31, 1993 were 3.21%
and 2.58% for Class A and Class B shares, respectively. During this period, no
Class C shares were outstanding.
From time to time, the performance of the Fund may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long-term and the rate of inflation.(1)
[The following table was represented as a graph in the printed material]
A Look At Performance Over the Long-Term
(1926-1992)
Common Stocks ....................... Average Annual Return 10.3%
Long-Term Government Bonds .......... Average Annual Return 4.8%
Inflation ........................... 3.1%
- ------------
(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 AND 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 an agreement with the Fund. See "How the Fund is
Managed--Custodian and Transfer and Dividend Disbursing Agent" in the
Prospectus.
B-28
<PAGE>
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison,
New Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of the
Fund. It is a wholly-owned subsidiary of PMF. PMFS provides customary transfer
agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, the payment of dividends and distributions and
related functions. For these services, PMFS receives an annual fee per
shareholder account, in addition to a new account set-up fee for each
manually-established account and a monthly inactive zero balance account fee per
shareholder account. PMFS is also reimbursed for its out-of-pocket expenses,
including but not limited to postage, stationery, printing, allocable
communications expenses and other costs. For the year ended December 31, 1993,
the Fund incurred fees of approximately $4,920,800 for the services of PMFS.
Price Waterhouse, 1177 Avenue of the Americas, New York, New York 10036,
serves as the Fund's independent accountants and in that capacity audits the
Fund's annual financial statements.
B-29
<PAGE>
PRUDENTIAL UTILITY FUND PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1993
VALUE
SHARES DESCRIPTION (NOTE 1)
- --------- --------------------------- -----------
LONG-TERM INVESTMENTS--88.2%
COMMON STOCKS--84.1%
COMMUNICATIONS--22.2%
993,600 Ameritech Corp........... $ 76,258,800
1,050,000 BCE, Inc................. 36,618,750
867,900 Bell Atlantic Corp....... 51,206,100
855,200 BellSouth Corp........... 49,494,700
8,200,000 British Telecommunications
PLC (ADR) (United
Kingdom)................ 57,126,825
1,322,400 GTE Corp................. 46,284,000
1,175,000 MTC Electronic
Technologies, Ltd....... 10,942,188
2,037,600 NYNEX Corp............... 81,758,700
1,500,000 Pacific Telesis Group.... 81,000,000
165,000 Rochester Telephone
Corp.................... 7,445,625
17,700,000 SIP (Italy).............. 37,163,292
2,719,200 Southern New England
Telecommunications
Corp.................... 98,231,100
3,769,300 Sprint Corp.............. 130,983,175
14,147,500 STET (Italy)............. 36,248,583
1,346,000 Telebras (ADR)
(Brazil)................ 45,679,875
2,550,000 Telefonica de Espana
(ADR) (Spain)........... 99,450,000
1,576,300 Telefonos de Mexico (ADR)
(Mexico)................ 106,400,250
1,713,700 U.S. West, Inc........... 78,615,988
-------------
1,130,907,951
-------------
ELECTRIC POWER--34.7%
253,028 AES Corp................. 8,824,352
243,200 American Electric Power,
Inc..................... 9,028,800
400,000 Boston Edison Co......... 11,900,000
1,000,000 California Energy,
Inc.*................... 18,500,000
2,336,500 Centerior Energy Corp.... 30,666,563
701,800 Central Hudson Gas &
Electric Co............. 21,317,175
1,033,400 Central Louisiana
Electric Co............. 25,576,650
744,900 Central Maine Power
Co...................... 11,173,500
5,200,000 China Light & Power Co.,
Ltd. (Hong Kong)........ 38,020,055
910,200 Cincinnati Gas & Electric
Co...................... 25,030,500
3,700,000 CMS Energy Corp.......... 92,962,500
2,804,600 Commonwealth Edison
Co...................... 79,229,950
1,960,160 Companhia Energetica de
Minas (ADR) (Brazil)*... 35,121,747
63,200 Destec Energy, Inc.*..... 908,500
2,200,600 Detroit Edison Co........ 66,018,000
1,121,400 DPL, Inc................. 23,128,875
763,700 DQE, Inc................. 26,347,650
896,300 Eastern Utilities
Assoc................... 25,096,400
1,710,200 El Paso Electric
Co.*/**................. 4,596,163
1,247,700 Empresa Nacional de
Electricidad (ADR)
(Spain)................. 59,265,750
300,000 Enersis (ADR) (Spain).... 7,050,000
1,562,700 Entergy Corp............. 56,257,200
250,000 Evn Energ Versorg
(Austria)............... 32,089,399
2,937,800 General Public Utilities
Corp.................... 90,704,575
5,316,200 Gulf States Utilities
Co.*.................... 106,324,000
6,300,000 Iberdrola (Spain)........ 45,110,022
3,351,700 Illinois Power Co........ 74,156,363
887,600 Kansas City Power & Light
Co...................... 20,414,800
89,600 Kenetech Corp.*.......... 1,797,600
3,625,000 Long Island Lighting
Co...................... 88,359,375
6,000,000 National Power PLC
(United Kingdom)*....... 42,774,276
1,864,600 New York State Electric &
Gas Corp................ 57,336,450
1,160,000 Niagara Mohawk Power
Corp.................... 23,490,000
1,018,200 NIPSCO Industries,
Inc..................... 33,473,325
2,473,900 Northeast Utilities
Co...................... 58,755,125
770,000 Oester Elektrizita
(Austria)............... 46,923,108
See Notes to Financial Statements.
B-30
<PAGE>
PRUDENTIAL UTILITY FUND
VALUE
SHARES DESCRIPTION (NOTE 1)
- --------- --------------------------- -----------
ELECTRIC POWER (CONT'D)
3,011,900 Philadelphia Electric
Co...................... $ 91,109,975
2,103,400 Pinnacle West Capital
Corp.................... 47,063,575
499,700 PowerGen PLC
(United Kingdom)*....... 4,015,979
2,612,400 PSI Resources, Inc....... 69,228,600
274,100 Public Service Co. of
Colorado................ 8,805,463
2,057,000 Public Service Co. of
New Mexico*............. 23,141,250
921,200 Rochester Gas & Electric
Corp.................... 24,181,500
1,098,100 Sithe Energies, Inc.*.... 14,275,300
1,922,900 Southern Co.............. 84,847,964
115,000 United Illuminating
Co...................... 4,628,750
-------------
1,769,027,104
-------------
NATURAL GAS--27.2%
3,148,000 Arkla, Inc............... 24,790,500
283,650 Bay State Gas Co......... 8,084,025
2,521,300 British Gas PLC (ADR)
(United Kingdom)........ 129,846,950
850,000 Burlington Resources,
Inc..................... 36,018,750
3,962,875 Coastal Corp............. 111,455,859
2,500,000 Columbia Gas System,
Inc.*/**................ 55,937,500
1,100,000 Consolidated Natural Gas
Co...................... 51,700,000
5,000 Eastern Enterprises,
Inc..................... 127,500
1,477,600 El Paso Natural Gas
Co...................... 53,193,600
500,000 Energen Corp............. 10,750,000
1,356,000 Enron Corp............... 39,324,000
2,782,900 ENSERCH Corp............. 45,222,125
1,500,000 Equitable Resources,
Inc..................... 54,937,500
690,300 KN Energy, Inc........... 17,775,225
1,210,600 NICOR, Inc............... 33,896,800
700,000 Oryx Energy Co........... 12,075,000
3,544,300 Pacific Enterprises...... 84,177,125
4,806,900 Panhandle Eastern
Corp.................... 113,563,013
117,600 Providence Energy
Corp.................... 2,278,500
1,880,400 Questar Corp............. 62,053,200
990,000 Sonat Offshore Drilling,
Inc..................... 15,840,000
3,561,400 Sonat, Inc............... 102,835,425
205,400 Southwest Gas Corp....... 3,286,400
802,500 Talisman Energy, Inc.*... 17,607,339
521,800 Tejas Power Corp.*....... 5,087,550
7,700,000 TransCanada Pipelines,
Ltd. (Canada)........... 117,240,400
1,916,300 Transco Energy Co........ 27,067,738
2,200,000 Westcoast Energy, Inc.... 36,300,000
4,396,450 Williams Cos., Inc....... 107,163,462
161,150 Yankee Energy System,
Inc..................... 3,968,319
-------------
1,383,603,805
-------------
Total common stocks
(cost $3,518,021,463)... 4,283,538,860
-------------
PREFERRED STOCKS
ELECTRIC POWER
El Paso Electric Co. */**
7,000 $8.24.................... 504,000
10,300 $8.44.................... 741,600
5,700 $8.95.................... 410,400
-------------
Total preferred stocks
(cost $1,158,100)...... 1,656,000
------------
PRINCIPAL
AMOUNT
(000)
- ---------
BONDS--4.1%
COMMUNICATIONS
MTC Electronic Technologies, Ltd.,
$2,250 8.00%, 7/31/03........... 2,576,250
------------
ELECTRIC POWER--1.7%
Arkansas Power & Light
Co.,
5,000 10.00%, 2/1/20........... 5,373,250
See Notes to Financial Statements.
B-31
<PAGE>
PRUDENTIAL UTILITY FUND
PRINCIPAL
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
--------- ------------------------------ -----------
ELECTRIC POWER (CONT'D)
Cincinnati Gas & Electric Co.,
$ 6,500 9.70%, 6/15/19............ $ 7,003,620
10,000 10.20%, 12/1/20........... 11,625,000
Cleveland Electric Illumination Co.,
10,000 9.375%, 3/1/17............ 10,037,500
Commonwealth Edison Co.,
10,000 9.625%, 7/1/19............ 10,649,300
Niagara Mohawk Power Corp.,
10,000 9.50%, 3/1/21............. 11,299,900
Ohio Edison Co.,
10,000 9.75%, 7/15/19............ 10,875,100
Texas Utilities Co.,
5,000 9.75%, 5/1/21............. 6,031,150
Virginia Electric & Power Co.,
10,000 9.75%, 2/1/19............. 10,660,300
--------------
83,555,120
--------------
NATURAL GAS--2.4%
Arkla, Inc.,
20,000 10.00%, 11/15/19.......... 23,000,000
Burlington Resources,
Inc.,
10,000 8.50%, 10/1/01............ 11,257,900
15,000 9.125%, 10/1/21........... 18,072,600
Coastal Corp.,
5,000 8.125%, 9/15/02........... 5,231,900
15,000 9.625%, 5/15/12........... 17,245,800
Columbia Gas System, Inc.,*/**
2,500 10.25%, 5/1/99............ 2,921,875
1,031 10.25%, 8/1/11............ 1,257,810
1,000 10.50%, 6/1/12............ 1,200,000
8,180 10.15%, 11/1/13........... 9,816,000
Oryx Energy Co.,
2,000 9.50%, 11/1/99............ 2,153,120
1,000 7.50%, 5/15/14............ 965,000
Transcontinental Gas Pipe Line,
11,000 8.875%, 9/15/02........... 11,591,140
Williams Cos., Inc.,
15,000 8.875%, 9/15/12........... 16,925,100
--------------
121,638,245
--------------
Total bonds
(cost $191,604,930)..... 207,769,615
--------------
Total long-term
investments
(cost $3,710,784,493)... 4,492,964,475
-------------
SHORT-TERM INVESTMENTS--12.5%
BONDS--7.1%
First Union National Bank of
North Carolina,
105,569 3.00%, 1/3/94............. 105,569,000
Republic National Bank,
254,000 3.188%, 1/3/94............ 254,000,000
--------------
Total bonds
(cost $359,569,000).... 359,569,000
--------------
REPURCHASE AGREEMENT--5.4%
Joint Repurchase Agreement Account,
274,219 3.153%, 1/3/94
(cost $274,219,000; Note
5)....................... 274,219,000
--------------
Total short-term
investments
(cost $633,788,000)..... 633,788,000
--------------
TOTAL INVESTMENTS--100.7%
(cost $4,344,572,493;
Note 4).................. 5,126,752,475
Liabilities in excess of
other assets--(0.7%)..... (34,512,175)
--------------
NET ASSETS--100%..........$5,092,240,300
==============
- -------------------
* Non-income producing securities.
** Issuer in bankruptcy.
ADR--American Depository Receipt.
See Notes to Financial Statements.
B-32
<PAGE>
PRUDENTIAL UTILITY FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31,
1993
--------------
ASSETS
Investments, at value (cost $4,344,572,493) ................. $5,126,752,475
Dividends and interest receivable ........................... 17,346,113
Receivable for Fund shares sold ............................. 7,348,316
Deferred expenses and other assets .......................... 97,358
--------------
Total assets ............................................ 5,151,544,262
--------------
LIABILITIES
Payable for investments purchased ........................... 42,257,025
Payable for Fund shares reacquired .......................... 9,277,411
Distribution fee payable .................................... 4,055,409
Accrued expenses and other liabilities ...................... 2,035,501
Management fee payable ...................................... 1,678,616
--------------
Total liabilities ....................................... 59,303,962
--------------
NET ASSETS .................................................. $5,092,240,300
==============
Net assets were comprised of:
Common stock, at par ...................................... $ 5,255,245
Paid-in capital in excess of par .......................... 3,865,379,704
--------------
3,870,634,949
Undistributed net investment income ....................... 415,726,618
Accumulated net realized gain on investments .............. 23,384,058
Net unrealized appreciation on investments
and foreign currencies .................................. 782,494,675
--------------
Net assets, December 31, 1993 ............................. $5,092,240,300
==============
Class A:
Net asset value and redemption price per share
($336,635,764 / 34,645,133 shares of common
stock issued and outstanding) ........................... $9.72
Maximum sales charge (5.25% of offering price) ............ .54
------
Maximum offering price to public .......................... $10.26
======
Class B:
Net asset value, offering price and redemption
price per share ($4,755,604,536 / 490,879,345 of
common stock issued and outstanding) .................... $ 9.69
======
See Notes to Financial Statements.
B-33
<PAGE>
PRUDENTIAL UTILITY FUND
STATEMENT OF OPERATIONS
YEAR ENDED
DECEMBER 31,
1993
------------
NET INVESTMENT INCOME
Income
Dividends (net of foreign withholding
taxes of $2,647,319) ................................... $139,439,683
Interest (net of foreign withholding
taxes of $10,875) ...................................... 42,346,733
------------
Total income ........................................... 181,786,416
------------
Expenses
Distribution fee--Class A ................................ 573,660
Distribution fee--Class B ................................ 43,080,963
Management fee ........................................... 18,383,363
Transfer agent's fees and expenses ....................... 6,400,000
Reports to shareholders .................................. 1,180,000
Custodian's fees and expenses ............................ 660,000
Registration fees ........................................ 505,000
Insurance ................................................ 114,000
Legal fees ............................................... 81,000
Audit fee ................................................ 62,000
Directors' fees .......................................... 54,000
Miscellaneous ............................................ 34,354
------------
Total expenses ......................................... 71,128,340
------------
Net investment income ...................................... 110,658,076
------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCY
TRANSACTIONS
Net realized gain (loss) on:
Security transactions .................................... 216,838,459
Foreign currency transactions ............................ (937,074)
------------
215,901,385
------------
Net change in unrealized appreciation on:
Securities ............................................... 257,223,087
Foreign currencies ....................................... 540,467
------------
257,763,554
------------
Net gain on investments and foreign currencies ............. 473,664,939
------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ................................ $584,323,015
============
See Notes to Financial Statements.
PRUDENTIAL UTILITY FUND
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31,
INCREASE (DECREASE) -------------------------------
IN NET ASSETS 1993 1992
-------------- --------------
Operations
Net investment income .................... $ 110,658,076 $ 107,121,511
Net realized gain on investment and
foreign currency transactions .......... 215,901,385 89,434,724
Net change in unrealized appreciation of
investments and foreign currencies ..... 257,763,554 92,759,598
-------------- --------------
Net increase in net assets resulting
from operations ........................ 584,323,015 289,315,833
-------------- --------------
Net equalization credits ................... 95,670,312 53,394,394
-------------- --------------
Dividends and distributions (Note 1)
Dividends from net investment income
Class A ................................ (8,808,902) (6,100,105)
Class B ................................ (99,427,992) (101,021,406)
-------------- --------------
(108,236,894) (107,121,511)
-------------- --------------
Distributions from net realized gains
Class A ................................ (13,264,520) (4,685,002)
Class B ................................ (189,046,028) (83,068,066)
-------------- --------------
(202,310,548) (87,753,068)
-------------- --------------
Fund share transactions (Note 6)
Net proceeds from shares subscribed ...... 1,512,896,198 844,256,938
Net asset value of shares issued to
shareholders in reinvestment of
dividends and distributions ............ 260,462,818 162,399,270
Cost of shares reacquired ................ (689,440,495) (444,645,324)
-------------- --------------
Net increase in net assets from Fund
share transactions ..................... 1,083,918,521 562,010,884
-------------- --------------
Total increase ............................. 1,453,364,406 709,846,532
NET ASSETS
Beginning of year .......................... 3,638,875,894 2,929,029,362
-------------- --------------
End of year ................................ $5,092,240,300 $3,638,875,894
============== ==============
See Notes to Financial Statements.
B-34
<PAGE>
PRUDENTIAL UTILITY FUND
NOTES TO FINANCIAL STATEMENTS
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 POLICIES
The following is a summary of significant accounting policies 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 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 year, 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 year. 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 year.
Net realized losses on foreign currency transactions of $937,074 represents
net foreign exchange losses from sales and maturities of short-term securities,
disposition of foreign currency, gains or losses realized between the trade and
settlement dates on 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 year 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.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
B-35
<PAGE>
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: Effective January 1, 1993, the Fund began
accounting and reporting for 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. As a result of this statement, the Fund changed the
classification of distributions to shareholders to disclose better the
differences between financial statement amounts and distributions determined in
accordance with income tax regulations. The effect caused by adopting this
statement was to increase paid-in capital in excess of par by $18,691,112,
decrease undistributed net investment income by $4,507,069 and decrease
accumulated net realized gain on investments by $14,184,043 compared to amounts
previously reported through December 31, 1992. For the year ended December 31,
1993, the Fund reclassified $1,704,541 of net foreign currency losses to
undistributed net investment income from accumulated net realized gains on
investments. 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.
Prior to October 1, 1993, the management fee paid PMF was 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 and .35% of the average daily net assets
of the Fund in excess of $2 billion. Effective October 1, 1993, the management
fee was reduced so that it is computed as follows: .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 .20 of 1% of the average daily net assets of the Class A shares for
the year ended December 31, 1993. 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 $5,755,000 in
front-end sales charges resulting from sales of Class A shares during the year
ended December 31, 1993. 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
B-36
<PAGE>
contingent deferred sales charges in connection with certain redemptions of
shares may exceed the total reimbursement made by the Fund pursuant to the Class
B Plan. PSI advised the Fund that for the year ended December 31, 1993, it
received approximately $4,330,000 in contingent deferred sales charges imposed
upon redemptions by certain shareholders. PSI, as distributor, has also advised
the Fund that at December 31, 1993, the amount of distribution expenses incurred
by PSI and not yet reimbursed by the Fund or recovered through contingent
deferred sales charges approximated $43,949,000. 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 TRANSACTIONS WITH AFFILIATES
Prudential Mutual Fund Services, Inc. ("PMFS"), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the year ended December 31,
1993, the Fund incurred fees of approximately $4,920,800 for the services of
PMFS. As of December 31, 1993, approximately $454,100 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 year ended December 31, 1993, PSI earned approximately $366,600 in
brokerage commissions from portfolio transactions executed on behalf of the
Fund.
NOTE 4. PORTFOLIO SECURITIES
Purchases and sales of investment securities, other than short-term investments,
for the year ended December 31, 1993, were $1,567,887,079 and $983,069,399,
respectively.
The federal income tax basis of the Fund's investments at December 31, 1993
was $4,345,786,537 and, accordingly, net unrealized appreciation for federal
income tax purposes was $780,965,938 (gross unrealized appreciation--
$846,478,073; gross unrealized depreciation--$65,512,135).
NOTE 5. JOINT REPURCHASE AGREEMENT ACCOUNT
The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Treasury or federal agency obligations.
As of December 31, 1993, the Fund had a 22.9% undivided interest in the
repurchase agreements in the joint account. The undivided interest for the Fund
represented $274,219,000 in principal amount. As of such date, each repurchase
agreement in the joint account and the collateral therefor was as follows:
Barclays de Zoete Wedd, Inc., 3.10%, in the principal amount of
$100,000,000, repurchase price $100,025,833, due 1/3/94; collateralized by
$32,000,000 U.S. Treasury Notes, 7.50%, due 11/15/01; $7,305,000 U.S. Treasury
Notes, 8.50%, due 2/15/00 and $49,000,000 U.S. Treasury Notes, 8.875%, due
11/15/98; approximate aggregate value including accrued interest--$102,043,014.
Bear, Stearns & Co., 3.18%, in the principal amount of $323,000,000,
repurchase price $323,085,595, due 1/3/94; collateralized by $200,000,000 U.S.
Treasury Notes, 3.875%, due 3/31/95; $5,745,000 U.S. Treasury Notes, 4.25%, due
7/31/95; $85,000 U.S. Treasury Notes, 7.375%, due 5/15/96; $30,000,000 U.S.
Treasury Notes, 5.625%, due 1/31/98 and $80,030,000 U.S. Treasury Notes, 7.50%,
due 11/15/01; approximate aggregate value including accrued interest--
$329,564,341.
Goldman, Sachs & Co., 3.10%, in the principal amount of $399,000,000,
repurchase price $399,103,075, due 1/3/94; collateralized by $363,720,000 U.S.
Treasury Bonds, 7.50%, due 11/15/16, approximate value including accrued
interest--$408,104,889.
Kidder, Peabody & Co. Inc., 3.20%, in the principal amount of $375,000,000,
repurchase price $375,100,000, due 1/3/94; collateralized by $200,000,000 U.S.
Treasury Bonds, 11.625%, due 11/15/04; $38,000,000 U.S. Treasury Bonds, 12.75%,
due 11/15/10; $11,730,000 U.S. Treasury Notes, 7.25%, due 11/15/96; $90,000 U.S.
Treasury Bonds, 9.00%, due 2/15/94 and $15,000,000 U.S. Treasury Notes, 7.375%,
due 5/15/96; approximate aggregate value including accrued interest--
$382,608,562.
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.
The Board of Directors approved an amendment to the Fund's Articles of
Incorporation increasing the number of authorized shares to 2 billion at $.01
par value per share.
B-37
<PAGE>
Transactions in shares of common stock for the years ended December 31, 1993 and
1992 were as follows:
CLASS A SHARES AMOUNT
------- ----------- --------------
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
=========== ==============
Year ended December 31, 1992:
Shares sold .................. 8,200,371 $ 144,749,564
Shares issued in
reinvestment of
dividends and
distributions .............. 570,475 10,033,103
Shares reacquired ............ (3,903,500) (69,439,087)
----------- --------------
Net increase in shares
outstanding ................ 4,867,346 $ 85,343,580
=========== ==============
CLASS B SHARES AMOUNT
------- ----------- --------------
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
=========== ==============
Year ended December 31, 1992:
Shares sold .................. 44,195,557 $ 699,507,374
Shares issued in
reinvestment of
dividends and
distributions .............. 9,463,606 152,366,167
Shares reacquired ............ (23,484,866) (375,206,237)
----------- --------------
Net increase in shares
outstanding ................ 30,174,297 $ 476,667,304
=========== ==============
NOTE 7. CONTINGENCY
On October 12, 1993 a lawsuit was instituted against the Fund, PMF, PIC, PSI and
certain current and former directors of the Fund. The suit was brought by
plaintiffs both derivatively on behalf of the Fund and purportedly on behalf of
the class of shareholders who purchased their shares prior to 1985. The
plaintiffs seek damages on behalf of the Fund in an unspecified amount for
alleged excessive management and distribution fees. The complaint also
challenges the Alternative Purchase 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 plaintiffs, on behalf of the purported class seek damages
and equitable relief against the Fund and the named directors to change the
classification of the shares of the class and to compel a further vote on such
plan. Although the outcome of this litigation cannot be predicted at this time,
the defendants believe they have meritorious defenses to the claims asserted in
the complaint 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 financial position and results of
operations.
B-38
<PAGE>
PRUDENTIAL UTILITY FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A CLASS B
---------------------------------- ------------------------------------------
JANUARY 22,
1990++
YEARS ENDED THROUGH
DECEMBER 31, DECEMBER YEARS ENDED DECEMBER 31,
------------------------ 31, ------------------------------------------
1993 1992 1991 1990 1993 1992 1991 1990 1989**
------ ------ ------- ------- ------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE*:
Net asset value,
beginning of period ... $ 8.97 $ 8.72 $ 7.63 $ 8.78 $ 8.96 $ 8.71 $ 7.63 $ 9.17 $ 7.31
------ ------ ------- ------- ------- ------ ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income ... .33 .38 .39 .36 .24 .31 .32 .31 .36
Net realized and
unrealized gains
(losses) on investment
and foreign currency
transactions .......... 1.12 .45 1.10 (.51) 1.12 .46 1.10 (.91) 2.30
------ ------ ------- ------- ------- ------ ------- ------- -------
Total from investment
operations ......... 1.45 .83 1.49 (.15) 1.36 .77 1.42 (.60) 2.66
------ ------ ------- ------- ------- ------ ------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net
investment income ..... (.29) (.34) (.39) (.40) (.22) (.28) (.33) (.34) (.36)
Distributions from net
realized gains ........ (.41) (.24) (.01) (.60) (.41) (.24) (.01) (.60) (.44)
------ ------ ------- ------- ------- ------ ------- ------- -------
Total
distributions ...... (.70) (.58) (.40) (1.00) (.63) (.52) (.34) (.94) (.80)
------ ------ ------- ------- ------- ------ ------- ------- -------
Net asset value, end of
period ................ $ 9.72 $ 8.97 $ 8.72 $ 7.63 $ 9.69 $ 8.96 $ 8.71 $ 7.63 $ 9.17
====== ====== ======= ======= ======= ====== ======= ======= =======
TOTAL RETURN# ........... 16.28% 9.88% 19.95% (1.53)% 15.27% 9.02% 19.01% (6.48)% 37.17%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000,000) ............. $337 $201 $111 $ 73 $4,756 $3,438 $2,818 $2,395 $2,306
Average net assets
(000,000) ............. $287 $149 $ 85 $ 51 $4,308 $3,027 $2,529 $2,315 $2,037
Ratios to average net
assets:
Expenses, including
distribution fees .... .80% .81% .87% .97%+ 1.60% 1.61% 1.67% 1.73% 1.46%
Expenses, excluding
distribution fees .... .60% .61% .67% .77%+ .60% .61% .67% .74% .73%
Net investment
income ............... 3.16% 4.14% 4.69% 4.78%+ 2.36% 3.34% 3.89% 3.94% 4.19%
Portfolio turnover
rate .................. 24% 24% 38% 53% 24% 24% 38% 53% 75%
<FN>
- ---------------
* Restated to reflect 2 for 1 stock split paid July 6, 1993 to shareholders
of record July 2, 1993.
** Based on average month-end shares outstanding.
+ Annualized.
++ 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.
</FN>
</TABLE>
See Notes to Financial Statements.
B-39
<PAGE>
- --------------------------------------------------------------------------------
R E P O R T O F I N D E P E N D E N T A C C O U N T A N T S
- --------------------------------------------------------------------------------
To Board of Directors and Shareholders of
Prudential Utility Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Utility Fund (the
"Fund") at December 31, 1993, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the five years in the period
then ended, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1993 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
/s/ Price Waterhouse
PRICE WATERHOUSE
1177 Avenue of the Americas
New York, New York
February 8, 1994
B-40
