<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 27, 1998
SECURITIES ACT REGISTRATION NO. 2-72097
INVESTMENT COMPANY ACT REGISTRATION NO. 811-3175
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 / /
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 26 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 / /
AMENDMENT NO. 27 /X/
(Check appropriate box or boxes)
------------------------
PRUDENTIAL UTILITY FUND, INC.
(Exact name of registrant as specified in charter)
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973) 367-7530
S. JANE ROSE, ESQ.
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(Name and Address of Agent for Service)
Approximate date of proposed public offering:
As soon as practicable after the effective
date of the Registration Statement.
It is proposed that this filing will become effective
(check appropriate box):
/ / immediately upon filing pursuant to paragraph (b)
/X/ on March 3, 1998 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / on (date) pursuant to paragraph (a)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
/ / this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment
<TABLE>
<S> <C>
Title of Securities Being Registered............ Shares of Common Stock, par value $.01 per
share.
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
- ----------------------------------------------- ----------------------------------
<S> <C> <C> <C>
PART A
Item 1. Cover Page........................ Cover Page
Item 2. Synopsis.......................... Fund Expenses; Fund Highlights
Item 3. Condensed Financial Information... Fund Expenses; Financial
Highlights; How the Fund
Calculates Performance
Item 4. General Description of
Registrant........................ Cover Page; Fund Highlights; How
the Fund Invests; General
Information
Item 5. Management of the Fund............ Financial Highlights; How the Fund
is Managed; General Information;
Shareholder Guide
Item 5A. Management's Discussion of Fund
Performance....................... Financial Highlights
Item 6. Capital Stock and Other
Securities........................ Taxes, Dividends and
Distributions; General
Information; Shareholder Guide
Item 7. Purchase of Securities Being
Offered........................... Shareholder Guide; How the Fund
Values its Shares; How the Fund is
Managed
Item 8. Redemption or Repurchase.......... Shareholder Guide; How the Fund
Values its Shares; General
Information
Item 9. Pending Legal Proceedings......... Not Applicable
PART B
Item 10. Cover Page........................ Cover Page
Item 11. Table of Contents................. Table of Contents
Item 12. General Information and History... General Information
Item 13. Investment Objectives and
Policies.......................... Investment Objective and Policies;
Investment Restrictions
Item 14. Management of the Fund............ Directors and Officers; Manager;
Distributor
Item 15. Control Persons and Principal
Holders of Securities............. Not Applicable
Item 16. Investment Advisory and Other
Services.......................... Manager; Distributor; Custodian,
Transfer and Dividend Disbursing
Agent and Independent Accountants
Item 17. Brokerage Allocation and Other
Practices......................... Portfolio Transactions and
Brokerage
Item 18. Capital Stock and Other
Securities........................ Not Applicable
Item 19. Purchase, Redemption and Pricing
of Securities Being Offered....... Purchase and Redemption of Fund
Shares; Shareholder Investment
Account; Net Asset Value
Item 20. Tax Status........................ Taxes, Dividends and Distributions
Item 21. Underwriters...................... Distributor
Item 22. Calculation of Performance Data... Performance Information
Item 23. Financial Statements.............. Financial Statements
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Post-Effective Amendment
to the Registration Statement.
</TABLE>
<PAGE>
Prudential Utility Fund, Inc.
- --------------------------------
PROSPECTUS DATED MARCH 3, 1998
- ----------------------------------------------------------------
Prudential Utility Fund, Inc. (the Fund) is an open-end, diversified, management
investment company. Its investment objective is to seek total return through a
combination of current income and capital appreciation. The Fund seeks to
achieve its objective through investment in equity-related and debt securities
of utility companies, which include electric, gas, gas pipeline, telephone,
telecommunications, water, cable, airport, seaport and toll road companies. In
normal circumstances, the Fund intends to invest at least 80% of its assets in
such securities. The Fund also may purchase and sell certain derivatives,
including 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 Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, 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 and is available at the Web
site of The Prudential Insurance Company of America (http://www.prudential.com).
Additional information about the Fund has been filed with the Securities and
Exchange Commission (the Commission) in a Statement of Additional Information,
dated March 3, 1998, 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. The
Commission maintains a Web site (http://www.sec.gov) that contains the Statement
of Additional Information, material incorporated by reference and other
information regarding the Fund.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL 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 total return through a
combination of current income and capital appreciation. It seeks to achieve
this objective by investing primarily in equity-related and debt securities
of utility companies, which include electric, gas, gas pipeline, telephone,
telecommunications, water, cable, airport, seaport and toll road 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 9.
WHAT ARE THE FUND'S 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 10.
In addition, the Fund may engage in various hedging and return 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 Return Enhancement Strategies--Risks of Hedging and
Return Enhancement Strategies" at page 14. As with an investment in any
mutual fund, an investment in this Fund can decrease in value and you can
lose money.
WHO MANAGES THE FUND?
Prudential Investments Fund Management LLC (PIFM 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 January 31,
1998, PIFM served as manager or administrator to 64 investment companies,
including 42 mutual funds, with aggregate assets of approximately $63
billion. The Prudential Investment Corporation, doing business as Prudential
Investments (PI, the Subadviser or the investment adviser), furnishes
investment advisory services in connection with the management of the Fund
under a Subadvisory Agreement with PIFM. See "How the Fund is
Managed--Manager" at page 16.
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Securities Incorporated (Prudential Securities or the
Distributor), a major securities underwriter and securities and commodities
broker, acts as the Distributor of the Fund's Class A, Class B, Class C and
Class Z 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 and is paid a distribution and service fee 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 Distributor
incurs the expense of distributing the Fund's Class Z shares under a
Distribution Agreement with the Fund, none of which is reimbursed or paid
for by the Fund. See "How the Fund is Managed--Distributor" at page 17.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000 for Class A and Class B shares
and $5,000 for Class C shares. The minimum subsequent investment is $100 for
Class A, Class B and Class C shares. Class Z shares are not subject to any
minimum investment requirements. 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 22 and
"Shareholder Guide--Shareholder Services" at page 33.
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 LLC (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). Class Z
shares are offered to a limited group of investors at NAV without any sales
charge. See "How the Fund Values its Shares" at page 19 and "Shareholder
Guide--How to Buy Shares of the Fund" at page 22.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers four 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.
- Class Z Shares:
Sold without either an initial sales charge or CDSC to a
limited group of investors. Class Z shares are not
subject to any ongoing service or distribution expenses.
See "Shareholder Guide--Alternative Purchase Plan" at page 23.
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
27. Participants in programs sponsored by Prudential Retirement Services
should contact their client representative for more information about
selling their Class Z shares.
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 20.
3
<PAGE>
FUND EXPENSES
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- ------------------------------ --------------------------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Load Imposed
on Purchases (as a
percentage of offering
price)..................... 5% None None None
Maximum Sales Load Imposed
on Reinvested Dividends.... None None None None
Maximum Deferred Sales Load
(as a percentage of
original purchase price or
redemption proceeds,
whichever is lower)........ None 5% during the first year, 1% on redemptions made None
decreasing by 1% annually to within one year of purchase
1% in the fifth and sixth and
0% the seventh year*
Redemption Fees............. None None None None
Exchange Fee................ None None None None
</TABLE>
<TABLE>
<CAPTION>
CLASS A CLASS Z
SHARES CLASS B SHARES CLASS C SHARES SHARES
------------- ------------------------- ------------------------- -------------
<S> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees............. .41% .41% .41% .41%
12b-1 Fees (After
Reduction)................. .25%++ 1.00% 1.00% None
Other Expenses.............. .16% .16% .16% .16%
--- ---
-- --
Total Fund Operating
Expenses (After
Reduction)................. 1.57% 1.57%
.82% .57%
--- ---
--- ---
-- --
-- --
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
EXAMPLE
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 $75 $93 $146
Class B.................................. $66 $80 $96 $157
Class C.................................. $26 $50 $86 $187
Class Z.................................. $ 6 $18 $32 $ 71
You would pay the following expenses on the
same investment, assuming no redemption:
Class A.................................. $58 $75 $93 $146
Class B.................................. $16 $50 $86 $157
Class C.................................. $16 $50 $86 $187
Class Z.................................. $ 6 $18 $32 $ 71
</TABLE>
The above example is based on data for the Fund's fiscal year ended
December 31, 1997. 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"
include operating expenses of the Fund, such as Directors' and
professional fees, registration fees, reports to shareholders and transfer
agency and custodian fees.
- ---------------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--
Class B Shares."
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and
asset-based sales charges on shares of the Fund may not exceed 6.25% of
total gross sales, subject to certain exclusions. This 6.25% limitation
is imposed on each class of the Fund rather than on a per shareholder
basis. Therefore, long-term shareholders of the Fund may pay more in
total sales charges than the economic equivalent of 6.25% of such
shareholders' investment in such shares. See "How the Fund is
Managed--Distributor."
++ 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
.25 of 1% of the average daily net assets of the Class A shares for the
fiscal year ending December 31, 1998. Total Fund Operating Expenses of
Class A shares without such limitation would be .87%. See "How the Fund
is Managed--Distributor."
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS A SHARES)
The following financial highlights for each of the five years in the period
ended December 31, 1997 have been audited by Price Waterhouse LLP, 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 financial highlights
contain selected data for a share of Class A common stock outstanding, total
return, ratios to average net assets and other supplemental data for each of the
periods indicated. Further performance information is contained in the annual
report, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1997 (d) 1996 (d) 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 10.88 $ 9.87 $ 8.27 $ 9.72 $ 8.97 $ 8.72 $ 7.63
-------- -------- -------- -------- -------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .34 .32 .30 .31 .33 .38 .39
Net realized and unrealized gains (losses) on
investment and foreign currency transactions.... 2.53 1.80 1.79 (1.06) 1.12 .45 1.10
-------- -------- -------- -------- -------- ------- -------
Total from investment operations................ 2.87 2.12 2.09 (.75) 1.45 .83 1.49
-------- -------- -------- -------- -------- ------- -------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.32) (.32) (.30) (.32) (.29) (.34) (.39)
Distributions from net realized gains............. (1.10) (.79) (.19) (.36) (.41) (.24) (.01)
Distributions in excess of net realized gains..... -- -- -- (.02) -- -- --
-------- -------- -------- -------- -------- ------- -------
Total distributions............................. (1.42) (1.11) (.49) (.70) (.70) (.58) (.40)
-------- -------- -------- -------- -------- ------- -------
Net asset value, end of period.................... $ 12.33 $ 10.88 $ 9.87 $ 8.27 $ 9.72 $ 8.97 $ 8.72
-------- -------- -------- -------- -------- ------- -------
-------- -------- -------- -------- -------- ------- -------
TOTAL RETURN (C):................................. 27.77% 22.09% 25.74% (7.89)% 16.28% 9.88% 19.95%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000,000)............... $ 2,583 $ 2,023 $ 1,709 $ 254 $ 337 $ 201 $ 111
Average net assets (000,000)...................... $ 2,201 $ 1,786 $ 1,440 $ 294 $ 287 $ 149 $ 85
Ratios to average net assets:
Expenses, including distribution fees........... .82% .86% .88% .88% .80% .81% .87%
Expenses, excluding distribution fees........... .57% .61% .63% .63% .60% .61% .67%
Net investment income........................... 2.95% 3.10% 3.12% 3.37% 3.16% 4.14% 4.69%
Portfolio turnover rate........................... 15% 17% 14% 15% 24% 24% 38%
Average commission rate paid per share............ $ .0301 $ .0332 $ .0302 N/A N/A N/A N/A
<CAPTION>
JANUARY 22,
1990 (a)
THROUGH
DECEMBER 31,
1990
-------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 8.65
-----
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .36
Net realized and unrealized gains (losses) on
investment and foreign currency transactions.... (.38)
-----
Total from investment operations................ (.02)
-----
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.40)
Distributions from net realized gains............. (.60)
Distributions in excess of net realized gains..... --
-----
Total distributions............................. (1.00)
-----
Net asset value, end of period.................... $ 7.63
-----
-----
TOTAL RETURN (C):................................. (0.11)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000,000)............... $ 73
Average net assets (000,000)...................... $ 51
Ratios to average net assets:
Expenses, including distribution fees........... .97%(b)
Expenses, excluding distribution fees........... .77%(b)
Net investment income........................... 4.78%(b)
Portfolio turnover rate........................... 53%
Average commission rate paid per share............ N/A
</TABLE>
- ---------------
(a) Commencement of offering of Class A shares.
(b) Annualized.
(c) 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.
(d) Calculated based upon weighted average shares outstanding during the
year.
5
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED YEARS)
(CLASS B SHARES)
The following financial highlights for each of the five years in the period
ended December 31, 1997 have been audited by Price Waterhouse LLP, 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 financial highlights
contain selected data for a share of Class B common stock outstanding, total
return, ratios to average net assets and other supplemental data for each of the
years indicated. Further performance information is contained in the annual
report, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS B
-------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1997 (f) 1996 (f) 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year................ $ 10.88 $ 9.87 $ 8.26 $ 9.69 $ 8.96 $ 8.71 $ 7.63
-------- -------- -------- -------- -------- ------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .25 .24 .22 .24 .24 .31 .32
Net realized and unrealized gains (losses) on
investment and foreign currency transactions.... 2.53 1.80 1.80 (1.05) 1.12 .46 1.10
-------- -------- -------- -------- -------- ------- --------
Total from investment operations................ 2.78 2.04 2.02 (.81) 1.36 .77 1.42
-------- -------- -------- -------- -------- ------- --------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.24) (.24) (.22) (.24) (.22) (.28) (.33)
Distributions from net realized gains............. (1.10) (.79) (.19) (.36) (.41) (.24) (.01)
Distributions in excess of net realized gains..... -- -- -- (.02) -- -- --
-------- -------- -------- -------- -------- ------- --------
Total distributions............................. (1.34) (1.03) (.41) (.62) (.63) (.52) (.34)
-------- -------- -------- -------- -------- ------- --------
Net asset value, end of year...................... $ 12.32 $ 10.88 $ 9.87 $ 8.26 $ 9.69 $ 8.96 $ 8.71
-------- -------- -------- -------- -------- ------- --------
-------- -------- -------- -------- -------- ------- --------
TOTAL RETURN (E):................................. 26.80% 21.16% 24.80% (8.51)% 15.27% 9.02% 19.01%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000,000)................. $ 2,132 $ 2,137 $ 2,355 $ 3,526 $ 4,756 $ 3,438 $ 2,818
Average net assets (000,000)...................... $ 2,059 $ 2,184 $ 2,450 $ 4,152 $ 4,308 $ 3,027 $ 2,529
Ratios to average net assets:
Expenses, including taxes (b)................... 1.57% 1.61% 1.63% 1.63% 1.60% 1.61% 1.67%
Expenses, excluding taxes and interest (b)...... 1.57% 1.61% 1.63% 1.63% 1.60% 1.61% 1.67%
Expenses, excluding distribution fees and taxes
(b)............................................ .57% .61% .63% .63% .60% .61% .67%
Net investment income........................... 2.20% 2.35% 2.37% 2.62% 2.36% 3.34% 3.89%
Portfolio turnover rate........................... 15% 17% 14% 15% 24% 24% 38%
Average commission rate paid per share............ $ .0301 $ .0332 $ .0302 N/A N/A N/A N/A
<CAPTION>
1990 1989 (D) 1988 (A)
------------- ------------- -------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year................ $ 9.17 $ 7.31 $ 6.29
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .31 .36 .33
Net realized and unrealized gains (losses) on
investment and foreign currency transactions.... (.91) 2.30 1.07
------ ------ ------
Total from investment operations................ (.60) 2.66 1.40
------ ------ ------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.34) (.36) (.33)
Distributions from net realized gains............. (.60) (.44) (.05)(c)
Distributions in excess of net realized gains..... -- -- --
------ ------ ------
Total distributions............................. (.94) (.80) (.38)
------ ------ ------
Net asset value, end of year...................... $ 7.63 $ 9.17 $ 7.31
------ ------ ------
------ ------ ------
TOTAL RETURN (E):................................. (6.48)% 37.17% 22.74%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000,000)................. $ 2,395 $ 2,306 $ 1,584
Average net assets (000,000)...................... $ 2,315 $ 2,037 $ 1,495
Ratios to average net assets:
Expenses, including taxes (b)................... 1.73% 1.46% 1.56%
Expenses, excluding taxes and interest (b)...... 1.73% 1.46% 1.56%
Expenses, excluding distribution fees and taxes
(b)............................................ .74% .73% .76%
Net investment income........................... 3.94% 4.19% 4.44%
Portfolio turnover rate........................... 53% 75% 66%
Average commission rate paid per share............ N/A N/A N/A
</TABLE>
- ---------------
(a) Prudential Mutual Fund Management, Inc. succeeded Prudential
Securities Incorporated as manager of the Fund on May 2, 1988.
(b) 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 (a), 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."
(c) Full amount of 1988 distribution represents a distribution from
paid-in capital.
(d) Based on average month-end shares outstanding.
(e) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each year reported and includes
reinvestment of dividends and distributions.
(f) Calculated based upon weighted average shares outstanding during the
year.
6
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS C SHARES)
The following financial highlights have been audited by Price Waterhouse LLP,
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 financial
highlights contain selected data for a share of Class C common stock
outstanding, total return, ratios to average net assets and other supplemental
data for each of the periods indicated. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide-- Shareholder Services-- Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS C
----------------------------------------------
AUGUST 1,
1994 (a)
YEAR ENDED DECEMBER 31, THROUGH
------------------------------ DECEMBER 31,
1997 (d) 1996 (d) 1995 1994
-------- -------- -------- -------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period...... $ 10.88 $ 9.87 $ 8.26 $ 9.30
-------- -------- -------- -----
INCOME FROM INVESTMENT OPERATIONS
Net investment income..................... .25 .24 .22 .11
Net realized and unrealized gains (losses)
on investment and foreign currency
transactions............................ 2.53 1.80 1.80 (.69)
-------- -------- -------- -----
Total from investment operations........ 2.78 2.04 2.02 (.58)
-------- -------- -------- -----
LESS DISTRIBUTIONS
Dividends from net investment income...... (.24) (.24) (.22) (.13)
Distributions from net realized gains..... (1.10) (.79) (.19) (.31)
Distributions in excess of net realized
gains................................... -- -- -- (.02)
-------- -------- -------- -----
Total distributions..................... (1.34) (1.03) (.41) (.46)
-------- -------- -------- -----
Net asset value, end of period............ $ 12.32 $10.88 $ 9.87 $ 8.26
-------- -------- -------- -----
-------- -------- -------- -----
TOTAL RETURN (C):......................... 26.80% 21.16% 24.80% (6.27)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........... $13,490 $6,001 $ 3,455 $ 787
Average net assets (000).................. $ 9,424 $4,517 $ 2,181 $ 433
Ratios to average net assets:
Expenses, including distribution fees... 1.57% 1.61% 1.63% 1.70%(b)
Expenses, excluding distribution fees... .57% .61% .63% .70%(b)
Net investment income................... 2.20% 2.35% 2.37% 2.65%(b)
Portfolio turnover rate................... 15% 17% 14% 15%
Average commission rate paid per share.... $ .0301 $.0332 $ .0302 N/A
</TABLE>
- ------------
(a) Commencement of offering of Class C shares.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a
sale on the last day of the period reported and includes reinvestment
of dividends and distributions. Total returns for periods of less than
one full year are not annualized.
(d) Calculated based upon weighted average shares outstanding during the
year.
7
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS Z SHARES)
The following financial highlights have been audited by Price Waterhouse LLP,
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 financial
highlights contain selected data for a share of Class Z common stock
outstanding, total return, ratios to average net assets and other supplemental
data for each of the periods indicated. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide-- Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS Z
-------------------------------
MARCH 1,
1996 (a)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1997 (d) 1996 (d)
-------------- --------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..................... $10.88 $10.05
------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................................... .36 .29
Net realized and unrealized gains on investment and
foreign currency transactions.......................... 2.54 1.67
------- -------
Total from investment operations....................... 2.90 1.96
------- -------
LESS DISTRIBUTIONS
Dividends from net investment income..................... (.34) (.34)
Distributions from net realized gains.................... (1.10) (.79)
------- -------
Total distributions.................................... (1.44) (1.13)
------- -------
Net asset value, end of period........................... $12.34 $10.88
------- -------
------- -------
TOTAL RETURN (C):........................................ 28.15% 20.11%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).......................... $41,904 $34,446
Average net assets (000)................................. $35,994 $34,291
Ratios to average net assets:
Expenses, including distribution fees.................. .57% .61%(b)
Expenses, excluding distribution fees.................. .57% .61%(b)
Net investment income.................................. 3.20% 3.35%(b)
Portfolio turnover rate.................................. 15% 17%
Average commission rate paid per share................... $.0301 $.0332
</TABLE>
- ------------
(a) Commencement of offering of Class Z shares.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a
sale on the last day of the period reported and includes reinvestment
of dividends and distributions. Total returns for periods of less than
a full year are not annualized.
(d) Calculated based upon weighted average shares outstanding during the
period.
8
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
THE FUND'S INVESTMENT OBJECTIVE IS TO SEEK TOTAL RETURN THROUGH A COMBINATION
OF CURRENT INCOME AND CAPITAL APPRECIATION. THE FUND SEEKS TO ACHIEVE ITS
OBJECTIVE THROUGH INVESTMENT IN EQUITY-RELATED AND DEBT SECURITIES OF UTILITY
COMPANIES, WHICH INCLUDE ELECTRIC, GAS, GAS PIPELINE, TELEPHONE,
TELECOMMUNICATIONS, WATER, CABLE, AIRPORT, SEAPORT AND TOLL ROAD 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
total 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. The
remaining 20% of its assets may be invested in other securities, including
stocks, debt obligations and money market instruments, as well as certain
derivative instruments. 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.
As with an investment in any mutual fund, an investment in this Fund can
decrease in value and you can lose money.
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 EQUITY-RELATED SECURITIES. Equity-related securities
include common stocks, preferred stocks, securities convertible or exchangeable
for common stocks or preferred stocks, equity investments in partnerships, joint
ventures and other forms of non-corporate investments, American Depositary
Receipts (ADRs), and warrants and rights exercisable for equity securities.
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 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, 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.
ADRs, which are receipts issued by an American bank or trust company evidencing
ownership of underlying securities issued by a foreign issuer, are not
considered foreign securities.
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.
9
<PAGE>
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
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 RETURN ENHANCEMENT STRATEGLES
THE FUND MAY ALSO ENGAGE IN VARIOUS PORTFOLIO STRATEGIES, INCLUDING USING
DERIVATIVES, TO REDUCE CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO
ENHANCE RETURN. 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, AND
THUS ITS INVESTORS, MAY LOSE MONEY THROUGH ANY UNSUCCESSFUL USE OF THESE
STRATEGIES. 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 OPTIONS).
10
<PAGE>
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. There is no limitation on the amount of call
options the Fund may write.
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.
THE FUND WILL WRITE ONLY "COVERED" CALL OPTIONS. A call option on debt or
equity securities written by the Fund is "covered" if, as long as the Fund is
obligated under the option, it (i) owns the security underlying the option or
has an absolute and immediate right to acquire that security without additional
consideration (or for additional consideration held in a segregated account by
its Custodian) upon conversion or exchange of other securities held in its
portfolio or (ii) 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 or other liquid assets, 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 OTC 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
11
<PAGE>
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
Options, Options on Indices, and 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
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. See
"Investment Objective and Policies--Forward Foreign Currency Exchange Contracts"
in the Statement of Additional Information.
The Fund may not use forward contracts to generate income, although the use of
such contracts may incidentally generate income. There is no limitation 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 or in a
different foreign currency (cross-hedge). The Fund will not speculate in forward
contracts. The Fund may not position hedge (including cross-hedges) with respect
to a particular currency for an amount greater than the aggregate market value
(determined at the time of making any sale of foreign currency) of the
securities being hedged.
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
12
<PAGE>
"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, Dividends and Distributions" 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 CERTAIN HEDGING
AND RISK MANAGEMENT PURPOSES AND TO ATTEMPT TO ENHANCE RETURN IN ACCORDANCE WITH
REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION. THE FUND, AND THUS ITS
INVESTORS, MAY LOSE MONEY THROUGH ANY UNSUCCESSFUL USE OF THESE STRATEGIES.
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 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.
UNDER REGULATIONS OF THE COMMODITY EXCHANGE ACT, INVESTMENT COMPANIES
REGISTERED UNDER THE INVESTMENT COMPANY ACT ARE EXEMPT FROM THE DEFINITION OF
"COMMODITY POOL OPERATOR," SUBJECT TO COMPLIANCE WITH CERTAIN CONDITIONS. THE
EXEMPTION IS CONDITIONED UPON THE FUND'S PURCHASING AND SELLING FUTURES
CONTRACTS AND OPTIONS THEREON FOR BONA FIDE HEDGING TRANSACTIONS, EXCEPT THAT
THE FUND MAY PURCHASE AND SELL FUTURES CONTRACTS AND OPTIONS THEREON FOR ANY
OTHER PURPOSE TO THE EXTENT THAT THE AGGREGATE INITIAL MARGIN AND OPTION
PREMIUMS DO NOT 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 CERTAIN HEDGING AND RISK MANAGEMENT
PURPOSES AND TO ATTEMPT TO ENHANCE RETURN. 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 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 Union, 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
13
<PAGE>
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 ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET AND
IS SUBJECT TO VARIOUS ADDITIONAL RISKS. The correlation between movements in the
price of a futures contract and the price of the securities being hedged is
imperfect and there is a risk that the value of the securities being hedged may
increase or decrease at a greater rate than the related futures contract,
resulting in losses to the Fund. 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 Options, Options on Indices, and Stock and Bond Index Futures and Options
Thereon" in the Statement of Additional Information.
THE FUND'S ABILITY TO ENTER INTO OR CLOSE OUT FUTURES CONTRACTS AND OPTIONS
THEREON MAY ALSO BE LIMITED BY THE REQUIREMENTS OF THE INTERNAL REVENUE CODE FOR
QUALIFICATION AS A REGULATED INVESTMENT COMPANY.
RISKS OF HEDGING AND RETURN 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. THE FUND, AND THUS ITS
INVESTORS, MAY LOSE MONEY THROUGH ANY UNSUCCESSFUL USE OF THESE STRATEGIES. If
the investment adviser's prediction of movements in the direction of the
securities, foreign currency or interest rate markets is 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, Dividends and Distributions" in the
Statement of Additional Information.
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OTHER INVESTMENTS AND POLICIES
BORROWING
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 its total assets
to secure these borrowings.
SECURITIES LENDING
The Fund may lend its portfolio securities to brokers or dealers, banks or
other recognized institutional borrowers of securities, provided that the
borrower at all times maintains cash or other liquid assets or secures an
irrevocable letter of credit in favor of the Fund in an amount equal to at least
100% of the market value of the securities loaned which is maintained in a
segregated account pursuant to applicable regulations. During the time portfolio
securities are on loan, the borrower will pay the Fund an amount equivalent to
any dividend or interest paid on such securities and the Fund may invest the
cash collateral and earn additional income, or it may receive an agreed-upon
amount of interest income from the borrower. As a matter of fundamental policy,
the Fund cannot lend more than 33% of the value of its total assets. The Fund
may pay reasonable administration and custodial fees in connection with a loan.
See "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 or other
liquid assets having a value equal to or greater than the Fund's purchase
commitments. 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 repurchase agreement. The Fund's repurchase agreements will at
all times be fully collateralized in an amount at least equal to the resale
price. 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 in a joint repurchase
account with other investment companies managed by PIFM pursuant to an order of
the Commission. See "Investment Objective and Policies--Repurchase Agreements"
in the Statement of Additional Information.
ILLIQUID SECURITIES
The Fund may hold up to 15% 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
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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. The Fund's investment in Rule
144A securities could have the effect of increasing illiquidity to the extent
that qualified institutional buyers become, for a limited time, uninterested in
purchasing Rule 144A securities. Repurchase agreements subject to demand are
deemed to have a maturity equal to the applicable notice period.
PORTFOLIO TURNOVER
As a result of the Fund's investment policies, the Fund anticipates that 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.
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, 1997, the Fund's total expenses as a
percentage of average net assets for Class A, Class B, Class C and Class Z
shares were .82%, 1.57%, 1.57% and .57%, respectively. See "Financial
Highlights."
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, 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. PIFM is organized in New York as a limited liability company.
For the fiscal year ended December 31, 1997, the Fund paid management fees to
PIFM of .41% of the Fund's average daily net assets. See "Manager" in the
Statement of Additional Information.
As of January 31, 1998, PIFM served as the manager to 42 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies, with aggregate assets of
approximately $63 billion.
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UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PIFM MANAGES THE INVESTMENT
OPERATIONS OF THE FUND AND ALSO ADMINISTERS THE FUND'S CORPORATE AFFAIRS. See
"Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PIFM AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC), DOING BUSINESS AS PRUDENTIAL INVESTMENTS (PI, THE SUBADVISER
OR THE INVESTMENT ADVISER), PI FURNISHES INVESTMENT ADVISORY SERVICES IN
CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PIFM FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PIFM continues to have responsibility for all investment
advisory services and supervises PI's performance of such services.
The current portfolio manager of the Fund is David A. Kiefer, CFA. Mr. Kiefer
is a Senior Portfolio Manager of Prudential Investments. Mr. Kiefer is
responsible for day-to-day management and stock selection for the Fund. Mr.
Kiefer joined Prudential Investments 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.
PIFM and PIC are wholly-owned subsidiaries of The Prudential Insurance Company
of America (Prudential), a major diversified insurance and financial services
company.
DISTRIBUTOR
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR THE DISTRIBUTOR),
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,
CLASS B, CLASS C AND CLASS Z 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 A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), THE DISTRIBUTOR INCURS THE EXPENSES OF DISTRIBUTING THE
FUND'S CLASS A, CLASS B AND CLASS C SHARES. The Distributor also incurs the
expenses of distributing the Fund's Class Z shares under the Distribution
Agreement, none of which is reimbursed by or paid for by the Fund. These
expenses include commissions and account servicing fees paid to, or on account
of, financial advisers of Prudential Securities and representatives of Pruco
Securities Corporation (Prusec), an affiliated broker-dealer, commissions and
account servicing fees paid to, or on account of, other broker-dealers or other
financial institutions 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.
Under the Plans, the Fund is obligated to pay distribution and/or service fees
to the Distributor as compensation for its distribution and service activities,
not as reimbursement for specific expenses incurred. If the Distributor's
expenses exceed its distribution and service fees, the Fund will not be
obligated to pay any additional expenses. If the Distributor's expenses are less
than such distribution and service fees, it will retain its full fees and
realize a profit.
UNDER THE CLASS A PLAN, THE FUND MAY PAY THE DISTRIBUTOR FOR ITS
DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE
OF UP TO .30 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES. The
Class A Plan provides that (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. The Distributor 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, 1998.
UNDER THE CLASS B AND CLASS C PLANS, THE FUND PAYS THE DISTRIBUTOR FOR ITS
DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C SHARES AT AN
ANNUAL RATE OF UP TO 1% OF THE AVERAGE DAILY NET ASSETS OF EACH OF THE CLASS B
AND CLASS C SHARES. The Class B and Class C Plans provide for the payment to the
Distributor of (i) an asset-based
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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. The
Distributor 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, 1997, the Fund paid distribution
expenses of .25%, 1.00% and 1.00% of the average net assets of the Class A,
Class B and Class C shares, respectively. The Fund records all payments made
under the Plans as expenses in the calculation of net investment income. See
"Distributor" in the Statement of Additional Information.
Distribution expenses attributable to the sale of Class A, Class B or Class C
shares of the Fund will be allocated to each such class based upon the ratio of
sales of each such class to the sales of Class A, Class B and Class C shares of
the Fund other than expenses allocable to a particular class. The distribution
fee and sales charge of one class will not be used to subsidize the sale of
another class.
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 distribution and service fees 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 (including Prudential Securities)
and other persons who distribute shares of the Fund (including Class Z shares).
Such payments may be calculated by reference to the net asset value of shares
sold by such persons or otherwise.
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.
FEE WAIVERS
The Distributor has agreed to limit its distribution fee for the Class A
shares as described above under "Distributor." Fee waivers will increase the
Fund's total return. See "Performance Information" in the Statement of
Additional Information and "Fund Expenses" above.
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 LLC (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 PIFM. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
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YEAR 2000
The services provided to the Fund and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of their outside service
providers. Many computer software systems in use today cannot distinguish the
year 2000 from the year 1900 because of the way dates are encoded and
calculated. Such event could have a negative impact on handling securities
trades, payments of interest and dividends, pricing and account services.
Although, at this time, there can be no assurance that there will be no adverse
impact on the Fund, the Manager, the Distributor, the Transfer Agent and the
Custodian have advised the Fund that they have been actively working on
necessary changes to their computer systems to prepare for the year 2000 and
expect that their systems, and those of their outside service providers, will be
adapted in time for that event.
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. For valuation purposes, quotations
of foreign securities in a foreign currency are converted to U.S. dollar
equivalents. 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.
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. The NAV of Class Z shares will
generally be higher than the NAV of the other three classes because Class Z
shares are not subject to any distribution and/or service fees. It is expected,
however, that the NAV per share of the four classes will tend to converge
immediately after the recording of dividends, if any, which will differ by
approximately the amount of the distribution and/or service fee expense accrual
differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE ITS AVERAGE ANNUAL TOTAL RETURN,
AGGREGATE TOTAL RETURN AND YIELD IN ADVERTISEMENTS OR SALES LITERATURE. TOTAL
RETURN AND YIELD ARE CALCULATED SEPARATELY FOR CLASS A, CLASS B, CLASS C AND
CLASS Z SHARES. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT
INTENDED TO INDICATE FUTURE PERFORMANCE. The total return shows how much an
investment in the Fund would have increased (decreased) over a specified period
of time (I.E., one, five or ten years or since inception of the Fund) assuming
that all distributions and dividends by the Fund were reinvested on the
reinvestment dates during the period and less all recurring fees. The aggregate
total return reflects actual performance over a stated period of time. Average
annual total return is a hypothetical rate of return that, if achieved annually,
would have produced the same aggregate total return if performance had been
constant over the entire period. Average annual total return smooths out
variations in performance and takes into account any applicable initial or
contingent deferred sales charges. Neither average annual total return nor
aggregate total return takes into account any federal or state income taxes
which may be payable upon redemption. The yield refers to the income generated
by an investment in the Fund over a one-month or 30-day period. This income is
then "annualized;" that is, the amount of income generated by the investment
during that 30-day period is assumed to
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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. 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 NET
CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. See "Taxes,
Dividends and Distributions" in the Statement of Additional Information.
TAXATION OF SHAREHOLDERS
Any dividends out of net investment income, together with distributions of net
short-term gains (I.E., the excess of net short-term capital gains over net
long-term capital losses) will be taxable as ordinary income to the shareholder
whether or not reinvested. See "Taxes, Dividends and Distributions" in the
Statement of Additional Information. Any net capital gains (I.E., the excess of
net long-term capital gains over net short-term capital losses) distributed to
shareholders will be taxable as long-term capital gains to shareholders, whether
or not reinvested and regardless of the length of time a shareholder has owned
his or her shares. The maximum long-term capital gains rate for individual
shareholders for securities held between 12 and 18 months currently is 28% and
for securities held more than 18 months is 20%. The maximum tax rate for
ordinary income is 39.6%. The maximum long-term capital gains rate for corporate
shareholders currently is the same as the maximum tax rate for ordinary income.
Dividends and distributions are currently 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 are declared. 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 and
net income and gain or loss from other sources are not eligible for the
corporate dividends-received deduction. See "Taxes, Dividends and Distributions"
in the Statement of Additional Information. Corporate shareholders should
consult their tax advisers regarding other requirements applicable to the
dividends-received deduction.
Any gain or loss realized upon a sale or redemption of Fund shares by a
shareholder who is not a dealer in securities will generally be treated as
long-term capital gain or loss if the shares have been held for more than one
year and otherwise as short-term capital gain or loss. Any such loss with
respect to shares that are held for six months or less, however, will be treated
as long-term capital loss to the extent of any capital gain distributions
received by the shareholder. Gain or loss on shares held more than 18 months
will be considered in determining a holder's adjusted net capital gain subject
to a maximum tax rate of 20%.
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 any
class of the Fund's shares for any other class of its shares constitutes a
taxable event for federal income tax purposes. However, such opinions are not
binding on the Internal Revenue Service.
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WITHHOLDING TAXES
Under the Internal Revenue Code, the Fund is required to withhold and remit to
the U.S. Treasury 31% of dividends, capital gain income and redemption proceeds
payable to certain individuals and certain non-corporate shareholders who fail
to furnish their correct tax identification numbers on IRS Form W-9 (or IRS Form
W-8 in the case of certain foreign shareholders) with the required
certifications regarding the shareholder's status under the federal income tax
law. Withholding at this rate is also required from dividends and capital gains
distributions (but not redemption proceeds) payable to shareholders who are
otherwise subject to backup withholding. Dividends of net investment income and
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).
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Taxes, Dividends and
Distributions" in the Statement of Additional Information.
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 other than
Class Z will bear its own distribution charges, generally resulting in lower
dividends for Class B and Class C shares in relation to Class A and Class Z
shares and lower dividends for Class A shares in relation to Class Z shares.
Distributions of net capital gains, if any, will be paid in the same amount per
share 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 LLC, Attention: Account Maintenance, P.O. Box 15015, New
Brunswick, New Jersey 08906-5015. If you hold shares through Prudential
Securities, you should contact your financial adviser to elect to receive
dividends and distributions in cash. 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 BUY SHARES ON OR IMMEDIATELY BEFORE THE RECORD DATE (THE DATE THAT
DETERMINES WHO RECEIVES THE DIVIDEND), YOU WILL RECEIVE A PORTION OF THE MONEY
YOU INVESTED AS A TAXABLE DIVIDEND. THEREFORE, YOU SHOULD CONSIDER THE TIMING OF
DIVIDENDS WHEN BUYING SHARES OF THE FUND.
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 FOUR CLASSES, DESIGNATED CLASS A, CLASS B, CLASS C AND CLASS Z
COMMON STOCK, CONSISTING OF 500 MILLION SHARES OF CLASS A COMMON STOCK, 700
MILLION SHARES OF CLASS B COMMON STOCK, 400 MILLION SHARES OF CLASS C COMMON
STOCK AND 400 MILLION SHARES OF CLASS Z COMMON STOCK. Each class represents an
interest in the same assets of the Fund and is identical in all respects except
that (i) each class is subject to different sales charges and distribution
and/or service fees (except for Class Z shares, which are not subject to any
sales charges and distribution and/or service fees), which may affect
performance, (ii) each class has exclusive voting rights on any matter submitted
to shareholders that relates solely to its arrangement and has separate voting
rights on any matter submitted to shareholders in which the interests of one
class differ from the interests of any other class, (iii) each class has a
different exchange
21
<PAGE>
privilege, (iv) only Class B shares have a conversion feature and (v) Class Z
shares are offered exclusively for sale to a limited group of investors. See
"How the Fund is Managed--Distributor." In accordance with the Fund's Articles
of Incorporation, the Board of Directors may authorize the creation of
additional series and classes within such series, with such preferences,
privileges, limitations and voting and dividend rights as the Directors may
determine.
The Board of Directors may increase or decrease the number of authorized
shares without approval by the shareholders. Shares of the Fund, when issued,
are fully paid, nonassessable, fully transferable and redeemable at the option
of the holder. Shares are also redeemable at the option of the Fund under
certain circumstances as described under "Shareholder Guide--How to Sell Your
Shares." Each share of each class of common stock is equal as to earnings,
assets and voting privileges, except as noted above, and each class of shares
(with the exception of Class Z shares, which are not subject to any distribution
or service fees) 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 common stock of the Fund is entitled to its portion
of all of the Fund's assets after all debt and expenses of the Fund have been
paid. Since Class B and Class C shares generally bear higher distribution
expenses than Class A shares, the liquidation proceeds to shareholders of those
classes are likely to be lower than to Class A shareholders and to Class Z
shareholders, whose shares are not subject to any distribution and/or service
fees. The Fund's shares do not have cumulative voting rights for the election of
Directors.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF DIRECTORS IS REQUIRED TO BE
ACTED ON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% 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 Commission
under the Securities Act. Copies of the Registration Statement may be obtained
at a reasonable charge from the Commission or may be examined, without charge,
at the office of the Commission in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE FUND THROUGH THE DISTRIBUTOR, PRUSEC OR
DIRECTLY FROM THE FUND THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES LLC (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES, P.O.
BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. Participants in programs
sponsored by Prudential Retirement Services should contact their client
representative for more information about Class Z shares. The purchase price is
the NAV per share next determined following receipt of an order in proper form
by the Transfer Agent or the Distributor 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). Class Z shares are offered
to a limited group of investors at net asset value without any sales charge.
Payments may be made by cash, wire, check or through your brokerage account. See
"Alternative Purchase Plan" below. See also "How the Fund Values its Shares."
The minimum initial investment is $1,000 for Class A and Class B shares and
$5,000 for Class C shares, except that the minimum initial investment for Class
C shares may be waived from time to time. There is no minimum initial investment
requirement for Class Z shares. The minimum subsequent investment is $100 for
all classes, except for Class Z shares, for which there is no such minimum. 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.
22
<PAGE>
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 third 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 class in which you are
eligible to invest (Class A, Class B, Class C or Class Z shares).
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Fund as of that day. See "Net Asset Value" in the
Statement of Additional Information.
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, Class C or Class Z shares and your name and individual
account number. It is not necessary to call PMFS to make subsequent purchase
orders utilizing Federal Funds. The minimum amount which may be invested by wire
is $1,000.
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS FOUR CLASSES OF SHARES (CLASS A, CLASS B, CLASS C AND CLASS Z
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
SALES CHARGE DAILY NET ASSETS) OTHER INFORMATION
----------------------------------- ----------------------------------- -----------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 5% .30 of 1% (Currently being charged Initial sales charge waived or
of the public offering price at a rate of .25 of 1%) reduced for certain purchases
CLASS B Maximum CDSC of 5% of the lesser of 1% Shares convert to Class A shares
the amount invested or the approximately seven years after
redemption proceeds; declines to purchase
zero after six years
CLASS C Maximum CDSC of 1% of the lesser of 1% Shares do not convert to another
the amount invested or the class
redemption proceeds on redemptions
made within one year of purchase
CLASS Z None None Sold to a limited group of
investors
</TABLE>
The four 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
(with the exception of Class Z shares, which are not subject to any distribution
or service fees) is subject to different sales charges and distribution and/or
service fees, which may affect performance), (ii) each class has exclusive
voting
23
<PAGE>
rights on any matter submitted to shareholders that relates solely to its
arrangement and has separate voting rights on any matter submitted to
shareholders in which the interests of one class differ from the interests of
any other class, (iii) each class has a different exchange privilege, (iv) only
Class B shares have a conversion feature and (v) Class Z shares are offered
exclusively for sale to a limited group of investors. 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 (if any) 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 and Class Z shares.
Financial advisers and other sales agents who sell shares of the Fund will
receive different compensation for selling Class A, Class B, Class C and Class Z
shares and will generally receive more compensation initially for selling Class
A and Class B shares than for selling Class C or Class Z 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 method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund:
If you intend to hold your investment in the Fund for less than 7 years and do
not qualify for a reduced sales charge on Class A shares, since Class A shares
are subject to a maximum initial sales charge of 5% and Class B shares are
subject to a CDSC of 5% which declines to zero over a 6 year period, you should
consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for 7 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B 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 NAV, the effect of the return on the investment
over this period of time or redemptions when 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
UNLESS THE PURCHASER IS ELIGIBLE TO PURCHASE CLASS Z SHARES. See "Reduction and
Waiver of Initial Sales Charges" and "Class Z Shares" below.
24
<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:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
------------------------ ---------------- ---------------- ------------------
<S> <C> <C> <C>
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
</TABLE>
The Distributor may reallow the entire initial sales charge to dealers.
Selling dealers may be deemed to be underwriters, as that term is defined under
the federal securities laws.
In connection with the sale of Class A shares at NAV (without payment of an
initial sales charge), the Manager, the Distributor or one of their affiliates
will pay dealers, financial advisers and other persons which distribute shares a
finders' fee from its own resources based on a percentage of the NAV of shares
sold by such person.
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 (collectively, Benefit Plans), provided that the Benefit Plan has
existing assets of at least $1 million invested in shares of Prudential Mutual
Funds (excluding money market funds other than those acquired pursuant to the
exchange privilege) or 250 eligible employees or participants. In the case of
Benefit Plans whose accounts are held directly with the Transfer Agent or
Prudential Securities and for which the Transfer Agent or Prudential Securities
does individual account recordkeeping (Direct Account Benefit Plans) and Benefit
Plans sponsored by Prudential Securities or its subsidiaries (Prudential
Securities or Subsidiary Prototype Benefit Plans), Class A shares may be
purchased at NAV by participants who are repaying loans made from such plans to
the participant.
PRUDENTIAL RETIREMENT PROGRAMS. Class A shares may be purchased at NAV by
certain savings, retirement and deferred compensation plans, qualified or
non-qualified under the Internal Revenue Code, for which Prudential serves as
the plan administrator or recordkeeper, provided that (i) the plan has at least
$1 million in existing assets or 250 eligible employees and (ii) the Fund is an
available investment option. These plans include pension, profit-sharing,
stock-bonus or other employee benefit plans under Section 401 of the Internal
Revenue Code, deferred compensation and annuity plans under Sections 457 and
403(b)(7) of the Internal Revenue Code and plans that participate in the
Transfer Agent's PruArray and SmartPath Programs (benefit plan recordkeeping
services) (hereafter referred to as a PruArray or SmartPath Plan). All plans of
a company for which Prudential serves as plan administrator or recordkeeper are
aggregated in meeting the $1 million threshold. The term "existing assets" as
used herein includes stock issued by a plan sponsor, shares of Prudential Mutual
Funds and shares of certain unaffiliated mutual funds that participate in the
PruArray or SmartPath Programs (Participating Funds). "Existing assets" also
25
<PAGE>
include monies invested in The Guaranteed Interest Account (GIA), a group
annuity insurance product issued by Prudential, and units of The Stable Value
Fund (SVF), an unaffiliated bank collective fund. Class A shares may also be
purchased at NAV by plans that have monies invested in GIA and SVF, provided (i)
the purchase is made with the proceeds of a redemption from either GIA or SVF
and (ii) Class A shares are an investment option of the plan.
PRUARRAY ASSOCIATION BENEFIT PLANS. Class A shares are also offered at NAV to
Benefit Plans or non-qualified plans sponsored by employers which are members of
a common trade, professional or membership association (Association) that
participate in the PruArray Program, provided that the Association enters into a
written agreement with Prudential. Such Benefit Plans or non-qualified plans may
purchase Class A shares at NAV without regard to the assets or number of
participants in the individual employer's qualified Plan(s) or non-qualified
plans so long as the employers in the Association (i) have retirement plan
assets in the aggregate of at least $1 million or 250 participants in the
aggregate and (ii) maintain their accounts with the Transfer Agent.
PRUARRAY SAVINGS PROGRAM. Class A shares are also offered at NAV to employees
of companies that enter into a written agreement with Prudential Retirement
Services to participate in the PruArray Savings Program. Under this Program, a
limited number of Prudential Mutual Funds are available for purchase at NAV by
Individual Retirement Accounts and Savings Accumulation Plans of the company's
employees. The Program is available only to (i) employees who open an IRA or
Savings Accumulation Plan account with the Transfer Agent and (ii) spouses of
employees who open an IRA account with the Transfer Agent. The Program is
offered to companies that have at least 250 eligible employees.
SPECIAL RULES APPLICABLE TO RETIREMENT PLANS. After a Benefit Plan or PruArray
or SmartPath Plan qualifies to purchase Class A shares at NAV, all subsequent
purchases will be made at NAV.
OTHER WAIVERS. In addition, Class A shares may be purchased at NAV, through
Prudential Securities or the Transfer Agent, by the following persons: (a)
officers of the Prudential Mutual Funds (including the Fund), (b) employees of
Prudential Securities and PIFM and their subsidiaries and members of the
families of such persons who maintain an "employee related" account at
Prudential Securities or the Transfer Agent, (c) employees of subadvisers of the
Prudential Mutual Funds provided that purchases at NAV are permitted by such
person's employer, (d) Prudential, employees and special agents of Prudential
and its subsidiaries and all persons who have retired directly from active
service with Prudential or one of its subsidiaries, (e) 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, (f) 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 180 days
of the commencement of the financial adviser's employment at Prudential
Securities, or within one year in the case of Benefit Plans, (ii) the purchase
is made with proceeds of a redemption of shares of any open-end, non-money
market fund sponsored by the financial adviser's previous employer (other than a
fund which imposes a distribution or service fee of .25 of 1% or less) and (iii)
the financial adviser served as the client's broker on the previous purchase,
and (g) investors in Individual Retirement Accounts, provided the purchase is
made with the proceeds of a tax-free rollover of assets from a Benefit Plan for
which Prudential Investments serves as the recordkeeper or administrator.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions. See "Purchase and
Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--Class
A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV 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
26
<PAGE>
Your Shares--Contingent Deferred Sales Charges." The Distributor will pay, from
its own resources, sales commissions of up to 4% of the purchase price of Class
B shares to dealers, financial advisers and other persons who sell Class B
shares at the time of sale. This facilitates the ability of the Fund to sell the
Class B shares without an initial sales charge being deducted at the time of
purchase. The Distributor anticipates that it will recoup its advancement of
sales commissions from the combination of the CDSC and the distribution fee. See
"How the Fund is Managed--Distributor." In connection with the sale of Class C
shares, the Distributor will pay, from its own resources, dealers, financial
advisers and other persons which distribute Class C shares a sales commission of
up to 1% of the purchase price at the time of the sale.
CLASS Z SHARES
Class Z shares of the Fund currently are available for purchase by: (i)
pension, profit-sharing or other employee benefit plans qualified under Section
401 of the Internal Revenue Code, deferred compensation and annuity plans under
Sections 457 and 403(b)(7) of the Internal Revenue Code and non-qualified plans
for which the Fund is an available option (collectively, Benefit Plans),
provided such Benefit Plans (in combination with other plans sponsored by the
same employer or group of related employers) have at least $50 million in
defined contribution assets; (ii) participants in any fee-based program or trust
program sponsored by Prudential Securities, The Prudential Savings Bank, F.S.B.
or any affiliate which includes mutual funds as investment options and for which
the Fund is an available option; (iii) certain participants in the MEDLEY
Program (group variable annuity contracts) sponsored by Prudential for whom
Class Z shares of the Prudential Mutual Funds are an available option; (iv)
Benefit Plans for which Prudential Retirement Services serves as recordkeeper
and as of September 20, 1996, (a) were Class Z shareholders of the Prudential
Mutual Funds or (b) executed a letter of intent to purchase Class Z shares of
the Prudential Mutual Funds; (v) current and former Directors/Trustees of the
Prudential Mutual Funds (including the Fund); and (vi) employees of Prudential
and/or Prudential Securities who participate in a Prudential-sponsored employee
savings plan. After a Benefit Plan qualifies to purchase Class Z shares, all
subsequent purchases will be for Class Z shares.
In connectlon with the sale of Class Z shares, the Manager, the Distributor or
one of their affiliates may pay dealers, financial advisers and other persons
which distribute shares a finders' fee from its own resources based on a
percentage of the net asset value of shares sold by such persons.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES AT ANY TIME FOR CASH AT THE NAV NEXT DETERMINED
AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE TRANSFER AGENT OR
PRUDENTIAL SECURITIES. See "How the Fund Values its Shares." In certain cases,
however, redemption proceeds will be reduced by the amount of any applicable
CDSC, as described below. See "Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST REDEEM
YOUR SHARES THROUGH PRUDENTIAL SECURITIES. PLEASE CONTACT YOUR PRUDENTIAL
SECURITIES FINANCIAL ADVISER.
IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION
SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD
CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE
CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION
REQUEST TO BE PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION,
PARTNERSHIP, TRUST OR FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE
TRANSFER AGENT MUST BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All
correspondence and documents concerning redemptions should be sent to the Fund
in care of its Transfer Agent, Prudential Mutual Fund Services LLC, Attention:
Redemption Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
27
<PAGE>
"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. In the case of redemptions
from a PruArray or SmartPath Plan, if the proceeds of the redemption are
invested in another investment option of the plan in the name of the record
holder and at the same address as reflected in the Transfer Agent's records, a
signature guarantee is not required.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT 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 Commission,
by order, so permits, provided that applicable rules and regulations of the
Commission 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 CASHIER'S CHECK.
REDEMPTION IN KIND. If the Board of Directors determines that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price in
whole or in part by a distribution in kind of securities from the investment
portfolio of the Fund, in lieu of cash, in conformity with applicable rules of
the Commission. Securities will be readily marketable and will be valued in the
same manner as 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 NAV of the Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Board of
Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose account
has a net asset value of less than $500 due to a redemption. The Fund will give
such shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No CDSC will be imposed on any such
involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not previously
exercised the repurchase privilege, you may reinvest any portion or all of the
proceeds of such redemption in shares of the Fund at the NAV next determined
after the order is received, which must be within 90 days after the date of the
redemption. Any CDSC paid in connection with such redemption will be credited
(in shares) to your account. If less than a full repurchase is made, the credit
will be on a PRO RATA basis. You must notify the Fund's Transfer Agent, either
directly or through Prudential Securities, at the time the repurchase privilege
is exercised to adjust your account for the CDSC you previously paid.
Thereafter, any redemptions will be subject to the CDSC applicable at the time
of the redemption. See "Contingent Deferred Sales Charges" below. Exercise of
the repurchase privilege will generally not affect the federal tax treatment of
any gain realized upon redemption. However, if the redemption was made within a
30 day period of the repurchase and if the redemption resulted in a loss, some
or all of the loss, depending on the amount reinvested, may not be allowed for
federal income tax purposes. For more information on the rule which disallows a
loss on the sale or exchange of shares of the Fund which are replaced, see
"Taxes, Dividends and Distributions" in the Statement of Additional Information.
28
<PAGE>
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which reduces the current value of
your Class B or Class C shares 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
acquired through reinvestment of dividends or distributions are not subject to a
CDSC. The amount of any CDSC will be paid to and retained by the Distributor.
See "How the Fund is Managed--Distributor" and "Waiver of 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" below.
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------------------------ -------------------------
<S> <C>
First......................... 5.0 %
Second........................ 4.0 %
Third......................... 3.0 %
Fourth........................ 2.0 %
Fifth......................... 1.0 %
Sixth......................... 1.0 %
Seventh....................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in NAV above the total amount of payments for
the purchase of Fund shares made during the preceding six years (five years for
shares purchased prior to January 22, 1990); then of amounts representing the
cost of shares held beyond the applicable CDSC period; then of amounts
representing the cost of shares acquired prior to July 1, 1985; and finally, of
amounts representing the cost of shares held for the longest period of time
within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you 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.
29
<PAGE>
WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will be
waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include: (i) in the case of a
tax-deferred retirement plan, a lump-sum or other distribution after retirement;
(ii) in the case of an IRA or Section 403(b) custodial account, a lump-sum or
other distribution after attaining age 59 1/2; and (iii) a tax-free return of an
excess contribution or plan distributions following the death or disability of
the shareholder, provided that the shares were purchased prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service (I.E.,
following voluntary or involuntary termination of employment or following
retirement). Under no circumstances will the CDSC be waived on redemptions
resulting from the termination of a tax-deferred retirement plan, unless such
redemptions otherwise qualify for a waiver as described above. In the case of
Direct Account and Prudential Securities or Subsidiary Prototype Benefit Plans,
the CDSC will be waived on redemptions which represent borrowings from such
plans. Shares purchased with amounts used to repay a loan from such plans on
which a CDSC was not previously deducted will thereafter be subject to a CDSC
without regard to the time such amounts were previously invested. In the case of
a 401(k) plan, the CDSC will also be waived upon the redemption of shares
purchased with amounts used to repay loans made from the account to the
participant and from which a CDSC was previously deducted.
SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12% of
the total dollar amount subject to the CDSC may be redeemed without charge. The
Transfer Agent will calculate the total amount available for this waiver
annually on the anniversary date of your purchase or, for shares purchased prior
to March 1, 1997, on March 1 of the current year. The CDSC will be waived (or
reduced) on redemptions until this threshold 12% is reached.
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.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS C SHARES
PRUARRAY OR SMARTPATH PLANS. The CDSC will be waived on redemptions from
certain qualified and non-qualified retirement and deferred compensation plans
that participate in the Transfer Agent's PruArray and SmartPath Programs.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of
30
<PAGE>
dividends and other distributions) (the Eligible Shares) will be determined on
each conversion date in accordance with the following formula: (i) the ratio of
(a) the amounts paid for Class B shares purchased at least seven years prior to
the conversion date to (b) the total amount paid for all Class B shares
purchased and then held in your account (ii) multiplied by the total number of
Class B shares purchased and then held in your account. Each time any Eligible
Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (I.E., $1,000
divided by $2,100 (47.62%) multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than for
Class B shares, the per share NAV of the Class A shares may be higher than that
of the Class B shares at the time of conversion. Thus, although the aggregate
dollar value will be the same, you may receive fewer Class A shares than Class B
shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange, or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are held in a money market fund, exchanges
will be deemed to have been made on the last day of the month. Class B shares
acquired through exchange will convert to Class A shares after expiration of the
conversion period applicable to the original purchase of such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service that (i) the
dividends and other distributions paid on Class A, Class B, Class C and Class Z
shares will not constitute "preferential dividends" under the Internal Revenue
Code and (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, INCLUDING ONE OR MORE SPECIFIED MONEY MARKET
FUNDS, SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A,
CLASS B, CLASS C AND CLASS Z SHARES OF THE FUND MAY BE EXCHANGED FOR CLASS A,
CLASS B, CLASS C AND CLASS Z 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, Inc. For purposes of calculating the
holding period applicable to the Class B conversion feature, the time period
during which Class B shares were held
31
<PAGE>
in a money market fund will be excluded. See "Conversion Feature--Class B
Shares" above. An exchange will be treated as a redemption and purchase for tax
purposes. See "Shareholder Investment Account--Exchange Privilege" in the
Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at
(800) 225-1852 to execute a telephone exchange of shares, on weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds next determined after the request is received in
good order.
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 LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGES. 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) and for shareholders who qualify to purchase Class Z shares (see
"Alternative Purchase Plan--Class Z Shares" 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 for shareholders who qualify to purchase Class A
shares at NAV on a quarterly basis, unless the shareholder elects otherwise.
Similarly, shareholders who qualify to purchase Class Z shares will have their
Class B and Class C shares which are not subject to a CDSC and their Class A
shares exchanged for Class Z shares on a quarterly basis. Eligibility for this
exchange privilege will be calculated on the business day prior to the date of
the exchange. Amounts representing Class B or Class C shares which are not
subject to a CDSC include the following: (1) amounts representing Class B or
Class C shares acquired pursuant to the automatic reinvestment of dividends 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.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares when
they elect to have those assets become a part of the fee-based program. Upon
leaving the program (whether voluntarily or not), such Class Z shares (and, to
the extent provided for in the program, Class Z shares acquired through
participation in the program) will be exchanged for Class A shares at NAV.
Similarly, participants in Prudential Securities' 401(k) Plan for which the
Fund's Class Z shares is an available option and who wish to transfer their
Class Z shares out of the Prudential Securities 401(k) Plan following separation
from service (I.E., voluntary or involuntary termination of employment or
retirement) will have their Class Z shares exchanged for Class A shares at NAV.
The exchange privilege is not a right and may be suspended, modified or
terminated on 60 days' notice to shareholders.
32
<PAGE>
FREQUENT TRADING. The Fund and the other Prudential Mutual Funds are not
intended to serve as vehicles for frequent trading in response to short-term
fluctuations in the market. Due to the disruptive effect that market timing
investment strategies and excessive trading can have on efficient portfolio
management, the Fund reserves the right to refuse purchase orders and exchanges
by any person, group or commonly controlled accounts, if, in the Manager's sole
judgment, such person, group or accounts were following a market timing strategy
or were otherwise engaging in excessive trading (Market Timers).
To implement this authority to protect the Fund and its shareholders from
excessive trading, the Fund will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Fund or its affiliates pursuant to which the Market Timer has agreed to
abide by certain procedures, which include a daily dollar limit on trading. The
Fund may notify the Market Timer of rejection of an exchange or purchase order
subsequent to the day on which the order was placed.
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 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 Gateway Center Three, 100
Mulberry Street, Newark, New Jersey 07102-4077. In addition, monthly unaudited
financial data is available upon request from the Fund.
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, 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.
33
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential 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 Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
TAX-EXEMPT BOND FUNDS
-----------------------------
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Maryland Series
Massachusetts Series
Michigan 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 Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
--------------------
Prudential Balanced Fund
Prudential Distressed Securities Fund, Inc.
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Index Series Fund
Prudential Bond Market Index Fund
Prudential Europe Index Fund
Prudential Pacific Index Fund
Prudential Small-Cap Index Fund
Prudential Stock Index Fund
Prudential Jennison Series Fund, Inc.
Prudential Jennison Active Balanced Fund
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Multi-Sector Fund, Inc.
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
--------------------------
- - TAXABLE MONEY MARKET FUNDS
Cash Accumulation Trust
Liquid Assets Fund
National Money Market Fund
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
- - TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
- - COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- - INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
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
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
FUND HIGHLIGHTS................................. 2
What are the Fund's Risk Factors and Special
Characteristics?............................. 2
FUND EXPENSES................................... 4
FINANCIAL HIGHLIGHTS............................ 5
HOW THE FUND INVESTS............................ 9
Investment Objective and Policies............. 9
Hedging and Return Enhancement Strategies..... 10
Other Investments and Policies................ 15
Investment Restrictions....................... 16
HOW THE FUND IS MANAGED......................... 16
Manager....................................... 16
Distributor................................... 17
Fee Waivers................................... 18
Portfolio Transactions........................ 18
Custodian and Transfer and Dividend Disbursing
Agent........................................ 18
Year 2000..................................... 19
HOW THE FUND VALUES ITS SHARES.................. 19
HOW THE FUND CALCULATES PERFORMANCE............. 19
TAXES, DIVIDENDS AND DISTRIBUTIONS.............. 20
GENERAL INFORMATION............................. 21
Description of Common Stock................... 21
Additional Information........................ 22
SHAREHOLDER GUIDE............................... 22
How to Buy Shares of the Fund................. 22
Alternative Purchase Plan..................... 23
How to Sell Your Shares....................... 27
Conversion Feature--Class B Shares............ 30
How to Exchange Your Shares................... 31
Shareholder Services.......................... 33
THE PRUDENTIAL MUTUAL FUND FAMILY............... A-1
</TABLE>
- -------------------------------------------
MF105A
Class A: 743911-208
Class B: 743911-109
CUSIP Nos.: Class C: 743911-307
Class Z: 443911-406
PRUDENTIAL
UTILITY
FUND, INC.
PROSPECTUS
March 3, 1998
www.prudential.com
PRUDENTIAL
INVESTMENTS
-----------------
[LOGO]
<PAGE>
PRUDENTIAL UTILITY FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
MARCH 3, 1998
Prudential Utility Fund, Inc. (the Fund), is an open-end, diversified,
management investment company. Its investment objective is to seek total return
through a combination of current income and capital appreciation. The Fund seeks
to achieve its objective through investment in equity-related and debt
securities of utility companies, which include electric, gas, gas pipeline,
telephone, telecommunications, water, cable, airport, seaport and toll road
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 total 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. The remaining 20% of its assets may be invested in other securities,
including stocks, debt obligations and money market instruments, as well as
certain derivative instruments. 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 Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077, and its telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Fund's Prospectus dated March 3, 1998, a copy of
which may be obtained from the Fund upon request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CROSS-REFERENCE
TO PAGE IN
PAGE PROSPECTUS
---- ---------------
<S> <C> <C>
General Information................................... B-2 21
Investment Objective and Policies..................... B-2 9
Investment Restrictions............................... B-12 16
Directors and Officers................................ B-14 16
Manager............................................... B-18 16
Distributor........................................... B-19 17
Portfolio Transactions and Brokerage.................. B-21 18
Purchase and Redemption of Fund Shares................ B-23 22
Shareholder Investment Account........................ B-27 33
Net Asset Value....................................... B-30 19
Taxes, Dividends and Distributions.................... B-31 20
Performance Information............................... B-33 19
Custodian and Transfer and Dividend Disbursing Agent
and Independent Accountants.......................... B-35 18
Financial Statements.................................. B-36 5
Report of Independent Accountants..................... B-48 --
Appendix I--General Investment Information............ I-1 --
Appendix II--Historical Performance Data.............. II-1 --
Appendix III--Information Relating to Prudential...... III-1 --
</TABLE>
- --------------------------------------------------------------------------------
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 total return through a
combination of current income and capital appreciation. The Fund seeks to
achieve its objective through investment in equity-related and debt securities
of utility companies, which include electric, gas, gas pipeline, telephone,
telecommunications, water, cable, airport, seaport and toll road 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 total 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. The
remaining 20% of its assets may be invested in other securities, including
stocks, debt obligations and money market instruments, as well as certain
derivative instruments. 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 "How the Fund
Invests--Investment Objective and Policies" in the Prospectus.
OPTIONS ON EQUITY SECURITIES
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
consideration (or for additional 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.
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
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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, other liquid assets 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 or other liquid assets 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 or other liquid
assets 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 or other liquid assets 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 or for return
enhancement. In instances involving the purchase of stock or bond index futures
contracts by the Fund, an amount of cash or other liquid assets 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 or futures
commission merchant 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 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
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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.
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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 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.
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
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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.
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.
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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
Commodity Futures Trading Commission (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.
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. If the Fund enters into a
position hedging transaction, the transaction will be covered by the position
being hedged, or the Fund's Custodian will place cash or other liquid assets
into a segregated account of the Fund (less the value of the "covering"
positions, if any) in an amount equal to the value of the Fund's total assets
committed to the consummation of the given forward contract. The assets placed
in the segregated account will be marked-to-market daily, and if the value of
the securities placed in the segregated account declines, additional cash or
securities will be placed in the account so that the value of the account will
equal the amount of the Fund's net 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.
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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. The Fund's ability to
enter into forward foreign currency exchange contracts may be limited by certain
requirements for qualification as a regulated investment company under the
Internal Revenue Code of 1986, as amended (Internal Revenue Code). See "Taxes,
Dividends and Distributions."
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.
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 currency 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
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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 Return Enhancement Strategies,"
including government actions affecting currency valuation and the movements of
currencies from one country to another. The quantity 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 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
B-9
<PAGE>
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 other liquid assets equal to the aggregate
exercise price of the puts.
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
B-10
<PAGE>
the repurchase agreement declines, the Fund may incur a loss. The Fund
participates in a joint repurchase account with other investment companies
managed by Prudential Investments Fund Management LLC (PIFM) 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" above.
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.
SEGREGATED ACCOUNTS
The Fund will establish a segregated account with its Custodian, State
Street Bank and Trust Company, in which it will maintain cash, U.S. Government
securities, equity securities (including foreign securities), debt securities or
other liquid, unencumbered assets equal in value to its obligations in respect
of potentially leveraged transactions. These include
B-11
<PAGE>
forward contracts, when-issued and delayed delivery securities, futures
contracts, written options and options on futures contracts (unless otherwise
covered). If collateralized or otherwise covered, in accordance with SEC
guidelines, these will not be deemed to be senior securities. The assets
deposited in the segregated account will be marked-to-market daily.
ILLIQUID SECURITIES
The Fund may not hold more than 15% of its net assets in repurchase
agreements which have a maturity of longer than seven days or in other illiquid
securities, including securities that are illiquid by virtue of the absence of a
readily available market (either within or outside of the United States) or
legal or contractual restrictions on resale. Historically, illiquid securities
have included securities subject to contractual or legal restrictions on resale
because they have not been registered under the Securities Act of 1933, as
amended (Securities Act), securities which are otherwise not readily marketable
and repurchase agreements having a maturity of longer than seven days.
Securities which have not been registered under the Securities Act are referred
to as private placements or restricted securities and are purchased directly
from the issuer or in the secondary market. Mutual funds do not typically hold a
significant amount of restricted or other illiquid securities because of the
potential for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and a mutual fund might be unable to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemptions within seven days. A mutual fund might also
have to register such restricted securities in order to dispose of them,
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes. Institutional
investors depend on an efficient institutional market in which the unregistered
security can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on resale
to the general public or to certain institutions may not be indicative of the
liquidity of such investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The investment adviser anticipates that the
market for certain restricted securities such as institutional commercial paper
and foreign 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. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities. A "majority of the Fund's
outstanding
B-12
<PAGE>
voting securities," when used in this Statement of Additional Information, means
the lesser of (i) 67% of the voting shares represented at a meeting at which
more than 50% of the outstanding voting shares are present in person or
represented by proxy or (ii) more than 50% of the outstanding voting shares.
The Fund may not:
1. Purchase 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.
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
B-13
<PAGE>
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."
The Office of Public Utility Regulation of the SEC has advised The
Prudential Insurance Company of America and its subsidiaries (Prudential) that
the Office would not recommend enforcement action with respect to the purchase
by Prudential of securities of "public utility companies" as defined by the
Public Utility Holding Company Act of 1935 in Prudential's capacity as owner or
manager of securities on the conditions that (i) the aggregate voting securities
of public utility companies held by accounts owned or managed by Prudential,
including the Fund, will be less than 10% of the outstanding voting securities
of any public utility company and (ii) Prudential will not attempt to control
any public utility company, other than through the exercise of rights associated
with stock ownership (including director representation). Accordingly, it is a
policy of the Fund, which may be changed without shareholder approval, not to
purchase any voting security of any public utility company if, as a result, the
Fund, along with other accounts owned or managed by Prudential, would then hold
10% or more of the outstanding voting securities of such company.
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE(1) WITH THE FUND DURING PAST 5 YEARS
- ------------------------------ ------------------------------ -----------------------------------------------------------------
<S> <C> <C>
Edward D. Beach (73) Director President and Director of BMC Fund, Inc., a closed-end investment
company; prior thereto, Vice Chairman of Broyhill Furniture
Industries, Inc.; Certified Public Accountant; Secretary and
Treasurer of Broyhill Family Foundation, Inc.; Member of the
Board of Trustees of Mars Hill College; Director of The High
Yield Income Fund, Inc.
Delayne Dedrick Gold (59) Director Marketing and Management Consultant; Director of The High Yield
Income Fund, Inc.
*Robert F. Gunia (51) Vice President and Director Vice President (since September 1997) of Prudential Investments;
Executive Vice President and Treasurer (since December 1996),
Prudential Investments Fund Management LLC (PIFM); Senior Vice
President (since March 1987) of Prudential Securities
Incorporated (Prudential Securities); formerly Chief
Administrative Officer (July 1990-September 1996), Director
(January 1989-September 1996), and Executive Vice President,
Treasurer and Chief Financial Officer (June 1987-September 1996)
of Prudential Mutual Fund Management, Inc.; Vice President and
Director of The Asia Pacific Fund, Inc. (since May 1989);
Director of The High Yield Income Fund, Inc.
</TABLE>
B-14
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE(1) WITH THE FUND DURING PAST 5 YEARS
- ------------------------------ ------------------------------ -----------------------------------------------------------------
<S> <C> <C>
Douglas H. McCorkindale (58) Director Vice Chairman (since March 1984) and President (since September
1997), Gannett Co. Inc. (publishing and media); Director of
Gannett Co. Inc., Frontier Corporation and Continental Airlines,
Inc.
*Mendel A Melzer, CFA (37) Director Chief Investment Officer (since October 1996) of Prudential
751 Broad Street Mutual Funds; formerly Chief Financial Officer (November
Newark, NJ 07102 1995-September 1996) of Prudential Investments, Senior Vice
President and Chief Financial Officer of Prudential Preferred
Financial Services (April 1993-November 1995), Managing Director
of Prudential Investment Advisors (April 1991-April 1993), and
Senior Vice President of Prudential Capital Corporation (July
1989-April 1991); Chairman and Director of Prudential Series
Fund, Inc.; Director of The High Yield Income Fund, Inc.
Thomas T. Mooney (56) Director President of the Greater Rochester Metro Chamber of Commerce;
former Rochester City Manager; Trustee of Center for
Governmental Research, Inc.; Director of Blue Cross of
Rochester, The Business Council of New York State, Monroe County
Water Authority, Rochester Jobs, Inc., Executive Service Corps
of Rochester, Monroe County Industrial Development Corporation,
Northeast Midwest Institute and The High Yield Income Fund,
Inc.; President, Director and Treasurer of First Financial Fund,
Inc. and The High Yield Plus Fund, Inc.
Stephen P. Munn (55) Director Chairman (since January 1994), Director and President (since
1988) and Chief Executive Officer (1988-December 1993) of
Carlisle Companies Incorporated (manufacturer of industrial
products).
*Richard A. Redeker (54) President and Director Employee of Prudential Investments; formerly President, Chief
751 Broad Street Executive Officer and Director (October 1993-September 1996),
Newark, NJ 07102 Prudential Mutual Fund Management, Inc., Director and Member of
Operating Committee (October 1993-September 1996), Prudential
Securities, Director (October 1993-September 1996) of Prudential
Securities Group, Inc., Executive Vice President, The Prudential
Investment Corporation (January 1994-September 1996), Director
(January 1994-September 1996), Prudential Mutual Fund
Distributors, Inc. and Prudential Mutual Fund Services, Inc.,
and Senior Executive Vice President and Director of Kemper
Financial Services, Inc. (September 1978-September 1993);
President and Director of The High Yield Income Fund, Inc.
</TABLE>
B-15
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE(1) WITH THE FUND DURING PAST 5 YEARS
- ------------------------------ ------------------------------ -----------------------------------------------------------------
<S> <C> <C>
Robin B. Smith (58) Director Chairman and Chief Executive Officer (since August 1996) of
Publishers Clearing House; formerly President and Chief
Executive Officer (January 1989-August 1996) and President and
Chief Operating Officer (September 1981-December 1988) of
Publishers Clearing House; Director of BellSouth Corporation,
Texaco Inc., Springs Industries Inc. and Kmart Corporation.
Louis A. Weil, III (56) Director Publisher and Chief Executive Officer (since January 1996) and
Director (since September 1991) of Central Newspapers, Inc.;
Chairman of the Board (since January 1996), Publisher and Chief
Executive Officer (August 1991-December 1995) of Phoenix
Newspapers, Inc.; formerly Publisher of Time Magazine (May
1989-March 1991), President, Publisher and Chief Executive
Officer of The Detroit News (February 1986-August 1989) and
member of the Advisory Board, Chase Manhattan Bank-Westchester;
Director of The High Yield Income Fund, Inc.
Clay T. Whitehead (59) Director President, National Exchange Inc. (new business development firm)
(since May 1983).
S. Jane Rose (52) Secretary Senior Vice President (since December 1996) of PIFM; Senior Vice
President and Senior Counsel of Prudential Securities (since
July 1992); formerly Senior Vice President (January
1991-September 1996) and Senior Counsel (June 1987-September
1996) of Prudential Mutual Fund Management, Inc.
Marguerite E.H. Morrison (41) Assistant Secretary Vice President (since December 1996) of PIFM; Vice President and
Associate General Counsel of Prudential Securities; formerly
Vice President and Associate General Counsel (June
1991-September 1996) of Prudential Mutual Fund Management, Inc.
Grace C. Torres (38) Treasurer and Principal First Vice President (since December 1996) of PIFM; First Vice
Financial and Accounting President (since March 1994) of Prudential Securities; formerly
Officer First Vice President (March 1994-September 1996) of Prudential
Mutual Fund Management, Inc. and Vice President (July 1989-March
1994) of Bankers Trust Corporation.
Stephen M. Ungerman (44) Assistant Treasurer Tax Director (since March 1996) of Prudential Investments and the
Private Asset Group of The Prudential Insurance Company of
America (Prudential); formerly First Vice President (February
1993-September 1996) of Prudential Mutual Fund Management, Inc.
and Senior Tax Manager (1981-January 1993) of Price Waterhouse
LLP.
</TABLE>
- ------------
(1) Unless otherwise stated, the address is c/o Prudential Investments Fund
Management LLC, Gateway Center Three, 100 Mulberry Street, Newark, New Jersey
07102-4077.
B-16
<PAGE>
* "Interested" Director, as defined in the Investment Company Act, by reason of
his affiliation with Prudential, Prudential Securities or PIFM.
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.
The officers conduct and supervise the daily business operations of the
Fund, while the Directors, in addition to their functions set forth under
"Manager" and "Distributor," review such actions and decide on general policy.
The Directors have adopted a retirement policy which calls for the
retirement of Directors on December 31 of the year in which they reach the age
of 72, except that retirement is being phased in for Directors who are age 68 or
older as of December 31, 1993. Under this phase-in provision, Mr. Beach is
scheduled to retire on December 31, 1999.
Pursuant to the Management Agreement with the Fund, the Manager pays all
compensation of officers and employees of the Fund as well as the fees and
expenses of all Directors of the Fund who are affiliated persons of the Manager.
The Fund pays each of its Directors who is not an affiliated person of PIFM
annual compensation of $5,000, in addition to certain out-of-pocket expenses.
The amount of annual compensation paid each Director may change as a result of
the introduction of additional funds on whose Boards the Director may be asked
to serve.
Directors may receive their 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. 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.
The following table sets forth the aggregate compensation paid by the Fund
to the Directors who are not affiliated with the Manager for the fiscal year
ended December 31, 1997 and the aggregate compensation paid to such Directors
for service on the Fund's Board and the boards of any other investment companies
managed by PIFM (Fund Complex) for the calendar year ended December 31, 1997.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
FROM FUND
AGGREGATE AND FUND
COMPENSATION COMPLEX PAID
NAME AND POSITION FROM FUND TO DIRECTORS
- ---------------------------------------------------------------------------------- ----------- ----------------
<S> <C> <C>
Edward D. Beach -- Director....................................................... $ 5,000 $ 135,000(38/63)*
Delayne Dedrick Gold -- Director.................................................. $ 5,000 $ 135,000(38/63)*
Robert F. Gunia(1) -- Director.................................................... -- --
Donald D. Lennox -- Retired Director.............................................. $ 5,000 $ 90,000(26/50)*
Douglas H. McCorkindale** -- Director............................................. $ 5,000 $ 70,000(20/35)*
Mendel A. Melzer(1) -- Director................................................... -- --
Thomas T. Mooney** -- Director.................................................... $ 5,000 $ 115,000(31/64)*
Stephen P. Munn -- Director....................................................... $ 5,000 $ 45,000(15/21)*
Richard A. Redeker(1) -- Director................................................. -- --
Robin B. Smith** -- Director...................................................... $ 5,000 $ 90,000(27/34)*
Louis A. Weil, III -- Director.................................................... $ 5,000 $ 90,000(26/50)*
Clay T. Whitehead -- Director..................................................... $ 5,000 $ 45,000(15/21)*
</TABLE>
- ------------
* Indicates number of funds/portfolios in Fund Complex to which aggregate
compensation relates.
** Total compensation from all of the funds in the Fund Complex for the calendar
year ended December 31, 1997 includes amounts deferred at the election of
Directors under the funds' deferred compensation plans. Including accrued
interest total, compensation amounted to $71,640, $143,909 and $139,097 for
Messrs. McCorkindale and Mooney and Ms. Smith, respectively.
(1) Robert F. Gunia, Mendel A. Melzer and Richard A. Redeker, who are interested
Directors, do not receive compensation from the Fund or any fund in the Fund
Complex.
B-17
<PAGE>
As of February 6, 1998, the Directors and officers of the Fund, as a group,
owned less than 1% of the outstanding common stock of the Fund.
As of February 6, 1998, Prudential Securities was record holder of
61,518,457 Class A shares (or 29.5% of the outstanding Class A shares),
76,128,347 Class B shares (or 43.8% of the outstanding Class B shares), 967,007
Class C shares (or 77.9% of the outstanding Class C shares) and 166,642 Class Z
shares (or 4.7% of the outstanding Class Z shares) of the Fund. In the event of
any meetings of shareholders, Prudential Securities will forward, or cause the
forwarding of, proxy material to the beneficial owners for which it is the
record holder.
MANAGER
The manager of the Fund is Prudential Investments Fund Management LLC (PIFM
or the Manager) (formerly, Prudential Mutual Fund Management LLC), Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. PIFM 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 January 31, 1998, PIFM managed and/or administered open-end
and closed-end management investment companies with assets of approximately $63
billion. According to the Investment Company Institute, as of October 31, 1997,
the Prudential Mutual Funds were the 17th largest family of mutual funds in the
United States.
PIFM is a subsidiary of Prudential Securities. Prudential Mutual Fund
Services LLC (PMFS or the Transfer Agent), a wholly-owned subsidiary of PIFM,
serves as the transfer agent for the Prudential Mutual Funds and, in addition,
provides customer service, recordkeeping and management and administration
services to qualified plans.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PIFM, subject to the supervision of the Fund's Board of Directors
and in conformity with the stated policies of the Fund, manages both the
investment operations of the Fund and the composition of the Fund's portfolio,
including the purchase, retention, disposition and loan of securities. In
connection therewith, PIFM is obligated to keep certain books and records of the
Fund. PIFM also administers the Fund's corporate affairs and, in connection
therewith, furnishes the Fund with office facilities, together with those
ordinary clerical and bookkeeping services which are not being furnished by
State Street Bank and Trust Company, the Fund's custodian, and PMFS, the Fund's
transfer and dividend disbursing agent. The management services of PIFM for the
Fund are not exclusive under the terms of the Management Agreement and PIFM is
free to, and does, render management services to others.
For its services, PIFM receives, pursuant to the Management Agreement, a fee
at an annual rate of .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. The Management Agreement also provides that, in the event the
expenses of the Fund (including the fees of PIFM, 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 PIFM will be reduced by the amount of such
excess. No jurisdiction currently limits the Fund's expenses.
In connection with its management of the corporate affairs of the Fund, PIFM
bears the following expenses:
(a) the salaries and expenses of all of its and the Fund's personnel except
the fees and expenses of Directors who are not affiliated persons of PIFM or the
Fund's investment adviser;
(b) all expenses incurred by PIFM or by the Fund in connection with managing
the ordinary course of the Fund's business, other than those assumed by the Fund
as described below; and
(c) the costs and expenses payable to The Prudential Investment Corporation,
doing business as Prudential Investments (PI, the Subadviser or the investment
adviser), pursuant to the subadvisory agreement between PIFM and PI (the
Subadvisory Agreement).
B-18
<PAGE>
Under the terms of the Management Agreement, the Fund is responsible for the
payment of the following expenses: (a) the fees payable to the Manager, (b) the
fees and expenses of Directors who are not affiliated persons of the Manager or
the Fund's investment adviser, (c) the fees and certain expenses of the
Custodian and Transfer and Dividend Disbursing Agent, including the cost of
providing records to the Manager in connection with its obligation of
maintaining required records of the Fund and of pricing the Fund's shares, (d)
the charges and expenses of legal counsel and independent accountants for the
Fund, (e) brokerage commissions and any issue or transfer taxes chargeable to
the Fund in connection with its securities transactions, (f) all taxes and
corporate fees payable by the Fund to governmental agencies, (g) the fees of any
trade associations of which the Fund may be a member, (h) the cost of stock
certificates representing shares of the Fund, (i) the cost of fidelity and
liability insurance, (j) the fees and expenses involved in registering and
maintaining registration of the Fund and of its shares with the SEC and the
states, including the preparation and printing of the Fund's registration
statements and prospectuses for such purposes, (k) allocable communications
expenses with respect to investor services and all expenses of shareholders' and
Directors' meetings and of preparing, printing and mailing reports, proxy
statements and prospectuses to shareholders in the amount necessary for
distribution to the shareholders, (l) litigation and indemnification expenses
and other extraordinary expenses not incurred in the ordinary course of the
Fund's business and (m) distribution fees.
The Management Agreement provides that PIFM will not be liable for any error
of judgment or for any loss suffered by the Fund in connection with the matters
to which the Management Agreement relates, except a loss resulting from willful
misfeasance, bad faith, gross negligence or reckless disregard of duty. The
Management Agreement provides that it will terminate automatically if assigned,
and that it may be terminated without penalty by either party upon not more than
60 days' nor less than 30 days' written notice. The Management Agreement will
continue in effect for a period of more than two years from the date of
execution only so long as such continuance is specifically approved at least
annually in conformity with the Investment Company Act. 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 May 21, 1997 and by
shareholders of the Fund on July 19, 1994.
For the years ended December 31, 1997, 1996 and 1995, the Fund paid
management fees to PIFM of $17,370,271, $16,378,451 and $15,997,525,
respectively.
PIFM has entered into the Subadvisory Agreement with PI, a wholly-owned
subsidiary of Prudential. The Subadvisory Agreement provides that the Subadviser
will furnish investment advisory services in connection with the management of
the Fund. In connection therewith, the Subadviser is obligated to keep certain
books and records of the Fund. PIFM continues to have responsibility for all
investment advisory services pursuant to the Management Agreement and supervises
the Subadviser's performance of such services. The Subadviser is reimbursed by
PIFM for the reasonable costs and expenses incurred by the Subadviser in
furnishing those services.
The Subadvisory Agreement was last approved by the Board of Directors,
including a majority of the Directors who are not parties to the contract or
interested persons of any such party as defined in the Investment Company Act,
on May 21, 1997, 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, PIFM or the Subadviser upon not more than 60 days', nor
less than 30 days', written notice. The Subadvisory Agreement provides that it
will continue in effect for a period of more than two years from its execution
only so long as such continuance is specifically approved at least annually in
accordance with the requirements of the Investment Company Act.
DISTRIBUTOR
Prudential Securities Incorporated (Prudential Securities or the
Distributor), One Seaport Plaza, New York, New York 10292, acts as the
distributor of the 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 a distribution agreement
(the Distribution Agreement), the Distributor incurs the expenses of
distributing the Fund's Class A, Class B and
B-19
<PAGE>
Class C shares. The Distributor also incurs the expenses of distributing the
Fund's Class Z shares under the Distribution Agreement, none of which are
reimbursed by or paid for by the Fund. 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 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 Class C Plan provides that (i) up to .25 of 1% of the average
daily net assets of the Class C shares may be paid for providing personal
service and/or maintaining shareholder accounts and (ii) up to .75 of 1% of the
average daily net assets of the Class C shares may be paid for
distribution-related expenses with respect to the Class C shares. The Plans were
last approved by the Board of Directors, including a majority of the Rule 12b-1
Directors, on May 21, 1997. 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, 1997, the Distributor
received payments of $5,503,617 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, 1997, the Distributor also received approximately $745,100 in initial sales
charges.
CLASS B PLAN. For the fiscal year ended December 31, 1997, the Distributor
received $20,593,729 from the Fund under the Class B Plan and spent
approximately $9,913,500 in distributing the Fund's Class B shares. It is
estimated that of the latter amount, approximately 1.0% ($101,700) was spent on
printing and mailing of prospectuses to other than current shareholders; 26.4%
($2,620,800) 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;
and 72.6% ($7,191,000) on the aggregate of (i) commission credits to Prudential
Securities branch offices for payments of commissions to financial advisers
(36.5% or $3,613,900) and (ii) an allocation of overhead and other branch office
distribution-related expenses (36.1% or $3,577,100). The term "overhead and
other branch office distribution-related expenses" represents (a) the expenses
of operating Prudential Securities' and Prusec's branch offices in connection
with the sale of Fund shares, including lease costs, the salaries and employee
benefits of operations and sales support personnel, utility costs,
communications costs and the costs of stationery and supplies, (b) the costs of
client sales seminars, (c) expenses of mutual fund sales coordinators to promote
the sale of Fund shares, and (d) other incidental expenses relating to branch
promotion of Fund sales.
B-20
<PAGE>
The Distributor also receives the proceeds of contingent deferred sales
charges paid by holders of Class B shares upon certain redemptions of Class B
shares. See "Shareholder Guide--How to Sell Your Shares--Contingent Deferred
Sales Charges" in the Prospectus. For the fiscal year ended December 31, 1997,
the Distributor received approximately $2,226,900 in contingent deferred sales
charges attributable to Class B shares.
CLASS C PLAN. For the fiscal year ended December 31, 1997, the Distributor
received $94,238 under the Class C Plan and spent approximately $115,100 in
distributing Class C shares. It is estimated that of the latter amount,
approximately 3.0% ($3,400) was spent on printing and mailing of prospectuses to
other than current shareholders; 10.4% ($12,000) on compensation to Prusec for
commissions to its representatives and other expenses, including an allocation
of overhead and other branch office distribution-related expenses, incurred by
it for distribution of Fund shares; and 86.6% ($99,700) on the aggregate of (i)
payments of commissions and account servicing fees to financial advisers (57.6%
or $66,400) and (ii) an allocation of overhead and other branch office
distribution-related expenses for payments of related expenses (29.0% or
$33,300). The Distributor also receives the proceeds of contingent deferred
sales charges paid by investors upon certain redemptions of Class C shares. For
the fiscal year ended December 31, 1997, the Distributor received approximately
$2,800 in contingent deferred sales charges attributable to Class C shares. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges"
in the Prospectus.
The Class A, Class B and Class C Plans continue in effect from year to year,
provided that each such continuance is approved at least annually by a vote of
the Board of Directors, including a majority vote of the Rule 12b-1 Directors,
cast in person at a meeting called for the purpose of voting on such
continuance. The Plans may each be terminated at any time, without penalty, by
the vote of a majority of the Rule 12b-1 Directors or by the vote of the holders
of a majority of the outstanding shares of the applicable class on not more than
30 days' written notice to any other party to the Plans. The Plans may not be
amended to increase materially the amounts to be spent for the services
described therein without approval by the shareholders of the applicable class
(by both Class A and Class B shareholders, voting separately, in the case of
material amendments to the Class A Plan), and all material amendments are
required to be approved by the Board of Directors in the manner described above.
Each Plan will automatically terminate in the event of its assignment. The Fund
will not be contractually obligated to pay expenses incurred under any Plan if
it is terminated or not continued.
Pursuant to each Plan, the Board of Directors will review at least quarterly
a written report of the distribution expenses incurred on behalf of each class
of shares of the Fund by the Distributor. The report includes an itemization of
the distribution expenses and the purposes of such expenditures. In addition, as
long as the Plans remain in effect, the selection and nomination of the Rule
12b-1 Directors shall be committed to the Rule 12b-1 Directors.
Pursuant to the Distribution Agreement, the Fund has agreed to indemnify the
Distributor to the extent permitted by applicable law against certain
liabilities under federal securities laws. A restated Distribution Agreement was
last approved by the Board of Directors, including a majority of the Rule 12b-1
Directors, on May 21, 1997.
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
B-21
<PAGE>
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 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) of the
Securities Exchange Act of
B-22
<PAGE>
1934, as amended, Prudential Securities may not retain compensation for
effecting transactions on a national securities exchange for the Fund unless the
Fund has expressly authorized the retention of such compensation. Prudential
Securities must furnish to the Fund at least annually a statement setting forth
the total amount of all compensation retained by Prudential Securities from
transactions effected for the Fund during the applicable period. Brokerage
transactions with Prudential Securities (or any affiliate) are also subject to
such fiduciary standards as may be imposed upon Prudential Securities (or such
affiliate) by applicable law.
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, 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Total brokerage commissions paid by the
Fund................................... $3,375,707 $3,574,816 $2,591,519
Total brokerage commissions paid to
Prudential Securities.................. $ 78,360 $221,877 $ 88,323
Percentage of total brokerage
commissions paid to Prudential
Securities............................. 2.32% 6.21% 3.41%
</TABLE>
The Fund effected approximately 2.32% of the total dollar amount of its
transactions involving the payment of commissions through Prudential Securities
during the year ended December 31, 1997. Of the total brokerage commissions paid
during that period, $2,498,256 (74.81%) were paid to firms which provide
research, statistical or other services to PI. PIFM 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 (NAV) 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). Class Z
shares of the Fund are not subject to any sales or redemption charge and are
offered exclusively for sale to a limited group of investors at NAV. See
"Shareholder Guide-- How to Buy Shares of the Fund" in the Prospectus.
Each class of shares represents an interest in the same assets of the Fund
and is identical in all respects except that (i) each class is subject to
different sales charges and distribution and/or service fees (except for Class Z
shares, which are not subject to any sales charges and distribution and/or
service fees), which may affect performance, (ii) each class has exclusive
voting rights with respect to any matter submitted to shareholders that relates
solely to its arrangement and has separate voting rights on any matter submitted
to shareholders in which the interests of one class differ from the interests of
any other class, (iii) each class has a different exchange privilege, (iv) only
Class B shares have a conversion feature and (v) Class Z shares are offered
exclusively for sale to a limited group of investors. See "Distributor" and
"Shareholder Investment Account--Exchange Privilege."
ISSUANCE OF FUND SHARES FOR SECURITIES
Transactions involving the issuance of Fund shares for securities (rather
than cash) will be limited to (i) reorganizations, (ii) statutory mergers, or
(iii) other acquisitions of portfolio securities that: (a) meet the investment
objective and policies of the Fund, (b) are liquid and not subject to
restrictions on resale, (c) have a value that is readily ascertainable via
listing on or trading in a recognized United States or international exchange or
market, and (d) are approved by the Fund's investment adviser.
B-23
<PAGE>
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares of the Fund are sold at a maximum sales charge of 5%
and Class B*, Class C* and Class Z shares are sold at NAV. Using the Fund's NAV
at December 31, 1997, the maximum offering price of the Fund's shares is as
follows:
<TABLE>
<S> <C>
CLASS A
Net asset value and redemption price per Class A share.............. $ 12.33
Maximum sales charge (5% of offering price)......................... .65
---------
Maximum offering price to public.................................... $ 12.98
---------
---------
CLASS B
Net asset value, offering price and redemption price per Class B
share*............................................................. $ 12.32
---------
---------
CLASS C
Net asset value, offering price and redemption price per Class C
share*............................................................. $ 12.32
---------
---------
CLASS Z
Net asset value, redemption price and offering price per Class Z
share.............................................................. $ 12.34
---------
---------
<FN>
--------------------
* 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.
</TABLE>
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
B-24
<PAGE>
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 (NAV 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 an
eligible group of related investors), including retirement and group plans, who
enter into a written Letter of Intent providing for the purchase, within a
thirteen-month period, of shares of the Fund and shares of other Prudential
Mutual Funds (Investment Letter of Intent). Retirement and group plans may also
qualify to purchase Class A shares at NAV by entering into a Letter of Intent
whereby they agree to enroll, within a thirteen-month period, a specified number
of eligible employees or participants (Participant Letter of Intent).
For purposes of the Investment Letter of Intent, all shares of the Fund and
shares of other Prudential Mutual Funds (excluding money market funds other than
those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent
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.
A Letter of Intent permits a purchaser, in the case of an Investment Letter
of Intent, to establish a total investment goal to be achieved by any number of
investments over a thirteen-month period and, in the case of a Participant
Letter of Intent, to establish a minimum eligible employee or participant
enrollment goal over a thirteen-month period. Each investment made during the
period, in the case of an Investment Letter of Intent, will receive the reduced
sales charge applicable to the amount represented by the goal, as if it were a
single investment. In the case of a Participant Letter of Intent, each
investment made during the period will be made at net asset value. Escrowed
Class A shares totaling 5% of the dollar amount of the Letter of Intent will be
held by the Transfer Agent in the name of the purchaser, except in the case of
retirement and group plans where the employer or plan sponsor will be
responsible for paying any applicable sales charge. The effective date of an
Investment Letter of Intent (except in the case of retirement and group plans)
may be back-dated up to 90 days, in order that any investments made during this
90-day period, valued at the purchaser's cost, can be applied to the fulfillment
of the Letter of Intent goal, except in the case of retirement and group plans.
The Investment Letter of Intent does not obligate the investor to purchase,
nor the Fund to sell, the indicated amount. Similarly, the Participant Letter of
Intent does not obligate the retirement or group plan to enroll the indicated
number of eligible employees or participants. In the event the Letter of Intent
goal is not achieved within the thirteen-month period, the purchaser (or the
employer or plan sponsor, in the case of any retirement or group plan) is
required to pay the difference between the sales charge otherwise applicable to
the purchases made during this period and sales charge actually paid. Such
payment may be made directly to the Distributor or, if not paid, the Distributor
will liquidate sufficient escrowed shares to obtain such difference. Investors
electing to purchase Class A shares of the Fund pursuant to a Letter of Intent
should carefully read such Letter of Intent.
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will, in the
case of an Investment Letter of Intent, be granted subject to confirmation of
the investor's holdings or in the case of a Participant Letter of Intent,
subject to confirmation of the number of eligible employees or participants in
the retirement or group plan. Letters of Intent are not available to individual
participants in any retirement or group plans.
B-25
<PAGE>
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
The contingent deferred sales charge (CDSC) 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
considered disabled if he or she is award letter or a letter from a physician on the
unable to engage in any substantial physician's letterhead stating that the
gainful activity by reason of any shareholder (or, in the case of a trust, the
medically determinable physical or grantor) is permanently disabled. The letter
mental impairment which can be must also indicate the date of disability.
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 Account custodial firm indicating (i) the date of birth
of the shareholder and (ii) that the shareholder
is over age 59 1/2 and is taking a normal
distribution--signed by the shareholder.
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 $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:
<TABLE>
<CAPTION>
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
- ------------------------- ----------------------- ----------------
<S> <C> <C>
First.................... 3.0% 2.0%
Second................... 2.0% 1.0%
Third.................... 1.0% 0%
Fourth and thereafter.... 0% 0%
</TABLE>
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to the reduced CDSC. The reduced CDSC will be granted subject to
confirmation of your holdings.
B-26
<PAGE>
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 NAV by returning the check or the proceeds to the Transfer Agent
within 30 days after the payment date. Such investment will be made at the NAV
per share next determined after receipt of the check or proceeds by the Transfer
Agent. Such shareholder will receive credit for any CDSC 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 the relative NAV next determined after receipt of an order
in proper form. An exchange will be treated as a redemption and purchase for tax
purposes. 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 (Short-Intermediate Term Series) and shares of the
money market funds specified below. No fee or sales load will be imposed upon
the exchange. Shareholders of money market funds who acquired such shares upon
exchange of Class A shares may use the Exchange Privilege only to acquire Class
A shares of the Prudential Mutual Funds participating in the exchange privilege.
The following money market funds participate in the Class A exchange
privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets, Inc. (Class A shares)
Prudential Tax-Free Money Fund, Inc.
B-27
<PAGE>
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, Inc.
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
Prudential Special Money Market Fund, Inc. without imposition of any CDSC at the
time of exchange. Upon subsequent redemption from such money market fund or
after re-exchange into the Fund, such shares will be subject to the CDSC
calculated by excluding the time such shares were held in the money market fund.
In order to minimize the period of time in which shares are subject to a CDSC,
shares exchanged out of the money market fund will be exchanged on the basis of
their remaining holding periods, with the longest remaining holding periods
being transferred first. In measuring the time period shares are held in a money
market fund and "tolled" for purposes of calculating the CDSC holding period,
exchanges are deemed to have been made on the last day of the month. Thus, if
shares are exchanged into the Fund from a money market fund during the month
(and are held in the Fund at the end of the month), the entire month will be
included in the CDSC holding period. Conversely, if shares are exchanged into a
money market fund prior to the last day of the month (and are held in the money
market fund on the last day of the month), the entire month will be excluded
from the CDSC holding period. For purposes of calculating the seven-year holding
period applicable to the Class B conversion feature, the time period during
which Class B shares were held in a money market fund will be excluded.
At any time after acquiring shares of other funds participating in the Class
B or Class C exchange privilege, the shareholder may again exchange those shares
(and any reinvested dividends and distributions) for Class B or Class C shares
of the Fund, respectively, without subjecting such shares to any CDSC. Shares of
any fund participating in the Class B or Class C exchange privilege that were
acquired through reinvestment of dividends or distributions may be exchanged for
Class B or Class C shares of other funds, respectively, without being subject to
any CDSC.
CLASS Z. Class Z shares may be exchanged for Class Z shares of other
Prudential Mutual Funds.
Additional details about the exchange privilege 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 $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class beginning in 2011, the cost of four years at a
private college could reach $210,000 and over $90,000 at a public university.(1)
- ------------
(1)Source information concerning the costs of education at public and
private universities is available from The College Board Annual Survey of
Colleges, 1993. Average costs for private institutions include tuition, fees,
room and board for the 1993-1994 academic year.
B-28
<PAGE>
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(2)
<TABLE>
<CAPTION>
PERIOD OF MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
- ------------------------------------------------------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
25 Years.................................................... $ 110 $ 165 $ 220 $ 275
20 years.................................................... 176 264 352 440
15 years.................................................... 296 444 592 740
10 years.................................................... 555 833 1,110 1,388
5 years.................................................... 1,371 2,057 2,742 3,428
See "Automatic Savings Accumulation Plan."
</TABLE>
- ------------
(2)The chart assumes an average 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
automatically reinvested in additional full and fractional shares at NAV 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
B-29
<PAGE>
plans are for use by both self-employed individuals and corporate employers.
These plans permit either self-direction of accounts by participants, or a
pooled account arrangement. Information regarding the establishment of these
plans, the administration, custodial fees and other details are available from
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.
<TABLE>
<CAPTION>
TAX-DEFERRED COMPOUNDING(1)
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
- ------------------------ ---------- ----------
<S> <C> <C>
10 years................ $ 26,165 $ 31,291
15 years................ 44,675 58,649
20 years................ 68,109 98,846
25 years................ 97,780 157,909
30 years................ 135,346 244,692
</TABLE>
- ------------
(1) The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated. Earnings in
a traditional IRA account will be subject to tax when withdrawn from the
account. Distributions from a Roth IRA which meet the conditions required under
the Internal Revenue Code will not be subject to tax upon withdrawal from the
account.
MUTUAL FUND PROGRAMS
From time to time, the Fund may be included in a mutual fund program with
other Prudential Mutual Funds. Under such a program, a group of portfolios will
be selected and thereafter marketed collectively. Typically, these programs are
created with an investment theme, E.G., to seek greater diversification,
protection from interest rate movements or access to different management
styles. In the event such a program is instituted, there may be a minimum
investment requirement for the program as a whole. The Fund may waive or reduce
the minimum initial investment requirements in connection with such a program.
The mutual funds in the program may be purchased individually or as part of
a program. Since the allocation of portfolios included in the program may not be
appropriate for all investors, individuals should consult their Prudential
Securities Financial Advisor or Prudential/Pruco Securities Representative
concerning the appropriate blend of portfolios for them. If investors elect to
purchase the individual mutual funds that constitute the program in an
investment ratio different from that offered by the program, the standard
minimum investment requirements for the individual mutual funds will apply.
NET ASSET VALUE
Under the Investment Company Act, the Board of Directors is responsible for
determining in good faith the fair value of securities of the Fund. In
accordance with procedures adopted by the Board of Directors, the value of
investments listed on a securities exchange and NASDAQ National Market System
securities (other than options on stock and stock indices) are valued at the
last sale price on the day of valuation or, if there was no sale on such day,
the mean between the last bid and asked prices on such day, or at the bid price
in the absence of an asked price. Corporate bonds (other than convertible debt
securities) and U.S. Government securities that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, are valued on the basis of valuations
provided
B-30
<PAGE>
by a pricing service which uses information with respect to transactions in
bonds, quotations from bond dealers, agency ratings, market transactions in
comparable securities and various relationships between securities in
determining value. Convertible debt securities that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, are valued at the mean between the
last reported bid and asked prices provided by principal market makers. Options
on stock and stock indices traded on an exchange are valued at the mean between
the most recently quoted bid and asked prices on the respective exchange and
futures contracts and options thereon are valued at their last sale prices as of
the close of trading on the applicable commodities exchange or board of trade
or, if there was no sale on the applicable commodities exchange or board of
trade on such day, at the mean between the most recently quoted bid and asked
prices on such exchange or board of trade. Quotations of foreign securities in a
foreign currency are converted to U.S. dollar equivalents at the current rate
obtained from a recognized bank or dealer and forward currency exchange
contracts are valued at the current cost of covering or offsetting such
contracts. Should an extraordinary event, which is likely to affect the value of
the security, occur after the close of an exchange on which a portfolio security
is traded, such security will be valued at fair value considering factors
determined in good faith by the investment adviser under procedures established
by and under the general supervision of the Fund's Board of Directors.
Securities or other assets for which reliable market quotations are not
readily available or for which the pricing agent or principal market maker does
not provide a valuation or methodology or provides a valuation or methodology
that, in the judgment of the Manager or Subadviser (or Valuation Committee or
Board of Directors) does not represent fair value, are valued by the Valuation
Committee or Board of Directors in consultation with the Manager or Subadviser.
Short-term debt securities are valued at cost, with interest accrued or discount
amortized to the date of maturity, if their original maturity was 60 days or
less, unless this is determined by the Board of Directors not to represent fair
value. Short-term securities with remaining maturities of more than 60 days, for
which market quotations are readily available, are valued at their current
market quotations as supplied by an independent pricing agent or principal
market maker. The Fund will compute its NAV at 4:15 P.M., New York time, on each
day the New York Stock Exchange is open for trading except on days on which no
orders to purchase, sell or redeem Fund shares have been received or days on
which changes in the value of the Fund's portfolio securities do not affect NAV.
In the event the New York Stock Exchange closes early on any business day, the
NAV of the Fund's shares shall be determined at the time between such closing
and 4:15 P.M., New York time. The New York Stock Exchange is closed on the
following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
NAV is calculated separately for each class. 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.
The NAV of Class Z shares will generally be higher than the NAV of Class A,
Class B or Class C shares as a result of the fact that the Class Z shares are
not subject to any distribution or service fee. It is expected, however, that
the NAV of the four classes will tend to converge immediately after the
recording of dividends, if any, which will differ by approximately the amount of
the distribution and/or service fee expense accrual differential among the
classes.
TAXES, DIVIDENDS AND DISTRIBUTIONS
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 annual gross income (without reduction for losses
from the sale or other disposition of securities) from dividends, interest,
payments with respect to securities loans 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)
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); and (c) the Fund distribute
to its shareholders at least 90% of its net investment income and net short-term
gains (I.E., the excess of net short-term capital gains over net long-term
capital losses) in each year.
B-31
<PAGE>
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. 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
or otherwise holds an offsetting position with respect to the securities. Other
gains or losses on the sale of securities will be short-term capital gains or
losses. Gains and losses on the sale, lapse or other termination of options on
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.
Certain of the Fund's transactions may be subject to wash sale, short sale,
constructive sale, straddle and anti-conversion provisions of the Internal
Revenue Code that may, among other things, require the Fund to defer recognition
of losses.
The "straddle" provisions of the Internal Revenue Code may affect the
taxation of the Fund's transactions (including 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.
Gains or losses attributable to fluctuations in exchange rates which occur
between the time the Fund accrues interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time the
Fund actually collects such receivables or pays such liabilities are treated as
ordinary income or ordinary loss. Similarly, gains or losses on forward foreign
currency exchange contracts or dispositions of debt securities denominated in a
foreign currency attributable to fluctuations in the value of the foreign
currency between the date of acquisition of the security and the date of
disposition also are treated as ordinary gain or loss. These gains or losses,
referred to under the Internal Revenue Code as "Section 988" gains or losses,
increase or decrease the amount of the Fund's investment company taxable income
available to be distributed to its shareholders as ordinary income, rather than
increasing or decreasing the amount of the Fund's net capital gain. If Section
988 losses exceed other investment company taxable income during a taxable year,
the Fund would not be able to make any ordinary dividend distributions, or
distributions made before the losses were realized would be recharacterized as a
return of capital to shareholders, rather than as an ordinary dividend, reducing
each shareholder's basis in his or her Fund shares.
Any 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.
If a shareholder acquires shares of the Fund and sells or otherwise disposes
of such shares within 90 days of acquisition, certain sales charges incurred in
acquiring such shares may not be included in the basis of such shares for
purposes of calculating gain or loss realized upon such sale or disposition.
B-32
<PAGE>
The per share dividends on Class B and Class C shares will be lower than the
per share dividends on Class A and Class Z shares as a result of the higher
distribution-related fee applicable to the Class B and Class C shares and lower
on Class A shares in relation to Class Z shares. The per share distributions of
net capital gains, if any, will be paid in the same amount for Class A, Class B,
Class C and Class Z shares. See "Net Asset Value."
Shareholders electing to receive dividends and distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the net asset value of a share of the Fund on the
reinvestment date.
Any dividends or distributions paid shortly after a purchase by an investor
may have the effect of reducing the per share net asset value of the investor's
shares by the per share amount of the dividends or distributions. Furthermore,
such dividends or distributions, although in effect a return of capital, are
subject to federal income taxes. 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 from time to time advertise its
average annual total return. Average annual total return is determined
separately for Class A, Class B, Class C and Class Z shares. See "How the Fund
Calculates Performance" in the Prospectus.
Average annual total return is computed according to the following formula:
P(1+T) to the power of n = ERV
Where: P = a hypothetical initial payment of $1000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value at the end of the 1, 5 or 10 year periods
(or fractional portion thereof) of a hypothetical $1000 investment
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 returns for Class A shares for the one year, five
year and since inception (January 22, 1990) periods ended December 31, 1997 were
21.38%, 14.82% and 12.94%, respectively. The average annual total returns for
Class B shares for the one, five and ten year and since inception (August 10,
1981) periods ended December 31, 1997 were 21.80%, 15.02%, 15.25% and 17.04%,
respectively. The average annual total returns for Class C shares for the one
year and since inception (August 1, 1994) periods ended December 31, 1997 were
25.80% and 18.72%, respectively. The average annual total returns for the Class
Z shares for the one year and since inception (March 1, 1996) periods ended
December 31, 1997 were 28.15% and 26.50%, respectively. 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,
Class C and Class Z shares. See "How the Fund Calculates Performance" in the
Prospectus.
B-33
<PAGE>
Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed according to the following formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of $1000.
ERV = Ending Redeemable Value at the end of the 1, 5, or 10 year
periods (or fractional portion thereof) of a hypothetical $1000
investment made at the beginning of the 1, 5 or 10 year
periods.
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.
The aggregate total returns for Class A shares for the one year, five year
and since inception periods ended December 31, 1997 were 27.77%, 110.09% and
176.59%, respectively. The aggregate total returns for Class B shares for the
one, five and ten year and since inception periods ended December 31, 1997 were
26.80%, 102.31%, 313.36% and 1218.51%, respectively. The aggregate total returns
for Class C shares for the one year and since inception periods ended December
31, 1997 were 26.80% and 79.71%, respectively. The aggregate total returns for
Class Z shares for the one year and since inception periods ended December 31,
1997 were 28.15% and 53.92%, respectively.
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, Class C
and Class Z shares. This yield will be computed by dividing the Fund's net
investment income per share earned during this 30-day period by the maximum
offering price per share on the last day of this period. Yield is calculated
according to the following formula:
a - b
YIELD = 2[( ------- +1)to the power of 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, 1997 were 2.49%,
1.91%, 1.91% and 2.86% for Class A, Class B, Class C and Class Z shares,
respectively.
B-34
<PAGE>
From time to time, the performance of the Fund may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long-term and the rate of inflation.(1)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
PERFORMANCE
COMPARISON OF
DIFFERENT
TYPES OF INVESTMENTS
OVER THE LONG TERM
(1/1926-09/1997)
<S> <C> <C>
Long-Term Govt.
Common Stocks Bonds Inflation
11.0% 5.1% 3.1%
</TABLE>
- ------------
(1)Source: Ibbotson Associates, "STOCKS, BONDS, BILLS AND INFLATION--1997
YEARBOOK" (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield.) Used with permission. All rights reserved. Common stock returns
are based on the Standard & Poor's 500 Stock Index, a market-weighted, unmanaged
index of 500 common stocks in a variety of industry sectors. It is a commonly
used indicator of broad stock price movements. This chart is for illustrative
purposes only, and is not intended to represent the performance of any
particular investment or fund. Investors cannot invest directly in an index.
Past performance is not a guarantee of future results.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT
AND INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and in that capacity maintains certain financial and accounting books and
records pursuant to an agreement with the Fund. See "How the Fund is
Managed--Custodian and Transfer and Dividend Disbursing Agent" in the
Prospectus.
Prudential Mutual Fund Services LLC (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 PIFM. PMFS provides customary transfer agency
services to the Fund, including the handling of shareholder communications, the
processing of shareholder transactions, the maintenance of shareholder account
records, the payment of dividends and distributions and related functions. For
these services, PMFS receives an annual fee 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, 1997, the Fund incurred fees of approximately $4,378,000
for the services of PMFS.
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York 10036,
serves as the Fund's independent accountants and in that capacity audits the
Fund's annual financial statements.
B-35
<PAGE>
PORTFOLIO OF INVESTMENTS
AS OF DECEMBER 31, 1997 PRUDENTIAL UTILITY FUND, INC.
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ----------------------------------------------------------------
LONG-TERM INVESTMENTS--95.1%
COMMON STOCKS--92.1%
- ----------------------------------------------------------------
ELECTRICAL POWER--40.3%
546,000 AES Corp. (a) $ 25,457,250
1,045,400 Boston Edison Co. 39,594,525
981,300 Central Louisiana Electric
Company, Inc. 31,769,588
1,179,500 Central Maine Power Co. 17,987,375
2,432,685 CINergy Corporation 93,202,244
2,300,000 CMS Energy Corporation 101,343,750
948,202 Companhia Energetica de Minas
Gerais-Cemig (ADR) (Brazil) 41,131,106
1,000,000 DPL, Inc. 28,750,000
3,185,111 Duke Energy Co. 176,375,522
803,100 Eastern Utilities Associates 21,081,375
4,015,000 Edison International 109,157,812
83,540 El Paso Electric Co. (a) 610,886
1,282,900 Entergy Corp. 38,406,819
20,000 Evn Energie - Versorgung
Niederoesterreich AG (Austria) 2,642,219
3,050,000 FirstEnergy Corp. 88,450,000
6,000,000 Iberdrola (Spain) 78,960,317
2,798,500 Illinova Corp. 75,384,594
2,175,300 Long Island Lighting Co. 65,530,912
7,250,000 National Power PLC (United
Kingdom) 71,729,181
906,800 New Century Energies, Inc. 43,469,725
3,107,700 New York State Electric & Gas
Corp. 110,323,350
6,475,600 Niagara Mohawk Power Corp. (a) 67,993,800
967,000 NIPSCO Industries, Inc. 47,806,063
9,061,400 Northeast Utilities Co. 107,037,787
1,978,600 PECO Energy Co. 47,981,050
2,003,400 Pinnacle West Capital Corp. 84,894,075
2,557,000 Public Service Company of New
Mexico 60,568,938
1,670,800 Rochester Gas & Electric Corp. 56,807,200
1,928,367 Texas Utilities Co. 80,147,753
1,720,740 Tuscon Electric Power Co. (a) 31,188,413
2,511,800 Unicom Corp. 77,237,850
---------------
1,923,021,479
- ----------------------------------------------------------------
GAS DISTRIBUTION--8.4%
283,650 Bay State Gas Co. $ 10,530,506
3,938,104 British Gas PLC (ADR) (United
Kingdom) 89,345,734
500,000 Energen Corp. 19,875,000
783,600 MCN Corporation 31,637,850
810,600 NICOR Inc. 34,197,188
3,144,300 Pacific Enterprises 118,304,287
117,600 Providence Energy Corp. 2,565,150
1,880,400 Questar Corp. 83,912,850
205,400 Southwest Gas Corporation 3,838,413
161,150 Yankee Energy System, Inc. 4,300,691
---------------
398,507,669
- ----------------------------------------------------------------
GAS PIPELINES--19.3%
2,709,275 Coastal Corp. 167,805,720
2,150,000 Columbia Gas System, Inc. 168,909,375
407,200 Consolidated Natural Gas Co. 24,635,600
237,700 Eastern Enterprises, Inc. 10,696,500
1,299,100 El Paso Natural Gas Co. 86,390,150
909,900 Enron Corp. 37,817,719
1,500,000 Equitable Resources, Inc. 53,062,500
690,300 KN Energy, Inc. 37,276,200
4,500,000 TransCanada Pipelines, Ltd.
(Canada) 100,451,349
2,200,000 Westcoast Energy, Inc. (Canada) 50,600,000
1,056,200 Western Gas Resources, Inc. 23,368,425
5,647,022 Williams Cos., Inc. 160,234,249
---------------
921,247,787
- ----------------------------------------------------------------
MANUFACTURING--1.5%
955,400 RWE AG (Germany) 51,264,200
36,350 Viag AG (Germany) 19,585,282
---------------
70,849,482
- ----------------------------------------------------------------
MEDIA--0.2%
1,135,971 Ascent Entertainment Group, Inc.
(a) 11,785,699
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-36
<PAGE>
PORTFOLIO OF INVESTMENTS
AS OF DECEMBER 31, 1997 PRUDENTIAL UTILITY FUND, INC.
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ----------------------------------------------------------------
OIL & GAS--3.7%
1,000,000 Alberta Energy Co., Ltd. (Canada) $ 19,375,000
375,000 RAO Gazprom (ADR) (Russia) 9,046,875
3,248,800 Sonat, Inc. 148,632,600
---------------
177,054,475
- ----------------------------------------------------------------
OIL & GAS EXPLORATION/PRODUCTION--1.8%
4,906,830 EEX Corporation 44,468,147
700,000 Oryx Energy Co.(a) 17,850,000
814,800 Pioneer Natural Resources Co. 23,578,275
---------------
85,896,422
- ----------------------------------------------------------------
REALTY INVESTMENT TRUST--1.8%
89,580 Crescent Operating, Inc. (a) 2,194,710
895,800 Crescent Real Estate Equities,
Inc. 35,272,125
969,900 Equity Residential Property Trust 49,040,569
---------------
86,507,404
- ----------------------------------------------------------------
TELECOMMUNICATIONS--15.1%
1,052,200 AT&T Corp. 64,447,250
1,939,600 BCE, Inc. (Canada) 64,612,925
2,414,000 Comsat Corp. 58,539,500
2,707,600 Frontier Corporation 65,151,625
3,200,000 Hellenic Telecommunication
Organization S.A. (GDR)
(Greece) 33,600,000
1,005,000 Millicom International Cellular S.
A. (Luxembourg) (a) 37,813,125
1,169,200 Southern New England
Telecommunications Corp. 58,825,375
1,000,000 Sprint Corp. 58,625,000
1,991,700 Tele Danmark (ADR) (Denmark) 61,369,256
371,400 Telebras (ADR) (Brazil) 43,244,887
800,000 Telefonica de Espana, S.A. (ADR)
(Spain) 72,850,000
1,441,500 Telefonica del Peru, S.A. (ADR)
(Peru) 33,604,969
1,211,500 Telefonos de Mexico, S.A. (ADR)
(Mexico) 67,919,719
11,000 U.S. West, Inc. (a) 496,375
---------------
721,100,006
---------------
Total common stocks
(cost $2,706,264,793) 4,395,970,423
---------------
- ----------------------------------------------------------------
PREFERRED STOCKS--1.6%
- ----------------------------------------------------------------
NATURAL GAS--0.2%
359,100 Enron Corp., 6.25% $ 7,406,438
- ----------------------------------------------------------------
TELECOMMUNICATIONS--1.4%
300,000 Compania de Inversiones,
Convertible, 7.00% (Argentina) 21,000,000
475,000 Nortel Inversora S. A.,
Convertible, 10.00% (Argentina) 30,132,812
398,000 Philippine Long Distance Telephone
Co. Convertible (GDR)
(The Philippines) 18,258,250
---------------
69,391,062
---------------
Total preferred stocks
(cost $64,270,654) 76,797,500
---------------
PRINCIPAL
AMOUNT
(000)
BONDS--1.4%
- ----------------------------------------------------------------
ELECTRICAL POWER--0.3%
$ 10,000 Niagara Mohawk Power Corp.,
9.50%, 3/1/21 10,664,800
5,000 Texas Utilities Co.,
9.75%, 5/1/21 5,616,100
---------------
16,280,900
- ----------------------------------------------------------------
NATURAL GAS--0.1%
Oryx Energy Co.,
2,000 9.50%, 11/1/99 2,096,540
1,000 7.50%, 5/15/14 1,007,500
---------------
3,104,040
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-37
<PAGE>
PRUDENTIAL UTILITY FUND, INC.
PORTFOLIO OF INVESTMENTS AS OF DECEMBER 31, 1997
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ----------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS--1.0%
United States Treasury Bond,
$ 43,000 6.375%, 8/15/27
(cost $42,631,422) $ 45,351,670
---------------
Total bonds
(cost $60,840,441) 64,736,610
---------------
Total long-term investments
(cost $2,831,375,888) 4,537,504,533
---------------
SHORT-TERM INVESTMENT--4.3%
- ----------------------------------------------------------------
REPURCHASE AGREEMENT
202,675 Joint Repurchase Agreement
Account,
6.63%, 1/2/98
(cost $202,675,000; Note 5) 202,675,000
---------------
- ----------------------------------------------------------------
TOTAL INVESTMENTS--99.4%
(cost $3,034,050,888; Note 4) 4,740,179,533
Other assets in excess of
liabilities--0.6% 30,687,261
---------------
Net Assets--100% $ 4,770,866,794
---------------
---------------
</TABLE>
- ---------------
(a) Non-income producing securities.
ADR--American Depository Receipt.
GDR--Global Depository Receipt.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-38
<PAGE>
Statement of Assets and Liabilities PRUDENTIAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS DECEMBER 31, 1997
<S> <C>
Investments, at value (cost $3,034,050,888)............................................................. $ 4,740,179,533
Foreign currency, at value (cost $7,004,269)............................................................ 6,944,978
Cash.................................................................................................... 776,902
Receivable for investments sold......................................................................... 14,718,524
Dividends and interest receivable....................................................................... 12,736,511
Receivable for Fund shares sold......................................................................... 4,437,485
Prepaid expenses........................................................................................ 98,423
-----------------
Total assets......................................................................................... 4,779,892,356
-----------------
LIABILITIES
Payable for Fund shares reacquired...................................................................... 3,739,079
Distribution fee payable................................................................................ 2,292,111
Management fee payable.................................................................................. 1,554,461
Accrued expenses........................................................................................ 955,213
Foreign withholding taxes payable....................................................................... 484,698
-----------------
Total liabilities.................................................................................... 9,025,562
-----------------
NET ASSETS.............................................................................................. $ 4,770,866,794
-----------------
-----------------
Net assets were comprised of:
Common stock, at par................................................................................. $ 3,869,715
Paid-in capital in excess of par..................................................................... 2,991,500,986
-----------------
2,995,370,701
Undistributed net investment income.................................................................. 9,335,543
Accumulated net realized gain on investments......................................................... 60,175,598
Net unrealized appreciation on investments and foreign currencies.................................... 1,705,984,952
-----------------
Net assets, December 31, 1997........................................................................... $ 4,770,866,794
-----------------
-----------------
Class A:
Net asset value and redemption price per share
($2,583,300,630 / 209,469,446 shares of common stock issued and outstanding)...................... $12.33
Maximum sales charge (5% of offering price).......................................................... .65
-----------------
Maximum offering price to public..................................................................... $12.98
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per share
($2,132,172,708 / 173,010,831 shares of common stock issued and outstanding)...................... $12.32
-----------------
-----------------
Class C:
Net asset value, offering price and redemption price per share
($13,489,733 / 1,094,600 shares of common stock issued and outstanding)........................... $12.32
-----------------
-----------------
Class Z:
Net asset value, offering price and redemption price per share
($41,903,723 / 3,396,606 shares of common stock issued and outstanding)........................... $12.34
-----------------
-----------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-39
<PAGE>
PRUDENTIAL UTILITY FUND, INC.
STATEMENT OF OPERATIONS
- ------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
NET INVESTMENT INCOME DECEMBER 31, 1997
<S> <C>
Income
Dividends (net of foreign withholding
taxes of $4,598,306)............... $ 147,106,502
Interest.............................. 15,238,562
-----------------
Total income....................... 162,345,064
-----------------
Expenses
Distribution fee--Class A............. 5,503,617
Distribution fee--Class B............. 20,593,729
Distribution fee--Class C............. 94,238
Management fee........................ 17,370,271
Transfer agent's fees and expenses.... 5,600,000
Custodian's fees and expenses......... 579,000
Reports to shareholders............... 490,000
Registration fees..................... 110,000
Insurance............................. 99,000
Legal fees and expenses............... 45,000
Directors' fees and expenses.......... 45,000
Audit fee............................. 32,000
Miscellaneous......................... 28,338
-----------------
Total expenses..................... 50,590,193
-----------------
Net investment income.................... 111,754,871
-----------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCY
TRANSACTIONS
Net realized gain (loss) on:
Investment transactions............... 413,513,785
Foreign currency transactions......... (764,114)
-----------------
412,749,671
-----------------
Net change in unrealized appreciation
(depreciation) on:
Investments........................... 540,067,336
Foreign currencies.................... (224,426)
-----------------
539,842,910
-----------------
Net gain on investments and foreign
currencies............................ 952,592,581
-----------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS................ $ 1,064,347,452
-----------------
-----------------
</TABLE>
PRUDENTIAL UTILITY FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------------
<TABLE>
<CAPTION>
INCREASE (DECREASE) YEAR ENDED DECEMBER 31,
IN NET ASSETS 1997 1996
<S> <C> <C>
Operations
Net investment income...... $ 111,754,871 $ 107,830,613
Net realized gain on
investments and foreign
currencies.............. 412,749,671 320,235,886
Net change in unrealized
appreciation of
investments and foreign
currencies.............. 539,842,910 357,572,748
-------------- -----------------
Net increase in net assets
resulting from
operations.............. 1,064,347,452 785,639,247
-------------- -----------------
Dividends and distributions
(Note 1)
Dividends from net
investment income
Class A................. (60,645,408) (56,517,524)
Class B................. (40,354,565) (49,728,071)
Class C................. (200,787) (110,317)
Class Z................. (1,038,271) (1,061,722)
-------------- -----------------
(102,239,031) (107,417,634)
-------------- -----------------
Distributions from net
realized capital gains
Class A................. (211,158,424) (136,028,661)
Class B................. (182,907,714) (151,218,004)
Class C................. (998,463) (377,943)
Class Z................. (3,229,427) (2,368,426)
-------------- -----------------
(398,294,028) (289,993,034)
-------------- -----------------
Fund share transactions (net of
share conversions) (Note 6)
Proceeds from shares
sold.................... 413,071,389 334,072,755
Net asset value of shares
issued in reinvestment
of dividends and
distributions........... 459,144,179 363,055,255
Cost of shares
reacquired.............. (865,755,515) (952,090,398)
-------------- -----------------
Net increase (decrease) in
net assets from Fund
share transactions...... 6,460,053 (254,962,388)
-------------- -----------------
Total increase................ 570,274,446 133,266,191
NET ASSETS
Beginning of year............. 4,200,592,348 4,067,326,157
-------------- -----------------
End of year................... $4,770,866,794 $ 4,200,592,348
-------------- -----------------
-------------- -----------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-40
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
Prudential Utility Fund, Inc. (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 total return, through a combination of
income and capital appreciation. The Fund 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, cable, airport, seaport and toll road 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 or designated subcustodians, as the case
may be under triparty repurchase agreements, takes possession of the underlying
collateral securities, the value of which exceeds the principal amount of the
repurchase transaction, including accrued interest. If the seller defaults and
the value of the collateral declines or if bankruptcy proceedings are commenced
with respect to the seller of the security, realization of the collateral by the
Fund may be delayed or limited.
All securities are valued as of 4:15 P.M., New York time.
FOREIGN CURRENCY TRANSLATION: The books and records of the Fund are maintained
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on
the following basis:
(i) market value of investment securities, other assets and liabilities--at the
closing daily rate of exchange;
(ii) purchases and sales of investment securities, income and expenses--at the
rate of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the 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 gains or losses on foreign currency transactions represent net
foreign exchange gains or losses from sales and maturities of short-term
securities, disposition of foreign currency, gains or losses realized between
the trade and settlement dates of security transactions, and the difference
between amounts of dividends, interest and foreign withholding taxes recorded on
the Fund's books and the US dollar equivalent amounts actually received or paid.
Net currency gains and losses from valuing foreign currency denominated assets,
except portfolio securities, and liabilities (other than investments) at year
end exchange rates are reflected as a component of unrealized appreciation or
depreciation on investments and 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 NET INVESTMENT INCOME: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
and foreign currencies are calculated on the identified cost basis. Dividend
income is recorded on the ex-dividend date and interest income is recorded on
the accrual basis. The Fund amortizes discounts on purchases of debt securities
as adjustments to interest income. Expenses are recorded on the accrual basis
which may require the use of certain estimates by management.
Net investment income (other than distribution fees) and unrealized and realized
gains or losses are allocated daily to each class of shares 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 capital loss carryforwards. Dividends and distributions are
recorded on the ex-dividend date.
- --------------------------------------------------------------------------------
B-41
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
TAXES: It is the Fund's policy to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable net income to its shareholders. Therefore, no
federal income tax provision is required.
Withholding taxes on foreign dividends have been provided for in accordance with
the Fund's understanding of the applicable country's tax rules and rates.
RECLASSIFICATION OF CAPITAL ACCOUNTS: The Fund accounts for and reports
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to decrease undistributed net investment income by $738,273
and increase accumulated net realized gain on investments by $738,273 for
realized foreign currency losses during the year ended December 31, 1997. Net
investment income, net realized gains and net assets were not affected by this
change.
- --------------------------------------------------------------------------------
NOTE 2. AGREEMENTS
The Fund has a management agreement with Prudential Investments Fund Management
LLC ("PIFM"). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. Pursuant to a subadvisory agreement between PIFM and The Prudential
Investment Corporation ("PIC"), PIC furnishes investment advisory services in
connection with the management of the Fund. PIFM pays for the cost of the
subadviser's services, the cost of compensation of officers of the Fund,
occupancy and certain clerical and bookkeeping costs of the Fund. The Fund bears
all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly at an annual
rate of .60% of the Fund's average daily net assets up to $250 million, .50% of
the next $500 million, .45% of the next $750 million, .40% of the next $500
million, .35% of the next $2 billion, .325% of the next $2 billion and .30% of
the average daily net assets of the Fund in excess of $6 billion.
The Fund has a distribution agreement with Prudential Securities Incorporated
("PSI"), which acts as the distributor of the Class A, Class B, Class C and
Class Z shares of the Fund. The Fund compensates PSI for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution, (the "Class A, B and C Plans"), regardless of expenses actually
incurred by PSI. The distribution fees for Class A, B and C shares are accrued
daily and payable monthly. PSI also incurs the expenses of distributing the
Fund's Class Z shares under the distribution agreement, none of which is
reimbursed or paid by the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%
of the average daily net assets of the Class A, B and C shares, respectively.
Such expenses under the Plans were .25 of 1%, 1% and 1% of the average daily net
assets of the Class A, B and C shares, respectively, for the year ended December
31, 1997.
PSI has advised the Fund that it has received approximately $745,100 in
front-end sales charges resulting from sales of Class A shares during the year
ended December 31, 1997. From these fees, PSI paid such sales charges to Pruco
Securities Corporation, an affiliated broker-dealer, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI advised the Fund that for the year ended December 31, 1997, it received
approximately $2,226,900 and $2,800 in contingent deferred sales charges imposed
upon redemptions by certain Class B and Class C shareholders, respectively.
PSI, PIFM and PIC are indirect, wholly owned subsidiaries of The Prudential
Insurance Company of America.
The Fund, along with other affiliated registered investment companies (the
"Funds"), has a credit agreement (the "Agreement") with an unaffiliated lender.
The maximum commitment under the Agreement is $200,000,000. Interest on any such
borrowings outstanding will be at market rates. The purpose of the Agreement is
to serve as an alternative source of funding for capital share redemptions. The
Fund did not borrow any amounts pursuant to the Agreement during the year ended
December 31, 1997. The Funds pay a commitment fee at an annual rate of .055 of
1% on the unused portion of the credit facility. The commitment fee is accrued
and paid quarterly on a pro-rata basis by the Funds. The Agreement expired on
December 30, 1997 and has been extended through December 29, 1998 under the same
terms.
- --------------------------------------------------------------------------------
NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES
Prudential Mutual Fund Services LLC ("PMFS"), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended December 31, 1997,
the Fund incurred fees of approximately $4,378,000
- --------------------------------------------------------------------------------
B-42
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
for the services of PMFS. As of December 31, 1997, approximately $357,000 of
such fees were due to PMFS. Transfer agent fees and expenses in the Statement of
Operations also include certain out-of-pocket expenses paid to nonaffiliates.
For the year ended December 31, 1997, PSI earned approximately $78,400 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, 1997, were $638,350,290 and $1,119,864,954,
respectively.
The federal income tax basis of the Fund's investments at December 31, 1997 was
$3,039,463,185 and, accordingly, net unrealized appreciation for federal income
tax purposes was $1,700,716,348 (gross unrealized appreciation--$1,726,387,997;
gross unrealized depreciation--$25,671,649).
The Fund elected to treat approximately $302,200 of net currency losses incurred
during the two month period ended December 31, 1997 as having incurred in the
following fiscal year.
- --------------------------------------------------------------------------------
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, 1997, the
Fund had a 17.21% undivided interest in the joint account. The undivided
interest for the Fund represents $202,675,000 in the principal amount. As of
such date, each repurchase agreement in the joint account and the collateral
therefor were as follows:
Credit Suisse First Boston Corp., 6.75%, in the principal amount of
$342,000,000, repurchase price $342,128,250, due 1/2/98. The value of the
collateral including accrued interest was $353,486,750.
Deutsche Morgan Grenfell, 6.80%, in the principal amount of $200,000,000,
repurchase price $200,075,555, due 1/2/98. The value of the collateral including
accrued interest was $204,000,314.
SBC Warburg Dillon Read, Inc., 6.55%, in the principal amount of $142,000,000,
repurchase price $142,051,672, due 1/2/98. The value of the collateral including
accrued interest was $144,862,841.
Morgan Stanley, Dean Witter, Discover & Co., 5.95%, in the principal amount of
$151,553,000, repurchase price $151,603,097, due 1/2/98. The value of the
collateral including accrued interest was $154,584,932.
Salomon Smith Barney Inc., 6.75%, in the principal amount of $342,000,000,
repurchase price $342,128,250, due 1/2/98. The value of the collateral including
accrued interest was $350,295,372.
- --------------------------------------------------------------------------------
NOTE 6. CAPITAL
The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are
sold with a front-end sales charge of up to 5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a contingent
deferred sales charge of 1% during the first year. Class B shares automatically
convert to Class A shares on a quarterly basis approximately seven years after
purchase. A special exchange privilege is also available for shareholders who
qualified to purchase Class A shares at net asset value. Class Z shares are not
subject to any sales or redemption charge and are offered exclusively for sale
to a limited group of investors.
There are 2 billion shares of $.01 par value per share common stock authorized
which consists of 500 million shares of Class A common stock, 700 million shares
of Class B common stock, 400 million shares of Class C common stock and 400
million shares of Class Z common stock.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A SHARES AMOUNT
- -------------------------------- ------------ ---------------
<S> <C> <C>
Year ended December 31, 1997:
Shares sold..................... 18,710,671 $ 214,780,201
Shares issued in reinvestment of
dividends and distributions... 21,742,349 248,368,140
Shares reacquired............... (41,618,692) (478,448,444)
------------ ---------------
Net decrease in shares
outstanding before
conversion.................... (1,165,672) (15,300,103)
Shares issued upon conversion
from Class B.................. 24,639,335 284,415,438
------------ ---------------
Net increase in shares
outstanding................... 23,473,663 $ 269,115,335
------------ ---------------
------------ ---------------
Year ended December 31, 1996:
Shares sold..................... 15,308,482 $ 159,264,202
Shares issued in reinvestment of
dividends and distributions... 16,527,013 175,127,592
Shares reacquired............... (41,901,121) (433,594,928)
------------ ---------------
Net decrease in shares
outstanding before
conversion.................... (10,065,626) (99,203,134)
Shares issued upon conversion
from Class B.................. 26,433,307 269,740,107
Shares reacquired upon
conversion into Class Z....... (3,501,686) (35,052,440)
------------ ---------------
Net increase in shares
outstanding................... 12,865,995 $ 135,484,533
------------ ---------------
------------ ---------------
</TABLE>
- --------------------------------------------------------------------------------
B-43
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B SHARES AMOUNT
- -------------------------------- ------------ ---------------
<S> <C> <C>
Year ended December 31, 1997:
Shares sold..................... 14,991,815 $ 170,422,061
Shares issued in reinvestment of
dividends and distributions... 18,013,110 205,416,554
Shares reacquired............... (31,804,005) (362,886,857)
------------ ---------------
Net increase in shares
outstanding before
conversion.................... 1,200,920 12,951,758
Shares reacquired upon
conversion into Class A....... (24,674,366) (284,415,438)
------------ ---------------
Net decrease in shares
outstanding................... (23,473,446) $ (271,463,680)
------------ ---------------
------------ ---------------
Year ended December 31, 1996:
Shares sold..................... 15,690,293 $ 161,351,912
Shares issued in reinvestment of
dividends and distributions... 17,344,216 184,033,919
Shares reacquired............... (48,711,671) (500,182,084)
------------ ---------------
Net decrease in shares
outstanding before
conversion.................... (15,677,162) (154,796,253)
Shares reacquired upon
conversion into Class A....... (26,471,144) (269,740,107)
------------ ---------------
Net decrease in shares
outstanding................... (42,148,306) $ (424,536,360)
------------ ---------------
------------ ---------------
<CAPTION>
Class C
- --------------------------------
Year ended December 31, 1997:
Shares sold..................... 1,039,426 $ 12,054,619
Shares issued in reinvestment of
dividends and distributions... 95,416 1,091,801
Shares reacquired............... (591,977) (6,968,862)
------------ ---------------
Net increase in shares
outstanding................... 542,865 $ 6,177,558
------------ ---------------
------------ ---------------
Year ended December 31, 1996:
Shares sold..................... 282,613 $ 2,928,285
Shares issued in reinvestment of
dividends and distributions... 43,560 463,633
Shares reacquired............... (124,537) (1,271,152)
------------ ---------------
Net increase in shares
outstanding................... 201,636 $ 2,120,766
------------ ---------------
------------ ---------------
<CAPTION>
Class Z SHARES AMOUNT
- -------------------------------- ------------ ---------------
<S> <C> <C>
Year ended December 31, 1997:
Shares sold..................... 1,379,164 $ 15,814,508
Shares issued in reinvestment of
dividends and distributions... 374,266 4,267,684
Shares reacquired............... (1,523,099) (17,451,352)
------------ ---------------
Net increase in shares
outstanding................... 230,331 $ 2,630,840
------------ ---------------
------------ ---------------
March 1, 1996(a) through
December 31, 1996:
Shares sold..................... 1,002,069 $ 10,528,356
Shares issued in reinvestment of
dividends and distributions... 324,254 3,430,111
Shares reacquired............... (1,661,734) (17,042,234)
------------ ---------------
Net decrease in shares
outstanding
before conversion............. (335,411) (3,083,767)
Shares issued upon conversion
from Class A.................. 3,501,686 35,052,440
------------ ---------------
Net increase in shares
outstanding................... 3,166,275 $ 31,968,673
------------ ---------------
------------ ---------------
</TABLE>
- ---------------
(a) Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------
B-44
<PAGE>
FINANCIAL HIGHLIGHTS PRUDENTIAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1997(b) 1996(b) 1995 1994 1993
-------- -------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................................... $10.88 $ 9.87 $ 8.27 $ 9.72 $ 8.97
-------- -------- ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income................................................. .34 .32 .30 .31 .33
Net realized and unrealized gains (losses) on investment and foreign
currency transactions.............................................. 2.53 1.80 1.79 (1.06) 1.12
-------- -------- ------ ------ ------
Total from investment operations................................... 2.87 2.12 2.09 (.75) 1.45
-------- -------- ------ ------ ------
LESS DISTRIBUTIONS
Dividends from net investment income.................................. (.32) (.32) (.30) (.32) (.29)
Distributions from net realized gains................................. (1.10) (.79) (.19) (.36) (.41)
Distributions in excess of net realized gains......................... -- -- -- (.02) --
-------- -------- ------ ------ ------
Total distributions................................................ (1.42) (1.11) (.49) (.70) (.70)
-------- -------- ------ ------ ------
Net asset value, end of year.......................................... $12.33 $10.88 $ 9.87 $ 8.27 $ 9.72
-------- -------- ------ ------ ------
-------- -------- ------ ------ ------
TOTAL RETURN(a)....................................................... 27.77% 22.09% 25.74% (7.89)% 16.28%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000,000)..................................... $2,583 $2,023 $1,709 $254 $337
Average net assets (000,000).......................................... $2,201 $1,786 $1,440 $294 $287
Ratios to average net assets:
Expenses, including distribution fees.............................. .82% .86% .88% .88% .80%
Expenses, excluding distribution fees.............................. .57% .61% .63% .63% .60%
Net investment income.............................................. 2.95% 3.10% 3.12% 3.37% 3.16%
For Class A, B, C and Z shares:
Portfolio turnover rate............................................ 15% 17% 14% 15% 24%
Average commission rate paid per share............................. $.0301 $.0332 $.0302 N/A N/A
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(b) Calculated based upon weighted average shares outstanding during the year.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-45
<PAGE>
FINANCIAL HIGHLIGHTS PRUDENTIAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B
------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1997(b) 1996(b) 1995 1994 1993
-------- -------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................................... $10.88 $ 9.87 $ 8.26 $ 9.69 $ 8.96
-------- -------- ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income................................................. .25 .24 .22 .24 .24
Net realized and unrealized gains (losses) on investment and foreign
currency transactions.............................................. 2.53 1.80 1.80 (1.05) 1.12
-------- -------- ------ ------ ------
Total from investment operations................................... 2.78 2.04 2.02 (.81) 1.36
-------- -------- ------ ------ ------
LESS DISTRIBUTIONS
Dividends from net investment income.................................. (.24) (.24) (.22) (.24) (.22)
Distributions from net realized gains................................. (1.10) (.79) (.19) (.36) (.41)
Distributions in excess of net realized gains......................... -- -- -- (.02) --
-------- -------- ------ ------ ------
Total distributions................................................ (1.34) (1.03) (.41) (.62) (.63)
-------- -------- ------ ------ ------
Net asset value, end of year.......................................... $12.32 $10.88 $ 9.87 $ 8.26 $ 9.69
-------- -------- ------ ------ ------
-------- -------- ------ ------ ------
TOTAL RETURN(a)....................................................... 26.80% 21.16% 24.80% (8.51)% 15.27%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000,000)..................................... $2,132 $2,137 $2,355 $3,526 $4,756
Average net assets (000,000).......................................... $2,059 $2,184 $2,450 $4,152 $4,308
Ratios to average net assets:
Expenses, including distribution fees.............................. 1.57% 1.61% 1.63% 1.63% 1.60%
Expenses, excluding distribution fees.............................. .57% .61% .63% .63% .60%
Net investment income.............................................. 2.20% 2.35% 2.37% 2.62% 2.36%
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(b) Calculated based upon weighted average shares outstanding during the year.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-46
<PAGE>
FINANCIAL HIGHLIGHTS PRUDENTIAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS C
-------------------------------------------------
AUGUST 1,
1994(d)
YEAR ENDED DECEMBER 31, THROUGH
-------------------------------- DECEMBER 31,
1997(b) 1996(b) 1995 1994
-------- -------- ------ ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................. $ 10.88 $ 9.87 $ 8.26 $ 9.30
-------- -------- ------ ------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income................................................. .25 .24 .22 .11
Net realized and unrealized gains (losses) on investment and foreign
currency transactions.............................................. 2.53 1.80 1.80 (.69)
-------- -------- ------ ------------
Total from investment operations................................... 2.78 2.04 2.02 (.58)
-------- -------- ------ ------------
LESS DISTRIBUTIONS
Dividends from net investment income.................................. (.24) (.24) (.22) (.13)
Distributions from net realized gains................................. (1.10) (.79) (.19) (.31)
Distributions in excess of net realized gains......................... -- -- -- (.02)
-------- -------- ------ ------------
Total distributions................................................ (1.34) (1.03) (.41) (.46)
-------- -------- ------ ------------
Net asset value, end of period........................................ $ 12.32 $10.88 $ 9.87 $ 8.26
-------- -------- ------ ------------
-------- -------- ------ ------------
TOTAL RETURN(a)....................................................... 26.80 % 21.16% 24.80% (6.27)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)....................................... $13,490 $6,001 $3,455 $787
Average net assets (000).............................................. $9,424 $4,517 $2,181 $433
Ratios to average net assets:
Expenses, including distribution fees.............................. 1.57 % 1.61% 1.63% 1.70%(c)
Expenses, excluding distribution fees.............................. .57 % .61% .63% .70%(c)
Net investment income.............................................. 2.20 % 2.35% 2.37% 2.65%(c)
<CAPTION>
CLASS Z
-----------------------------
MARCH 1,
1996(e)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1997(b) 1996(b)
------------ ------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................. $10.88 $ 10.05
----- ------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income................................................. .36 .29
Net realized and unrealized gains (losses) on investment and foreign
currency transactions.............................................. 2.54 1.67
----- ------------
Total from investment operations................................... 2.90 1.96
----- ------------
LESS DISTRIBUTIONS
Dividends from net investment income.................................. (.34) (.34)
Distributions from net realized gains................................. (1.10) (.79)
Distributions in excess of net realized gains......................... -- --
----- ------------
Total distributions................................................ (1.44) (1.13)
----- ------------
Net asset value, end of period........................................ $12.34 $ 10.88
----- ------------
----- ------------
TOTAL RETURN(a)....................................................... 28.15% 20.11%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)....................................... $41,904 $34,446
Average net assets (000).............................................. $35,994 $34,291
Ratios to average net assets:
Expenses, including distribution fees.............................. .57% .61%(c)
Expenses, excluding distribution fees.............................. .57% .61%(c)
Net investment income.............................................. 3.20% 3.35%(c)
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total return for periods of less than one full year are not
annualized.
(b) Calculated based upon weighted average shares outstanding during the period.
(c) Annualized.
(d) Commencement of offering of Class C shares.
(e) Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-47
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS PRUDENTIAL UTILITY FUND FUND, INC.
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Prudential Utility Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Utility Fund, Inc. (the
'Fund') at December 31, 1997, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the periods indicated, 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, 1997 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmation from brokers were not received, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
February 13, 1998
- --------------------------------------------------------------------------------
B-48
<PAGE>
APPENDIX I--GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk and providing balance.
Asset allocation among different types of securities within an overall
investment portfolio helps to reduce risk and to potentially provide stable
returns, while enabling investors to work toward their financial goal(s). Asset
allocation is also a strategy to gain exposure to better performing asset
classes while maintaining investment in other asset classes.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable returns.
Owning a portfolio of securities mitigates the individual risks (and returns) of
any one security. Additionally, diversification among types of securities
reduces the risks (and general returns) of any one type of security.
DURATION
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to changes
in interest rates. When interest rates fall, bond prices generally rise.
Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, I.E., principal and interest
rate payments. Duration is expressed as a measure of time in years--the longer
the duration of a bond (or a bond portfolio), the greater the impact of interest
rate changes on the bond's (or the bond portfolio's) price. Duration differs
from effective maturity in that duration takes into account call provisions,
coupon rates and other factors. Duration measures interest rate risk only and
not other risks, such as credit risk and, in the case of non-U.S. dollar
denominated securities, currency risk. Effective maturity measures the final
maturity dates of a bond (or a bond portfolio).
MARKET TIMING
Market timing--buying securities when prices are low and selling them when
prices are relatively higher--may not work for many investors because it is
impossible to predict with certainty how the price of a security will fluctuate.
However, owning a security for a long period of time may help investors off-set
short-term price volatility and realize positive returns.
POWER OF COMPOUNDING
Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth of
assets. The long-term investment results of compounding may be greater than that
of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.
STANDARD DEVIATION
Standard deviation is an absolute (non-relative) measure of volatility
which, for a mutual fund, depicts how widely the returns varied over a certain
period of time. When a fund has a high standard deviation, its range of
performance has been very wide, implying greater volatility potential. Standard
deviation is only one of several measures of a fund's volatility.
I-1
<PAGE>
APPENDIX II--HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
This following chart shows the long-term performance of various asset
classes and the rate of inflation.
EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
VALUE OF $1.00 INVESTED
ON
1/1/26 THROUGH
12/31/97.
<S> <C>
Small Stocks $5,519.97
Common Stocks $1,828.33
Long-Term Bonds $39.07
Treasury Bills $14.25
Inflation $9.02
</TABLE>
Source: Stocks, Bonds, Bills, and Inflation 1997 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. This chart is for illustrative
purposes only and is not indicative of the past, present, or future performance
of any asset class or any Prudential Mutual Fund.
Generally, stock returns are due to capital appreciation and the reinvestment of
gains. Bond returns are due mainly to reinvesting interest. Also, stock prices
usually are more volatile than bond prices over the long-term. Small stock
returns for 1926-1980 are those of stocks comprising the 5th quintile of the New
York Stock Exchange. Thereafter, returns are those of the Dimensional Fund
Advisors (DFA) Small Company Fund. Common stock returns are based on the S&P
Composite Index, a market-weighted, unmanaged index of 500 stocks (currently) in
a variety of industries. It is often used as a broad measure of stock market
performance.
Long-term government bond returns are measured using a constant one-bond
portfolio with a maturity of roughly 20 years. Treasury bill returns are for a
one-month bill. Treasuries are guaranteed by the government as to the timely
payment of principal and interest; equities are not. Inflation is measured by
the consumer price index (CPI).
II-1
<PAGE>
Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1987
through 1997. The total returns of the indices include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Fund or of any sector in which the
Fund invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees of
a mutual fund. See "Fund Expenses" in the prospectus. The net effect of the
deduction of the operating expenses of a mutual fund on the historical total
returns, including the compounded effect over time, could be substantial.
HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS
<TABLE>
<CAPTION>
'87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT
TREASURY
BONDS(1) 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 18.4% 2.7% 9.6%
- -------------------------------------------------------------------------------------------------
U. S. GOVERNMENT
MORTGAGE
SECURITIES(2) 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8% 5.4% 9.5%
- -------------------------------------------------------------------------------------------------
U.S. INVESTMENT
GRADE
CORPORATE
BONDS(3) 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3% 3.3% 10.2%
- -------------------------------------------------------------------------------------------------
U.S.
HIGH YIELD
CORPORATE
BONDS(4) 5.0% 12.5% 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2% 11.4% 12.8%
- -------------------------------------------------------------------------------------------------
WORLD
GOVERNMENT
BONDS(5) 35.2% 2.3% (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1% (4.3%)
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
DIFFERENCE BETWEEN
HIGHEST
AND LOWEST RETURN
PERCENT 33.2 10.2 18.8 24.9 30.9 11.0 10.3 9.9 5.5 8.7 17.1
</TABLE>
1 LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over 150
public issues of the U.S. Treasury having maturities of at least one year.
2 LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgaged-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
3 LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year.
4 LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by S&P or Fitch Investors
Service). All bonds in the index have maturities of at least one year.
5 SALOMON BROTHERS WORLD GOVERNMENT INDEX (NON U.S.) includes 800 bonds issued
by various foreign governments or agencies, excluding those in the U.S., but
including those in Japan, Germany, France, the U.K., Canada, Italy, Australia,
Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All bonds in the
index have maturities of at least one year.
II-2
<PAGE>
This chart illustrates the performance of major world stock markets for the
period from 1986 through December 1997. It does not represent the performance of
any Prudential Mutual Fund.
AVERAGE ANNUAL TOTAL RETURNS OF MAJOR WORLD STOCK MARKETS 12/31/86 - 12/31/97
(IN U.S. DOLLARS)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
The Netherlands 20.5%
Sweden 20.4%
Spain 20.4%
Hong Kong 19.7%
Belgium 19.5%
Switzerland 17.9%
USA 17.1%
UK 16.6%
France 15.6%
Germany 12.1%
Austria 9.6%
Japan 6.6%
</TABLE>
Source: Morgan Stanley Capital International (MSCI) and Lipper Analytical
Services, Inc. Used with permission. Morgan Stanley Country indices are
unmanaged indices which include those stocks making up the largest two-thirds of
each country's total stock market capitalization. Returns reflect the
reinvestment of all distributions. This chart is for illustrative purposes only
and is not indicative of the past, present or future performance of any specific
investment. Investors cannot invest directly in stock indices.
This chart shows the growth of a hypothetical $10,000 investment made in the
stocks representing the S&P 500 stock index with and without reinvested
dividends.
CAPITAL APPRECIATION AND
REINVESTING DIVIDENDS - $304,596
CAPITAL APPRECIATION ONLY - $105,413
[CHART]
Source: Stocks, Bonds, Bills, and Inflation 1997 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefeld). Used
with permission. All rights reserved. This chart is used for illustrative
purposes only and is not intended to represent the past, present or future
performance of any Prudential Mutual Fund. Common stock total return is based on
the Standard & Poor's 500 Stock Index, a market-value-weighted index made up of
500 of the largest stocks in the U.S. based upon their stock market value.
Investors cannot invest directly in indices.
II-3
<PAGE>
WORLD STOCK MARKET CAPITALIZATION BY REGION
WORLD TOTAL : $12.5 TRILLION
<TABLE>
<S> <C>
Canada 2.5%
U.S. 49.8%
Europe 32.1%
Pacific
Basin 15.6%
</TABLE>
Source: Morgan Stanley Capital International, December 31, 1997. Used with
permission. This chart represents the capitalization of major world stock
markets as measured by the Morgan Stanley Capital International (MSCI) World
Index. The total market capitalization is based on the value of approximately
1577 companies in 22 countries (representing approximately 60% of the aggregate
market value of the stock exchanges). This chart is for illustrative purposes
only and does not represent the allocation of any Prudential Mutual Fund.
------------------------
The chart below shows the historical volatility of general interest rates as
measured by the long U.S. Treasury Bond.
LONG U.S. TREASURY BOND YIELD IN PERCENT (1926-1997)
[CHART]
Source: Stocks, Bonds, Bills and Inflation 1997 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. This chart illustrates the historical
yield of the long-term U.S. Treasury Bond from 1926-1997. Yields represent that
of an annually renewed one-bond portfolio with a remaining maturity of
approximately 20 years. This chart is for illustrative purposes only and should
not be construed to represent the yields of any Prudential Mutual Fund.
II-4
<PAGE>
APPENDIX III--INFORMATION RELATING TO PRUDENTIAL
Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating to
the Prudential Mutual Funds. See "Management of the Fund--Manager" in the
Prospectus. The data will be used in sales materials relating to the Prudential
Mutual Funds. Unless otherwise indicated, the information is as of December 31,
1996 and is subject to change thereafter. All information relies on data
provided by The Prudential Investment Corporation (PIC) or from other sources
believed by the Manager to be reliable. Such information has not been verified
by the Fund.
INFORMATION ABOUT PRUDENTIAL
The Manager and PIC(1) are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December 31,
1996. Principal products and services include life and health insurance, other
healthcare products, property and casualty insurance, securities brokerage,
asset management, investment advisory services and real estate brokerage.
Prudential (together with its subsidiaries) employs more than 81,000 persons
worldwide, and maintains a sales force of approximately 11,500 agents and 6,400
financial advisors. Prudential is a major issuer of annuities, including
variable annuities. Prudential seeks to develop innovative products and services
to meet consumer needs in each of its business areas. Prudential uses the rock
of Gibraltar as its symbol. The Prudential rock is a recognized brand name
throughout the world.
INSURANCE. Prudential has been engaged in the insurance business since 1875.
It insures or provides financial services to nearly 50 million people worldwide.
Long one of the largest issuers of individual life insurance, the Prudential has
22 million life insurance policies in force today with a face value of $1
trillion. Prudential has the largest capital base ($12.1 billion) of any life
insurance company in the United States. The Prudential provides auto insurance
for approximately 1.6 million cars and insures approximately 1.2 million homes.
MONEY MANAGEMENT. Prudential is one of the largest pension fund managers in
the country, providing pension services to 1 in 3 Fortune 500 firms. It manages
$36 billion of individual retirement plan assets, such as 401(k) plans. As of
December 31, 1996, Prudential had more than $322 billion in assets under
management. Prudential Investments, a business group of Prudential (of which
Prudential Mutual Funds is a key part), manages over $190 billion in assets of
institutions and individuals. In PENSIONS & INVESTMENTS, May 12, 1996,
Prudential was ranked third in terms of total assets under management.
REAL ESTATE. The Prudential Real Estate Affiliates, the fourth largest real
estate brokerage network in the United States, has more than 37,000 brokers and
agents across the United States.(2)
HEALTHCARE. Over two decades ago, Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, approximately 4.6
million Americans receive healthcare from a Prudential managed care membership.
FINANCIAL SERVICES. The Prudential Bank, a wholly-owned subsidiary of
Prudential, has over $1 billion in assets and serves nearly 1.5 million
customers across 50 states.
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
As of October 31, 1997, Prudential Investments Fund Management was the 17th
largest mutual fund company in the country, with over 2.5 million shareholders
invested in more than 50 mutual fund portfolios and variable annuities with more
than 3.7 million shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers who manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment
portfolios.
- ------------
(1)PIC serves as the Subadviser to substantially all of the Prudential
Mutual Funds. Wellington Management Company serves as the subadviser to Global
Utility Fund, Inc., Nicholas-Applegate Capital Management as the subadviser to
Nicholas-Applegate Fund, Inc., Jennison Associates LLC as the subadviser to
Prudential Jennison Series Fund, Inc. and Mercator Asset Management LP as the
Subadviser to International Stock Series, a portfolio of Prudential World Fund,
Inc. There are multiple subadvisers for The Target Portfolio Trust.
(2)As of December 31, 1996.
III-1
<PAGE>
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser in
national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
THE WALL STREET JOURNAL, THE NEW YORK TIMES, BARRON'S and USA TODAY.
EQUITY FUNDS. Forbes magazine listed Prudential Equity Fund among twenty
mutual funds on its Honor Roll in its mutual fund issue of August 28, 1995.
Honorees are chosen annually among mutual funds (excluding sector funds) which
are open to new investors and have had the same management for at least five
years. Forbes considers, among other criteria, the total return of a mutual fund
in both bull and bear markets as well as a fund's risk profile. Prudential
Equity Fund is managed with a "value" investment style by PIC. In 1995,
Prudential Securities introduced Prudential Jennison Fund, a growth-style equity
fund managed by Jennison Associates LLC, a premier institutional equity manager
and a subsidiary of Prudential.
HIGH YIELD FUNDS. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor
approximately 200 issues held in the Prudential High Yield Fund (currently the
largest fund of its kind in the country) along with 100 or so other high yield
bonds, which may be considered for purchase.(3) Non-investment grade bonds, also
known as junk bonds or high yield bonds, are subject to a greater risk of loss
of principal and interest including default risk than higher-rated bonds.
Prudential high yield portfolio managers and analysts meet face-to-face with
almost every bond issuer in the High Yield Fund's portfolio annually, and have
additional telephone contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets--from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from PULP AND PAPER FORECASTER to WOMEN'S
WEAR DAILY--to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential Mutual
Fund.
Prudential Mutual Funds trade approximately $31 billion in U.S. and foreign
government securities a year. PIC seeks information from government policy
makers. In 1995, Prudential's portfolio managers met with several senior U.S.
and foreign government officials, on issues ranging from economic conditions in
foreign countries to the viability of index-linked securities in the United
States.
Prudential Mutual Funds' portfolio managers and analysts met with over 1,200
companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.
Prudential Mutual Fund global equity managers conducted many of their visits
overseas, often holding private meetings with a company in a foreign language
(our global equity managers speak 7 different languages, including Mandarin
Chinese).
TRADING DATA.(4) On an average day, Prudential Mutual Funds' U.S. and
foreign equity trading desks traded $77 million in securities representing over
3.8 million shares with nearly 200 different firms. Prudential Mutual Funds'
bond trading desks traded $157 million in government and corporate bonds on an
average day. That represents more in
- ------------
(3)As of December 31, 1996. The number of bonds and the size of the Fund are
subject to change.
(4)Trading data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PIC serves as the subadviser, portfolios of
the Prudential Series Fund and institutional and non-US accounts managed by
Prudential Mutual Fund Investment Management, a division of PIC, for the year
ended December 31, 1995.
III-2
<PAGE>
daily trading than most bond funds tracked by Lipper even have in assets.(5)
Prudential Mutual Funds' money market desk traded $3.2 billion in money market
securities on an average day, or over $800 billion a year. They made a trade
every 3
minutes of every trading day. In 1994, the Prudential Mutual Funds effected more
than 40,000 trades in money market securities and held on average $20 billion of
money market securities.(6)
Based on complex-wide data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Services LLC, the Transfer Agent of the
Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free number. On an
annual basis, that represents approximately 1.8 million telephone calls
answered.
INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 5,600 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1995, assets held by Prudential Securities for its
clients approximated $168 billion. During 1994, over 28,000 new customer
accounts were opened each month at Prudential Securities.(7)
Prudential Securities has a two-year Financial Advisor training program plus
advanced education programs, including Prudential Securities "university," which
provides advanced education in a wide array of investment areas. Prudential
Securities is the only Wall Street firm to have its own in-house Certified
Financial Planner (CFP) program. In the December 1995 issue of REGISTERED REP,
an industry publication, Prudential Securities' Financial Advisor training
programs received a grade of A- (compared to an industry average of B+).
In 1995, Prudential Securities' equity research team ranked 8th in
INSTITUTIONAL INVESTOR magazine's 1995 "All America Research Team" survey. Five
Prudential Securities analysts were ranked as first-team finishers.(8)
In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial ArchitectsSFinancial Advisors to evaluate a client's objectives and
overall financial plan, and a comprehensive mutual fund information and analysis
system that compares different mutual funds.
For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
- ------------
(5)Based on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate U.S.
Government, Short Investment Grade Debt, Intermediate Investment Grade Debt,
General U.S. Treasury, General U.S. Government and Mortgage Funds.
(6)As of December 31, 1994.
(7)As of December 31, 1994.
(8)On an annual basis, INSTITUTIONAL INVESTOR magazine surveys, more than
700 institutional money managers, chief investment officers and research
directors, asking them to evaluate analysts in 76 industry sectors. Scores are
produced by taxing the number of votes awarded to an individual analyst and
weighting them based on the size of the voting institution. In total, the
magazine sends its survey to approximately 2,000 institutions and a group of
European and Asian institutions.
III-3
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS:
(1) Financial Statements included in the Prospectus constituting Part A of
this Registration Statement:
Financial Highlights.
(2) Financial Statements included in the Statement of Additional Information
constituting Part B of this Registration Statement:
Portfolio of Investments at December 31, 1997.
Statement of Assets and Liabilities at December 31, 1997.
Statement of Operations for the Year Ended December 31, 1997.
Statement of Changes in Net Assets for the Years Ended December 31, 1997
and 1996.
Notes to Financial Statements.
Financial Highlights for the Five Years Ended December 31, 1997.
Report of Independent Accountants.
(B) EXHIBITS:
1. (a) Articles of Amendment to Articles of Incorporation, incorporated by
reference to Exhibit 1(a) to Post-Effective Amendment No. 20 to the
Registration Statement on Form N-1A (File No. 2-72097) filed via EDGAR on
March 1, 1995.
(b) Articles of Restatement, incorporated by reference to Exhibit 1(b)
to Post-Effective Amendment No. 20 to the Registration Statement on Form
N-1A (File No. 2-72097) filed via EDGAR on March 1, 1995.
(c) Articles Supplementary, incorporated by reference to Exhibit 1(c) to
Post-Effective Amendment No. 23 to the Registration Statement on Form
N-1A (File No. 2-72097) filed via EDGAR on March 1, 1996.
2. (a) By-Laws, incorporated by reference to Exhibit 2 to Post-Effective
Amendment No. 20 to the Registration Statement on Form N-1A (File No.
2-72097) filed via EDGAR on March 1, 1995.
4. Specimen Stock Certificate issued by the Registrant, incorporated by
reference to Exhibit 4 to Post-Effective Amendment No. 25 to the
Registration Statement on Form N-1A (File No. 2-72097) filed via EDGAR on
March 4, 1997.
5. (a) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation, incorporated by reference
to Exhibit 5(a) to Post-Effective Amendment No. 25 to the Registration
Statement on Form N-1A (File No. 2-72097) filed via EDGAR on March 4,
1997.
(b) Amended Management Agreement, incorporated by reference to Exhibit
5(b) to Post-Effective Amendment No. 20 to the Registration Statement on
Form N-1A (File No. 2-72097) filed via EDGAR on March 1, 1995.
6. (a) Selected Dealers Agreement (Continuous Offering), incorporated by
reference to Exhibit 6(a) to Post-Effective Amendment No. 25 to the
Registration Statement on Form N-1A (File No. 2-72097) filed via EDGAR on
March 4, 1997.
(b) Restated Distribution Agreement, incorporated by reference to
Exhibit 6(b) to Post-Effective Amendment No. 25 to the Registration
Statement on Form N-1A (File No. 2-72097) filed via EDGAR on March 4,
1997.
C-1
<PAGE>
8. Custodian Agreement between the Registrant and State Street Bank and
Trust Company, incorporated by reference to Exhibit 8 to Post-Effective
Amendment No. 25 to the Registration Statement on Form N-1A (File No.
2-72097) filed via EDGAR on March 4, 1997.
9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc., incorporated by reference to
Exhibit 9 to Post-Effective Amendment No. 25 to the Registration
Statement on Form N-1A (File No. 2-72097) filed via EDGAR on March 4,
1997.
10. Opinion of Sullivan & Cromwell dated August 7, 1981, incorporated by
reference to Exhibit 10(a) to Post-Effective Amendment No. 25 to the
Registration Statement on Form N-1A (File No. 2-72097) filed via EDGAR on
March 4, 1997.
11. Consent of Independent Accountants.*
15. (a) Distribution and Service Plan for Class A shares, incorporated by
reference to Exhibit 15(a) to Post-Effective Amendment No. 20 to the
Registration Statement on Form N-1A (File No. 2-72097) filed via EDGAR on
March 1, 1995.
(b) Distribution and Service Plan for Class B shares, incorporated by
reference to Exhibit 15(b) to Post-Effective Amendment No. 20 to the
Registration Statement on Form N-1A (File No. 2-72097) filed via EDGAR on
March 1, 1995.
(c) Distribution and Service Plan for Class C Shares, incorporated by
reference to Exhibit 15(c) to Post-Effective Amendment No. 20 to the
Registration Statement on Form N-1A (File No. 2-72097) filed via EDGAR on
March 1, 1995.
16. (a) Schedule of Computation of Performance Quotations relating to
Average Annual Total Return, incorporated by reference to Exhibit 16(a)
to Post-Effective Amendment No. 25 to the Registration Statement on Form
N-1A (File No. 2-72097) filed via EDGAR on March 4, 1997.
(b) Schedule of Computation of Performance Quotations relating to
Aggregate Total Return, incorporated by reference to Exhibit 16(b) to
Post-Effective Amendment No. 25 to the Registration Statement on Form
N-1A (File No. 2-72097) filed via EDGAR on March 4, 1997.
18. Rule 18f-3 Plan, incorporated by reference to Exhibit 18 to
Post-Effective Amendment No. 21 to the Registration Statement on Form
N-1A (File No. 2-72097) filed via EDGAR on October 27, 1995.
27. Financial data schedules.*
- ------------------------
*Filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of February 6, 1998 there were 208,150,634, 173,723,305, 1,241,042 and
3,536,359 record holders of Class A, Class B, Class C and Class Z shares of
common stock, $.01 par value per share, of the Registrant, respectively.
ITEM 27. INDEMNIFICATION.
As permitted by Sections 17(h) and (i) of the Investment Company Act of 1940
(the 1940 Act) and pursuant to Article VI of the Fund's By-Laws (Exhibit 2 to
the Registration Statement), officers, directors, employees and agents of the
Registrant will not be liable to the Registrant, any stockholder, officer,
director, employee, agent or other person for any action or failure to act,
except for bad faith, willful misfeasance, gross negligence or reckless
disregard of duties, and those individuals may be
C-2
<PAGE>
indemnified against liabilities in connection with the Registrant, subject to
the same exceptions. Section 2-418 of Maryland General Corporation Law permits
indemnification of directors who acted in good faith and reasonably believed
that the conduct was in the best interests of the Registrant. As permitted by
Section 17(i) of the 1940 Act, pursuant to Section 10 of the Distribution
Agreement (Exhibit 6(b) to the Registration Statement), the Distributor of the
Registrant may be indemnified against liabilities which it may incur, except
liabilities arising from bad faith, gross negligence, willful misfeasance or
reckless disregard of duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (Securities Act) may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the 1940 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in connection with the successful defense
of any action, suit or proceeding) is asserted against the Registrant by such
director, officer or controlling person in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1940 Act and will be governed by the final
adjudication of such issue.
The Registrant has purchased an insurance policy insuring its officers and
directors against liabilities, and certain costs of defending claims against
such officers and directors, to the extent such officers and directors are not
found to have committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of indemnification
payments to officers and directors under certain circumstances.
Section 9 of the amended Management Agreement (Exhibit 5 (b) to the
Registration Statement) and Section 4 of the Subadvisory Agreement (Exhibit 5
(a) to the Registration Statement) limit the liability of Prudential Investments
Fund Management LLC (PIFM) and The Prudential Investment Corporation (PIC),
respectively, to liabilities arising from willful misfeasance, bad faith or
gross negligence in the performance of their respective duties or from reckless
disregard by them of their respective obligations and duties under the
agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and each Distribution Agreement in a manner consistent
with Release No. 11330 of the Securities and Exchange Commission under the 1940
Act so long as the interpretation of Sections 17(h) and 17(i) of such Act remain
in effect and are consistently applied.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
(i) Prudential Investments Fund Management LLC (PIFM)
See "How the Fund is Managed--Manager" in the Prospectus constituting Part A
of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
The business and other connections of the officers of PIFM are listed in
Schedules A and D of Form ADV of PIFM as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference
(File No. 801-31104).
The business and other connections of PIFM's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATIONS
- -------------------- ------------------------ ------------------------------------------------------------------------------
<S> <C> <C>
Frank W. Giordano Executive Vice Executive Vice President, Secretary and General Counsel, PIFM; Senior Vice
President, Secretary and President, Prudential Securities Incorporated
General Counsel
</TABLE>
C-3
<PAGE>
<TABLE>
<S> <C> <C>
Robert F. Gunia Executive Vice President Vice President, Prudential Investments; Executive Vice President and
and Treasurer Treasurer, PIFM; Senior Vice President, Prudential Securities Incorporated
Neil A. McGuinness Executive Vice President Executive Vice President and Director of Marketing, Prudential Mutual Funds &
Annuities (PMF&A); Executive Vice President, PIFM
Brian Storms Officer-in-Charge, President, PMF&A; Officer-in-Charge, President, Chief Executive Officer and
President, Chief Chief Operating Officer, PIFM
Executive Officer and
Chief Operating Officer
Robert J. Sullivan Executive Vice President Executive Vice President, PMF&A; Executive Vice President, PIFM
</TABLE>
(ii) The Prudential Investment Corporation (PIC)
See "How the Fund is Managed--Manager" in the Prospectus constituting Part A
of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
The business and other connections of PIC's directors and executive officers
are as set forth below. The address of each person is Prudential Plaza, Newark,
NJ 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- ---------------------- --------------------- ------------------------------------------------------------------
<S> <C> <C>
E. Michael Caulfield Chairman of the Chief Executive Officer of Prudential Investments of The
Board, President and Prudential Insurance Company of America (Prudential)
Chief Executive
Officer and Director
Jonathan M. Greene Senior Vice President President-Investment Management of Prudential Investments of
and Director Prudential; Senior Vice President and Director, PIC
John R. Strangfeld, Vice President and President of Private Asset Management Group of Prudential; Senior
Jr. Director Vice President, Prudential; Vice President and Director, PIC
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) Prudential Securities
Prudential Securities Incorporated is distributor for Cash Accumulation
Trust, Command Government Fund, Command Money Fund, Command Tax-Free Fund, The
Global Total Return Fund, Inc., Global Utility Fund, Inc., Nicholas-Applegate
Fund, Inc. (Nicholas-Applegate Growth Equity Fund), Prudential Balanced Fund,
Prudential California Municipal Fund, Prudential Diversified Bond Fund, Inc.,
Prudential Distressed Securities Fund, Inc., Prudential Emerging Growth Fund,
Inc., Prudential Equity Fund, Inc., Prudential Equity Income Fund, Prudential
Europe Growth Fund, Inc., Prudential Global Genesis Fund, Inc., Prudential
Global Limited Maturity Fund, Inc., Prudential Government Income Fund, Inc.,
Prudential Government Securities Trust, Prudential High Yield Fund, Inc.,
Prudential Index Series Fund, Prudential Institutional Liquidity Portfolio,
Inc., Prudential Intermediate Global Income Fund, Inc., Prudential International
Bond Fund, Inc., Prudential Jennison Series Fund, Inc., Prudential MoneyMart
Assets, Inc., Prudential Mortgage Income Fund, Inc., Prudential Multi-Sector
Fund, Inc., Prudential Municipal Bond Fund, Prudential Municipal Series Fund,
Prudential National Municipals Fund, Inc., Prudential Natural Resources Fund,
Inc., Prudential Pacific Growth Fund, Inc., Prudential Small-Cap Quantum Fund,
Inc., Prudential Small Company Value Fund, Inc., Prudential Special Money Market
Fund, Inc., Prudential Structured Maturity Fund, Inc., Prudential Tax-Free Money
Fund, Inc., Prudential Utility Fund, Inc., Prudential World Fund, Inc. and The
Target Portfolio Trust.
Prudential Securities is also a depositor for the following unit investment
trusts:
C-4
<PAGE>
Corporate Investment Trust Fund
Prudential Equity Trust Shares
National Equity Trust
Prudential Unit Trust
Government Securities Equity Trust
National Municipal Trust
(b) Information concerning the directors and officers of Prudential
Securities Incorporated is set forth below.
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(1) UNDERWRITER REGISTRANT
- ------------------------------ ----------------------------------------------------------------------- --------------
<S> <C> <C>
Alan D. Hogan................. Executive Vice President, Chief Administrative Officer and Director None
William Horan................. Chief Financial Officer None
George A. Murray.............. Executive Vice President and Director None
Leland B. Paton............... Executive Vice President and Director None
One New York Plaza
New York, NY
Martin Pfinsgraff............. Executive Vice President and Director None
Vincent T. Pica, II........... Executive Vice President and Director None
One New York Plaza
New York, NY
Hardwick Simmons.............. Chief Executive Officer, President and Director None
Lee B. Spencer, Jr............ Executive Vice President, General Counsel, Secretary and Director None
Brian Storms.................. Director None
Gateway Center Three
Newark, NJ 07102
<FN>
- ------------------------
(1) The address of each person named is One Seaport Plaza, New York, NY 10292
unless otherwise indicated.
</TABLE>
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder are maintained at the offices of
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, The Prudential Investment Corporation, Prudential Plaza,
745 Broad Street, Newark, New Jersey 07102 and Two Gateway Center, Newark, New
Jersey, 07102, the Registrant, Gateway Center Three, 100 Mulberry Street,
Newark, New Jersey 07102-4077 and Prudential Mutual Fund Services LLC, Raritan
Plaza One, Edison, New Jersey 08837. Documents required by Rules 31a-1(b)(5),
(6), (7), (9), (10) and (11), 31a-1(f) and 31a-1(b)(4) and (11) and 31a-1(d)
will be kept at Gateway Center Three, Newark, New Jersey 07102-4077, and the
remaining accounts, books and other documents required by such other pertinent
provisions of Section 31(a) and the Rules promulgated thereunder will be kept by
State Street Bank and Trust Company and Prudential Mutual Fund Services LLC.
ITEM 31. MANAGEMENT SERVICES.
Other than as set forth under the captions "How the Fund is
Managed--Manager" and "How the Fund is Managed-- Distributor" in the Prospectus
and the captions "Manager" and "Distributor" in the Statement of Additional
Information, constituting Parts A and B, respectively, of this Post-Effective
Amendment to the Registration Statement, Registrant is not a party to any
management-related service contract.
C-5
<PAGE>
ITEM 32. UNDERTAKINGS.
The Registrant hereby undertakes to furnish each person to whom a Prospectus
is delivered with a copy of the Registrant's latest annual report to
shareholders upon request and without charge.
C-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Newark and State of New Jersey on the 25th day of February, 1998.
PRUDENTIAL UTILITY FUND, INC.
/s/ Richard A. Redeker
By:
------------------------------------------
(RICHARD A. REDEKER, PRESIDENT)
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------- ------------------
<S> <C> <C>
/s/ Grace C. Torres Treasurer and Principal February 25, 1998
------------------------------------ Financial and
GRACE C. TORRES Accounting Officer
/s/ Edward D. Beach
------------------------------------ Director February 25, 1998
EDWARD D. BEACH
/s/ Delayne Dedrick Gold
------------------------------------ Director February 25, 1998
DELAYNE DEDRICK GOLD
/s/ Robert F. Gunia
------------------------------------ Director February 25, 1998
ROBERT F. GUNIA
/s/ Douglas H. McCorkindale
------------------------------------ Director February 25, 1998
DOUGLAS H. MCCORKINDALE
/s/ Mendel A. Melzer
------------------------------------ Director February 25, 1998
MENDEL A. MELZER
/s/ Thomas T. Mooney
------------------------------------ Director February 25, 1998
THOMAS T. MOONEY
/s/ Stephen P. Munn
------------------------------------ Director February 25, 1998
STEPHEN P. MUNN
/s/ Richard A. Redeker
------------------------------------ President and Director February 25, 1998
RICHARD A. REDEKER
/s/ Robin B. Smith
------------------------------------ Director February 25, 1998
ROBIN B. SMITH
/s/ Louis A. Weil, III
------------------------------------ Director February 25, 1998
LOUIS A. WEIL, III
/s/ Clay T. Whitehead
------------------------------------ Director February 25, 1998
CLAY T. WHITEHEAD
</TABLE>
<PAGE>
EXHIBIT INDEX
1. (a) Articles of Amendment to Articles of Incorporation, incorporated by
reference to Exhibit 1(a) to Post-Effective Amendment No. 20 to the
Registration Statement on Form N-1A (File No. 2-72097) filed via EDGAR on
March 1, 1995.
(b) Articles of Restatement, incorporated by reference to Exhibit 1(b)
to Post-Effective Amendment No. 20 to the Registration Statement on Form
N-1A (File No. 2-72097) filed via EDGAR on March 1, 1995.
(c) Articles Supplementary, incorporated by reference to Exhibit 1(c) to
Post-Effective Amendment No. 23 to the Registration Statement on Form
N-1A (File No. 2-72097) filed via EDGAR on March 1, 1996.
2. (a) By-Laws, incorporated by reference to Exhibit 2 to Post-Effective
Amendment No. 20 to the Registration Statement on Form N-1A (File No.
2-72097) filed via EDGAR on March 1, 1995.
4. Specimen Stock Certificate issued by the Registrant, incorporated by
reference to Exhibit 4 to Post-Effective Amendment No. 25 to the
Registration Statement on Form N-1A (File No. 2-72097) filed via EDGAR on
March 4, 1997.
5. (a) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation, incorporated by reference
to Exhibit 5(a) to Post-Effective Amendment No. 25 to the Registration
Statement on Form N-1A (File No. 2-72097) filed via EDGAR on March 4,
1997.
(b) Amended Management Agreement, incorporated by reference to Exhibit
5(b) to Post-Effective Amendment No. 20 to the Registration Statement on
Form N-1A (File No. 2-72097) filed via EDGAR on March 1, 1995.
6. (a) Selected Dealers Agreement (Continuous Offering), incorporated by
reference to Exhibit 6(a) to Post-Effective Amendment No. 25 to the
Registration Statement on Form N-1A (File No. 2-72097) filed via EDGAR on
March 4, 1997.
(b) Restated Distribution Agreement, incorporated by reference to
Exhibit 6(b) to Post-Effective Amendment No. 25 to the Registration
Statement on Form N-1A (File No. 2-72097) filed via EDGAR on March 4,
1997.
8. Custodian Agreement between the Registrant and State Street Bank and
Trust Company, incorporated by reference to Exhibit 8 to Post-Effective
Amendment No. 25 to the Registration Statement on Form N-1A (File No.
2-72097) filed via EDGAR on March 4, 1997.
9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc, incorporated by reference to
Exhibit 9 to Post-Effective Amendment No. 25 to the Registration
Statement on Form N-1A (File No. 2-72097) filed via EDGAR on March 4,
1997.
10. Opinion of Sullivan & Cromwell dated August 7, 1981, incorporated by
reference to Exhibit 10(a) to Post-Effective Amendment No. 25 to the
Registration Statement on Form N-1A (File No. 2-72097) filed via EDGAR on
March 4, 1997.
11. Consent of Independent Accountants.*
15. (a) Distribution and Service Plan for Class A shares, incorporated by
reference to Exhibit 15(a) to Post-Effective Amendment No. 20 to the
Registration Statement on Form N-1A (File No. 2-72097) filed via EDGAR on
March 1, 1995.
(b) Distribution and Service Plan for Class B shares, incorporated by
reference to Exhibit 15(b) to Post-Effective Amendment No. 20 to the
Registration Statement on Form N-1A (File No. 2-72097) filed via EDGAR on
March 1, 1995.
<PAGE>
(c) Distribution and Service Plan for Class C Shares, incorporated by
reference to Exhibit 15(c) to Post-Effective Amendment No. 20 to the
Registration Statement on Form N-1A (File No. 2-72097) filed via EDGAR on
March 1, 1995.
16. (a) Schedule of Computation of Performance Quotations relating to
Average Annual Total Return, incorporated by reference to Exhibit 16(a)
to Post-Effective Amendment No. 25 to the Registration Statement on Form
N-1A (File No. 2-72097) filed via EDGAR on March 4, 1997.
(b) Schedule of Computation of Performance Quotations relating to
Aggregate Total Return, incorporated by reference to Exhibit 16(b) to
Post-Effective Amendment No. 25 to the Registration Statement on Form
N-1A (File No. 2-72097) filed via EDGAR on March 4, 1997.
18. Rule 18f-3 Plan, incorporated by reference to Exhibit 18 to
Post-Effective Amendment No. 21 to the Registration Statement on Form
N-1A (File No. 2-72097) filed via EDGAR on October 27, 1995.
27. Financial data schedules.*
- ------------------------
*Filed herewith.
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 26 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
February 13, 1998, relating to the financial statements and financial
highlights of Prudential Utility Fund, Inc., which appears in such Statement
of Additional Information, and to the incorporation by reference of our
report into the Prospectus which constitutes part of this Registration
Statement. We also consent to the reference to us under the heading
"Custodian, Transfer and Dividend Disbursing Agent and Independent
Accountants" in such Statement of Additional Information and to the
references to us under the headings "Financial Highlights" in such Prospectus.
/s/ Price Waterhouse LLP
- ----------------------------
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
February 25, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000352665
<NAME> PRUDENTIAL UTILITY FUND, INC.
<SERIES>
<NUMBER> 001
<NAME> UTILITY FUND (CLASS A)
<S> <C>
<PERIOD-TYPE> YEAR
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<PERIOD-END> DEC-31-1997
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<INVESTMENTS-AT-VALUE> 4,740,179,533
<RECEIVABLES> 31,892,520
<ASSETS-OTHER> 7,820,303
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 9,025,562
<TOTAL-LIABILITIES> 0
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<SHARES-COMMON-PRIOR> 386,198,070
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<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 60,175,598
<OVERDISTRIBUTION-GAINS> 0
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<DIVIDEND-INCOME> 147,106,502
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<OTHER-INCOME> 0
<EXPENSES-NET> 50,590,193
<NET-INVESTMENT-INCOME> 111,754,871
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<NET-CHANGE-FROM-OPS> 1,064,347,452
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<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (398,294,028)
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<GROSS-EXPENSE> 50,590,193
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<PER-SHARE-NII> 2.87
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<PER-SHARE-NAV-END> 12.33
<EXPENSE-RATIO> 0.82
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000352665
<NAME> PRUDENTIAL UTILITY FUND, INC.
<SERIES>
<NUMBER> 002
<NAME> UTILITY FUND (CLASS B)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 3,034,050,888
<INVESTMENTS-AT-VALUE> 4,740,179,533
<RECEIVABLES> 31,892,520
<ASSETS-OTHER> 7,820,303
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 9,025,562
<TOTAL-LIABILITIES> 0
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<PAID-IN-CAPITAL-COMMON> 2,995,370,701
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<OVERDISTRIBUTION-NII> 0
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<OVERDISTRIBUTION-GAINS> 0
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<DIVIDEND-INCOME> 147,106,502
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<NET-INVESTMENT-INCOME> 111,754,871
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<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 17,370,271
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 50,590,193
<AVERAGE-NET-ASSETS> 2,059,000
<PER-SHARE-NAV-BEGIN> 10.88
<PER-SHARE-NII> 2.78
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (1.34)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 12.32
<EXPENSE-RATIO> 1.57
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000352665
<NAME> PRUDENTIAL UTILITY FUND, INC.
<SERIES>
<NUMBER> 003
<NAME> UTILITY FUND (CLASS C)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 3,034,050,888
<INVESTMENTS-AT-VALUE> 4,740,179,533
<RECEIVABLES> 31,892,520
<ASSETS-OTHER> 7,820,303
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
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<SENIOR-LONG-TERM-DEBT> 0
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<TOTAL-LIABILITIES> 0
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<PAID-IN-CAPITAL-COMMON> 2,995,370,701
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<SHARES-COMMON-PRIOR> 386,198,070
<ACCUMULATED-NII-CURRENT> 9,335,543
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 60,175,598
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,705,984,952
<NET-ASSETS> (773,169,553)
<DIVIDEND-INCOME> 147,106,502
<INTEREST-INCOME> 15,238,562
<OTHER-INCOME> 0
<EXPENSES-NET> 50,590,193
<NET-INVESTMENT-INCOME> 111,754,871
<REALIZED-GAINS-CURRENT> 412,749,671
<APPREC-INCREASE-CURRENT> 539,842,910
<NET-CHANGE-FROM-OPS> 1,064,347,452
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (398,294,028)
<DISTRIBUTIONS-OTHER> (102,239,031)
<NUMBER-OF-SHARES-SOLD> 413,071,389
<NUMBER-OF-SHARES-REDEEMED> (865,755,515)
<SHARES-REINVESTED> 459,144,179
<NET-CHANGE-IN-ASSETS> 570,274,446
<ACCUMULATED-NII-PRIOR> 557,976
<ACCUMULATED-GAINS-PRIOR> 44,981,682
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 17,370,271
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 50,590,193
<AVERAGE-NET-ASSETS> 9,424,000
<PER-SHARE-NAV-BEGIN> 10.88
<PER-SHARE-NII> 2.78
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (1.34)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 12.32
<EXPENSE-RATIO> 1.57
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000352665
<NAME> PRUDENTIAL UTILITY FUND, INC.
<SERIES>
<NUMBER> 004
<NAME> UTILITY FUND (CLASS Z)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 3,034,050,888
<INVESTMENTS-AT-VALUE> 4,740,179,533
<RECEIVABLES> 31,892,520
<ASSETS-OTHER> 7,820,303
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 9,025,562
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,995,370,701
<SHARES-COMMON-STOCK> 386,971,483
<SHARES-COMMON-PRIOR> 386,198,070
<ACCUMULATED-NII-CURRENT> 9,335,543
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 60,175,598
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,705,984,952
<NET-ASSETS> (773,169,553)
<DIVIDEND-INCOME> 147,106,502
<INTEREST-INCOME> 15,238,562
<OTHER-INCOME> 0
<EXPENSES-NET> 50,590,193
<NET-INVESTMENT-INCOME> 111,754,871
<REALIZED-GAINS-CURRENT> 412,749,671
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</TABLE>
