<PAGE>
FUND TYPE:
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Stock
INVESTMENT OBJECTIVE:
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Long-term capital appreciation
[LOGO]
PRUDENTIAL
FINANCIAL
SERVICES FUND
PRUDENTIAL
HEALTH
SCIENCES FUND
PRUDENTIAL
TECHNOLOGY FUND
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PROSPECTUS: MAY 20, 1999
The Funds' Distributor will solicit subscriptions for Fund shares during a
subscription period expected to last from May 26, 1999 to June 25, 1999. The
Funds expect to begin a continuous offering of their shares on July 22, 1999.
As with all mutual funds, the Securities and
Exchange Commission has not approved or
disapproved the Funds' shares, nor has the SEC
determined that this prospectus is complete or
accurate. It is a criminal offense to state
otherwise.
[LOGO]
<PAGE>
TABLE OF CONTENTS
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<TABLE>
<S> <C>
1 RISK/RETURN SUMMARY
1 Investment Objective and Principal Strategies
2 Principal Risks
4 Fees and Expenses
6 HOW THE FUNDS INVEST
6 Investment Objective and Policies
9 Derivative Strategies
10 Other Investments
12 Additional Strategies
13 Investment Risks
18 HOW THE FUNDS ARE MANAGED
18 Board of Directors
18 Manager
18 Investment Advisers
19 Portfolio Managers
20 Distributor
21 Year 2000 Readiness Disclosure
22 FUND DISTRIBUTIONS AND TAX ISSUES
22 Distributions
23 Tax Issues
24 If You Sell or Exchange Your Shares
26 HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUNDS
26 Initial Offering of Shares
27 How to Buy Shares
36 How to Sell Your Shares
40 How to Exchange Your Shares
44 THE PRUDENTIAL MUTUAL FUND FAMILY
FOR MORE INFORMATION (Back Cover)
</TABLE>
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PRUDENTIAL SECTOR FUNDS, INC. [LOGO] (800) 225-1852
<PAGE>
RISK/RETURN SUMMARY
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This prospectus provides information about three of the four series of
PRUDENTIAL SECTOR FUNDS, INC., which we refer to as "the Company." Those three
series are PRUDENTIAL FINANCIAL SERVICES FUND, PRUDENTIAL HEALTH SCIENCES FUND
and PRUDENTIAL TECHNOLOGY FUND (each referred to as a "Fund" and collectively as
"the Funds"). To obtain information about the fourth series, Prudential Utility
Fund, see the back cover page of this prospectus. While the three Funds have
some common attributes, such as their investment objective and many of their
investment policies, each focuses on a different sector. Therefore, some
sections of this prospectus deal with each Fund separately, while other sections
address all three Funds at the same time.
This section highlights key information about each Fund. Additional
information follows this summary.
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Each Fund's investment objective is LONG-TERM CAPITAL APPRECIATION. This means
we seek investments whose price will increase over time. Each Fund normally
invests at least 65% of its total assets in equity-related securities of U.S.
companies within a specific group of industries. We refer to the industries in
which each Fund concentrates as its "sector."
-- PRUDENTIAL FINANCIAL SERVICES FUND buys securities of companies, such
as banks, finance companies, insurance companies and securities/brokerage firms,
that are primarily engaged in providing financial services.
-- PRUDENTIAL HEALTH SCIENCES FUND buys securities of pharmaceutical
companies, biotechnology companies, medical device manufacturers, healthcare
service providers and HMOs that derive a substantial portion of their sales from
healthcare-related products or services.
-- PRUDENTIAL TECHNOLOGY FUND buys securities of companies that derive,
or that its investment adviser expects will derive, a substantial portion of
their sales from products or services in technology and technology-related
activities.
Each Fund has two separate portfolios, the "Concentrated" portfolio and the
"Enhanced Index" portfolio. The two portfolios normally will have approximately
equal assets.
Each Concentrated portfolio holds a relatively small number of equity-
related securities (typically 20 to 40 issuers) in which the portfolio managers
- --------------------------------------------------------------------------------
1
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
have the highest confidence. The portfolio managers will use fundamental and
quantitative analyses to select individual securities.
Each Enhanced Index portfolio contains securities selected from a benchmark
index made up of securities of that Fund's sector from the Standard & Poor's
(S&P) SuperComposite 1500 Index. The S&P SuperComposite 1500 Index is made up of
the S&P 500 Stock Index, the S&P Midcap 400 Index and the S&P SmallCap 600
Index. Each benchmark index is comprised of securities of the relevant Fund's
sector contained in the S&P SuperComposite 1500 Index. The portfolio managers
seek to outperform the benchmark index and to limit the possibility of
significantly underperforming that benchmark. The Enhanced Index portfolios are
expected to hold a representative sample of the securities in the benchmark
index and to over-weight or under-weight the selected securities based upon
proprietary quantitative models. The portfolio managers try to control the risk
of significantly underperforming the benchmark by keeping size and industry
weightings relatively close to those in the benchmark. Because the S&P 500 makes
up 90% of the benchmark index's market capitalization, large-cap stocks may
dominate.
Equity-related securities in which the Funds primarily invest are common
stocks, nonconvertible preferred stocks and convertible securities. We also may
use derivatives.
For the Concentrated portfolios of Prudential Financial Services Fund and
Prudential Technology Fund, we consider selling a security when it has increased
in price to the point where it is no longer underpriced in the opinion of the
investment adviser. However, for the Concentrated portfolio of Prudential Health
Sciences Fund, we consider selling or reducing a stock position when, in the
opinion of the investment adviser, the stock has experienced a fundamental
disappointment in earnings; the stock has experienced adverse price movement;
the stock has reached an intermediate-term price objective and its outlook no
longer seems sufficiently promising; or a relatively more attractive stock
emerges. While we make every effort to achieve each Fund's investment objective,
we can't guarantee success.
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. Each Fund is
subject to risks within its own sector because it concentrates its investments
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2 PRUDENTIAL SECTOR FUNDS, INC. [LOGO] (800) 225-1852
<PAGE>
RISK/RETURN SUMMARY
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in securities of companies within those industries. For example, Prudential
Financial Services Fund can be adversely affected by legislative changes,
increased competition and general economic conditions. Prudential Health
Sciences Fund faces risks created by government regulation and invests in
companies whose products or services may quickly become obsolete. Prudential
Technology Fund invests in companies subject to intense competition whose
products may quickly become obsolete. Therefore, the prices of these securities
can be volatile.
Since each Fund is a sector fund, its holdings can vary significantly from
broad market indexes and the performance of a Fund can deviate from the
performance of the indexes. For the Enhanced Index portfolios, there is a risk
that the quantitative analysis used to determine which securities they will
invest in may result in underperforming the benchmark index. Because we invest
in stocks, there is the risk that a particular stock we own could go down or pay
lower-than-expected dividends. In addition to an individual stock losing value,
the value of the equity markets could go down. Stock markets are volatile.
Each Fund is nondiversified, meaning we can invest more than 5% of the
Fund's assets in the securities of any one issuer. Investing in a nondiversified
fund involves greater risk than investing in a diversified mutual fund because a
loss resulting from the decline in value of one security may represent a greater
portion of the total assets of a nondiversified fund.
Some of our derivative strategies also involve risk. The Funds may use risk
management techniques to try to preserve assets or enhance return. These
strategies may present above-average risks. Derivatives may not fully offset the
underlying positions and this could result in losses to the Funds that would not
otherwise have occurred.
Like any mutual fund, an investment in a Fund could lose value and you could
lose money. For more detailed information about the risks associated with each
Fund, see "How the Funds Invest--Investment Risks."
An investment in a Fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
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3
<PAGE>
RISK/RETURN SUMMARY
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FEES AND EXPENSES
These tables show the sales charges, fees and expenses that you may pay if you
buy and hold shares of each share class of each Fund--Class A, B, C and Z. The
sales charges, fees and expenses of a class are the same for each Fund. Each
share class has different sales charges--known as loads-- and expenses, but
represents an investment in the same Fund. Class Z shares are available only to
a limited group of investors. For more information about which share class may
be right for you, see "How to Buy, Sell and Exchange Shares of the Funds."
SHAREHOLDER FEES(1) (PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
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CLASS A CLASS B CLASS C CLASS Z
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<S> <C> <C> <C> <C>
Maximum sales charge (load)
imposed on purchases (as a
percentage of offering
price) 5% None 1% None
Maximum deferred sales
charge (load) (as a
percentage of the lower of
original purchase price or
sale proceeds) None 5%(2) 1%(3) None
Maximum sales charge (load)
imposed on reinvested
dividends and other
distributions None None None None
Redemption fees None None None None
Exchange fee None None None None
</TABLE>
ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS Z
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Management fees(4) .75% .75% .75% .75%
+ Distribution and service
(12b-1) fees .30% 1.00% 1.00% None
+ Other expenses .65% .65% .65% .65%
= Total annual Fund
operating expenses 1.70% 2.40% 2.40% 1.40%
- Fee waiver(4) .20% .15% .15% .15%
= NET ANNUAL FUND OPERATING
EXPENSES(4) 1.50% 2.25% 2.25% 1.25%
</TABLE>
1 YOUR BROKER MAY CHARGE YOU A SEPARATE OR ADDITIONAL FEE FOR PURCHASES AND
SALES OF SHARES.
2 THE CONTINGENT DEFERRED SALES CHARGE (CDSC) FOR CLASS B SHARES DECREASES BY
1% ANNUALLY TO 1% IN THE FIFTH AND SIXTH YEARS AND 0% IN THE SEVENTH YEAR.
CLASS B SHARES CONVERT TO CLASS A SHARES APPROXIMATELY SEVEN YEARS AFTER
PURCHASE.
3 THE CDSC FOR CLASS C SHARES IS 1% FOR SHARES REDEEMED WITHIN 18 MONTHS OF
PURCHASE.
4 FOR THE CURRENT FISCAL YEAR AND THE FISCAL YEAR ENDING NOVEMBER 30, 2000,
THE MANAGER HAS CONTRACTUALLY AGREED TO REDUCE ITS MANAGEMENT FEE TO .60 OF
1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A, CLASS B, CLASS C AND
CLASS Z SHARES OF EACH FUND. FOR THE SAME PERIOD, THE DISTRIBUTOR OF THE
FUNDS HAS CONTRACTUALLY AGREED TO REDUCE ITS DISTRIBUTION AND SERVICE
(12b-1) FEES FOR CLASS A SHARES TO .25 OF 1% OF THE AVERAGE DAILY NET
ASSETS OF THE CLASS A SHARES.
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4 PRUDENTIAL SECTOR FUNDS, INC. [LOGO] (800) 225-1852
<PAGE>
RISK/RETURN SUMMARY
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EXAMPLE
This example will help you compare the fees and expenses of each Fund's
different share classes and the cost of investing in each Fund with the cost of
investing in other mutual funds.
The example assumes that you invest $10,000 in a Fund for the time periods
indicated and then sell all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that
each Fund's operating expenses remain the same. After the first year, the
example does not take into account the Manager's agreement to waive a portion of
its fee and the Distributor's agreement to reduce its distribution and service
(12b-1) fee for Class A shares. Although your actual costs may be higher or
lower, based on these assumptions, your costs would be:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
1 YR 3 YRS
- ----------------------------------------------------------------
<S> <C> <C>
Class A shares $645 $990
Class B shares $728 $1,034
Class C shares $426 $827
Class Z shares $127 $428
</TABLE>
You would pay the following expenses on the same investment if you did not sell
your shares:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
1 YR 3 YRS
- ----------------------------------------------------------------
<S> <C> <C>
Class A shares $645 $990
Class B shares $228 $734
Class C shares $326 $827
Class Z shares $127 $428
</TABLE>
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5
<PAGE>
HOW THE FUNDS INVEST
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INVESTMENT OBJECTIVE AND POLICIES
Each Fund's investment objective is LONG-TERM CAPITAL APPRECIATION. This means
we seek investments whose price will increase over time. While we make every
effort to achieve each Fund's investment objective, we can't guarantee success.
In pursuing each Fund's objective, we normally invest at least 65% of a
Fund's total assets in EQUITY-RELATED SECURITIES OF U.S. COMPANIES IN ITS
SECTOR. Each Fund considers a company to be principally engaged in a sector if
at the time of investment, in the opinion of the investment adviser, at least
50% of a company's assets, revenues or profits on a consolidated basis are
derived or (for start-up companies) are expected to be derived from operations
in that area.
PRUDENTIAL FINANCIAL SERVICES FUND concentrates on companies in the banking
and financial services group of industries. Companies in the banking industry
include thrifts, commercial and investment banks and savings institutions
(including their parent holding companies). Companies in the financial services
industry include brokerage and advisory firms, commercial and industrial finance
companies, diversified financial service companies, leasing companies, and
insurance companies (including multi-line, property, casualty and life insurance
companies and insurance holding companies).
PRUDENTIAL HEALTH SCIENCES FUND concentrates on companies primarily engaged
in the drug, health care, medicine, medical device and biotechnology group of
industries. These companies include manufacturers of
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WE'RE VALUE INVESTORS
In deciding which stocks to buy for the Concentrated portfolio of Prudential
Financial Services Fund, we use what is known as a value investment style; that
is, we invest in companies selling at a price that is low relative to the
company's earnings, assets, cash flow or dividends.
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6 PRUDENTIAL SECTOR FUNDS, INC. [LOGO] (800) 225-1852
<PAGE>
HOW THE FUNDS INVEST
- ------------------------------------------------
healthcare products, such as pharmaceutical firms, biotechnology companies or
medical device companies. They may also include providers of healthcare- or
healthcare-related services, such as hospitals, nursing homes, assisted living
centers and physician practices; healthcare insurance companies including HMOs;
distributors and retailers of healthcare products; healthcare
information-technology suppliers; contract research organizations; and providers
of outsourcing or other services to the healthcare industry.
PRUDENTIAL TECHNOLOGY FUND concentrates on companies that derive, or that
its investment adviser expects will derive, a substantial portion of their sales
from products or services in technology and technology-related activities. These
companies include those that design, manufacture or sell computers and
peripheral products, electronic components and systems software; equipment
vendors; electronic component manufacturers, contract manufacturers and
distributors; and electronic instruments and system vendors. They also include
companies that provide media, telecommunication and information services and
companies expected to benefit from technological advances and improvements.
- -------------------------------------------------------------------
WE'RE GROWTH INVESTORS
In deciding which stocks to buy for the Concentrated portfolio of Prudential
Health Sciences Fund, we use what is known as a growth investment style. This
means we invest in companies experiencing some or all of the following:
above-average revenue and earnings per share growth, strong market position,
improving profitability and distinctive attributes such as unique marketing
ability, strong research and development and productive new product flow, and
financial strength. Such companies generally trade at high prices relative to
their current earnings.
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- -------------------------------------------------------------------
OUR GROWTH STRATEGY
In managing the Concentrated portfolio of Prudential Technology Fund, we look
for companies that have growth in sales and earnings driven by products or
services. These companies usually have a unique market niche, a strong new
product profile or superior management. We analyze companies using both
fundamental and quantitative techniques.
- -------------------------------------------------------------------
- --------------------------------------------------------------------------------
7
<PAGE>
HOW THE FUNDS INVEST
- ------------------------------------------------
Each Fund will invest in equity-related securities, principally common
stocks, convertible securities and nonconvertible preferred stocks. In addition,
equity-related securities include American Depositary Receipts (ADRs) and S&P
depositary receipts (SPDRs); warrants and rights that can be exercised to obtain
stock; investments in various types of business ventures, including partnerships
and joint ventures; real estate investment trusts; and similar securities.
Convertible securities are securities--like bonds, corporate notes and preferred
stocks--that we can convert into the company's common stock or some other equity
security. We buy only investment-grade convertible securities. We may buy
equity-related securities of companies of every size--small-, medium- and
large-capitalization.
DIVISION OF ASSETS
Each Fund has two separate portfolios, the "Concentrated" portfolio and the
"Enhanced Index" portfolio. The two portfolios normally will have approximately
equal assets.
Each Concentrated portfolio holds a relatively small number of equity-
related securities (generally 20 to 40 issuers) in which the portfolio managers
have the highest confidence. The portfolio managers will use fundamental and
quantitative analyses to select individual securities.
Each Enhanced Index portfolio contains securities selected from a benchmark
index made up of securities of that Fund's sector from the S&P SuperComposite
1500 Index. The portfolio managers seek to outperform the benchmark index and to
limit the possibility of significantly underperforming that benchmark. The
Enhanced Index portfolios are expected to hold a representative sample of the
securities in the benchmark index. The portfolio managers try to outperform the
benchmark index by over-weighting or under-weighting the selected securities
based upon proprietary quantitative models. The Enhanced Index portfolio
managers try to control the risk of significantly underperforming the benchmark
by keeping size and industry weightings relatively close to those in the
benchmark. Because the S&P 500 makes up 90% of the benchmark index's market
capitalization, large-cap stocks may dominate.
Under normal conditions, there will be an approximately equal division of
each Fund's assets between the two portfolios. All daily cash inflows (that is,
subscriptions and reinvested distributions) and outflows (that is, redemptions
and expense items) will be divided between the two portfolios of each
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8 PRUDENTIAL SECTOR FUNDS, INC. [LOGO] (800) 225-1852
<PAGE>
HOW THE FUNDS INVEST
- ------------------------------------------------
Fund as the Manager deems appropriate. There will be a periodic rebalancing of
each portfolio's assets to take account of market fluctuations in order to
maintain the approximate equal allocation. Each portfolio will be limited to 60%
of total Fund assets. As a consequence, the Manager may allocate assets from the
portfolio that has appreciated more to the other. Reallocations may result in
additional costs since sales of securities may result in higher portfolio
turnover. Also, because each portfolio manager selects portfolio securities
independently, it is possible that a security held by one portfolio may also be
held by the other portfolio segment of a Fund. In addition, if one portfolio
manager buys a security as the other portfolio manager sells it, the net
position of a Fund in the security may be approximately the same as it would
have been with a single portfolio and no such sale and purchase, but the Fund
will have incurred additional costs. The Manager will consider these costs in
determining the allocation of assets. To maintain each Fund's federal income tax
status as a regulated investment company, the Manager also may have to sell
securities on a periodic basis and the Fund could realize capital gains that
would not have otherwise occurred.
DERIVATIVE STRATEGIES
We may use various derivative strategies to try to improve a Fund's returns or
protect its assets, although we cannot guarantee that these strategies will
work, that the instruments necessary to implement these strategies will be
available or that the Fund will not lose money. Derivatives--such as futures,
options, foreign currency forward contracts and options on futures--involve
costs and can be volatile. With derivatives, a Fund's investment adviser tries
to predict whether the underlying investment--a security, market index,
currency, interest rate or some other benchmark--will go up or down at some
future date. We may use derivatives to try to reduce risk, for cash management
purposes or to increase return consistent with a Fund's overall investment
objective. A Fund's investment adviser will consider other factors (such as
cost) in deciding whether to employ any particular strategy or use any
particular instrument. Any derivatives we use may not match the Fund's
underlying holdings.
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9
<PAGE>
HOW THE FUNDS INVEST
- ------------------------------------------------
OPTIONS
Each Fund may purchase and sell put and call options on equity securities and
stock indexes and currencies traded on U.S. or foreign securities exchanges, on
NASDAQ or in the over-the-counter market. An option is the right to buy or sell
securities in exchange for a premium. The Funds will sell only covered options.
FUTURES CONTRACTS AND RELATED OPTIONS,
FOREIGN CURRENCY FORWARD CONTRACTS
Each Fund may purchase and sell stock and bond index futures contracts and
related options on stock and bond index futures to improve its returns or
protect its assets. Each Fund also may purchase and sell futures contracts on
foreign currencies and related options on foreign currency futures contracts. A
futures contract is an agreement to buy or sell a set quantity of an underlying
product at a future date, or to make or receive a cash payment based on the
value of a securities index. Each Fund may also enter into foreign currency
forward contracts to protect the value of its assets against future changes in
the level of foreign exchange rates. A foreign currency forward contract is an
obligation to buy or sell a given currency on a future date at a set price.
For more information, see "Investment Risks" below and the Statement of
Additional Information, "Description of the Funds, Their Investments and Risks."
The Statement of Additional Information--which we refer to as the SAI--contains
additional information about the Funds. To obtain a copy, see the back cover
page of this prospectus.
Each Fund's investment objective is a fundamental policy that cannot be
changed without approval of that Fund's shareholders. The Board can change
investment policies that are not fundamental.
OTHER INVESTMENTS
In addition to the principal strategies, we also may make the following
investments to try to increase a Fund's returns or protect its assets if market
conditions warrant.
INVESTMENTS IN NONSECTOR INDUSTRIES
Under normal circumstances, each Fund may invest up to 35% of its total assets
in securities of issuers not in its sector industries. These include
equity-related securities, fixed-income instruments (Prudential Financial
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10 PRUDENTIAL SECTOR FUNDS, INC. [LOGO] (800) 225-1852
<PAGE>
HOW THE FUNDS INVEST
- ------------------------------------------------
Services Fund and Prudential Technology Fund only) and money market instruments.
FOREIGN SECURITIES
We may invest up to 35% of each Fund's total assets in FOREIGN SECURITIES,
including money market instruments and other fixed-income securities (Prudential
Financial Services Fund and Prudential Technology Fund only), stocks and other
equity-related securities. Foreign securities have additional risks. Foreign
markets are more volatile than U.S. markets. Changes in currency exchange rates
can reduce or increase market performance. For purposes of the 35% limit, we do
not consider ADRs and other similar receipts or shares to be foreign securities.
The ability to choose securities from around the world allows us to pursue
potentially higher returns and decrease Fund risk through diversification.
SHORT SALES
Prudential Health Sciences Fund and Prudential Technology Fund may use SHORT
SALES, where a Fund sells a security it does not own, with the expectation of a
decline in the market value of that security. To complete the transaction, the
Fund will borrow the security to make delivery to the buyer. The Fund must
replace the borrowed security by purchasing it at the market price at the time
of replacement. The price at that time may be more or less than the price at
which the Fund sold the security. The Fund is required to pay the lender any
dividends or interest accrued. To borrow the security, the Fund may pay a
premium which would increase the cost of the security sold.
FIXED-INCOME OBLIGATIONS
Prudential Financial Services Fund and Prudential Technology Fund may invest up
to 10% of their total assets in debt securities, primarily those rated
investment grade (BBB/Baa or above). A Fund may continue to hold a security if
it is downgraded below BBB/Baa or is no longer rated by a major rating service.
Lower-rated obligations are subject to a greater risk of loss of principal and
interest.
TEMPORARY DEFENSIVE INVESTMENTS
In response to adverse market, economic or political conditions, we may
temporarily invest up to 100% of a Fund's assets in MONEY MARKET INSTRUMENTS.
Money market instruments include the commercial paper of
- --------------------------------------------------------------------------------
11
<PAGE>
HOW THE FUNDS INVEST
- ------------------------------------------------
corporations, the obligations of banks, certificates of deposit and obligations
issued or guaranteed by the U.S. government or its agencies or a foreign
government. Investing heavily in these securities limits our ability to achieve
our investment objective, but can help to preserve the Fund's assets when the
equity markets are unstable.
REPURCHASE AGREEMENTS
Each Fund also may use REPURCHASE AGREEMENTS, where a party agrees to sell a
security to the Fund and then repurchase it at an agreed-upon price at a stated
time. This creates a fixed return for the Fund and is in effect a loan by the
Fund.
ADDITIONAL STRATEGIES
Each Fund also follows certain policies when it BORROWS MONEY (each Fund can
borrow up to 33 1/3% of the value of its total assets); LENDS ITS SECURITIES to
others (each Fund can lend up to 33 1/3% of the value of its total assets,
including collateral received in the transaction); and HOLDS ILLIQUID SECURITIES
(each Fund may hold up to 15% of its net assets in illiquid securities,
including securities with legal or contractual restrictions, those without a
readily available market and repurchase agreements with maturities longer than
seven days). Each Fund is "NONDIVERSIFIED," meaning it can invest more than 5%
of its assets in the securities of any one issuer. Each Fund is subject to
certain other investment restrictions that are fundamental policies, which means
they cannot be changed without that Fund's shareholders' approval. For more
information about these restrictions, see the SAI.
PORTFOLIO TURNOVER
It is not a principal strategy of the Funds to actively and frequently trade
their portfolio securities to achieve their investment objective. Nevertheless,
Prudential Health Sciences Fund and Prudential Technology Fund may have an
annual portfolio turnover rate of up to 250%. Portfolio turnover is generally
the percentage found by dividing the lesser of portfolio purchases and sales by
the monthly average value of the portfolio. High portfolio turnover (100% or
more) results in higher brokerage commissions and other costs and can affect a
Fund's performance. It also can result in a greater amount of distributions as
ordinary income rather than long-term capital gains. Prudential Financial
Services Fund is not expected to have a high portfolio turnover rate.
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12 PRUDENTIAL SECTOR FUNDS, INC. [LOGO] (800) 225-1852
<PAGE>
HOW THE FUNDS INVEST
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INVESTMENT RISKS
As noted, all investments involve risk, and investing in the Funds is no
exception. Since each Fund's holdings can vary significantly from broad market
indexes, performance of a Fund can deviate from performance of the indexes. This
chart outlines the key risks and potential rewards of the Funds' principal
investments and certain other investments the Funds may make. See, too,
"Description of the Funds, Their Investments and Risks" in the SAI.
INVESTMENT TYPE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
- -----------------------------------------------------------------------------------
<S> <C> <C>
- ------------------------------------------------------------------------------------
SECURITIES OF FINANCIAL SERVICES -- Companies in which -- Potential for
COMPANIES the Fund invests capital
(PRUDENTIAL FINANCIAL SERVICES FUND may be adversely appreciation
ONLY) affected by the -- Companies in which
AT LEAST 65% adoption of the Fund invests
legislation that may be positively
promotes affected by the
competition in the adoption of
financial services legislation that
industry affects both
-- General economic competition in the
conditions affect banking industry as
companies that face well as increased
exposure to credit savings and
losses and depend investment
on interest rate -- Improved economic
activity conditions may
-- Financial services reduce exposure to
companies may use credit losses and
leverage more dependence on
actively than interest rate
companies in other activity
industries -- As baby boomers
-- Changes in approach retirement
regulatory age, the financial
environment services industry
-- See equity-related may profit from
securities retirement
investing
- ------------------------------------------------------------------------------------
</TABLE>
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13
<PAGE>
HOW THE FUNDS INVEST
- ------------------------------------------------
INVESTMENT TYPE (CONT'D)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
- -----------------------------------------------------------------------------------
<S> <C> <C>
- ------------------------------------------------------------------------------------
SECURITIES OF HEALTH SCIENCES -- Issuers are often subject -- Potential for capital
COMPANIES (PRUDENTIAL HEALTH SCIENCES to government regulation appreciation
FUND ONLY) and approval, which could -- New products or services
AT LEAST 65% affect the price and may reap profits from
availability of their rendering others obsolete
products or services -- Technological advances in
-- Product cycle may be healthcare products and
volatile services may produce more
-- Products and services may effective and more
quickly become obsolete profitable therapies for
-- Products may be withdrawn unmet medical needs
for safety reasons -- The aging of the U.S.
-- See equity-related population and the
securities industrialization of
emerging markets may
increase demand for
healthcare products and
services
-- The healthcare industry
enjoys demand that is
relatively insensitive to
the ups and downs of the
business cycle
- ------------------------------------------------------------------------------------
SECURITIES OF TECHNOLOGY COMPANIES -- Products and services may -- Potential for capital
(PRUDENTIAL TECHNOLOGY FUND ONLY) quickly become obsolete appreciation
AT LEAST 65% -- Dependence on global -- New products or services
markets may reap profits from
-- Companies with electronic rendering others obsolete
products are subject to
intense competition
-- Securities of companies
with emerging concepts may
be more volatile due to
their limited product
lines, markets or
financial resources
-- See equity-related
securities
- ------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------
14 PRUDENTIAL SECTOR FUNDS, INC. [LOGO] (800) 225-1852
<PAGE>
HOW THE FUNDS INVEST
- ------------------------------------------------
INVESTMENT TYPE (CONT'D)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
- -----------------------------------------------------------------------------------
<S> <C> <C>
- ------------------------------------------------------------------------------------
EQUITY-RELATED SECURITIES -- Individual stocks could -- Historically, stocks have
AT LEAST 65% lose value outperformed other
-- The equity markets could go investments over the long
down, resulting in a term
decline in value of a -- Generally, economic growth
Fund's investments means higher corporate
-- Changes in economic or profits, which leads to an
political conditions, both increase in stock prices,
domestic and known as capital
international, may result appreciation
in a decline in value of a
Fund's investments
- ------------------------------------------------------------------------------------
DERIVATIVES -- Derivatives such as -- A Fund could make money and
PERCENTAGE VARIES futures, options and protect against losses if
foreign currency forward the investment analysis
contracts that are used proves correct
for hedging purposes may -- Derivatives that involve
not fully offset the leverage could generate
underlying positions and substantial gains at low
this could result in cost
losses to a Fund that -- One way to manage a Fund's
would not have otherwise risk/return balance is to
occurred lock in the value of an
-- Derivatives used for risk investment ahead of time
management may not have
the intended effects and
may result in losses or
missed opportunities
-- The other party to a
derivatives contract could
default
-- Derivatives that involve
leverage could magnify
losses
-- Certain types of
derivatives involve costs
to a Fund that can reduce
returns
- ------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
15
<PAGE>
HOW THE FUNDS INVEST
- ------------------------------------------------
INVESTMENT TYPE (CONT'D)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
- -----------------------------------------------------------------------------------
<S> <C> <C>
- ------------------------------------------------------------------------------------
FOREIGN SECURITIES -- Foreign markets, economies -- Investors can participate
UP TO 35% and political systems may in foreign markets and
not be as stable as in the companies operating in
U.S. those markets
-- Currency risk-- changing -- Changing values of foreign
values of foreign currencies
currencies -- Opportunities for
-- May be less liquid than diversification
U.S. stocks and bonds
-- Differences in foreign
laws, accounting
standards, public
information, custody and
settlement practices
-- Year 2000 conversion may be
more of a problem for some
foreign issuers
- ------------------------------------------------------------------------------------
SHORT SALES -- May magnify underlying -- May magnify underlying
(PRUDENTIAL HEALTH SCIENCES FUND AND investment losses investment gains
PRUDENTIAL TECHNOLOGY FUND ONLY) -- Investment costs may exceed
UP TO 25% OF NET ASSETS potential underlying
investment gains
- ------------------------------------------------------------------------------------
FIXED-INCOME OBLIGATIONS -- A Fund's holdings, share -- Bonds have generally
(PRUDENTIAL FINANCIAL price, yield and total outperformed money market
SERVICES FUND AND return may fluctuate in instruments over the long
PRUDENTIAL TECHNOLOGY FUND ONLY) response to bond market term with less risk than
UP TO 10% movements stocks
-- Credit risk--the risk that -- Most bonds will rise in
the default of an issuer value when interest rates
would leave a Fund with fall
unpaid interest or -- Regular interest income
principal. The lower a -- Investment-grade bonds have
bond's quality, the higher a lower risk of default
its potential volatility
- ------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------
16 PRUDENTIAL SECTOR FUNDS, INC. [LOGO] (800) 225-1852
<PAGE>
HOW THE FUNDS INVEST
- ------------------------------------------------
INVESTMENT TYPE (CONT'D)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
- -----------------------------------------------------------------------------------
<S> <C> <C>
- ------------------------------------------------------------------------------------
FIXED-INCOME OBLIGATIONS (CONT'D) -- Market risk--the risk that -- Generally more secure than
the market value of an stock since companies must
investment may move up or pay their debts before
down rapidly or they pay dividends
unpredictably. Market risk -- Junk bonds offer higher
may affect an industry, a yields and higher
sector, or the market as a potential gains
whole
-- Interest rate risk--the
value of most bonds will
fall when interest rates
rise; the longer a bond's
maturity and the lower its
credit quality, the more
its value typically falls.
It can lead to price
volatility
-- Junk bonds have a higher
risk of default, tend to
be less liquid and may be
more difficult to value
- ------------------------------------------------------------------------------------
ILLIQUID SECURITIES -- May be difficult to value -- May offer a more attractive
UP TO 15% OF NET ASSETS precisely yield or potential for
-- May be difficult to sell at growth than more widely
the time or price desired traded securities
- ------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS -- Limits potential for -- May preserve a Fund's
UP TO 100% ON A TEMPORARY BASIS capital appreciation assets
-- See credit risk and market
risk
- ------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
17
<PAGE>
HOW THE FUNDS ARE MANAGED
- -------------------------------------
BOARD OF DIRECTORS
The Company's Board of Directors oversees the actions of the Manager, Investment
Advisers and Distributor and decides on general policies. The Board also
oversees the Company's officers, who conduct and supervise the daily business
operations of each Fund.
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM)
GATEWAY CENTER THREE, 100 MULBERRY STREET
NEWARK, NJ 07102-4077
Under a management agreement with each Fund, PIFM manages the Fund's
investment operations and administers its business affairs. Each Fund has agreed
to pay PIFM an annual management fee of .75 of 1% of its average net assets.
After the waiver, each Fund pays PIFM annual management fees of .60 of 1% of its
average net assets.
As of March 31, 1999, PIFM served as the Manager to all 46 of the Prudential
mutual funds, and as Manager or administrator to 22 closed-end investment
companies, with aggregate assets of approximately $71.6 billion.
INVESTMENT ADVISERS
-- PRUDENTIAL FINANCIAL SERVICES FUND AND PRUDENTIAL TECHNOLOGY FUND.
The Prudential Investment Corporation, called Prudential Investments, is the
investment adviser to Prudential Financial Services Fund and Prudential
Technology Fund. Its address is Prudential Plaza, 751 Broad Street, Newark, NJ
07102.
-- PRUDENTIAL HEALTH SCIENCES FUND. Jennison Associates LLC, called
Jennison, is the investment adviser to the Concentrated portfolio of Prudential
Health Sciences Fund. Its address is 466 Lexington Avenue, New York, NY 10017.
Prudential Investments is the investment adviser to the Enhanced Index portfolio
of Prudential Health Sciences Fund.
PIFM has responsibility for all investment advisory services and supervises
Prudential Investments and Jennison. PIFM reimburses Prudential Investments for
its reasonable costs and expenses and pays Jennison for its services a fee at an
annual rate of .30% of the average daily net assets of Prudential Health Science
Fund's Concentrated portfolio up to and including
- -------------------------------------------------------------------
18 PRUDENTIAL SECTOR FUNDS, INC. [LOGO] (800) 225-1852
<PAGE>
HOW THE FUNDS ARE MANAGED
- ------------------------------------------------
$300 million and .25% of the Concentrated portfolio's average daily net assets
over $300 million. As of March 31, 1999, Jennison managed approximately $49.2
billion in assets.
PORTFOLIO MANAGERS
-- PRUDENTIAL FINANCIAL SERVICES FUND. Patrick O'Brien is the portfolio
manager of the Concentrated portfolio of the Fund. PATRICK O'BRIEN, Vice
President, joined Prudential Investments in 1999 after six years as an analyst
with Wellington Management and Schneider Capital Management. He served as a
general analyst for both of these firms, with a primary focus on banks, savings
and loans, finance companies, real estate investment trusts and industrials. He
holds a B.S. from Ohio State University and an M.B.A. from Columbia University.
MARK STUMPP, PH.D., is the portfolio manager for the Enhanced Index portfolio of
the Fund. Mr. Stumpp is a Senior Managing Director of Prudential Investments. He
chairs the Quantitative Management (QM) group's Investment Policy Committee and
is responsible for its model portfolio. Mr. Stumpp developed the group's
tactical asset allocation algorithm. He also developed and oversees the
methodology underlying the group's actively managed equity portfolios. Mr.
Stumpp has managed mutual fund portfolios since 1995 and has managed investment
portfolios for over 11 years. He holds a B.A. from Boston University and an M.A.
and Ph.D. from Brown University.
-- PRUDENTIAL HEALTH SCIENCES FUND. Kathleen McCarragher and David Chan
are the portfolio managers of the Concentrated portfolio of the Fund. KATHLEEN
MCCARRAGHER, Director and Executive Vice President of Jennison, is also
Jennison's Growth Equity Investment Strategist. She joined Jennison in 1998
after a 17-year investment career, including positions at Weiss, Peck & Greer
(1992 to 1998) as a portfolio manager and State Street Research and Management
Company, where she was a member of the Investment Committee. She received a
B.B.A. from the University of Wisconsin and an M.B.A. from Harvard Business
School. DAVID CHAN, Director and Senior Vice President of Jennison, joined
Jennison in 1992. Previously, he was employed at the Boston Consulting Group,
where he was a team leader and consultant on projects in many industries,
including pharmaceuticals and drug retailing and distribution. He received a
B.A. from Harvard University and an M.B.A. from Columbia University. JOHN VAN
BELLE, PH.D., is the portfolio manager of the Enhanced Index portfolio of
- --------------------------------------------------------------------------------
19
<PAGE>
HOW THE FUNDS ARE MANAGED
- ------------------------------------------------
the Fund. Mr. Van Belle is a Managing Director in Prudential Investments QM
group and joined QM in 1983. He has managed mutual fund portfolios since 1988
and investment portfolios for more than 15 years, and is responsible for
managing several equity, balanced and global balanced portfolios on behalf of
institutional clients, as well as the overall asset allocation for Prudential
Diversified Funds. Mr. Van Belle holds a B.S. from St. Joseph's College and a
Ph.D. from the University of Virginia.
-- PRUDENTIAL TECHNOLOGY FUND. Susan Hirsch and Jeff Rose, CFA, are the
portfolio managers of the Concentrated portfolio of the Fund. SUSAN HIRSCH, a
Managing Director of Prudential Investments, joined Prudential Investments in
July 1996. Before that she was employed by Lehman Brothers Global Asset
Management from 1988 to 1996 and Delphi Asset Management in 1996. She managed
growth stock portfolios at both firms. During this time, Susan Hirsch was named
as an INSTITUTIONAL INVESTOR All-American Research Team Analyst for small growth
stocks in 1991, 1992 and 1993. She holds a B.S. from Brooklyn College and is a
member of the Financial Analysts Federation and the New York Society of Security
Analysts. JEFF ROSE, CFA, is a Managing Director of Prudential Investments,
which he joined in June 1994 as an equity analyst. Before that, he co-managed a
portfolio of private debt and equity securities for Prudential Capital Group
(May 1992 to June 1994). He has a B.A. from Cornell University and an M.B.A.
from the Amos Tuck School--Dartmouth College. He also holds a Certified
Financial Analyst designation. TED LOCKWOOD is the portfolio manager for the
Enhanced Index portfolio of the Fund. Mr. Lockwood is a Managing Director of
Prudential Investments and heads QM's equity area, which includes quantitative
equity, derivative and index funds. He has managed mutual fund portfolios since
1998 and investment portfolios since 1990. He is also responsible for managing
portfolios on behalf of institutional clients, investment research and new
product development. He joined Prudential in 1988. Mr. Lockwood earned a B.E.
from the State University of New York at Stony Brook and holds an M.S. and an
M.B.A. from Columbia University.
DISTRIBUTOR
Prudential Investment Management Services LLC (PIMS) distributes the Funds'
shares under a Distribution Agreement with each Fund. Each Fund has Distribution
and Service Plans under Rule 12b-1 of the Investment
- -------------------------------------------------------------------
20 PRUDENTIAL SECTOR FUNDS, INC. [LOGO] (800) 225-1852
<PAGE>
HOW THE FUNDS ARE MANAGED
- ------------------------------------------------
Company Act. Under the Plans and the Distribution Agreements, PIMS pays the
expenses of distributing each Fund's Class A, B, C and Z shares and provides
certain shareholder support services. Each Fund pays distribution and other fees
to PIMS as compensation for its services for each class of shares other than
Class Z. These fees--known as 12b-1 fees--are shown in the "Fees and Expenses"
tables.
YEAR 2000 READINESS DISCLOSURE
The services provided to the Funds and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of outside service providers.
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 an
event could have a negative impact on handling securities trades, payments of
interest and dividends, pricing and account services. Although, at this time,
there can be no assurance that there will be no adverse impact on the Funds, the
Manager, the Distributor, the Transfer Agent and the Custodian have advised the
Funds that they have been actively working on necessary changes to their
computer systems to prepare for the year 2000. The Company's Board receives, and
has received since early 1998, satisfactory quarterly reports from the principal
service providers as to their preparations for year 2000 readiness, although
there can be no assurance that the service providers (or other securities market
participants) will successfully complete the necessary changes in a timely
manner. Moreover, the Funds at this time have not considered retaining
alternative service providers or directly undertaken efforts to achieve year
2000 readiness, the latter of which would involve substantial expenses without
an assurance of success.
Additionally, issuers of securities generally, as well as those purchased by
a Fund, may confront year 2000 compliance issues which, if material and not
resolved, could have an adverse impact on securities markets and/ or a specific
issuer's performance and could result in a decline in the value of the
securities held by a Fund.
- --------------------------------------------------------------------------------
21
<PAGE>
FUND DISTRIBUTIONS
AND TAX ISSUES
- -------------------------------------
Investors who buy shares of a Fund should be aware of some important tax issues.
For example, each Fund distributes DIVIDENDS of ordinary income and any realized
net CAPITAL GAINS to shareholders. These distributions are subject to taxes,
unless you hold your shares in a 401(k) plan, an Individual Retirement Account
(IRA), or some other qualified tax-deferred plan or account.
Also, if you sell shares of a Fund for a profit, you may have to pay capital
gains taxes on the amount of your profit, again unless you hold your shares in a
qualified tax-deferred plan or account.
The following briefly discusses some of the important federal tax issues you
should be aware of, but is not meant to be tax advice. For tax advice, please
speak with your tax adviser.
DISTRIBUTIONS
Each Fund distributes DIVIDENDS of any net investment income to shareholders
typically annually. For example, if a Fund owns ACME Corp. stock and the stock
pays a dividend, the Fund will pay out a portion of this dividend to its
shareholders, assuming the Fund's income is more than its costs and expenses.
The dividends you receive from a Fund will be taxed as ordinary income whether
or not they are reinvested in the Fund.
Each Fund also distributes realized net CAPITAL GAINS to shareholders--
typically once a year--which are generated when a Fund sells its assets for a
profit. For example, if a Fund bought 100 shares of ACME Corp. stock for a total
of $1,000 and more than one year later sold the shares for a total of $1,500,
the Fund has net long-term capital gains of $500, which it will pass on to
shareholders (assuming the Fund's total gains are greater than any losses it may
have). Capital gains are taxed differently depending on how long a Fund holds
the security--if a security is held more than one year before it is sold,
LONG-TERM capital gains are taxed at the rate of 20%, but if the security is
held one year or less, SHORT-TERM capital gains are taxed at ordinary income
rates of up to 39.6%. Different rates apply to corporate shareholders.
For your convenience, a Fund's distributions of dividends and capital gains
are AUTOMATICALLY REINVESTED in the Fund without any sales charge. If you ask us
to pay the distributions in cash, we will send you a check if your account is
with the Transfer Agent. Otherwise, if your account is with a broker, you will
receive a credit to your account. Either way, the distributions
- -------------------------------------------------------------------
22 PRUDENTIAL SECTOR FUNDS, INC. [LOGO] (800) 225-1852
<PAGE>
FUND DISTRIBUTIONS
AND TAX ISSUES
- ------------------------------------------------
may be subject to taxes, unless your shares are held in a qualified tax-deferred
plan or account. For more information about automatic reinvestment and other
shareholder services, see "Step 4: Additional Shareholder Services" in the next
section.
TAX ISSUES
FORM 1099
Every year, you will receive a Form 1099, which reports the amount of dividends
and capital gains we distributed to you during the prior year. If you own shares
of a Fund as part of a qualified tax-deferred plan or account, your taxes are
deferred, so you will not receive a Form 1099. However, you will receive a Form
1099 when you take any distributions from your qualified tax-deferred plan or
account.
Fund distributions are generally taxable to you in the calendar year they
are received, except when we declare certain dividends in the fourth quarter and
actually pay them in January of the following year. In such cases, the dividends
are treated as if they were paid on December 31 of the prior year. Corporate
shareholders are eligible for the 70% dividends-received deduction for certain
dividends.
WITHHOLDING TAXES
If federal tax law requires you to provide a Fund with your tax identification
number and certifications as to your tax status, and you fail to do this, we
will withhold and pay to the U.S. Treasury 31% of your distributions and sale
proceeds. If you are subject to backup withholding, we will withhold and pay to
the U.S. Treasury 31% of your distributions. Dividends of net investment income
and short-term capital gains paid to a nonresident foreign shareholder generally
will be subject to a U.S. withholding tax of 30%. This rate may be lower,
depending on any tax treaty the U.S. may have with the shareholder's country.
IF YOU PURCHASE JUST BEFORE RECORD DATE
If you buy shares of a Fund just before the record date (the date that
determines who receives the distribution), that distribution will be paid to
you. As explained above, the distribution may be subject to income or capital
gains taxes. You may think you've done well since you bought shares one day and
soon thereafter received a distribution. That is not so because
- --------------------------------------------------------------------------------
23
<PAGE>
FUND DISTRIBUTIONS
AND TAX ISSUES
- ------------------------------------------------
when dividends are paid out, the value of each share of a Fund decreases by the
amount of the dividend and the market changes (if any) to reflect the payout.
The distribution you receive makes up for the decrease in share value. However,
the timing of your purchase does mean that part of your investment came back to
you as taxable income.
QUALIFIED RETIREMENT PLANS
Retirement plans and accounts allow you to defer paying taxes on investment
income and capital gains. Contributions to these plans may also be tax
deductible, although distributions from these plans generally are taxable. In
the case of Roth IRA accounts, contributions are not tax deductible, but
distributions from the plan may be tax-free. Please contact your financial
adviser for information on a variety of Prudential mutual funds that are
suitable for retirement plans offered by Prudential.
IF YOU SELL OR EXCHANGE YOUR SHARES
If you sell any shares of a Fund for a profit, you have REALIZED A CAPITAL GAIN,
which is subject to tax unless you hold shares in a qualified tax-deferred plan
or account. The amount of tax you pay depends on how long you owned your shares.
If you sell shares of a Fund for a loss, you may have a capital loss, which you
may use to offset certain capital gains you have.
RECEIPTS +$ CAPITAL GAIN
(taxes owed)
OR
FROM SALE -$ CAPITAL LOSS
(offset against gain)
Exchanging your shares of a Fund for the shares of another Prudential mutual
fund is considered a sale for tax purposes. In other words, it's a "taxable
event." Therefore, if the shares you exchanged have increased in value since you
purchased them, you have capital gains, which are subject to the taxes described
above.
Any gain or loss you may have from selling or exchanging Fund shares will
not be reported on the Form 1099; however, proceeds from the sale or exchange
will be reported on Form 1099-B. Therefore, unless you hold your shares in a
qualified tax-deferred plan or account, you or your financial adviser should
keep track of the dates on which you buy and sell--or exchange--Fund shares, as
well as the amount of any gain or loss on each transaction. For tax advice,
please see your tax adviser.
- -------------------------------------------------------------------
24 PRUDENTIAL SECTOR FUNDS, INC. [LOGO] (800) 225-1852
<PAGE>
FUND DISTRIBUTIONS
AND TAX ISSUES
- ------------------------------------------------
AUTOMATIC CONVERSION OF CLASS B SHARES
We have obtained a legal opinion that the conversion of Class B shares into
Class A shares--which happens automatically approximately seven years after
purchase--is not a "taxable event" because it does not involve an actual sale of
your Class B shares. This opinion, however, is not binding on the Internal
Revenue Service. For more information about the automatic conversion of Class B
shares, see "Class B Shares Convert to Class A Shares After Approximately Seven
Years" in the next section.
- --------------------------------------------------------------------------------
25
<PAGE>
HOW TO BUY, SELL AND EXCHANGE
SHARES OF THE FUNDS
- -------------------------------------
INITIAL OFFERING OF SHARES
PIMS will solicit subscriptions for Class A, Class B, Class C and Class Z shares
of each Fund during a subscription period beginning May 26, 1999 and expected to
end June 25, 1999. Fund shares subscribed for during this time will be issued at
a net asset value of $10.00 per share on a closing date expected to occur on
June 30, 1999. An initial sales charge of 5% (5.26% of the net amount invested)
is imposed on each transaction in Class A shares. This initial sales charge may
be reduced depending on the amount of the purchase as shown in the table under
"Reducing or Waiving Class A's Initial Sales Charge." An initial sales charge of
1% (1.01% of the net amount invested) is imposed on each transaction in Class C
shares. Your broker will notify you of the end of the subscription period.
Payment for Fund shares will be due within three days. If you send an order
during the subscription period along with payment, your money will be returned
unless you allow the money to be invested in Prudential MoneyMart Assets, Inc.
(MoneyMart Fund), a money market fund. If this is your first investment in
MoneyMart Fund, all amounts received and invested in MoneyMart Fund, including
any dividends received on these funds, will be automatically invested in this
Fund on the closing date. If you previously owned shares of MoneyMart Fund,
dividends accrued on your shares will not be exchanged for Fund shares. The
minimum initial investment is $1,000 for Class A and Class B shares and $2,500
for Class C shares. There are no minimum investment requirements for Class Z
shares and for certain retirement and employee savings plans or custodial
accounts for minors. You will not receive share certificates.
If you subscribe for shares, you will not have any rights as a shareholder
of a Fund until your shares are paid for and their issuance has been reflected
in the Fund's books. We reserve the right to withdraw, modify or terminate the
initial offering without notice and to refuse any order in whole or in part.
- -------------------------------------------------------------------
26 PRUDENTIAL SECTOR FUNDS, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND EXCHANGE
SHARES OF THE FUNDS
- ------------------------------------------------
The Funds will be closed for purchases and exchanges from on or about June
30, 1999 to July 21, 1999, while the investment advisers invest the proceeds of
the offering in accordance with each Fund's investment objective and policies
(the closing period). Beginning on or about July 22, 1999, each Fund will
commence a continuous offering of its shares. During the closing period,
shareholders may redeem existing positions or exchange out of a Fund, but the
Funds will be closed to new purchases and no exchanges into a Fund will be
accepted.
HOW TO BUY SHARES
STEP 1: OPEN AN ACCOUNT
If you don't have an account with us or a securities firm that is permitted to
buy or sell shares of a Fund for you, call Prudential Mutual Fund Services LLC
(PMFS) at (800) 225-1852, or contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: INVESTMENT SERVICES
P.O. BOX 15020
NEW BRUNSWICK, NJ 08906-5020
To purchase by wire, call the number above to obtain an application. After
PMFS receives your completed application, you will receive an account number.
For additional information about purchasing shares of a Fund, see the back cover
page of this prospectus. We have the right to reject any purchase order
(including an exchange into a Fund) or suspend or modify a Fund's sale of its
shares.
STEP 2: CHOOSE A SHARE CLASS
Individual investors can choose among Class A, Class B, Class C and Class Z
shares of a Fund, although Class Z shares are available only to a limited group
of investors.
Multiple share classes let you choose a cost structure that better meets
your needs. With Class A shares, you pay the sales charge at the time of
purchase, but the operating expenses each year are lower than the expenses of
Class B and Class C shares. With Class B shares, you only pay a sales charge if
you sell your shares within six years (that is why it is called a Contingent
Deferred Sales Charge or CDSC), but the operating expenses
- --------------------------------------------------------------------------------
27
<PAGE>
HOW TO BUY, SELL AND EXCHANGE
SHARES OF THE FUNDS
- ------------------------------------------------
each year are higher than the Class A share expenses. With Class C shares, you
pay a 1% front-end sales charge and a 1% CDSC if you sell within 18 months of
purchase, but the operating expenses are also higher than the expenses for Class
A shares.
When choosing a share class, you should consider the following:
-- The amount of your investment
-- The length of time you expect to hold the shares and the impact of
varying distribution fees
-- The different sales charges that apply to each share class-- Class
A's front-end sales charge vs. Class B's CDSC vs. Class C's low
front-end sales charge and low CDSC
-- Whether you qualify for any reduction or waiver of sales charges
-- The fact that Class B shares automatically convert to Class A shares
approximately seven years after purchase
-- Whether you qualify to purchase Class Z shares.
See "How to Sell Your Shares" for a description of the impact of CDSCs.
- -------------------------------------------------------------------
28 PRUDENTIAL SECTOR FUNDS, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND EXCHANGE
SHARES OF THE FUNDS
- ------------------------------------------------
SHARE CLASS COMPARISON. Use this chart to help you compare the Funds' different
share classes. The discussion following this chart will tell you whether you are
entitled to a reduction or waiver of any sales charges.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS Z
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Minimum purchase $1,000 $1,000 $2,500 None
amount(1)
Minimum amount for $100 $100 $100 None
subsequent
purchases(1)
Maximum initial sales 5% of the public None 1% of the public None
charge offering price offering price
Contingent Deferred None If sold during: 1% on sales made None
Sales Charge (CDSC)(2) Year 1 5% within 18 months
Year 2 4% of purchase
Year 3 3%
Year 4 2%
Years 5/6 1%
Year 7 0%
Annual distribution and .30 of 1% 1% 1% None
service (12b-1) fees (.25 of 1%
shown as a percentage currently)
of average net
assets(3)
</TABLE>
1 THE MINIMUM INVESTMENT REQUIREMENTS DO NOT APPLY TO CERTAIN RETIREMENT AND
EMPLOYEE SAVINGS PLANS AND CUSTODIAL ACCOUNTS FOR MINORS. THE MINIMUM
INITIAL AND SUBSEQUENT INVESTMENT FOR PURCHASES MADE THROUGH THE AUTOMATIC
INVESTMENT PLAN IS $50. FOR MORE INFORMATION, SEE "ADDITIONAL SHAREHOLDER
SERVICES--AUTOMATIC INVESTMENT PLAN."
2 FOR MORE INFORMATION ABOUT THE CDSC AND HOW IT IS CALCULATED, SEE "HOW TO
SELL YOUR SHARES-- CONTINGENT DEFERRED SALES CHARGE (CDSC)."
3 THESE DISTRIBUTION FEES ARE PAID FROM A FUND'S ASSETS ON A CONTINUOUS
BASIS. OVER TIME, THE FEES WILL INCREASE THE COST OF YOUR INVESTMENT AND
MAY COST YOU MORE THAN PAYING OTHER TYPES OF SALES CHARGES. THE SERVICE FEE
FOR CLASS A, CLASS B AND CLASS C SHARES IS .25 OF 1%. THE DISTRIBUTION FEE
FOR CLASS A SHARES IS LIMITED TO .30 OF 1% (INCLUDING THE .25 OF 1% SERVICE
FEE) AND IS .75 OF 1% FOR CLASS B AND CLASS C SHARES.
REDUCING OR WAIVING CLASS A'S INITIAL SALES CHARGE
The following describes the different ways investors can reduce or avoid paying
Class A's initial sales charge.
INCREASE THE AMOUNT OF YOUR INVESTMENT. You can reduce Class A's sales charge by
increasing the amount of your investment. This table shows you how the sales
charge decreases as the amount of your investment increases.
- --------------------------------------------------------------------------------
29
<PAGE>
HOW TO BUY, SELL AND EXCHANGE
SHARES OF THE FUNDS
- ------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
SALES CHARGE AS SALES CHARGE AS
% %
OF OFFERING OF AMOUNT DEALER
AMOUNT OF PURCHASE PRICE INVESTED REALLOWANCE
- ---------------------------------------------------------------------------------
<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 million and above* None None None
</TABLE>
* IF YOU INVEST $1 MILLION OR MORE, YOU CAN BUY ONLY CLASS A SHARES, UNLESS
YOU QUALIFY TO BUY CLASS Z SHARES.
To satisfy the purchase amounts above, you can:
-- Invest with an eligible group of related investors
-- Buy the Class A shares of two or more Prudential mutual funds at the
same time
-- Use your RIGHTS OF ACCUMULATION, which allow you to combine the value
of Prudential mutual fund shares you already own with the value of
the shares you are purchasing for purposes of determining the
applicable sales charge (note: you must notify the Transfer Agent if
you qualify for Rights of Accumulation)
-- Sign a LETTER OF INTENT, stating in writing that you or an eligible
group of related investors will purchase a certain amount of shares
in a Fund and other Prudential mutual funds within 13 months.
BENEFIT PLANS. Benefit Plans can avoid Class A's initial sales charge if 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
under the exchange privilege) or 250 eligible employees or participants. For
these purposes, a Benefit Plan is a pension, profit-sharing or other employee
benefit plan qualified under Section 401 of the Internal Revenue Code, a
deferred compensation or annuity plan under Sections 403(b) and 457 of the
Internal Revenue Code, a "rabbi" trust or a nonqualified deferred compensation
plan sponsored by an employer that has a tax-qualified benefit plan with
Prudential. Class A shares also may be purchased without a sales charge by
participants who are repaying loans
- -------------------------------------------------------------------
30 PRUDENTIAL SECTOR FUNDS, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND EXCHANGE
SHARES OF THE FUNDS
- ------------------------------------------------
from Benefit Plans where Prudential or its affiliates provide administrative or
recordkeeping services, sponsor the product or provide account services.
Certain Prudential retirement programs--such as PruArray Association Benefit
Plans and PruArray Savings Programs--may also be exempt from Class A's sales
charge. For more information, see the SAI or contact your financial adviser. In
addition, waivers are available to investors in certain programs sponsored by
brokers, investment advisers and financial planners who have agreements with
Prudential Investments Advisory Group relating to:
-- Mutual fund "wrap" or asset allocation programs where the sponsor
places Fund trades and charges its clients a management, consulting
or other fee for its services
-- Mutual fund "supermarket" programs where the sponsor links its
customers' accounts to a master account in the sponsor's name and the
sponsor charges a fee for its services.
OTHER TYPES OF INVESTORS. Other investors pay no sales charge, including certain
officers, employees or agents of Prudential and its affiliates, the Prudential
mutual funds, the subadvisers of the Prudential mutual funds and clients of
brokers that have entered into a selected dealer agreement with the Distributor.
To qualify for a reduction or waiver of the sales charge, you must notify the
Transfer Agent or your broker at the time of purchase. For more information, see
the SAI, "Purchase, Redemption and Pricing of Fund Shares--Reduction and Waiver
of Initial Sales Charge--Class A Shares."
WAIVING CLASS C'S INITIAL SALES CHARGE
BENEFIT PLANS. Benefit Plans (as defined above) may purchase Class C shares
without paying an initial sales charge. Class C shares also may be purchased
without an initial sales charge by participants who are repaying loans from
Benefit Plans where Prudential or its affiliates provide administrative or
recordkeeping services, sponsor the product or provide account services.
PRUDENTIAL RETIREMENT PLANS. The initial sales charge will be waived for
purchases of Class C shares by both qualified and nonqualified retirement and
deferred compensation plans participating in a PruArray Plan and other plans if
Prudential also provides administrative or recordkeeping services.
- --------------------------------------------------------------------------------
31
<PAGE>
HOW TO BUY, SELL AND EXCHANGE
SHARES OF THE FUNDS
- ------------------------------------------------
INVESTMENT OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES. The initial
sales charge will be waived for purchases of Class C shares if the purchase is
made with money from the redemption of shares of any unaffiliated investment
company, as long as the shares were not held in an account at Prudential
Securities Incorporated or one of its affiliates. These purchases must be made
within 60 days of the redemption. To qualify for this waiver, you must do one of
the following:
-- Purchase your shares through an account at Prudential Securities
-- Purchase your shares through an ADVANTAGE Account or an Investor
Account with Pruco Securities Corporation
-- Purchase your shares through another broker.
This waiver is not available to investors who purchase shares directly from
the Transfer Agent. If you are entitled to the waiver, you must notify either
the Transfer Agent or your broker. The Transfer Agent may require any supporting
documents it considers appropriate.
QUALIFYING FOR CLASS Z SHARES
Class Z shares of a Fund can be purchased by any of the following:
-- Any Benefit Plan, as defined above, and certain nonqualified plans,
provided the Benefit Plan--in combination with other plans sponsored
by the same employer or group of related employers--has at least $50
million in defined contribution assets
-- Participants in any fee-based program or trust program sponsored by
Prudential or an affiliate which includes mutual funds as investment
options and that Fund as an available option
-- 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
-- Benefit Plans for which an affiliate of the Distributor provides
administrative or recordkeeping services and, as of September 20,
1996, were either Class Z shareholders of the Prudential mutual funds
or executed a letter of intent to purchase Class Z shares of the
Prudential mutual funds
-- Current and former Directors/Trustees of the Prudential mutual funds
(including the Company)
-- Prudential with an investment of $10 million or more.
- -------------------------------------------------------------------
32 PRUDENTIAL SECTOR FUNDS, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND EXCHANGE
SHARES OF THE FUNDS
- ------------------------------------------------
In connection with the sale of shares, the Manager, the Distributor or one
of their affiliates may pay brokers, financial advisers and other persons a
commission of up to 4% of the purchase price for Class B shares, up to 2% of the
purchase price for Class C shares and a finder's fee for Class Z shares from
their own resources based on a percentage of the net asset value of shares sold
or otherwise.
CLASS B SHARES CONVERT TO CLASS A SHARES AFTER APPROXIMATELY SEVEN YEARS
If you buy Class B shares and hold them for approximately seven years, we will
automatically convert them into Class A shares without charge. At that time, we
also will convert any Class B shares that you purchased with reinvested
dividends and other distributions. Since the 12b-1 fees for Class A shares are
lower than for Class B shares, converting to Class A shares lowers your Fund
expenses.
When we do the conversion, you will get fewer Class A shares than the number
of converted Class B shares if the price of the Class A shares is higher than
the price of Class B shares. The total dollar value will be the same, so you
will not have lost any money by getting fewer Class A shares. We do the
conversions quarterly, not on the anniversary date of your purchase. For more
information, see the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Conversion Feature--Class B Shares."
- --------------------------------------------------------------------------------
33
<PAGE>
HOW TO BUY, SELL AND EXCHANGE
SHARES OF THE FUNDS
- ------------------------------------------------
STEP 3: UNDERSTANDING THE PRICE YOU'LL PAY
The price you pay for each share of a Fund is based on the share value. The
share value of a mutual fund--known as the NET ASSET VALUE or NAV-- is
determined by a simple calculation: it's the total value of the Fund (assets
minus liabilities) divided by the total number of shares outstanding. For
example, if the value of the investments held by fund XYZ (minus its
liabilities) is $1,000 and there are 100 shares of fund XYZ owned by
shareholders, the price of one share of the fund--or the NAV--is $10 ($1,000
divided by 100). Portfolio securities are valued based upon market quotations
or, if not readily available, at fair value as determined in good faith under
procedures established by the Company's Board. Most national newspapers report
the NAVs of most mutual funds, which allows investors to check the price of
mutual funds daily.
We determine the NAV of each Fund's shares once each business day at 4:15
p.m. New York Time on days that the New York Stock Exchange is open for trading.
We do not determine the NAV on days when we have not received any orders to
purchase, sell or exchange Fund shares, or when changes in the value of a Fund's
portfolio do not materially affect the NAV.
WHAT PRICE WILL YOU PAY FOR SHARES OF A FUND?
For Class A and Class C shares, you'll pay the public offering price, which is
the NAV next determined after we receive your order to purchase, plus an initial
sales charge (unless you're entitled to a waiver). For Class B and Class Z
shares, you will pay the NAV next determined after we receive your order to
purchase (remember, there are no up-front sales charges for these share
classes). Your broker may charge you a separate or additional fee for purchases
of shares.
- -------------------------------------------------------------------
MUTUAL FUND SHARES
The NAV of mutual fund shares changes every day because the value of a fund's
portfolio changes constantly. For example, if fund XYZ holds ACME Corp. stock in
its portfolio and the price of ACME stock goes up while the value of the fund's
other holdings remains the same and expenses don't change, the NAV of fund XYZ
will increase.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
34 PRUDENTIAL SECTOR FUNDS, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND EXCHANGE
SHARES OF THE FUNDS
- ------------------------------------------------
STEP 4: ADDITIONAL SHAREHOLDER SERVICES
As a Fund shareholder, you can take advantage of the following services and
privileges:
AUTOMATIC REINVESTMENT. As we explained in the "Fund Distributions and Tax
Issues" section, each Fund pays out--or distributes--its net investment income
and capital gains to all shareholders. For your convenience, we will
automatically reinvest your distributions in your Fund at NAV without any sales
charge. If you want your distributions paid in cash, you can indicate this
preference on your application, notify your broker or notify the Transfer Agent
in writing (at the address below) at least five business days before the date we
determine who receives dividends.
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: ACCOUNT MAINTENANCE
P.O. BOX 15015
NEW BRUNSWICK, NJ 08906-5015
AUTOMATIC INVESTMENT PLAN. You can make regular purchases of a Fund for as
little as $50 by having the funds automatically withdrawn from your bank or
brokerage account at specified intervals.
RETIREMENT PLAN SERVICES. Prudential offers a wide variety of retirement plans
for individuals and institutions, including large and small businesses. For
information on IRAs, including Roth IRAs or SEP IRAs for a one-person business,
please contact your financial adviser. If you are interested in opening a 401(k)
or other company-sponsored retirement plan (SIMPLES, SEP plans, Keoghs, 403(b)
plans, pension and profit-sharing plans), your financial adviser will help you
determine which retirement plan best meets your needs. Complete instructions
about how to establish and maintain your plan and how to open accounts for you
and your employees will be included in the retirement plan kit you receive in
the mail.
THE PRUTECTOR PROGRAM. Optional group term life insurance--which protects the
value of your Prudential mutual fund investment for your beneficiaries against
market declines--is available to investors who purchase their shares through
Prudential. This insurance is subject to various restrictions and charges and is
not available in all states.
- --------------------------------------------------------------------------------
35
<PAGE>
HOW TO BUY, SELL AND EXCHANGE
SHARES OF THE FUNDS
- ------------------------------------------------
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available that will
provide you with monthly or quarterly checks. Remember, the sale of Class B and
Class C shares may be subject to a CDSC.
REPORTS TO SHAREHOLDERS. Every year we will send you an annual report (along
with an updated prospectus) and a semi-annual report, which contain important
financial information about the Funds. To reduce Fund expenses, we will send one
annual shareholder report, one semi-annual shareholder report and one annual
prospectus per household, unless you instruct us or your broker otherwise.
HOW TO SELL YOUR SHARES
You can sell your shares of a Fund for cash (in the form of a check) at any
time, subject to certain restrictions.
When you sell shares of a Fund--also known as redeeming your shares--the
price you will receive will be the NAV next determined after the Transfer Agent,
the Distributor or your broker receives your order to sell. If your broker holds
your shares, he must receive your order to sell by 4:15 p.m. New York Time to
process the sale on that day. Otherwise contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: REDEMPTION SERVICES
P.O. BOX 15010
NEW BRUNSWICK, NJ 08906-5010
Generally, we will pay you for the shares that you sell within seven days
after the Transfer Agent, the Distributor or your broker receives your sell
order. If you hold shares through a broker, payment will be credited to your
account. If you are selling shares you recently purchased with a check, we may
delay sending you the proceeds until your check clears, which can take up to 10
days from the purchase date. You can avoid delay if you purchase shares by wire,
certified check or cashier's check. Your broker may charge you a separate or
additional fee for sales of shares.
- -------------------------------------------------------------------
36 PRUDENTIAL SECTOR FUNDS, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND EXCHANGE
SHARES OF THE FUNDS
- ------------------------------------------------
RESTRICTIONS ON SALES
There are certain times when you may not be able to sell shares of a Fund, or
when we may delay paying you the proceeds from a sale. This may happen during
unusual market conditions or emergencies when the Fund can't determine the value
of its assets or sell its holdings. For more information, see the SAI,
"Purchase, Redemption and Pricing of Fund Shares--Sale of Shares."
If you are selling more than $100,000 of shares, you want the check sent to
someone or some place that is not in our records, or you are a business or a
trust and you hold your shares directly with the Transfer Agent, you will need
to have the signature on your sell order guaranteed by a financial institution.
For more information, see the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Sale of Shares--Signature Guarantee."
CONTINGENT DEFERRED SALES CHARGE (CDSC)
If you sell Class B shares within six years of purchase or Class C shares within
18 months of purchase, you will have to pay a CDSC. To keep the CDSC as low as
possible, we will sell amounts representing shares in the following order:
-- Amounts representing shares you purchased with reinvested dividends
and distributions
-- Amounts representing the increase in NAV above the total amount of
payments for shares made during the past six years for Class B shares
and 18 months for Class C shares
-- Amounts representing the cost of shares held beyond the CDSC period
(six years for Class B shares and 18 months for Class C shares).
Since shares that fall into any of the categories listed above are not
subject to the CDSC, selling them first helps you to avoid--or at least
minimize--the CDSC.
Having sold the exempt shares first, if there are any remaining shares that
are subject to the CDSC, we will apply the CDSC to amounts representing the cost
of shares held for the longest period of time within the applicable CDSC period.
- --------------------------------------------------------------------------------
37
<PAGE>
HOW TO BUY, SELL AND EXCHANGE
SHARES OF THE FUNDS
- ------------------------------------------------
As we noted before in the "Share Class Comparison" chart, the CDSC for Class
B shares is 5% in the first year, 4% in the second, 3% in the third, 2% in the
fourth and 1% in the fifth and sixth years. The rate decreases on the first day
of the month following the anniversary date of your purchase, not on the
anniversary date itself. The CDSC is 1% for Class C shares-- which is applied to
shares sold within 18 months of purchase. For both Class B and Class C shares,
the CDSC is calculated based on the lesser of the original purchase price or the
redemption proceeds. For purposes of determining how long you've held your
shares, all purchases during the month are grouped together and considered to
have been made on the last day of the month.
The holding period for purposes of determining the applicable CDSC will be
calculated from the first day of the month after initial purchase, excluding any
time shares were held in a money market fund.
WAIVER OF THE CDSC--CLASS B SHARES
The CDSC will be waived if the Class B shares are sold:
-- After a shareholder is deceased or disabled (or, in the case of a
trust account, the death or disability of the grantor). This waiver
applies to individual shareholders, as well as shares owned in joint
tenancy (with rights of survivorship), provided the shares were
purchased before the death or disability
-- To provide for certain distributions--made without IRS penalty-- from
a tax-deferred retirement plan, IRA or Section 403(b) custodial
account
-- On certain sales from a Systematic Withdrawal Plan.
For more information on the above and other waivers, see the SAI, "Purchase,
Redemption and Pricing of Fund Shares--Waiver of Contingent Deferred Sales
Charge--Class B Shares."
WAIVER OF THE CDSC--CLASS C SHARES
PRUDENTIAL RETIREMENT PLANS. The CDSC will be waived for purchases of Class C
shares by both qualified and nonqualified retirement and deferred compensation
plans participating in a PruArray Plan and other plans if Prudential also
provides administrative or recordkeeping services. The CDSC will also be waived
on redemptions from Benefit Plans sponsored by
- -------------------------------------------------------------------
38 PRUDENTIAL SECTOR FUNDS, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND EXCHANGE
SHARES OF THE FUNDS
- ------------------------------------------------
Prudential and its affiliates to the extent that the redemption proceeds are
invested in The Guaranteed Investment Account (a group annuity insurance product
sponsored by Prudential), the Guaranteed Insulated Separate Account (a separate
account offered by Prudential) and shares of The Stable Value Fund (an
unaffiliated bank collective fund).
OTHER BENEFIT PLANS. The CDSC will be waived on redemptions from Benefit Plans
holding shares through a broker not affiliated with Prudential and for which the
broker provides administrative or recordkeeping services.
REDEMPTION IN KIND
If the sales of a Fund's shares you make during any 90-day period reach the
lesser of $250,000 or 1% of the value of the Fund's net assets, we can then give
you securities from the Fund's portfolio instead of cash. If you want to sell
the securities for cash, you would have to pay the costs charged by a broker.
SMALL ACCOUNTS
If you make a sale that reduces your account value to less than $500, we may
sell the rest of your shares (without charging any CDSC) and close your account.
We would do this to minimize Fund expenses paid by other shareholders. We will
give you 60 days' notice, during which time you can purchase additional shares
to avoid this action. This involuntary sale does not apply to shareholders who
own their shares as part of a 401(k) plan, an IRA or some other tax-deferred
plan or account.
90-DAY REPURCHASE PRIVILEGE
After you redeem your shares, you have a 90-day period during which you may
reinvest any of the redemption proceeds in shares of the same Fund without
paying an initial sales charge. Also, if you paid a CDSC when you redeemed your
shares, we will credit your new account with the appropriate number of shares to
reflect the amount of the CDSC you paid. In order to take advantage of this
one-time privilege, you must notify the Transfer Agent or your broker at the
time of the repurchase. See the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Sale of Shares."
- --------------------------------------------------------------------------------
39
<PAGE>
HOW TO BUY, SELL AND EXCHANGE
SHARES OF THE FUNDS
- ------------------------------------------------
RETIREMENT PLANS
To sell shares and receive a distribution from a retirement account, call your
broker or the Transfer Agent for a distribution request form. There are special
distribution and income tax withholding requirements for distributions from
retirement plans and you must submit a withholding form with your request to
avoid delay. If your retirement plan account is held for you by your employer or
plan trustee, you must arrange for the distribution request to be signed and
sent by the plan administrator or trustee. For additional information, see the
SAI.
HOW TO EXCHANGE YOUR SHARES
You can exchange your shares of a Fund for shares of the same class in certain
other Prudential mutual funds--including certain money market funds--if you
satisfy the minimum investment requirements. For example, you can exchange Class
A shares of the Fund for Class A shares of another Prudential mutual fund, but
you can't exchange Class A shares for Class B, Class C or Class Z shares. Class
B and Class C shares may not be exchanged into money market funds other than
Prudential Special Money Market Fund, Inc. After an exchange, at redemption the
CDSC will be calculated from the first day of the month after initial purchase,
excluding any time shares were held in a money market fund. We may change the
terms of the exchange privilege after giving you 60 days' notice.
If you hold shares through a broker, you must exchange shares through your
broker. Otherwise contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: EXCHANGE PROCESSING
P.O. BOX 15010
NEW BRUNSWICK, NJ 08906-5010
There is no sales charge for such exchanges. However, if you exchange--and
then sell--Class B shares within approximately six years of your original
purchase or Class C shares within 18 months of your original purchase, you must
still pay the applicable CDSC. If you have exchanged Class B or Class C shares
into a money market fund, the time you hold the shares in the money market
account will not be counted in calculating the required holding period for CDSC
liability.
- -------------------------------------------------------------------
40 PRUDENTIAL SECTOR FUNDS, INC. [LOGO] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND EXCHANGE
SHARES OF THE FUNDS
- ------------------------------------------------
Remember, as we explained in the section entitled "Fund Distributions and
Tax Issues--If You Sell or Exchange Your Shares," exchanging shares is
considered a sale for tax purposes. Therefore, if the shares you exchange are
worth more than you paid for them, you may have to pay capital gains tax. For
additional information about exchanging shares, see the SAI, "Shareholder
Investment Account--Exchange Privilege."
If you own Class B or Class C shares and qualify to purchase Class A shares
without paying an initial sales charge, we will automatically exchange your
Class B or Class C shares which are not subject to a CDSC for Class A shares. We
make such exchanges on a quarterly basis if you qualify for this exchange
privilege. We have obtained a legal opinion that this exchange is not a "taxable
event" for federal income tax purposes. This opinion is not binding on the IRS.
FREQUENT TRADING
Frequent trading of Fund shares in response to short-term fluctuations in the
market--also known as "market timing"--may make it very difficult to manage a
Fund's investments. When market timing occurs, a Fund may have to sell portfolio
securities to have the cash necessary to redeem the market timer's shares. This
can happen at a time when it is not advantageous to sell any securities, so the
Fund's performance may be hurt. When large dollar amounts are involved, market
timing can also make it difficult to use long-term investment strategies because
we cannot predict how much cash a Fund will have to invest. When, in our
opinion, such activity would have a disruptive effect on portfolio management,
each Fund reserves the right to refuse purchase orders and exchanges into the
Fund by any person, group or commonly controlled account. A Fund may notify a
market timer of rejection of an exchange or purchase order after the day the
order is placed. If a Fund allows a market timer to trade Fund shares, it may
require the market timer to enter into a written agreement to follow certain
procedures and limitations.
- --------------------------------------------------------------------------------
41
<PAGE>
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42 PRUDENTIAL SECTOR FUNDS, INC. [LOGO] (800) 225-1852
<PAGE>
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- --------------------------------------------------------------------------------
43
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
- -------------------------------------
Prudential offers a broad range of mutual funds designed to meet your individual
needs. For information about these funds, contact your financial adviser or call
us at (800) 225-1852. Please read the prospectus carefully before you invest or
send money.
STOCK FUNDS
PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
PRUDENTIAL EMERGING GROWTH FUND, INC.
PRUDENTIAL EQUITY FUND, INC.
PRUDENTIAL EQUITY INCOME FUND
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL SMALL-CAP INDEX FUND
PRUDENTIAL STOCK INDEX FUND
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL JENNISON GROWTH FUND
PRUDENTIAL JENNISON GROWTH & INCOME FUND
PRUDENTIAL MID-CAP VALUE FUND
PRUDENTIAL REAL ESTATE SECURITIES FUND
PRUDENTIAL SECTOR FUNDS, INC.
PRUDENTIAL FINANCIAL SERVICES FUND
PRUDENTIAL HEALTH SCIENCES FUND
PRUDENTIAL TECHNOLOGY FUND
PRUDENTIAL UTILITY FUND
PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
PRUDENTIAL TAX-MANAGED EQUITY FUND
PRUDENTIAL 20/20 FOCUS FUND
NICHOLAS-APPLEGATE FUND, INC.
NICHOLAS-APPLEGATE GROWTH EQUITY FUND
ASSET ALLOCATION/BALANCED FUNDS
PRUDENTIAL BALANCED FUND
PRUDENTIAL DIVERSIFIED FUNDS
CONSERVATIVE GROWTH FUND
MODERATE GROWTH FUND
HIGH GROWTH FUND
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL ACTIVE BALANCED FUND
GLOBAL FUNDS
GLOBAL STOCK FUNDS
PRUDENTIAL DEVELOPING MARKETS FUND
PRUDENTIAL DEVELOPING MARKETS EQUITY FUND
PRUDENTIAL LATIN AMERICA EQUITY FUND
PRUDENTIAL EUROPE GROWTH FUND, INC.
PRUDENTIAL GLOBAL GENESIS FUND, INC.
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL EUROPE INDEX FUND
PRUDENTIAL PACIFIC INDEX FUND
PRUDENTIAL NATURAL RESOURCES FUND, INC.
PRUDENTIAL PACIFIC GROWTH FUND, INC.
PRUDENTIAL WORLD FUND, INC.
GLOBAL SERIES
INTERNATIONAL STOCK SERIES
GLOBAL UTILITY FUND, INC.
GLOBAL BOND FUNDS
PRUDENTIAL GLOBAL LIMITED MATURITY FUND, INC.
LIMITED MATURITY PORTFOLIO
PRUDENTIAL INTERMEDIATE GLOBAL
INCOME FUND, INC.
PRUDENTIAL INTERNATIONAL BOND FUND, INC.
THE GLOBAL TOTAL RETURN FUND, INC.
- -------------------------------------------------------------------
44 PRUDENTIAL SECTOR FUNDS, INC. [LOGO] (800) 225-1852
<PAGE>
- -------------------------------------
BOND FUNDS
TAXABLE BOND FUNDS
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
PRUDENTIAL GOVERNMENT SECURITIES TRUST
SHORT-INTERMEDIATE TERM SERIES
PRUDENTIAL HIGH YIELD FUND, INC.
PRUDENTIAL HIGH YIELD TOTAL RETURN FUND, INC.
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL BOND MARKET INDEX FUND
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
INCOME PORTFOLIO
TAX-EXEMPT BOND FUNDS
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA SERIES
CALIFORNIA INCOME SERIES
PRUDENTIAL MUNICIPAL BOND FUND
HIGH INCOME SERIES
INSURED SERIES
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
MASSACHUSETTS SERIES
NEW JERSEY SERIES
NEW YORK SERIES
NORTH CAROLINA SERIES
OHIO SERIES
PENNSYLVANIA SERIES
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
MONEY MARKET FUNDS
TAXABLE MONEY MARKET FUNDS
CASH ACCUMULATION TRUST
LIQUID ASSETS FUND
NATIONAL MONEY MARKET FUND
PRUDENTIAL GOVERNMENT SECURITIES TRUST
MONEY MARKET SERIES
U.S. TREASURY MONEY MARKET SERIES
PRUDENTIAL SPECIAL MONEY MARKET FUND, INC.
MONEY MARKET SERIES
PRUDENTIAL MONEYMART ASSETS, INC.
TAX-FREE MONEY MARKET FUNDS
PRUDENTIAL TAX-FREE MONEY FUND, INC.
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA MONEY MARKET SERIES
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
- --------------------------------------------------------------------------------
45
<PAGE>
FOR MORE INFORMATION:
- --------------------------------------------------------------------------------
Please read this prospectus before you invest in a Fund and keep it for future
reference. For information or shareholder questions contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
P.O. BOX 15005
NEW BRUNSWICK, NJ 08906-5005
(800) 225-1852
(732) 417-7555
(if calling from outside the U.S.)
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Outside Brokers Should Contact:
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC
P.O. BOX 15035
NEW BRUNSWICK, NJ 08906-5035
(800) 778-8769
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Visit Prudential's Web Site At:
http://www.prudential.com
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Additional information about the Funds can be obtained without charge and can be
found in the following documents:
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
(incorporated by reference into this prospectus)
ANNUAL REPORT
(contains a discussion of the market conditions and investment strategies that
significantly affected a Fund's performance)
SEMI-ANNUAL REPORT
You can also obtain copies of Fund documents from the Securities and Exchange
Commission as follows:
By Mail:
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-6009
(The SEC charges a fee to copy documents.)
In Person:
Public Reference Room in
Washington, DC
(For hours of operation, call (800) SEC-0330.)
Via the Internet:
http://www.sec.gov
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CUSIP Numbers:
Prudential Financial Services Fund
Class A: 74437K-10-3
Class B: 74437K-20-2
Class C: 74437K-30-1
Class Z: 74437K-40-0
Prudential Health Sciences Fund
Class A: 74437K-50-9
Class B: 74437K-60-8
Class C: 74437K-70-7
Class Z: 74437K-80-6
Prudential Technology Fund
Class A: 74437K-88-9
Class B: 74437K-87-1
Class C: 74437K-86-3
Class Z: 74437K-85-5
Investment Company Act File No:
811-3175
MF188A [LOGO] Printed on Recycled Paper
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION
MAY 20, 1999
Prudential Sector Funds, Inc., formerly Prudential Utility Fund, Inc. (the
Company), is an open-end, management investment company presently consisting of
the following four series: Prudential Financial Services Fund, Prudential Health
Sciences Fund, Prudential Technology Fund and Prudential Utility Fund (each a
Fund and collectively, the Funds). Except for Prudential Utility Fund, each of
the Funds is a non-diversified series. Each Fund concentrates its investments on
companies in a given sector.
THE INVESTMENT OBJECTIVE OF PRUDENTIAL FINANCIAL SERVICES FUND IS LONG-TERM
CAPITAL APPRECIATION. The Fund seeks to achieve its objective by investing
primarily in equity-related securities of U.S. companies in the banking and
financial services group of industries. Under normal circumstances, the Fund
intends to invest at least 65% of its assets in such securities.
THE INVESTMENT OBJECTIVE OF PRUDENTIAL HEALTH SCIENCES FUND IS LONG-TERM
CAPITAL APPRECIATION. The Fund seeks to achieve its objective by investing
primarily in equity-related securities of U.S. companies engaged in the drug,
health care, medicine, medical device and biotechnology group of industries.
Under normal circumstances, the Fund intends to invest at least 65% of its
assets in such securities.
THE INVESTMENT OBJECTIVE OF PRUDENTIAL TECHNOLOGY FUND IS LONG-TERM CAPITAL
APPRECIATION. The Fund seeks to achieve its objective by investing primarily in
equity-related securities of U.S. companies that its investment adviser expects
will derive or that already derive a substantial portion of their sales from
products or services in technology and technology-related activities. Under
normal circumstances, the Fund intends to invest at least 65% of its assets in
such securities.
THE INVESTMENT OBJECTIVE OF PRUDENTIAL UTILITY FUND 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 its 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.
There can be no assurance that a Fund's investment objective will be
achieved. See "Description of the Funds, Their Investments and Risks."
The Company'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 Prudential Utility Fund's Prospectus dated March 1,
1999, as supplemented, or the Prospectus of Prudential Financial Services Fund,
Prudential Health Sciences Fund and Prudential Technology Fund dated May 20,
1999. A copy of either Prospectus may be obtained from the Company upon request.
TABLE OF CONTENTS
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<CAPTION>
PAGE
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<S> <C>
Company History....................................... B-2
Description of the Funds, Their Investments and
Risks................................................ B-2
Investment Restrictions............................... B-18
Management of the Company............................. B-20
Control Persons and Principal Holders of Securities... B-24
Investment Advisory and Other Services................ B-25
Brokerage Allocation and Other Practices.............. B-29
Capital Shares, Other Securities and Organization..... B-31
Purchase, Redemption and Pricing of Fund Shares....... B-32
Shareholder Investment Account........................ B-44
Net Asset Value....................................... B-48
Taxes, Dividends and Distributions.................... B-49
Performance Information............................... B-52
Financial Statements.................................. B-54
Report of Independent Accountants..................... B-67
Appendix I--General Investment Information............ I-1
Appendix II--Historical Performance Data.............. II-1
Appendix III--Information Relating to Prudential...... III-1
</TABLE>
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MF188A
<PAGE>
COMPANY HISTORY
The Company was incorporated in Maryland on April 29, 1981. At a special
meeting held on July 19, 1994, shareholders approved an amendment to the
Company's Articles of Incorporation to change the Company's name from
Prudential-Bache Utility Fund, Inc. to Prudential Utility Fund, Inc. Effective
May 17, 1999, the Company's name changed from Prudential Utility Fund, Inc. to
Prudential Sector Funds, Inc. in conjunction with the creation of Prudential
Financial Services Fund, Prudential Health Sciences Fund and Prudential
Technology Fund, and Prudential Utility Fund became a fourth series of the
Company.
DESCRIPTION OF THE FUNDS, THEIR INVESTMENTS AND RISKS
(a) CLASSIFICATION. The Company is an open-end, management investment
company. Prudential Utility Fund is a diversified series of the Company, while
Prudential Financial Services Fund, Prudential Health Sciences Fund and
Prudential Technology Fund are non-diversified.
(b) AND (c) INVESTMENT STRATEGIES, POLICIES AND RISKS. Prudential Financial
Services Fund, Prudential Health Sciences Fund and Prudential Technology Fund
each have an investment objective of long-term capital appreciation. Under
normal circumstances each Fund, other than Prudential Utility Fund, intends to
invest at least 65% of its total assets in equity-related securities of U.S.
companies within its sector. Prudential Utility Fund's investment objective is
to seek total return through a combination of current income and capital
appreciation. Prudential Utility Fund intends to invest at least 80% of its
total assets in equity-related and debt securities of utility companies. While
the principal investment policies and strategies for seeking to achieve each
Fund's objective are described in that Fund's Prospectus, each Fund may from
time to time also use the securities, instruments, policies and strategies
described below in seeking to achieve its objective. A Fund may not be
successful in achieving its objective and you could lose money.
Each Fund is permitted to concentrate its investments in the sector as
described in its Prospectus and in the industries listed below.
Prudential Financial Services Fund's sector includes the following
industries:
<TABLE>
<S> <C> <C>
Major banks Savings & loan associations Property/casualty insurers
Mid-sized banks Finance companies Multi-line insurers
Smaller banks Investment banking/brokers Life insurance
Non-U.S. banks Investment managers Accident and health insurance
Diversified financial
Real estate investment trusts services Specialty insurers
Rental/leasing companies Mutual Funds Insurance brokers
</TABLE>
Prudential Health Sciences Fund's sector includes the following industries:
<TABLE>
<S> <C> <C>
Major pharmaceuticals Medical specialties Medical nursing services
Specialty pharmaceuticals Healthcare providers Healthcare information
(including (including services
drug delivery) assisted living) Other healthcare services
Other pharmaceuticals Managed care (including
Generic drugs Drug/medical/dental providers of outsourcing
Biotechnology distribution services)
Medical devices/equipment Hospital management Contract research
Assisted living services organizations
</TABLE>
Prudential Technology Fund's sector includes the following industries:
<TABLE>
<S> <C> <C>
Semiconductors Electronic components Diversified electronic
products
Telecommunications equipment Military/government Aerospace
Precision instruments Electronic data processing E.D.P. peripherals
(EDP)
Office/plant automation Computer communications Electronic production
Consumer E.D.P. services Computer software
electronics/applications
Electronics distributors Internet services Financial publishing/services
Media conglomerates Broadcasting Cable television
Major U.S. telecommunications Other Cellular telephone
telephone/communications
</TABLE>
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<PAGE>
Prudential Utility Fund may invest in the following industries:
<TABLE>
<S> <C> <C>
Electric Telecommunications Airport
Gas Water Seaport
Gas pipeline Cable Toll road
Telephone
</TABLE>
Where the focus of one Fund may overlap with that of another Fund, both
Funds may invest in securities of the same issuer.
FOREIGN SECURITIES
Each Fund, except for Prudential Utility Fund (which may invest up to 30% of
its total assets), may invest up to 35% of its total assets in foreign money
market instruments and debt and equity securities. American Depositary Receipts
(ADRs) and American Depositary Shares (ADSs) are not considered foreign
securities within this limitation. 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 that should be considered carefully
by an investor in a 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 a 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. A 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.
Investing in Prudential Utility Fund may involve additional risks because
the utility companies of many major foreign countries, such as the United
Kingdom, Spain and Mexico, have substantially increased investor ownership
(including ownership by U.S. investors). As a result, these companies have
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 Prudential Utility Fund.
RISK FACTORS AND SPECIAL CONSIDERATIONS OF INVESTING IN EURO-DENOMINATED
SECURITIES
On January 1, 1999, 11 of the 15 member states of the European Monetary
Union introduced the "euro" as a common currency. During a three-year
transitional period, the euro will coexist with each participating state's
currency and, on July 1, 2002, the euro is expected to become the sole currency
of the participating states. During the transition period, each Fund will treat
the euro as a separate currency from that of any participating state.
The conversion may adversely affect each Fund if the euro does not take
effect as planned; if a participating state withdraws from the European Monetary
Union; or if the computing, accounting and trading systems used by the Fund's
service providers, or by entities with which the Fund or its service providers
do business, are not capable of recognizing the euro as a distinct currency at
the time of, and following, euro conversion. In addition, the conversion could
cause markets to become more volatile.
The overall effect of the transition of member states' currencies to the
euro is not known at this time. It is likely that more general short- and
long-term ramifications can be expected, such as changes in the economic
environment and
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<PAGE>
change in the behavior of investors, which would affect a Fund's investments and
its net asset value. In addition, although U.S. Treasury regulations generally
provide that the euro conversion will not, in itself, cause a U.S. taxpayer to
realize gain or loss, other changes that may occur at the time of the
conversion, such as accrual periods, holiday conventions, indices, and other
features may require the realization of a gain or loss by a Fund as determined
under existing tax law.
The Funds' Manager has taken steps: (1) that it believes will reasonably
address euro-related changes to enable each Fund and its service providers to
process transactions accurately and completely with mininal disruption to
business activities and (2) to obtain reasonable assurances that appropriate
steps have been taken by each Fund's other service providers to address the
conversion. The Funds have not borne any expenses relating to these actions.
LOWER-RATED AND UNRATED DEBT SECURITIES
Prudential Financial Services Fund and Prudential Technology Fund may invest
up to 5% of their total assets in lower-rated and unrated debt securities.
Non-investment grade fixed-income securities are rated lower than Baa by Moody's
Investors Service or BBB by Standard & Poor's Ratings Group (or the equivalent
rating or, if not rated, determined by the Subadviser to be of comparable
quality to securities so rated) and are commonly referred to as high risk or
high yield securities or "junk" bonds. High yield securities are generally
riskier than higher quality securities and are subject to more credit risk,
including risk of default, and the prices of such securities are more volatile
than higher quality securities. Such securities may also have less liquidity
than higher quality securities.
RISK MANAGEMENT AND RETURN ENHANCEMENT STRATEGIES
Each Fund also may engage in various portfolio strategies, including using
derivatives, to seek to reduce certain risks of its investments and to enhance
return but not for speculation. These strategies include (1) the purchase and
writing (that is, sale) of put and call options on equity securities and on
stock indexes, (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 on such
contracts. Each 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. Each Fund also may purchase and sell foreign currency
forward contracts. A Fund, and thus its investors, may lose money through any
unsuccessful use of these strategies. A Fund's ability to use these strategies
may be limited by various factors, such as market conditions, regulatory limits
and tax considerations, and there can be no assurance that any of these
strategies will succeed. If new financial products and risk management
techniques are developed, a Fund may use them to the extent they are consistent
with its investment objective and policies.
OPTIONS ON EQUITY SECURITIES
Each Fund may purchase and write (that is, 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).
CALL OPTIONS ON STOCK. A call option is a short-term contract that gives the
purchaser, in exchange 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 or a specified amount of cash to
the purchaser upon receipt of the exercise price. When a 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 a Fund may write.
Each 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, a
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 a 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 a Fund by
the purchaser of the option is the "premium." A Fund's obligation to
B-4
<PAGE>
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.
A 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 on an exchange,
a Fund is required to comply with the rules of The Options Clearing Corporation
and the various exchanges with respect to collateral requirements. It is
possible that the cost of effecting a closing purchase transaction may be
greater than the premium received by a Fund for writing the option.
PUT OPTIONS ON STOCK. 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. A Fund as the writer of a put option might, therefore, be
obligated to purchase underlying securities for more than their current market
price.
Each Fund also may purchase a "protective put," that is, 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.
A Fund may purchase put options as a portfolio investment strategy when its
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 a Fund is holding
a security that 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.
STOCK INDEX OPTIONS
Each Fund also may purchase and write (that is, sell) put and call options
on stock indexes traded on securities exchanges, on NASDAQ or in the OTC market.
Options on stock indexes 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.
A Fund's successful use of options on indexes depends upon its 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 a Fund. Likewise, if a
stock index call option written by a Fund is exercised, the Fund may incur a
loss on the transaction which is not offset, in whole or in part, by an increase
in the value of the securities being written against, which securities may,
depending on market circumstances, decline in value.
B-5
<PAGE>
Except as described below, a Fund will write call options on indexes 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 a Fund writes a
call option on a broadly-based stock market index, the Fund will segregate 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 a Fund has written an option on an industry or market segment index, it
will segregate 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 or pledged falls below 100% of the current index value
times the multiplier times the number of contracts, the Fund will segregate or
pledge an amount in cash or other liquid assets equal in value to the
difference. In addition, when a 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 a 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 segregated 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. Each Fund may use listed stock and bond index
futures traded on a commodities exchange or board of trade to reduce certain
risks of its investments and to attempt to enhance return in accordance with
regulations of the Commodity Futures Trading Commission. A 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.
Under regulations of the Commodity Exchange Act, investment companies
registered under the Investment Company Act of 1940, as amended (Investment
Company Act) are exempt from the definition of "commodity pool operator,"
subject to compliance with certain conditions. The exemption is conditioned upon
a Fund's purchasing and selling futures contracts and options thereon for BONA
FIDE hedging transactions, except that a 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.
A 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 that are held in the Fund's portfolio or that 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 a Fund, an
amount of cash or other liquid assets equal to the market value of the futures
contracts will be segregated 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.
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<PAGE>
OPTIONS ON STOCK AND BOND INDEX FUTURES CONTRACTS. Each Fund also may
purchase and write options on stock and bond index futures contracts to reduce
certain risks of its investments 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. Each Fund is permitted to buy and
sell futures contracts on foreign currencies, and purchase and write options
thereon for hedging purposes. A Fund will engage in transactions in only those
futures contracts and options thereon that are traded on a commodities exchange
or a board of trade. A "sale" of a futures contract on foreign currency means
the assumption of a contractual obligation to deliver the specified amount of
foreign currency at a specified price in a specified future month. A "purchase"
of a futures contract means the assumption of a contractual obligation to
acquire the currency called for by the contract at a specified price in a
specified future month. At the time a futures contract is purchased or sold, a
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."
A Fund's successful use of futures contracts and options thereon depends on
its 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 a Fund's ability to purchase or sell certain futures
contracts or options thereon on any particular day. In addition, if a 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 a 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.
RISKS OF RISK MANAGEMENT AND RETURN ENHANCEMENT STRATEGIES
Participation in the options or futures markets and in currency exchange
transactions involves investment risks and transaction costs to which a Fund
would not be subject absent the use of these strategies. A Fund, and thus its
investors, may lose money through any unsuccessful use of these strategies. If a
Fund's investment adviser's predictions of movements in the direction of the
securities, foreign currency or interest rate markets are inaccurate, the
adverse consequences to the Fund may leave the Fund in a worse position than if
such strategies were not used. Risks inherent in the use of these strategies
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 risk that the counterparty may be unable to complete the transaction;
and (6) the possible inability of a 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 a Fund to sell a portfolio security at a disadvantageous time,
due to the need for the Fund to maintain "cover" or to segregate assets in
connection with hedging transactions.
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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 a 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 a 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 a
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 a 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 a 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, a 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 a 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, a Fund may be unable to
liquidate an OTC option.
Each Fund also may purchase a "protective put," that is, 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, a 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 indexes 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, a Fund will be
exposed to the risk that the counterparty will default on, or be unable to
complete, due to bankruptcy or otherwise, its obligation on the option. In such
an event, the Fund may lose the benefit of the transaction. The value of an OTC
option to a Fund is dependent upon the financial viability of the counterparty.
If a Fund decides to enter into transactions in OTC options, its investment
adviser will take into account the credit quality of counterparties in order to
limit the risk of default by the counterparty.
RISKS OF OPTIONS ON INDEXES
A Fund's purchase and sale of options on indexes will be subject to risks
described above under "Risks of Transactions in Stock Options." In addition, the
distinctive characteristics of options on indexes 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 a 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 a
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Fund of options on indexes would be subject to its 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. Each 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, a Fund would not be able to
close out options that it had purchased or written and, if restrictions on
exercise were imposed, the Fund may be unable to exercise an option it holds,
which could result in substantial losses to the Fund. It is each Fund's policy
to purchase or write options only on indexes that 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. A Fund will not
purchase or sell any index option contract unless and until, in its 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 INDEXES
Because exercises of index options are settled in cash, a call writer such
as a 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, a Fund will write call options on indexes only
under the circumstances described above under "Stock Index Options."
Price movements in a 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 a
Fund's portfolio does not rise. If this occurred, the Fund would experience a
loss on the call that 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 a Fund in the opposite direction as the
market would be likely to occur for only a short period or to a small degree.
Unless a Fund has other liquid assets which are sufficient to satisfy the
exercise of a call, the Fund would be required to liquidate portfolio securities
in order to satisfy the exercise. Because an exercise must be settled within
hours after receiving the notice of exercise, if a Fund fails to anticipate an
exercise, it may have to borrow from a bank (in amounts not exceeding 33 1/3% of
the Fund's total assets, except that Prudential Utility Fund may only borrow an
amount not exceeding 20% of its total assets) pending settlement of the sale of
securities in its portfolio and would incur interest charges thereon.
When a Fund has written a call, there also is 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, a 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 a 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.
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SPECIAL RISKS OF PURCHASING PUTS AND CALLS ON INDEXES
If a 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 a 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 a 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 a 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 a 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, a 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 a Fund were the writer of the option, its obligation would not
terminate until the option expired or the Fund was assigned an exercise notice.
FOREIGN CURRENCY FORWARD CONTRACTS
Each Fund may enter into foreign currency forward 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.
A 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 a Fund may enter. However, a 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 a 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
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<PAGE>
security positions denominated or quoted in that currency or in a different
foreign currency (cross-hedge). A Fund will not speculate in forward contracts.
A 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 a Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, or when a Fund anticipates the receipt in a
foreign currency of dividends or interest payments on a security which it holds,
the Fund may desire to "lock in" the U.S. dollar price of the security or the
U.S. dollar equivalent of such dividend or interest payment, as the case may be.
By entering into a forward contract for a fixed amount of dollars for the
purchase or sale of the amount of foreign currency involved in the underlying
transaction, a Fund may 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 a Fund's 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. A 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, each 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 a Fund enters into a
position hedging transaction, the transaction will be covered by the position
being hedged, or the Fund's Custodian will segregate cash or other liquid assets
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.
A Fund generally will not enter into a forward contract with a term of
greater than one year. At the maturity of a forward contract, a Fund may either
sell the portfolio security and make delivery of the foreign currency, or it may
retain the security and terminate its contractual obligation to deliver the
foreign currency by purchasing an "offsetting" contract with the same currency
trader obligating it to purchase, on the same maturity date, the same amount of
the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the contract. Accordingly, it
may be necessary for a 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 a 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 a 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.
A Fund's dealing in foreign currency forward contracts will be limited to
the transactions described above. Of course, a Fund is not required to enter
into such transactions with regard to its foreign currency-denominated
securities. Also, this method of protecting the value of a 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
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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, they also tend to limit any
potential gain which might result should the value of such currency increase. A
Fund's ability to enter into foreign currency forward contracts may be limited
by certain requirements for qualification as a regulated investment company
under the Internal Revenue Code. See "Taxes, Dividends and Distributions."
Although each 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 a
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
Each 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 a Fund has the right to take or make delivery of a
specified amount of foreign currency, rather than stock.
Each 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 a 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, a 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,
a 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, a Fund's 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, a Fund could write a put option on the currency and, if the
exchange rates move as anticipated, the option would expire unexercised.
Instead of purchasing or selling futures or forward currency exchange
contracts, a 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 a Fund the right to sell a currency at the exercise price until the option
expires. A call option gives a 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 a Fund to fully hedge
its positions by purchasing such options.
Each 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 (as compared to the U.S. dollar) historically have a high
degree of positive correlation.
RISKS 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 a 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
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exchange will exist for any particular option, or at any particular time, and
for some options no secondary market on an exchange or otherwise may exist. In
such event it might not be possible to effect closing transactions in particular
options, with the result that the Fund would have to exercise its options in
order to realize any profits and would incur brokerage commissions upon the
exercise of call options and upon the subsequent disposition of underlying
currencies acquired through the exercise of call options or upon the purchase of
underlying currencies for the exercise of put options. If a 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: (1) there may be insufficient trading interest in certain
options; (2) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (3) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (4) unusual or unforeseen circumstances may interrupt normal operations
on an exchange; (5) the facilities of an exchange or a clearing corporation may
not at all times be adequate to handle current trading or volume; or (6) one or
more exchanges could, for economic or other reasons, decide or be compelled at
some future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
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. Each 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 above under "Risks
of Risk Management 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 a Fund's investment adviser may
still not result in a successful hedging transaction for the Fund.
Although a 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 a 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.
Successful use of futures contracts by a Fund is also subject to the ability
of the Fund's Manager or investment adviser to predict correctly movements in
the direction of markets and other factors affecting currencies generally. For
example, if a 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
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to meet daily variation margin requirements, it may need to sell securities to
meet such requirements. Such sales of securities may be, but will not
necessarily be, at increased prices which reflect the rising market. A 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 a 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.
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.
POSITION LIMITS
Transactions by a 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 a Fund may
write or purchase may be affected by the futures contracts and options written
or purchased by other investment advisory clients of its investment adviser. An
exchange, board of trade or other trading facility may order the liquidation of
positions found to be in excess of these limits, and it may impose certain other
sanctions.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
A 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 a 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. A Fund's Custodian will
segregate 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
A Fund may enter into repurchase agreements, whereby the seller 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. A
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.
B-14
<PAGE>
A Fund will enter into repurchase transactions only with parties meeting
creditworthiness standards approved by the Company's Board of Directors. The
Fund's investment adviser will monitor the creditworthiness of such parties
under the general supervision of the Board of Directors. In the event of a
default or bankruptcy by a seller, the Fund will promptly seek to liquidate the
collateral.
Each 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 Commission. On a daily basis, any uninvested cash balances of
a Fund may be aggregated with those of such investment companies and invested in
one or more repurchase agreements. Each fund participates in the income earned
or accrued in the joint account based on the percentage of its investment.
BORROWING
Each Fund, other than Prudential Utility Fund, may borrow up to 33 1/3% 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.
Prudential Utility Fund may only borrow up to 20% of the value of its total
assets for temporary, extraordinary or emergency purposes or for the clearance
of transactions. Each Fund, other than Prudential Utility Fund, may pledge up to
33 1/3% of its total assets to secure these borrowings; Prudential Utility Fund
may pledge no more than 20% of its total assets to secure its borrowings. If a
Fund's asset coverage for borrowings falls below 300%, the Fund will take prompt
action (within 3 days) to reduce its borrowings. If the 300% asset coverage
should decline as a result of market fluctuations or other reasons, the Fund may
be required to sell portfolio securities to reduce the debt and restore the 300%
asset coverage, even though it may be disadvantageous from an investment
standpoint to sell securities at that time. No Fund will purchase portfolio
securities when borrowings exceed 5% of the value of its total assets.
LENDING OF SECURITIES
Consistent with applicable regulatory requirements, each Fund, except
Prudential Utility Fund, may lend its portfolio securities to brokers, dealers
and financial institutions, provided that outstanding loans do not exceed in the
aggregate 33 1/3% of the value of the Fund's total assets and that the loans are
callable at any time by the Fund. Prudential Utility Fund's outstanding loans
cannot exceed 33% of the value of its total assets. As a matter of fundamental
policy, Prudential Utility Fund and each of the other Funds will not lend more
than 33% and 33 1/3%, respectively, of the value of their total assets. The
loans must at all times be secured by cash or other liquid assets or secured by
an irrevocable letter of credit in favor of the lending Fund in an amount equal
to at least 100%, determined daily, of the market value of the loaned
securities. The collateral is segregated pursuant to applicable regulations.
During the time portfolio securities are on loan, the borrower will pay the
lending 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. 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 or by the lending 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 Company. On termination of the loan,
the borrower is required to return the securities to the lending 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 lending 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.
B-15
<PAGE>
SEGREGATED ASSETS
Each Fund segregates with its Custodian, State Street Bank and Trust
Company, 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 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 Commission
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
Each 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. Repurchase agreements subject to
demand are deemed to have a maturity equal to the applicable notice period.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the Securities Act),
securities that are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities that have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. 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 advisers anticipate that the
market for certain restricted securities such as institutional commercial paper
and foreign 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. (NASD).
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and privately placed commercial paper for which there is a
readily available market are treated as liquid only when deemed liquid under
procedures established by the Board of Directors. A 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. Each investment adviser will monitor the
liquidity of such restricted securities subject to the supervision of the Board
of Directors. In reaching liquidity decisions, each investment adviser will
consider, among others, the following factors: (1) the frequency of trades and
quotes for the security; (2) the number of dealers wishing to purchase or sell
the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades (for example, the time needed
to dispose of the security, the method of soliciting offers and the mechanics of
the transfer). In addition, in order for commercial paper that is issued in
reliance on Section 4(2) of the Securities Act to be considered liquid, (a) it
must be
B-16
<PAGE>
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 (b) it must not be "traded flat" (that is,
without accrued interest) or in default as to principal or interest.
The staff of the Commission has taken the position that purchased OTC
options and the assets used as "cover" for written OTC options are illiquid
securities unless the Fund participating in the option 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 that 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."
SHORT SALES
Prudential Health Sciences Fund and Prudential Technology Fund each may sell
a security it does not own in anticipation of a decline in the market value of
that security (short sales). To complete the transaction, the Fund will borrow
the security to make delivery to the buyer. The Fund is then obligated to
replace the security borrowed by purchasing it at the market price at the time
of replacement. The price at such time may be more or less than the price at
which the security was sold by the Fund. Until the security is replaced, the
Fund is required to pay to the lender any dividends or interest which accrue
during the period of the loan. To borrow the security, the Fund may be required
to pay a premium which would increase the cost of the security sold. The
proceeds of the short sale will be retained by the broker to the extent
necessary to meet margin requirements until the short position is closed out.
Until the Fund replaces the borrowed security, it will (a) segregate cash or
other liquid assets at such a level that the amount deposited in the account
plus the amount deposited with the broker as collateral will equal the current
value of the security sold short and will not be less than the market value of
the security at the time it was sold short or (b) otherwise cover its short
position through a short sale "against-the-box," which is a short sale in which
the Fund owns an equal amount of the securities sold short or securities
convertible into or exchangeable for, without payment of any further
consideration, securities of the same issue as, and equal in amount to, the
securities sold short.
The Fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which the
Fund replaces the borrowed security. The Fund will realize a gain if the
security declines in price between those dates. The amount of any gain will be
decreased, and the amount of any loss will be increased, by the amount of any
premium, dividends or interest paid in connection with the short sale.
(D) TEMPORARY DEFENSIVE STRATEGY AND SHORT-TERM INVESTMENTS
When conditions dictate a defensive strategy, or pending investment of
proceeds from sales of a Fund's shares, 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. Each Fund also may 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 a
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.
(E) PORTFOLIO TURNOVER
Prudential Utility Fund expects that its portfolio turnover rate will be
less than 200%; its portfolio turnover rates for the fiscal years ended December
31, 1998 and 1997 were 17% and 15%, respectively. Each Fund's portfolio 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 (100% or more)
involves correspondingly greater brokerage commissions and other transaction
costs, which are borne directly by the Fund. In addition, high
B-17
<PAGE>
portfolio turnover may also mean that a proportionately greater amount of
distributions to shareholders will be taxed as ordinary income rather than
long-term capital gains compared to investment companies with lower portfolio
turnover. See "Brokerage Allocation and Other Practices" and "Taxes, Dividends
and Distributions."
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. Fundamental policies
are those that cannot be changed without the approval of the holders of a
majority of a Fund's outstanding voting securities. A "majority of a Fund's
outstanding voting securities," when used in this Statement of Additional
Information, means the lesser of (1) 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 (2) more than 50% of the outstanding voting
shares.
PRUDENTIAL FINANCIAL SERVICES FUND, PRUDENTIAL HEALTH SCIENCES FUND AND
PRUDENTIAL TECHNOLOGY FUND MAY NOT:
1. Issue senior securities, borrow money or pledge its assets, except that
the Fund may borrow from banks up to 33 1/3% 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. Each of these Funds may pledge up
to 33 1/3% of the value of its total assets to secure such borrowings. For
purposes of this restriction, the purchase or sale of securities on a
when-issued or delayed delivery basis, forward foreign currency exchange
contracts and collateral arrangements relating thereto, and collateral
arrangements with respect to futures contracts and options thereon and with
respect to the writing of options and obligations of a Fund to Directors
pursuant to deferred compensation arrangements are not deemed to be a pledge of
assets subject to this restriction.
2. Buy or sell real estate or interests in real estate, except that a Fund
may purchase and sell securities which are secured by real estate, securities of
companies which invest or deal in real estate and publicly traded securities of
real estate investment trusts.
3. Buy or sell commodities or commodity contracts, except that a Fund may
purchase and sell financial futures contracts and options thereon, and forward
foreign currency exchange contracts.
4. 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.
5. Make loans, except through (a) repurchase agreements and (b) loans of
portfolio securities limited to 33 1/3% of the Fund's total assets.
6. Purchase any security (other than obligations of the U.S. Government, its
agencies or instrumentalities) if, as a result, 25% or more of the Fund's total
assets (determined at the time of the investment) would be invested in any one
industry other than as follows: Prudential Financial Services Fund will
concentrate its investments (I.E., will invest at least 25% of its total assets
under normal circumstances) in securities of companies in the financial services
group of industries. Prudential Health Sciences Fund will concentrate its
investments (I.E., will invest at least 25% of its total assets under normal
circumstances) in securities of companies in the health sciences group of
industries. Prudential Technology Fund will concentrate its investments (I.E.,
will invest at least 25% of its total assets under normal circumstances) in
securities of companies in the technology group of industries.
Although not fundamental, Prudential Financial Services Fund, Prudential
Health Sciences Fund and Prudential Technology Fund have the following
additional investment restrictions.
The Fund may not:
1. Purchase securities on margin (but a Fund may obtain such short-term
credits as may be necessary for the clearance of transactions); provided that
the deposit or payment by the Fund of initial or maintenance margin in
connection with futures or options is not considered the purchase of a security
on margin.
2. Make short sales of securities or maintain a short position, except that
Prudential Health Sciences Fund and Prudential Technology Fund may make short
sales if, when added together, not more than 25% of the value of a Fund's net
B-18
<PAGE>
assets would be (i) deposited as collateral for the obligation to replace
securities borrowed to effect short sales and (ii) allocated to segregated
accounts in connection with short sales. Short sales "against-the-box" are not
subject to this limitation.
3. Invest for the purpose of exercising control or management.
4. Invest in securities of other investment companies, except: (a) purchases
in the open market involving only customary brokerage commissions and as a
result of which a Fund will not hold more than 3% of the outstanding voting
securities of any one investment company, will not have invested more than 5% of
its total assets in any one investment company and will not have invested more
than 10% of its total assets (determined at the time of investment) in such
securities of one or more investment companies, (b) as part of a merger,
consolidation or other acquisition and (c) purchases of affiliated investment
company shares pursuant to and subject to such limits as the Commission may
impose by rule or order.
5. Purchase more than 10% of all outstanding voting securities of any one
issuer.
PRUDENTIAL UTILITY 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 "Description of
the Funds, Their Investments and Risks."
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.
B-19
<PAGE>
10. Invest in securities of other investment companies, except by purchases
in the open market involving only customary brokerage commissions and as a
result of which not more than 5% of its total assets (taken at current value)
would be invested in such securities, or except as part of a merger,
consolidation or other acquisition.
11. Invest in interests in oil, gas or other mineral exploration or
development programs, although it may invest in the common stocks of companies
which invest in or sponsor such programs.
12. Make loans, except through (i) the purchase of bonds, debentures,
commercial paper, corporate notes and similar evidences of indebtedness of a
type commonly sold privately to financial institutions, (ii) the lending of its
portfolio securities, as described under "Description of the Funds, Their
Investments and Risks--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.)
Since under normal circumstances Prudential Utility Fund will invest at
least 80% of its total assets in securities of utility companies, it will not
concentrate its investments in any industry other than the utility industry.
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of a 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 a Fund's asset
coverage for borrowings falls below 300%, the Fund will take prompt action to
reduce its borrowings, as required by applicable law.
Each Fund's policy with respect to put and call options is not a fundamental
policy and may be changed without shareholder approval.
The Office of Public Utility Regulation of the Commission 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 (1) the aggregate voting securities
of public utility companies held by accounts owned or managed by Prudential,
including Prudential Utility Fund, will be less than 10% of the outstanding
voting securities of any public utility company and (2) 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 Prudential Utility 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.
MANAGEMENT OF THE COMPANY
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) WITH THE COMPANY DURING PAST 5 YEARS
- ------------------------------ ------------------------------ -----------------------------------------------------------------
<S> <C> <C>
Edward D. Beach (74) Director President and Director of BMC Fund, Inc., a closed-end investment
company; formerly, 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 or Trustee of
44 funds within the Prudential Mutual Funds.
Delayne Dedrick Gold (60) Director Marketing and Management Consultant; and Director or Trustee of
44 funds within the Prudential Mutual Funds.
</TABLE>
B-20
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) WITH THE COMPANY DURING PAST 5 YEARS
- ------------------------------ ------------------------------ -----------------------------------------------------------------
<S> <C> <C>
*Robert F. Gunia (52) President and Director Vice President (since September 1997) of The Prudential Insurance
Company of America (Prudential); 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 (since May 1989) of The Asia Pacific
Fund, Inc.; and Director or Trustee of 44 funds within the
Prudential Mutual Funds.
Douglas H. McCorkindale (59) Director Vice Chairman (since March 1984) and President (since September
1997) of Gannett Co. Inc. (publishing and media); Director of
Gannett Co. Inc., Frontier Corporation and Continental Airlines,
Inc. and Director or Trustee of 23 funds within the Prudential
Mutual Funds.
Thomas T. Mooney (57) 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, Monroe County Water Authority, Executive Service
Corps of Rochester, Monroe County Industrial Development
Corporation, Northeast Midwest Institute; President, Director
and Treasurer of First Financial Fund, Inc. and The High Yield
Plus Fund, Inc. and Director or Trustee of 33 other funds within
the Prudential Mutual Funds.
Stephen P. Munn (56) 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) and Director or Trustee of 18 funds within the
Prudential Mutual Funds.
</TABLE>
B-21
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) WITH THE COMPANY DURING PAST 5 YEARS
- ------------------------------ ------------------------------ -----------------------------------------------------------------
<S> <C> <C>
Richard A. Redeker (55) Director Formerly President, Chief Executive Officer and Director (October
1993-September 1996), Prudential Mutual Fund Management, Inc.,
Executive Vice President, 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 (September 1978-September 1993) of
Kemper Financial Services, Inc.; and Director or Trustee of 30
funds within the Prudential Mutual Funds.
Robin B. Smith (59) 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., Spring Industries Inc. and Kmart Corporation and
Director or Trustee of 32 funds within the Prudential Mutual
Funds.
Louis A. Weil, III (58) Director Chairman (since January 1999), President and Chief Executive
Officer (since January 1996) and Director (since September 1991)
of Central Newspapers, Inc.; Chairman of the Board (since
January 1996), Publisher and Chief Executive Officer (August
1991-December 1995) of Phoenix Newspapers, Inc.; 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; and Director or Trustee of 30
funds within the Prudential Mutual Funds.
Clay T. Whitehead (60) Director President, National Exchange Inc. (new business development firm)
(since May 1983) and Director or Trustee of 18 funds within the
Prudential Mutual Funds.
Marguerite E.H. Morrison (43) Secretary Vice President and Associate General Counsel (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.
</TABLE>
B-22
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) WITH THE COMPANY DURING PAST 5 YEARS
- ------------------------------ ------------------------------ -----------------------------------------------------------------
<S> <C> <C>
Grace C. Torres (39) Treasurer and Principal First Vice President (since December 1996) of PIFM; First Vice
Financial and Accounting President (since March 1993) 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 (45) Assistant Treasurer Tax Director (since March 1996) of Prudential Investments;
formerly First Vice President (February 1993-September 1996) of
Prudential Mutual Fund Management, Inc.
</TABLE>
- ------------
* "Interested" Director, as defined in the Investment Company Act, by reason of
affiliation with Prudential, Prudential Securities or PIFM.
** Unless otherwise stated, the address of the Directors and officers is c/o
Prudential Investments Fund Management LLC, Gateway Center Three, 100 Mulberry
Street, Newark, New Jersey 07102-4077.
The Company has Directors who, in addition to overseeing the actions of each
Fund's Manager, Subadviser and Distributor, decide upon matters of general
policy. The Directors also review the actions of the Company's officers, who
conduct and supervise the daily business operations of each Fund.
The Board of Directors has 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 each Management Agreement with the Company, the Manager pays all
compensation of officers and employees of the Company as well as the fees and
expenses of all Directors of the Company who are affiliated persons of the
Manager. The Company 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 Company. Under the terms of such agreement, the Company
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 a Commission exemptive
order, at the daily rate of return of a Fund. Payment of the interest so accrued
is also deferred and accruals become payable at the option of the Director. The
Company's obligation to make payments of deferred Directors' fees, together with
interest thereon, is a general obligation of the Company.
The following table sets forth the aggregate compensation paid by the
Company to the Directors who are not affiliated with the Manager for the fiscal
year ended December 31, 1998 and the aggregate compensation paid to such
Directors for service on the Company's Board and the boards of all other
investment companies managed by PIFM (Fund Complex) for the calendar year ended
December 31, 1998.
B-23
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
FROM COMPANY
AGGREGATE AND FUND
COMPENSATION COMPLEX PAID
NAME AND POSITION FROM COMPANY TO DIRECTORS
- -------------------------------------------------------------------------------- ------------- -----------------
<S> <C> <C>
Edward D. Beach -- Director..................................................... $ 5,000 $ 135,000(44/71)*
Delayne Dedrick Gold -- Director................................................ $ 5,000 $ 135,000(44/71)*
Robert F. Gunia(1) -- Director.................................................. -- --
Douglas H. McCorkindale** -- Director........................................... $ 5,000 $ 70,000(23/40)*
Thomas T. Mooney** -- Director.................................................. $ 5,000 $ 115,000(35/70)*
Stephen P. Munn -- Director..................................................... $ 5,000 $ 45,000(18/24)*
Richard A. Redeker(1) -- Director............................................... -- --
Robin B. Smith** -- Director.................................................... $ 5,000 $ 90,000(32/41)*
Louis A. Weil, III -- Director.................................................. $ 5,000 $ 90,000(30/54)*
Clay T. Whitehead -- Director................................................... $ 5,000 $ 45,000(18/24)*
</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, 1998 includes amounts deferred at the election of
Directors under the funds' deferred compensation plans. Including accrued
interest, total compensation amounted to $71,145, $119,740 and $116,225 for
Messrs. McCorkindale and Mooney and Ms. Smith, respectively.
(1) Interested Directors do not receive compensation from the Company or any
fund in the Fund Complex. Mr. Redeker is no longer an interested Director.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
Directors of the Company are eligible to purchase Class Z shares of each
Fund, which are sold without either an initial sales charge or contingent
deferred sales charge to a limited group of investors.
As of April 23, 1999, the Directors and officers of the Company, as a group,
owned less than 1% of the outstanding common stock of Prudential Utility Fund.
As of such date, no shares of Prudential Financial Services Fund, Prudential
Health Sciences Fund or Prudential Technology Fund were outstanding.
As of April 23, 1999, Prudential Securities was record holder of 68,042,224
Class A shares (or 30.27% of the outstanding Class A shares), 62,107,075 Class B
shares (or 41.41% of the outstanding Class B shares), 1,543,609 Class C shares
(or 75.25% of the outstanding Class C shares) and 665,714 Class Z shares (or
18.48% of the outstanding Class Z shares) of Prudential Utility 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.
B-24
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
(A) MANAGER AND INVESTMENT ADVISERS
The manager of each Fund is Prudential Investments Fund Management LLC (PIFM
or the Manager), Gateway Center Three, 100 Mulberry Street, Newark, New Jersey
07102-4077. PIFM serves as manager to all of the other investment companies
that, together with each Fund, comprise the Prudential Mutual Funds. See "How
the Fund is Managed-- Manager" in Prudential Utility Fund's Prospectus and "How
the Funds are Managed--Manager" in the other Funds' Prospectus. As of March 31,
1999, PIFM managed and/or administered open-end and closed-end management
investment companies with assets of approximately $71.6 billion. According to
the Investment Company Institute, as of December 31, 1998, the Prudential Mutual
Funds were the 18th largest family of mutual funds in the United States.
PIFM is a subsidiary of Prudential Securities and The Prudential Insurance
Company of America (Prudential). Prudential Mutual Fund Services LLC (PMFS or
the Transfer Agent), a wholly-owned subsidiary of 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 each Management Agreement with the Company (each a Management
Agreement and collectively, the Management Agreements), PIFM, subject to the
supervision of the Company's Board of Directors and in conformity with the
stated policies of each Fund, manages both the investment operations of each
Fund and the composition of each 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 each Fund. PIFM also administers
each Fund's corporate affairs and, in connection therewith, furnishes each 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 Funds' custodian, and PMFS, the Funds' transfer and dividend disbursing
agent. The management services of PIFM for each Fund are not exclusive under the
terms of each Management Agreement and PIFM is free to, and does, render
management services to others.
For its services, PIFM receives, pursuant to a Management Agreement, a fee
at an annual rate of .60 of 1% of Prudential Utility 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 average
daily net assets in excess of $6 billion. For its services to Prudential
Financial Services Fund, Prudential Health Sciences Fund and Prudential
Technology Fund, PIFM receives, pursuant to separate Management Agreements, a
fee at an annual rate of .75 of 1% of each such Fund's average daily net assets,
except that PIFM has agreed to limit its fee to .60 of 1% for the fiscal year
ending November 30, 2000. These fees are computed daily and payable monthly.
Prudential Utility Fund's 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 Funds' expenses.
In connection with its management of the corporate affairs of each 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), and the fee payable to Jennison
Associates LLC (Jennison), pursuant to three subadvisory agreements between PIFM
and PI and a Subadvisory Agreement between PIFM and Jennison, respectively (each
a Subadvisory Agreement).
Under the terms of each Management Agreement, a 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
B-25
<PAGE>
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 Commission 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.
Each Management Agreement provides that PIFM will not be liable for any
error of judgment or for any loss suffered by a 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.
Each 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. Each Management
Agreement will continue in effect for a period of more than two years from the
date of execution only so long as such continuance is specifically approved at
least annually in conformity with the Investment Company Act.
For the years ended December 31, 1998, 1997 and 1996, Prudential Utility
Fund paid management fees to PIFM of $19,099,006, $17,370,271 and $16,378,451,
respectively.
PIFM has entered into four Subadvisory Agreements with PI, a wholly-owned
subsidiary of Prudential, and one Subadvisory Agreement with Jennison. Under the
Subadvisory Agreements, PI will furnish investment advisory services in
connection with the management of Prudential Financial Services Fund, Prudential
Technology Fund and Prudential Utility Fund, respectively, and the Enhanced
Index portfolio of Prudential Health Sciences Fund, and Jennison will furnish
investment advisory services to the Concentrated portfolio of Prudential Health
Sciences Fund. In connection therewith, PI and Jennison are obligated to keep
certain books and records of each Fund for which they serve as investment
adviser. PIFM continues to have responsibility for all investment advisory
services pursuant to the Management Agreements and supervises PI's and
Jennison's performance of such services. PI is reimbursed by PIFM for the
reasonable costs and expenses incurred by PI in furnishing investment advisory
services. Under its Subadvisory Agreement with Jennison, PIFM compensates
Jennison for its services at an annual rate of .30% of the average daily net
assets of Prudential Health Sciences Fund's Concentrated portfolio up to and
including $300 million and .25% of the Concentrated portfolio's average daily
net assets over $300 million.
Each 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 applicable Management Agreement with that Fund. Each
Subadvisory Agreement may be terminated by the Company, PIFM or PI or Jennison,
respectively, upon not more than 60 days', nor less than 30 days', written
notice. Each 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.
(B) PRINCIPAL UNDERWRITER, DISTRIBUTOR AND RULE 12B-1 PLANS
Prudential Investment Management Services LLC (PIMS or the Distributor),
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, acts
as the distributor of the shares of each Fund. Prior to June 1, 1998, Prudential
Securities Incorporated (Prudential Securities) was Prudential Utility Fund's
distributor. PIMS and Prudential Securities are subsidiaries of Prudential.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the
Company under Rule 12b-1 under the Investment Company Act and separate
B-26
<PAGE>
distribution agreements for each Fund (each a Distribution Agreement and
collectively, the Distribution Agreements), the Distributor incurs the expenses
of distributing each Fund's Class A, Class B and Class C shares. The Distributor
also incurs the expenses of distributing each Fund's Class Z shares under the
Distribution Agreements, none of which are reimbursed by or paid for by a Fund.
The expenses incurred under the Plans include commissions and account
servicing fees paid to, or on account of, brokers or 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 the Distributor associated with the sale of Fund
shares, including lease, utility, communications and sales promotion expenses.
Under its Plans, a Fund is obligated to pay distribution and/or service fees
to the Distributor as compensation for its distribution and service activities,
not as reimbursement for specific expenses incurred. If the Distributor's
expenses exceed its distribution and service fees, the Fund will not be
obligated to pay any additional expenses. If the Distributor's expenses are less
than such distribution and service fees, it will retain its full fees and
realize a profit.
The distribution and/or service fees may also be used by the Distributor to
compensate on a continuing basis brokers in consideration for the distribution,
marketing, administrative and other services and activities provided by brokers
with respect to the promotion of the sale of a Fund's shares and the maintenance
of related shareholder accounts.
CLASS A PLAN. Under each Fund's Class A Plan, the Fund may pay the
Distributor for its distribution-related activities with respect to Class A
shares at an annual rate of up to .30 of 1% of the average daily net assets of
the Class A shares. The Class A Plan provides that (1) up to .25 of 1% of the
average daily net assets of the Class A shares may be used to pay for personal
service and/or the maintenance of shareholder accounts (service fee) and (2)
total distribution fees (including the service fee of .25 of 1%) may not exceed
.30 of 1%. The Distributor has contractually agreed to limit its distribution-
related fees payable under each Class A Plan to .25 of 1% of the average daily
net assets of the Class A shares for the fiscal year ending November 30, 2000
and voluntarily limited its distribution-related fees for the fiscal year ended
December 31, 1998 to .25 of 1% of the average daily net assets of Prudential
Utility Fund's Class A shares.
For the fiscal year ended December 31, 1998, the Distributor and Prudential
Securities collectively received payments of $6,629,270 under Prudential Utility
Fund's Class A Plan and spent approximately $6,629,270 in distributing the
Fund's Class A shares. This amount was primarily expended for payment of account
servicing fees to financial advisers and other persons who sell Class A shares.
For the fiscal year ended December 31, 1998, the Distributor and Prudential
Securities also collectively received approximately $1,167,500 in initial sales
charges in connection with the sale of Prudential Utility Fund's Class A shares.
CLASS B AND CLASS C PLANS. Under each Fund's Class B and Class C Plans, the
Fund pays the Distributor for its distribution-related activities with respect
to Class B and Class C shares at an annual rate of up to 1% of the average daily
net assets of each of the Class B and Class C shares. The Class B Plan provides
that (1) up to .25 of 1% of the average daily net assets of the Class B shares
may be paid as a service fee and (2) up to .75 of 1% (not including the service
fee) of the average daily net assets of the Class B shares (asset-based sales
charge) may be paid for distribution-related expenses with respect to the Class
B shares. The Class C Plan provides that (1) up to .25 of 1% of the average
daily net assets of the Class C shares may be paid as a service fee and (2) up
to .75 of 1% of the average daily net assets of the Class C shares may be paid
for distribution-related expenses with respect to Class C shares. The service
fee (.25 of 1% of average daily net assets) is used to pay for personal service
and/or the maintenance of shareholder accounts. The Distributor also receives
contingent deferred sales charges from certain redeeming shareholders and, with
respect to Class C shares, an initial sales charge.
CLASS B PLAN. For the fiscal year ended December 31, 1998, the Distributor
and Prudential Securities collectively received $21,200,458 from Prudential
Utility Fund under its Class B Plan and spent approximately $12,553,100 in
distributing the Fund's Class B shares. It is estimated that of the latter
amount, approximately 0% ($0) was spent on printing and mailing of prospectuses
to other than current shareholders; 28.7% ($3,602,000) on compensation to
broker-dealers for commissions to representatives and other expenses, including
an allocation on account of overhead and other branch office
distribution-related expenses, incurred for distribution of Class B shares; and
71.3% ($8,951,100) on the aggregate of (1) payments of commissions and account
servicing fees to financial advisers (34.9% or $4,386,500) and (2) an allocation
of overhead and other branch office distribution-related expenses (36.4% or
$4,564,600). The term
B-27
<PAGE>
"overhead and other branch office distribution-related expenses" represents (a)
the expenses of operating Prudential Securities' and Pruco Securities
Corporation's (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.
The Distributor (and Prudential Securities as its predecessor) also receives
the proceeds of contingent deferred sales charges paid by holders of Class B
shares upon certain redemptions of Class B shares. For the fiscal year ended
December 31, 1998, the Distributor and Prudential Securities collectively
received approximately $1,683,000 in contingent deferred sales charges
attributable to Class B shares of Prudential Utility Fund.
CLASS C PLAN. For the fiscal year ended December 31, 1998, the Distributor
and Prudential Securities collectively received $203,090 under Prudential
Utility Fund's Class C Plan and spent approximately $245,300 in distributing its
Class C shares. It is estimated that of the latter amount, approximately 0% ($0)
was spent on printing and mailing of prospectuses to other than current
shareholders; 9.6% ($23,500) was spent on compensation to broker-dealers for
commissions to representatives and other expenses, including an allocation of
overhead and other branch office distribution-related expenses, incurred for
distribution of Class C shares; and 90.4% ($221,800) was spent on the aggregate
of (1) payments of commissions and account servicing fees to financial advisers
(56.3% or $138,100) and (2) an allocation of overhead and other branch office
distribution-related expenses for payments of related expenses (34.1% or
$83,700).
The Distributor also receives an initial sales charge and the Distributor
(and Prudential Securities as its predecessor) receive the proceeds of
contingent deferred sales charges paid by investors upon certain redemptions of
Class C shares. For the fiscal year ended December 31, 1998, the Distributor and
Prudential Securities collectively received approximately $10,500 in contingent
deferred sales charges attributable to Class C shares. For the fiscal year ended
December 31, 1998, the Distributor also received approximately $14,700 in
initial sales charges in connection with the sale of Class C shares of
Prudential Utility Fund.
Distribution expenses attributable to the sale of Class A, Class B and Class
C shares of a Fund are 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.
The Class A, Class B and Class C Plans continue in effect from year to year,
provided that each such continuance is approved at least annually by a vote of
the Board of Directors, including a majority vote of the Directors who are not
interested persons of the Company and who have no direct or indirect financial
interest in the Class A, Class B and Class C Plan or in any agreement related to
the Plans (Rule 12b-1 Directors), cast in person at a meeting called for the
purpose of voting on such continuance. A Plan may be terminated at any time,
without penalty, by the vote of a majority of the Rule 12b-1 Directors or by the
vote of the holders of a majority of the outstanding shares of the applicable
class of a Fund on not more than 30 days' written notice to any other party to
the Plan. The Plans may not be amended to increase materially the amounts to be
spent for the services described therein without approval by the shareholders of
the applicable class (by both Class A and Class B shareholders, voting
separately, in the case of material amendments to the Class A Plan), and all
material amendments are required to be approved by the Board of Directors in the
manner described above. Each Plan will automatically terminate in the event of
its assignment. A 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 each 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 each Distribution Agreement, the Funds have agreed to indemnify
the Distributor to the extent permitted by applicable law against certain
liabilities under federal securities laws.
B-28
<PAGE>
In addition to distribution and service fees paid by each Fund under its
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments to dealers (including Prudential Securities) and other persons
which distribute shares of the Fund (including Class Z shares). Such payments
may be calculated by reference to the net asset value of shares sold by such
persons or otherwise.
FEE WAIVERS/SUBSIDIES
PIFM may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of a Fund. For the current
fiscal year and the fiscal year ending November 30, 2000, PIFM has contractually
agreed to waive a portion of its fee equal to .15% of average daily net assets
of each of the Prudential Financial Services Fund, the Prudential Health
Sciences Fund and the Prudential Technology Fund. In addition, the Distributor
has agreed to waive a portion of its distribution fees for the Class A shares as
described above. Fee waivers and subsidies will increase a Fund's total return.
NASD MAXIMUM SALES CHARGE RULE
Pursuant to rules of the NASD, the Distributor is required to limit
aggregate initial sales charges, deferred sales charges and asset-based sales
charges to 6.25% of total gross sales of each class of shares. Interest charges
on unreimbursed distribution expenses equal to the prime rate plus one percent
per annum may be added to the 6.25% limitation. Sales from the reinvestment of
dividends and distributions are not included in the calculation of the 6.25%
limitation. The annual asset-based sales charge on Class B shares of a Fund may
not exceed .75 of 1% per class. The 6.25% limitation applies to each class of
the Fund rather than on a per shareholder basis. If aggregate sales charges were
to exceed 6.25% of total gross sales of any class, all sales charges on shares
of that class would be suspended.
(C) OTHER SERVICE PROVIDERS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for each Fund's portfolio securities
and cash and, in that capacity, maintains certain financial and accounting books
and records pursuant to an agreement with the Company. Subcustodians provide
custodial services for each Fund's foreign assets held outside the United
States.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as the transfer and dividend disbursing agent of each Fund.
PMFS is a wholly-owned subsidiary of PIFM. PMFS provides customary transfer
agency services to each Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, the payment of dividends and distributions and
related functions. For these services, PMFS receives an annual fee of $10.00 per
shareholder account, a new account set-up fee of $2.00 for each manually
established shareholder account and a monthly inactive zero balance account fee
of $.20 per shareholder account. PMFS is also reimbursed for its out-of-pocket
expenses, including but not limited to postage, stationery, printing, allocable
communication expenses and other costs.
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036, serves as each Fund's independent accountants and in that capacity audits
each Fund's annual financial statements.
BROKERAGE ALLOCATION AND OTHER PRACTICES
The Manager is responsible for decisions to buy and sell securities, futures
contracts and options on futures contracts for each Fund, the selection of
brokers, dealers and futures commission merchants to effect the transactions and
the negotiation of brokerage commissions, if any. The term "Manager" as used in
this section includes the Subadvisers. Broker-dealers may receive brokerage
commissions on Fund portfolio transactions, including options and the purchase
and sale of underlying securities upon the exercise of options. Orders may be
directed to any broker or futures commission merchant including, to the extent
and in the manner permitted by applicable law, Prudential Securities and its
affiliates. Brokerage commissions on United States securities, options and
futures exchanges or boards of trade are subject to negotiation between the
Manager and the broker or futures commission merchant.
B-29
<PAGE>
In the over-the-counter market, securities are generally traded on a "net"
basis with dealers acting as principal for their own accounts without a stated
commission, although the price of the security usually includes a profit to the
dealer. In underwritten offerings, securities are purchased at a fixed price
which includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. On occasion, certain money
market instruments and U.S. Government agency securities may be purchased
directly from the issuer, in which case no commissions or discounts are paid.
None of the Funds will deal with Prudential Securities or any affiliate in any
transaction in which Prudential Securities or any affilate acts as principal,
except in accordance with rules of the Commission. Thus it will not deal in the
over-the-counter market 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 a
Fund's order.
In placing orders for portfolio securities of a Fund, the Manager's
overriding objective is to obtain the best possible combination of price and
execution. The Manager seeks to effect each transaction at a price and
commission that provides the most favorable total cost or proceeds reasonably
attainable in the circumstances. The factors that the Manager may consider in
selecting a particular broker, dealer or futures commission merchant (firms) are
the Manager's knowledge of negotiated commission rates currently available and
other current transaction costs; the nature of the portfolio transaction; the
size of the transaction; the desired timing of the trade; the activity existing
and expected in the market for the particular transaction; confidentiality; the
execution, clearance and settlement capabilities of the firms; the availability
of research and research related services provided through such firms; the
Manager's knowledge of the financial stability of the firms; the Manager's
knowledge of actual or apparent operational problems of firms; and the amount of
capital, if any, that would be contributed by firms executing the transaction.
Given these factors, a Fund may pay transaction costs in excess of that which
another firm might have charged for effecting the same transaction.
When the Manager selects a firm that executes orders or is a party to
portfolio transactions, relevant factors taken into consideration are whether
that firm has furnished research and research related products and/or services,
such as research reports, research compilations, statistical and economic data,
computer data bases, quotation equipment and services, research oriented
computer-software, hardware and services, reports concerning the performance of
accounts, valuations of securities, investment related periodicals, investment
seminars and other economic services and consultants. Such services are used in
connection with some or all of the Manager's investment activities; some of such
services, obtained in connection with the execution of transactions for one
investment account, may be used in managing other accounts, and not all of these
services may be used in connection with a Fund.
The Manager maintains an internal allocation procedure to identify those
firms who have provided it with research and research related products and/or
services, and the amount that was provided, and to endeavor to direct sufficient
commissions to them to ensure the continued receipt of those services that the
Manager believes provides a benefit to the Funds and its other clients. The
Manager makes a good faith determination that the research and/or service is
reasonable in light of the type of service provided and the price and execution
of the related portfolio transactions.
When the Manager deems the purchase or sale of equities to be in the best
interests of a Fund or its other clients, including Prudential, the Manager may,
but is under no obligation to, aggregate the transactions in order to obtain the
most favorable price or lower brokerage commissions and efficient execution. In
such event, allocation of the transactions, as well as the expenses incurred in
the transaction, will be made by the Manager in the manner it considers to be
most equitable and consistent with its fiduciary obligations to its clients. The
allocation of orders among firms and the commission rates paid are reviewed
periodically by the Company'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 Commission. This limitation, in the opinion of the
Funds, will not significantly affect a Fund's ability to pursue its present
investment objective. However, in the future in other circumstances, a 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, Prudential Securities may act as a
securities broker or futures commission merchant for a Fund. In order for
Prudential Securities (or any affiliate) to effect any portfolio transactions
for a 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 firms in connection with
comparable transactions
B-30
<PAGE>
involving similar securities or futures being purchased or sold on an exchange
or board of trade 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 firm in a
commensurate arm's-length transaction. Furthermore, the Board of Directors of
the Company, including a majority of the non-interested Directors, has adopted
procedures that are reasonably designed to provide that any commissions, fees or
other remuneration paid to Prudential Securities (or any affiliate) are
consistent with the foregoing standard. In accordance with Section 11(a) of the
Securities Exchange Act of 1934, as amended, Prudential Securities may not
retain compensation for effecting transactions on a national securities exchange
for a Fund unless the Fund has expressly authorized the retention of such
compensation. Prudential Securities must furnish to each Fund at least annually
a statement setting forth the total amount of all compensation retained by
Prudential Securities from transactions effected for the Fund during the
applicable period. Brokerage and futures transactions with Prudential Securities
(or any affiliate) are also subject to such fiduciary standards as may be
imposed upon Prudential Securities (or such affiliate) by applicable law.
The table below shows certain information regarding the payment of
commissions by Prudential Utility Fund, including the commissions paid to
Prudential Securities, for the three years ended December 31, 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Total brokerage commissions paid by the
Fund................................... $2,394,964 $3,375,707 $3,574,816
Total brokerage commissions paid to
Prudential Securities.................. $ 24,552 $ 78,360 $ 221,877
Percentage of total brokerage
commissions paid to Prudential
Securities............................. 1.03% 2.32% 6.21%
</TABLE>
Prudential Utility Fund effected approximately 1.65% of the total dollar
amount of its transactions involving the payment of commissions to Prudential
Securities during the year ended December 31, 1998. Of the total brokerage
commissions paid during that period, $1,553,871 (64.88%) 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.
Each Fund is required to disclose its holdings of securities of its regular
brokers and dealers (as defined under Rule 10b-1 of the Investment Company Act)
and their parents at December 31, 1998. As of December 31, 1998, Prudential
Utility Fund held debt securities of the following: Bear Stearns & Co., Inc.,
$23,038,000; Deutsche Bank Securities Inc., $13,962,000; Goldman Sachs & Co.,
$12,996,000; Morgan (J.P.) Securities Inc., $23,038,000 and Warburg Dillon Read,
Inc., $23,038,000.
CAPITAL SHARES, OTHER SECURITIES AND ORGANIZATION
The Company is authorized to issue 2 billion shares of common stock, $.01
par value per share divided into four series (the Funds), of which Prudential
Utility Fund is authorized to issue 800 million shares and each other Fund may
issue 400 million shares. Each Fund is divided into four classes, designated
Class A, Class B, Class C and Class Z shares, consisting of 100 million shares
of Class A common stock (400 million for Prudential Utility Fund), 100 million
shares of Class B common stock (300 million for Prudential Utility Fund), 100
million shares of Class C common stock (50 million for Prudential Utility Fund)
and 100 million shares of Class Z common stock (50 million for Prudential
Utility Fund). With respect to each Fund, each class of shares represents an
interest in the same assets of the Fund and is identical in all respects except
that (1) each class is subject to different sales charges and distribution
and/or service fees (except for Class Z shares, which are not subject to any
sales charges and distribution and/or service fees), which may affect
performance, (2) each class has exclusive voting rights 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, (3) each class has a
different exchange privilege, (4) only Class B shares have a conversion feature
and (5) Class Z shares are offered exclusively for sale to a limited group of
investors. In accordance with the Company's Articles of Incorporation, the
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 voting rights of the
shareholders of a series or class can be modified only by the majority vote of
shareholders of that series or class.
B-31
<PAGE>
Shares of each Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances. Each share of
each class 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 the Class B shares, there are no conversion, preemptive or other
subscription rights. In the event of liquidation, each share of a 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 Company does not intend to hold annual meetings of shareholders unless
otherwise required by law. The Company 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 the vote of 10% of a
Fund's outstanding shares for the purpose of voting on the removal of one or
more Directors or to transact any other business.
Under the Articles of Incorporation, the Directors may authorize the
creation of additional series of shares (the proceeds of which would be invested
in separate, independently managed portfolios with distinct investment
objectives and policies and share purchase, redemption and net asset value
procedures) with such preferences, privileges, limitations and voting and
dividend rights as the Directors may determine. All consideration received by
the Company for shares of any additional series, and all assets in which such
consideration is invested, would belong to that series (subject only to the
rights of creditors of that series) and would be subject to the liabilities
related thereto. Under the Investment Company Act, shareholders of any
additional series of shares would normally have to approve the adoption of any
advisory contract relating to such series and of any changes in the investment
policies related thereto.
The Directors have the power to alter the number and the terms of office of
the Directors and they may at any time lengthen their own terms or make their
terms of unlimited duration and appoint their own successors, provided that
always at least a majority of the Directors have been elected by the
shareholders of the Company. The voting rights of shareholders are not
cumulative, so that holders of more than 50 percent of the shares voting can if
they choose, elect all Directors being selected, while the holders of the
remaining shares would be unable to elect any Director.
PURCHASE, REDEMPTION AND PRICING OF FUND SHARES
Shares of a 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 (1) at the time of purchase (the Class A or
Class C shares) or (2) on a deferred basis (the Class B or Class C shares).
Class Z shares of a Fund are offered to a limited group of investors at NAV
without any sales charges.
PURCHASE BY WIRE. For an initial purchase of shares of a Fund by wire, you
must complete an application and telephone PMFS at (800) 225-1852 (toll-free) to
receive an account number. The following information will be requested: your
name, address, tax identification number, series election, 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 Sector Funds, Inc.,
specifying on the wire the account number assigned by PMFS and your name and
identifying the Fund and 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 a Fund as of that day.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Sector Funds,
Inc., the Fund in which you would like to invest, 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.
B-32
<PAGE>
ISSUANCE OF FUND SHARES FOR SECURITIES
Transactions involving the issuance of a Fund's shares for securities
(rather than cash) will be limited to (1) reorganizations, (2) statutory
mergers, or (3) other acquisitions of portfolio securities that: (a) meet the
investment objective and policies of the Fund, (b) are liquid and not subject to
restrictions on resale, (c) have a value that is readily ascertainable via
listing on or trading in a recognized United States or international exchange or
market, and (d) are approved by the Fund's investment adviser.
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between each Fund and the
Distributor, Class A shares of a Fund are sold at a maximum sales charge of 5%,
Class C* shares are sold with a 1% sales charge, and Class B* and Class Z shares
are sold at NAV. Using Prudential Utility Fund's NAV at December 31, 1998, 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.............. $ 12.06
Maximum sales charge (5% of offering price)......................... .63
---------
Maximum offering price to public.................................... $ 12.69
---------
---------
CLASS B
Net asset value, offering price and redemption price per Class B
share*............................................................. $ 12.05
---------
---------
CLASS C
Net asset value and redemption price per Class C share*............. $ 12.05
Sales charge (1% of offering price)................................. .12
---------
Offering price to public............................................ $ 12.17
---------
---------
CLASS Z
Net asset value, redemption price and offering price per Class Z
share.............................................................. $ 12.07
---------
---------
<FN>
--------------------
* Class B and Class C shares are subject to a contingent deferred sales
charge on certain redemptions.
</TABLE>
Using the NAV of Prudential Financial Services Fund, Prudential Health
Sciences Fund and Prudential Technology Fund at May 18, 1999, the maximum
offering price of each Fund's shares is as follows:
<TABLE>
<S> <C>
CLASS A
Net asset value and redemption price per Class A share.............. $ 10.00
Maximum sales charge (5% of offering price)......................... .53
---------
Maximum offering price to public.................................... $ 10.53
---------
---------
CLASS B
Net asset value, offering price and redemption price per Class B
share*............................................................. $ 10.00
---------
---------
CLASS C
Net asset value and redemption price per Class C share*............. $ 10.00
Sales charge (1% of offering price)................................. .10
---------
Offering price to public............................................ $ 10.10
---------
---------
CLASS Z
Net asset value, redemption price and offering price per Class Z
share.............................................................. $ 10.00
---------
---------
<FN>
--------------------
* Class B and Class C shares are subject to a contingent deferred sales
charge on certain redemptions.
</TABLE>
B-33
<PAGE>
SELECTING A PURCHASE ALTERNATIVE
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to Prudential Utility Fund:
If you intend to hold your investment in a Fund for less than 4 years and do
not qualify for a reduced sales charge on Class A shares, since Class A shares
are subject to an 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 longer than 4 years, but less than
5 years, and do not qualify for a reduced sales charge on Class A shares, you
should consider purchasing Class B or Class C shares over Class A shares. This
is because the initial sales charge plus the cumulative annual
distribution-related fee on Class A shares would exceed those of the Class B and
Class C shares if you redeem your investment during this time period. In
addition, more of your money would be invested initially in the case of Class C
shares, because of the relatively low initial sales charge, and all of your
money would be invested initially in the case of Class B shares, which are sold
at NAV.
If you intend to hold your investment for longer than 5 years, you should
consider purchasing Class A shares over either Class B or Class C shares. This
is because the maximum sales charge plus the cumulative annual distribution-
related fee on Class A shares would be less than those of the Class B and Class
C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B shares, you would not have all of your money invested initially
because the sales charge on Class A shares is deducted at the time of purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B shares and for more than 5 years in the
case of Class C shares for the higher cumulative annual distribution-related fee
on those shares plus, in the case of Class C shares, the 1% initial sales charge
to exceed the initial sales charge plus the cumulative annual
distribution-related fees on Class A shares. This does not take into account the
time value of money, which further reduces the impact of the higher Class B or
Class C distribution-related fee on the investment, fluctuations in NAV, the
effect of the return on the investment over this period of time or redemptions
when the CDSC is applicable.
REDUCTION AND WAIVER OF INITIAL SALES CHARGE--CLASS A SHARES
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, deferred compensation
or annuity plans under Sections 401(a), 403(b) and 457 of the Internal Revenue
Code, "rabbi" trusts and non-qualifed deferred compensation plans that are
sponsored by any employer that has a tax-qualified plan with Prudential
(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, 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 provides
administrative or recordkeeping services, provided that (1) the plan has at
least $1 million in existing assets or 250 eligible employees and (2) 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
PruArray Program (benefit plan recordkeeping service) (hereafter referred to as
a PruArray Plan). All Benefit Plans of a company (or affiliated
B-34
<PAGE>
companies under common control) for which Prudential serves as plan
administrator or recordkeeper are aggregated in meeting the $1 million
threshold, provided that Prudential has been notified in advance of the
entitlement of the waiver of the sales charge based on the aggregated assets.
The term "existing assets" includes stock issued by a plan sponsor, shares of
Prudential Mutual Funds and shares of certain unaffiliated mutual funds that
participate in a PruArray Plan (Participating Funds). "Existing assets" also
include monies invested in The Guaranteed Investment Account (GIA), a group
annuity insurance product issued by Prudential, the Guaranteed Insulated
Separate Account, a separate account offered 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 (1) the purchase is made with the proceeds of a redemption from either
GIA or SVF and (2) 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 a PruArray Plan 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 (1) have retirement plan
assets in the aggregate of at least $1 million or 250 participants in the
aggregate and (2) 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 (1) employees who open an
IRA or Savings Accumulation Plan account with the Transfer Agent and (2) 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 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
the Distributor or the Transfer Agent, by:
- officers of the Prudential Mutual Funds (including the Company),
- employees of the Distributor, Prudential Securities, PIFM and their
subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer Agent,
- employees of subadvisers of the Prudential Mutual Funds provided that
purchases at NAV are permitted by such person's employer,
- Prudential, directors, 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,
- registered representatives and employees of brokers who have entered into
a selected dealer agreement with the Distributor provided that purchases
at NAV are permitted by such person's employer,
- investors who have a business relationship with a financial adviser who
joined Prudential Securities from another investment firm, provided that
(1) the purchase is made within 180 days of the commencement of the
financial adviser's employment at Prudential Securities, or within one
year in the case of Benefit Plans, (2) the purchase is made with proceeds
of a redemption of shares of any open-end non-money market fund sponsored
by the financial adviser's previous employer (other than a fund which
imposes a distribution or service fee of .25 of 1% or less) and (3) the
financial adviser served as the client's broker on the previous purchase,
- investors in Individual Retirement Accounts, provided the purchase is made
in a directed rollover to such Individual Retirement Account or with the
proceeds of a tax-free rollover of assets from a Benefit Plan for which
Prudential provides administrative or recordkeeping services and further
provided that such purchase is made within 60 days of receipt of the
Benefit Plan distribution,
B-35
<PAGE>
- orders placed by broker-dealers, investment advisers or financial planners
who have entered into an agreement with the Distributor, who place trades
for their own accounts or the accounts of their clients and who charge a
management, consulting or other fee for their services (for example,
mutual fund "wrap" or asset allocation programs), and
- orders placed by clients of broker-dealers, investment advisers or
financial planners who place trades for customer accounts if the accounts
are linked to the master account of such broker-dealer, investment adviser
or financial planner and the broker-dealer, investment adviser or
financial planner charges its clients a separate fee for its services (for
example, mutual fund "supermarket programs").
For an investor to obtain any reduction or waiver of the initial sales
charges, at the time of the sale either the Transfer Agent must be notified
directly by the investor or the Distributor must be notified by the broker
facilitating the transaction that the sale qualifies for the reduced or waived
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions.
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other Prudential Mutual Funds, the purchases
may be combined to take advantage of the reduced sales charges applicable to
larger purchases. See "How to Buy, Sell and Exchange Shares of the
Fund--Reducing or Waiving Class A's Initial Sales Charge" in Prudential Utility
Fund's Prospectus or "How to Buy, Sell and Exchange Shares of the
Funds--Reducing or Waiving Class A's Initial Sales Charge" in the other Funds'
Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
- an individual,
- the individual's spouse, their children and their parents,
- the individual's and spouse's Individual Retirement Account (IRA),
- any company controlled by the individual (a person, entity or group that
holds 25% or more of the outstanding voting securities of a company will
be deemed to control the company, and a partnership will be deemed to be
controlled by each of its general partners),
- a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children,
- a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse, and
- one or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that employer).
The Transfer Agent, the Distributor or your broker must be notified at the
time of purchase that the investor is entitled to a reduced sales charge. The
reduced sales charges will be granted subject to confirmation of the investor's
holdings. The Combined Purchase and Cumulative Purchase Privilege does not apply
to individual participants in any retirement or group plans.
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of related
investors, as described above under "Combined Purchase and Cumulative Purchase
Privilege," may aggregate the value of their existing holdings of shares of a
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 your broker will not be aggregated to determine the
reduced sales charge. The value of existing holdings for purposes of determining
the
B-36
<PAGE>
reduced sales charge is calculated using the maximum offering price (NAV plus
maximum sales charge) as of the previous business day. The Distributor or the
Transfer Agent must be notified at the time of purchase that the investor is
entitled to a reduced sales charge. The reduced sales charges will be granted
subject to confirmation of the investor's holdings. Rights of Accumulation are
not available to individual participants in any retirement or group plans.
LETTERS OF INTENT. Reduced sales charges also 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 a 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 a 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,
Prudential or its affiliates, and through your broker will not be aggregated to
determine the reduced sales charge.
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.
The Investment Letter of Intent does not obligate the investor to purchase,
nor a 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 a 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.
CLASS B SHARES
The offering price of Class B shares for investors choosing one of the
deferred sales charge alternatives is the NAV next determined following receipt
of an order in proper form by the Transfer Agent, your broker or the
Distributor. Although there is no sales charge imposed at the time of purchase,
redemptions of Class B shares may be subject to a CDSC. See "Sale of
Shares--Contingent Deferred Sales Charge" below.
The Distributor will pay, from its own resources, sales commissions of up to
4% of the purchase price of Class B shares to brokers, financial advisers and
other persons who sell Class B shares at the time of sale. This facilitates the
B-37
<PAGE>
ability of the Fund to sell the Class B shares without an initial sales charge
being deducted at the time of purchase. The Distributor anticipates that it will
recoup its advancement of sales commissions from the combination of the CDSC and
the distribution fee.
CLASS C SHARES
The offering price of Class C shares is the next determined NAV plus a 1%
sales charge. In connection with the sale of Class C shares, the Distributor
will pay, from its own resources, brokers, financial advisers and other persons
which distribute Class C shares a sales commission of up to 2% of the purchase
price at the time of the sale.
WAIVER OF INITIAL SALES CHARGE--CLASS C SHARES
BENEFIT PLANS. Class C shares may be purchased at NAV, without payment of an
initial sales charge, by Benefit Plans (as defined above). 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, Prudential Securities or its subsidiaries
(Prudential Securities or Subsidiary Prototype Benefit Plans), Class C shares
may be purchased at NAV by participants who are repaying the loans made from
such plans to the participant.
PRUDENTIAL RETIREMENT PLANS. The initial sales charge will be waived with
respect to purchases of Class C shares by qualified and non-qualified retirement
and deferred compensation plans participating in a PruArray Plan and other plans
for which Prudential provides administrative or recordkeeping services.
INVESTMENT OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES. Investors
may purchase Class C shares at NAV, without the initial sales charge, with the
proceeds from the redemption of shares of any unaffiliated registered investment
company which were not held through an account with any Prudential affiliate.
Such purchases must be made within 60 days of the redemption. Investors eligible
for this waiver include: (1) investors purchasing shares through an account at
Prudential Securities; (2) investors purchasing shares through an ADVANTAGE
Account or an Investor Account with Prusec; and (3) investors purchasing shares
through other brokers. This waiver is not available to investors who purchase
shares directly from the Transfer Agent. You must notify the Transfer Agent
directly or through your broker if you are entitled to this waiver and provide
the Transfer Agent with such supporting documents as it may deem appropriate.
CLASS Z SHARES
Class Z shares of each Fund currently are available for purchase by the
following categories of investors:
- 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,
- participants in any fee-based program or trust program sponsored by an
affiliate of the Distributor which includes mutual funds as investment
options and for which the Fund is an available option,
- certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by an affiliate of the Distributor for whom Class Z
shares of the Prudential Mutual Funds are an available investment option,
- Benefit Plans for which an affiliate of the Distributor provides
administrative or recordkeeping services and as of September 20, 1996, (1)
were Class Z shareholders of the Prudential Mutual Funds or (2) executed a
letter of intent to purchase Class Z shares of the Prudential Mutual
Funds,
- current and former Directors/Trustees of the Prudential Mutual Funds
(including the Company), and
- Prudential with an investment of $10 million or more.
After a Benefit Plan qualifies to purchase Class Z shares, all subsequent
purchases will be for Class Z shares.
B-38
<PAGE>
In connection with the sale of Class Z shares, the Manager, the Distributor
or one of their affiliates may pay brokers, financial advisers and other persons
which distribute shares a finder's fee, from its own resources, based on a
percentage of the net asset value of shares sold by such persons.
SALE OF 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 (in accordance with
procedures established by the Transfer Agent in connection with investors'
accounts) by the Transfer Agent, the Distributor or your broker. In certain
cases, however, redemption proceeds will be reduced by the amount of any
applicable CDSC, as described below. See "Contingent Deferred Sales Charge"
below. If you are redeeming your shares through a broker, your broker must
receive your sell order before the Fund whose shares you are redeeming computes
its NAV for that day (that is, 4:15 P.M., New York time) in order to receive
that day's NAV. Your broker will be responsible for furnishing all necessary
documentation to the Distributor and may charge you for its services in
connection with redeeming shares of a Fund.
If you hold shares of a 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, the Distributor or your
broker in order for the redemption request to be processed. If redemption is
requested by a corporation, partnership, trust or fiduciary, written evidence of
authority acceptable to the Transfer Agent must be submitted before such request
will be accepted. All correspondence and documents concerning redemptions should
be sent to the Fund whose shares you are redeeming in care of its Transfer
Agent, Prudential Mutual Fund Services LLC, Attention: Redemption Services, P.O.
Box 15010, New Brunswick, New Jersey 08906-5010, the Distributor or to your
broker.
SIGNATURE GUARANTEE. If the proceeds of the redemption (1) exceed $100,000,
(2) are to be paid to a person other than the record owner, (3) are to be sent
to an address other than the address on the Transfer Agent's records, or (4) are
to be paid to a corporation, partnership, trust or fiduciary, and your shares
are held directly with the Transfer Agent, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices. In the case of redemptions
from a PruArray Plan, if the proceeds of the redemption are invested in another
investment option of the plan in the name of the record holder and at the same
address as reflected in the Transfer Agent's records, a signature guarantee is
not required.
Payment for shares presented for redemption will be made by check within
seven days after receipt by the Transfer Agent, the Distributor or your broker
of the certificate and/or written request, except as indicated below. If you
hold shares through a broker, payment for shares presented for redemption will
be credited to your account at your broker, unless you indicate otherwise. Such
payment may be postponed or the right of redemption suspended at times (1) when
the New York Stock Exchange is closed for other than customary weekends and
holidays, (2) when trading on such Exchange is restricted, (3) when an emergency
exists as a result of which disposal by a Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or (4) during any other period when
the Commission, by order, so permits; provided that applicable rules and
regulations of the Commission shall govern as to whether the conditions
prescribed in (2), (3) or (4) exist.
REDEMPTION IN KIND. If the Directors determine that it would be detrimental
to the best interests of the remaining shareholders of a Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Fund, in lieu of cash, in conformity with applicable rules of the
Commission. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. If your shares are redeemed in kind, you
would incur transaction costs in converting the assets into
B-39
<PAGE>
cash. Each 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 a Fund, the 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 of a Fund 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 Transfer Agent,
either directly or through the Distributor or your broker, at the time the
repurchase privilege is exercised to adjust your account for the CDSC you
previously paid. Thereafter, any redemptions will be subject to the CDSC
applicable at the time of the redemption. See "Contingent Deferred Sales Charge"
below. Exercise of the repurchase privilege will generally not affect 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.
CONTINGENT DEFERRED SALES CHARGE
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 18 months of purchase (one year in the case of shares purchased
before November 2, 1998) will be subject to a 1% CDSC. The CDSC will be deducted
from the redemption proceeds and reduce the amount paid to you. The CDSC will be
imposed on any redemption by you which reduces the current value of your Class B
or Class C shares to an amount which is lower than the amount of all payments by
you for shares during the preceding six years, in the case of Class B shares,
and 18 months, in the case of Class C shares (one year for Class C shares
purchased before November 2, 1998). A CDSC will be applied on the lesser of the
original purchase price or the current value of the shares being redeemed.
Increases in the value of your shares or shares acquired through reinvestment of
dividends or distributions are not subject to a CDSC. The amount of any CDSC
will be paid to and retained by the Distributor.
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.
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>
B-40
<PAGE>
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 Class B shares made during the preceding six years (five years
for Class B shares purchased prior to January 22, 1990) and 18 months for Class
C shares (one year for Class C shares bought before November 2, 1998); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
then of amounts representing the cost of shares bought before July 1, 1985; and
finally, of amounts representing the cost of shares held for the longest period
of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES. The CDSC will be
waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(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 are:
(1)in the case of a tax-deferred retirement plan, a lump-sum or other
distribution after retirement;
(2)in the case of an IRA (including a Roth IRA), a lump-sum or other
distribution after attaining age 59 1/2 or a periodic distribution based
on life expectancy;
(3)in the case of a Section 403(b) custodial account, a lump sum or other
distribution after attaining age 59 1/2; and
(4)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 (that is, 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.
Finally, the CDSC will be waived to the extent that the proceeds from shares
redeemed are invested in Prudential Mutual Funds, The Guaranteed Investment
Account, the Guaranteed Insulated Separate Account or units of The Stable Value
Fund.
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
B-41
<PAGE>
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 Company.
You must notify the Fund's Transfer Agent either directly or through your
broker, at the time of redemption, that you are entitled to waiver of the CDSC
and provide the Transfer Agent with such supporting documentation as it may deem
appropriate. The waiver will be granted subject to confirmation of your
entitlement.
In connection with these waivers, the Transfer Agent will require you to
submit the supporting documentation set forth below.
<TABLE>
<CAPTION>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
<S> <C>
Death A copy of the shareholder's death certificate
or, in the case of a trust, a copy of the
grantor's death certificate, plus a copy of the
trust agreement identifying the grantor.
Disability--An individual will be 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--PRUDENTIAL UTILITY FUND CLASS B SHARES PURCHASED PRIOR TO
AUGUST 1, 1994
The CDSC is reduced on redemptions of Class B shares of Prudential Utility
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
B-42
<PAGE>
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 Distributor or 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.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE--CLASS C SHARES
PRUDENTIAL RETIREMENT PLANS. The CDSC will be waived on redemptions from
qualified and non-qualified retirement and deferred compensation plans that
participate in a PruArray Plan and other plans for which Prudential provides
administrative or recordkeeping services. The CDSC will also be waived on
redemptions from Benefit Plans sponsored by Prudential and its affiliates to the
extent that the redemption proceeds are invested in The Guaranteed Investment
Account, the Guaranteed Insulated Separate Account and units of The Stable Value
Fund.
OTHER BENEFIT PLANS. The CDSC will be waived on redemptions from Benefit
Plans holding shares through a broker not affiliated with Prudential and for
which the broker provides administrative or recordkeeping services.
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 each Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different NAVs per share, the number of Eligible Shares calculated
as described above will generally be either more or less than the number of
shares actually purchased approximately seven years before such conversion date.
For example, if 100 shares were initially purchased at $10 per share (for a
total of $1,000) and a second purchase of 100 shares was subsequently made at
$11 per share (for a total of $1,100), 95.24 shares would convert approximately
seven years from the initial purchase (that is, $1,000 divided by $2,100
(47.62%), multiplied by 200 shares equals 95.24 shares). The Manager reserves
the right to modify the formula for determining the number of Eligible Shares in
the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share 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.
B-43
<PAGE>
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 would not
convert to Class A shares until approximately eight years from purchase. For
purposes of measuring the time period during which shares are held in a 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 (1) that the
dividends and other distributions paid on Class A, Class B, Class C and Class Z
shares will not constitute "preferential dividends" under the Internal Revenue
Code and (2) that the conversion of shares does not constitute a taxable event.
The conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Fund will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which the shares are held for the
investor by the Transfer Agent. If a stock certificate is desired, it must be
requested in writing for each transaction. Certificates are issued only for full
shares and may be redeposited in the Account at any time. There is no charge to
the investor for issuance of a certificate. Each Fund makes available to its
shareholders the following privileges and plans.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund in which they
have invested. An investor may direct the Transfer Agent in writing not less
than five full business days prior to the record date to have subsequent
dividends and/or distributions sent in cash rather than reinvested. In the case
of recently purchased shares for which registration instructions have not been
received on the record date, cash payment will be made directly to the broker.
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
Each 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.
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
whose shares you wish to exchange 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
B-44
<PAGE>
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.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.
In periods of severe market or economic conditions the telephone exchange of
shares may be difficult to implement and you should make exchanges by mail by
writing to Prudential Mutual Fund Services LLC, at the address noted above.
CLASS A. Shareholders of a 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.
CLASS B AND CLASS C. Shareholders of a Fund may exchange their Class B and
Class C shares of the Fund for Class B and Class C shares, respectively, of
certain other Prudential Mutual Funds and shares of Prudential Special Money
Market Fund, Inc., a money market fund. No CDSC will be payable upon such
exchange, but a CDSC may be payable upon the redemption of the Class B and Class
C shares acquired as a result of an exchange. The applicable sales charge will
be that imposed by the fund in which shares were initially purchased and the
purchase date will be deemed to be the first day of the month after the initial
purchase, rather than the date of the exchange.
Class B and Class C shares of a 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 without regard to 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 a 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.
B-45
<PAGE>
Conversely, if shares are exchanged into a money market fund prior to the last
day of the month (and are held in the money market fund on the last day of the
month), the entire month will be excluded from the CDSC holding period. For
purposes of calculating the seven year holding period applicable to the Class B
conversion feature, the time period during which Class B shares were held in a
money market fund will be excluded.
At any time after acquiring shares of other funds participating in the Class
B or Class C exchange privilege, a shareholder may again exchange those shares
(and any reinvested dividends and distributions) for Class B or Class C shares
of a 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.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV and for shareholders
who qualify to purchase Class Z shares. Under this exchange privilege, amounts
representing any Class B and Class C shares which are not subject to a CDSC held
in such a shareholder's account will 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.
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 NAV above the total
amount of payments for the purchase of Class B or Class C shares and (3) amounts
representing Class B or Class C shares held beyond the applicable CDSC period.
Class B and Class C shareholders must notify the Transfer Agent either directly
or through Prudential Securities, Prusec or another broker that they are
eligible for this special exchange privilege.
Participants in any fee-based program for which a 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 a 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 (that is, voluntary or involuntary termination of employment or
retirement) will have their Class Z shares exchanged for Class A shares at NAV.
Additional details about the exchange privilege and prospectuses for each of
the Prudential Mutual Funds are available from the Funds' Transfer Agent, the
Distributor or your broker. The exchange privilege may be modified, terminated
or suspended on sixty days' notice, and any fund, including the Funds, 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-46
<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.................................................... $ 105 $ 158 $ 210 $ 263
20 years.................................................... 170 255 340 424
15 years.................................................... 289 433 578 722
10 years.................................................... 547 820 1,093 1,366
5 years.................................................... 1,361 2,041 2,721 3,402
See "Automatic Investment Plan."
</TABLE>
AUTOMATIC INVESTMENT PLAN (AIP)
Under AIP, an investor may arrange to have a fixed amount automatically
invested in shares of a Fund monthly by authorizing his or her bank account or
brokerage account (including a Prudential Securities 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 AIP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, the Distributor or your broker.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders through the
Transfer Agent, the Distributor or your broker. 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.
In the case of shares held through the Transfer Agent (1) a $10,000 minimum
account value applies, (2) withdrawals may not be for less than $100 and (3) 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.
The Transfer Agent, the Distributor or your broker acts as an agent 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 (1)
the purchase of Class A and Class C shares and (2) the redemption 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-deferred 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 are available from the Distributor or the Transfer Agent.
- ------------
(2)The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not intended
to reflect the performance of an investment in shares of a Fund. The investment
return and principal value of an investment will fluctuate so that an investor's
shares when redeemed may be worth more or less than their original cost.
B-47
<PAGE>
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 a 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, a Fund may be included in a mutual fund program with
other Prudential Mutual Funds. Under such a program, a group of portfolios will
be selected and thereafter marketed collectively. Typically, these programs are
created with an investment theme, such as, 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. A 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 financial
adviser 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
Each 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. A
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 a
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.
Under the Investment Company Act, the Board of Directors is responsible for
determining in good faith the fair value of securities of each 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 of such exchange system on the day of valuation or, if there was
no sale on such
B-48
<PAGE>
day, the mean between the last bid and asked prices on such day, or at the bid
price on such day 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 by the Manager in consultation with the Fund's
Subadviser to be over-the-counter, are valued on the basis of valuations
provided by an independent pricing agent or principal market maker 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 by the Manager in
consultation with the Fund's Subadviser 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 foreign currency forward 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
Company'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 the 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
the Subadviser, including its portfolio manager, traders, and its research and
credit analysts, on the basis of the following factors: cost of the security,
transactions in comparable securities, relationships among various securities
and such other factors as may be determined by the Manager, the Subadviser,
Board of Directors or Valuation Committee to materially affect the value of the
security. 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.
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 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
Prudential Utility Fund has elected to qualify, each other Fund intends to
elect to qualify, and each Fund intends to remain qualified as a regulated
investment company under Subchapter M of the Internal Revenue Code. This
relieves each Fund (but not its shareholders) from paying federal income tax on
income and capital gains which are distributed to shareholders, and permits net
capital gains of each Fund (that is, the excess of net long-term capital gains
over net short-term capital losses) to be treated as long-term capital gains of
the shareholders, regardless of how long shareholders have held their shares in
the Fund. Net capital gains of a Fund which are available for distribution to
shareholders will be computed by taking into account any capital loss
carryforward of the Fund.
Qualification of a Fund as a regulated investment company requires, among
other things, that the Fund (a) derive at least 90% of its annual gross income
(without reduction for losses from the sale or other disposition of securities
or foreign currencies) from dividends, interest, payments with respect to
securities loans and gains from the sale or other
B-49
<PAGE>
disposition of securities or options thereon 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 quarter of
the taxable year, (i) at least 50% of the 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 (that is, the excess of net short-term capital
gains over net long-term capital losses) in each year.
Gains or losses on sales of securities by a Fund will be treated as
long-term capital gains or losses if the securities have been held by it for
more than one year, except in certain cases where the Fund acquires a put or
writes a call thereon or otherwise holds an offsetting position with respect to
the securities. Other gains or losses on the sale of securities will be
short-term capital gains or losses. Gains and losses on the sale, lapse or other
termination of options on securities will be treated as gains and losses from
the sale of securities. If an option written by a Fund on securities lapses or
is terminated through a closing transaction, such as a repurchase by the Fund of
the option from its holder, the Fund will generally realize short-term capital
gain or loss. If securities are sold by a Fund pursuant to the exercise of a
call option written by it, the Fund will include the premium received in the
sale proceeds of the securities delivered in determining the amount of gain or
loss on the sale. Certain of a Fund's transactions may be subject to wash sale,
short sale, constructive sale, anti-conversion and straddle provisions of the
Internal Revenue Code that may, among other things, require the Fund to defer
recognition of losses. In addition, debt securities acquired by a Fund may be
subject to original issue discount and market discount rules which,
respectively, may cause the Fund to accrue income in the advance of the receipt
of cash with respect to interest or cause gains to be treated as ordinary
income.
Special rules apply to most options on stock indices, futures contracts and
options thereon, and foreign currency forward contracts in which the Funds may
invest. These investments will generally constitute Section 1256 contracts and
will be required to be "marked to market" for federal income tax purposes at the
end of the Funds' taxable year; that is, treated as having been sold at market
value. Except with respect to certain foreign currency forward contracts, 60% of
any gain or loss recognized on these deemed sales and on actual dispositions
will be treated as long-term capital gain or loss, and the remainder will be
treated as short-term capital gain or loss.
Gain or loss on the sale, lapse or other termination of options on stock and
on narrowly-based stock indices will be capital gain or loss and will be
long-term or short-term depending on the holding period of the option. In
addition, positions which are part of a "straddle" will be subject to certain
wash sale, short sale and constructive sale provisions of the Internal Revenue
Code. In the case of a straddle, a Fund may be required to defer the recognition
of losses on positions it holds to the extent of any unrecognized gain on
offsetting positions held by the Fund.
Gains or losses attributable to fluctuations in exchange rates which occur
between the time a 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 foreign currency
forward 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 a 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 a Fund's 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.
Shareholders of a Fund 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.
B-50
<PAGE>
Any dividends or distributions paid shortly after a purchase by an investor
may have the effect of reducing the per share net asset value of the investor's
shares by the per share amount of the dividends or distributions. Furthermore,
such dividends or distributions, although in effect a return of capital, are
subject to federal income taxes. Therefore, prior to purchasing shares of a
Fund, the investor should carefully consider the impact of dividends or capital
gains distributions which are expected to be or have been announced.
Any loss realized on a sale, redemption or exchange of shares of a Fund by a
shareholder will be disallowed to the extent the shares are replaced within a
61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
A shareholder who acquires shares of a Fund and sells or otherwise disposes
of such shares within 90 days of acquisition may not be allowed to include
certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of the Fund.
Dividends of net investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a nominee
or fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends, unless the
dividends are effectively connected with a U.S. trade or business conducted by
the foreign shareholder. Net capital gain dividends paid to a foreign
shareholder are generally not subject to withholding tax. A foreign shareholder
will, however, be required to pay U.S. income tax on any dividends and capital
gain distributions that are effectively connected with a U.S. trade or business
of the foreign shareholder.
Dividends received by corporate shareholders are eligible for a
dividends-received deduction of 70% to the extent a Fund's income is derived
from qualified dividends received by the Fund from domestic corporations.
Dividends attributable to foreign corporations, interest income, capital and
currency and gain or loss from Section 1256 contracts (described above) and
income from certain other sources will not constitute qualified dividends.
Individual shareholders are not eligible for the dividends-received deduction.
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."
Each Fund is required to distribute 98% of its ordinary income in the same
calendar year in which it is earned. Each Fund also is required to distribute
during the calendar year 98% of the capital gain net income it earned during the
twelve months ending on October 31 of such calendar year. In addition, each Fund
must distribute during the calendar year all undistributed ordinary income and
undistributed capital gain net income from the prior year or the twelve-month
period ending on October 31 of such prior calendar year, respectively. To the
extent it does not meet these distribution requirements, a Fund will be subject
to a non-deductible 4% excise tax on the undistributed amount. For purposes of
this excise tax, income on which a Fund pays income tax is treated as
distributed.
A Fund may, from time to time, invest in Passive Foreign Investment
Companies (PFICs). A PFIC is a foreign corporation that, in general, meets
either of the following tests: (1) at least 75% of its gross income is passive
or (2) an average of at least 50% of its assets produce, or are held for the
production of, passive income. If a Fund acquires and holds stock in a PFIC
beyond the end of the year of its acquisition, the Fund will be subject to
federal income tax on a portion of any "excess distribution" received on the
stock or on any gain from disposition of the stock (collectively, PFIC income),
plus interest thereon, even if the Fund distributes the PFIC income as a taxable
dividend to its shareholders. The balance of the PFIC income will be included in
the Fund's investment company taxable income and, accordingly, will not be
taxable to it to the extent that income is distributed to its shareholders. A
Fund may make a "mark-to-market" election with respect to any marketable stock
it holds of a PFIC. If the election is in effect, at the end of the Fund's
taxable year, the Fund will recognize the amount of gains, if any, as ordinary
income with respect to PFIC stock. No loss will be recognized on PFIC stock,
except to the extent of gains recognized in prior years. Alternatively, a Fund,
if it meets certain requirements, may elect to treat any PFIC in which it
invests as a "qualified electing fund," in which case, in lieu of the foregoing
tax and
B-51
<PAGE>
interest obligation, the Fund will be required to include in income each year
its PRO RATA share of the qualified electing fund's annual ordinary earnings and
net capital gain, even if they are not distributed to the Fund; those amounts
would be subject to the distribution requirements applicable to the Fund
described above.
Income received by a Fund from sources within foreign countries may be
subject to wihtholding and other taxes imposed by such countries. Income tax
treaties between certain countries and the United States may reduce or eliminate
such taxes. It is impossible to determine in advance the effective rate of
foreign tax to which a Fund will be subject, since the amount of the Fund's
assets to be invested in various countries will vary.
Dividends and distributions may also be subject to state and local taxes.
Foreign shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in a Fund.
PERFORMANCE INFORMATION
AVERAGE ANNUAL TOTAL RETURN. Each 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.
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 of a hypothetical $1000 investment made at
the beginning of the 1, 5 or 10 year periods at the end of the 1, 5
or 10 year periods (or fractional portion thereof).
Average annual total return 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.
Below are the average annual total returns for Prudential Utility Fund's
share classes for the periods ended December 31, 1998.
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
----------- ----------- ----------- -------------------
<S> <C> <C> <C> <C>
Class A.......................................................... 2.58% 13.14% N/A 12.37% (1/22/90)
Class B.......................................................... 2.18 13.34 13.70% 16.45 (8/10/81)
Class C.......................................................... 5.11 N/A N/A 15.74 (8/1/94)
Class Z.......................................................... 8.24 N/A N/A 19.74 (3/1/96)
</TABLE>
AGGREGATE TOTAL RETURN. Each Fund also may advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B,
Class C and Class Z shares.
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 of a hypothetical $1000 investment made
at the beginning of the 1, 5 or 10 year periods at the end of
the 1, 5, or 10 year periods (or fractional portion thereof).
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.
B-52
<PAGE>
Below are the aggregate total returns for the Prudential Utility Fund's
share classes for the periods ended December 31, 1998.
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
----------- ----------- ----------- ----------------------
<S> <C> <C> <C> <C>
Class A........................................................ 7.98% 95.09% N/A 198.66% (1/22/90)
Class B........................................................ 7.18 88.00 260.91% 1313.15 (8/10/81)
Class C........................................................ 7.18 N/A N/A 92.61 (8/1/94)
Class Z........................................................ 8.24 N/A N/A 66.60 (3/1/96)
</TABLE>
YIELD. Each 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 a 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 a Fund as to what an investment in the Fund will actually yield for any given
period.
Prudential Utility Fund's 30-day yields for the period ended December 31,
1998 were 2.02%, 1.39%, 1.39% and 2.37% for Class A, Class B, Class C and Class
Z shares, respectively.
Each Fund may include comparative performance information in advertising or
marketing the Fund's shares. Such performance information may include data from
Lipper Inc., Morningstar Publications, Inc. and other industry publications,
business periodicals and market 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
(12/31/25-12/31/98)
LONG-TERM GOVT.
COMMON STOCKS BONDS INFLATION
<S> <C> <C>
11.2% 5.3% 3.1%
</TABLE>
- ------------
(1)Source: Ibbotson Associates. 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.
B-53
<PAGE>
Portfolio of Investments as of December 31, 1998
PRUDENTIAL UTILITY FUND, INC.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--98.0%
COMMON STOCKS--95.1%
- ------------------------------------------------------------
Commercial Services
89,580 Crescent Operating, Inc.(a) $ 425,505
- ------------------------------------------------------------
Electrical Power--47.8%
546,000 AES Corp.(a) 25,866,750
700,000 American Electric Power Company,
Inc. 32,943,753
1,045,400 BEC Energy 43,057,412
1,100,000 BNDES Participacoes SA BNDESP
(ADR) (Brazil) 22,550,000
2,632,685 CINergy Corp. 90,498,547
981,300 Cleco Corp. 33,670,856
1,179,500 CMP Group Inc. 22,263,062
2,500,000 CMS Energy Corp. 121,093,750
487,000 Commonwealth Energy System 19,723,500
1,160,381 Companhia Energetica de Minas
Gerais-Cemig (ADR) (Brazil) 22,076,249
3,000,000 DPL, Inc. 64,875,000
1,285,111 Duke Energy Co. 82,327,423
903,100 Eastern Utilities Associates 25,512,575
3,435,000 Edison International 95,750,625
83,540 El Paso Electric Co.(a) 730,975
2,497,700 Energy East Corp. 141,120,050
3,325,000 FirstEnergy Corp. 108,270,312
3,000,000 Iberdrola (Spain) 56,117,236
3,598,500 Illinova Corp. 89,962,500
7,523,805 National Power PLC (United
Kingdom) 64,778,613
800,000 Nevada Power Co. 20,800,000
906,800 New Century Energies, Inc. 44,206,500
6,475,600 Niagara Mohawk Power Corp.(a) 104,419,050
1,934,000 NIPSCO Industries, Inc. 58,866,125
8,161,400 Northeast Utilities Co. 130,582,400
3,700,000 PacifiCorp 77,931,250
1,978,600 PECO Energy Co. 82,359,225
2,003,400 Pinnacle West Capital Corp. 84,894,075
2,557,000 Public Service Company of New
Mexico 52,258,688
1,470,800 Rochester Gas & Electric Corp. 45,962,500
1,005,400 RWE AG (Germany) 55,080,902
3,548,366 Sempra Energy 90,039,787
500,000 Sierra Pacific Resources 19,000,000
973,200 Teco Energy Inc. 27,432,075
1,778,367 Texas Utilities Co. 83,027,509
2,511,800 Unicom Corp. $ 96,861,288
1,770,740 Unisource Energy Corp. 23,904,990
62,350 Viag AG (Germany) 36,572,976
---------------
2,297,388,528
- ------------------------------------------------------------
Gas Distribution--7.0%
283,650 Bay State Gas Co. 11,292,816
3,938,104 British Gas PLC (ADR) (United
Kingdom) 128,726,774
237,700 Eastern Enterprises, Inc. 10,399,375
700,600 Energen Corp. 13,661,700
2,211,792 Keyspan Energy 68,565,552
2,383,600 MCN Corp. 45,437,375
810,600 NICOR, Inc. 34,247,850
117,600 Providence Energy Corp. 2,469,600
205,400 Southwest Gas Corp. 5,520,125
303,600 Washington Gas Light Co. 8,235,150
276,650 Yankee Energy System, Inc. 8,057,431
---------------
336,613,748
- ------------------------------------------------------------
Gas Pipelines--24.3%
5,418,550 Coastal Corp. 189,310,591
3,025,000 Columbia Energy Group 174,693,750
807,200 Consolidated Natural Gas Co. 43,588,800
2,698,200 El Paso Energy Corp. 93,931,087
909,900 Enron Corp. 51,921,169
2,061,800 Equitable Resources, Inc. 60,049,925
1,740,300 KN Energy, Inc. 63,303,412
4,360,800 Questar Corp. 84,490,500
375,000 RAO Gazprom (ADR) (Russia) 3,178,125
3,636,300 Sonat, Inc. 98,407,369
5,400,000 TransCanada Pipelines, Ltd.
(Canada) 77,753,462
2,200,000 Westcoast Energy, Inc. (Canada) 43,725,000
1,475,900 Western Gas Resources, Inc. 8,486,425
5,647,022 Williams Companies, Inc. 176,116,499
---------------
1,168,956,114
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-54
<PAGE>
Portfolio of Investments as of December 31, 1998
PRUDENTIAL UTILITY FUND, INC.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Media--0.2%
1,135,971 Ascent Entertainment Group,
Inc.(a) $ 8,377,786
- ------------------------------------------------------------
Oil & Gas Exploration/Production--1.4%
1,000,000 Alberta Energy Co., Ltd. (Canada) 21,500,000
1,635,610 EEX Corp. 11,449,270
359,100 Enron Oil & Gas Co. 6,194,475
168,300 Oryx Energy Co.(a) 2,261,531
1,514,800 Pioneer Natural Resources Co. 13,254,500
1,600,000 Union Pacific Resources Group,
Inc. 14,500,000
---------------
69,159,776
- ------------------------------------------------------------
Real Estate Investment Trust--1.3%
895,800 Crescent Real Estate Equities, Co. 20,603,400
969,900 Equity Residential Property Trust 39,220,331
---------------
59,823,731
- ------------------------------------------------------------
Telecommunications--13.1%
1,402,200 AT&T Corp. 105,515,550
1,739,600 BCE, Inc. (Canada) 65,996,075
500,000 Bell Atlantic Corp. 26,500,000
2,023,000 Comsat Corp. 72,828,000
2,126,100 Frontier Corp. 72,287,400
1,009,055 Hellenic Telecommunication
Organization S.A. (GDR)
(Greece) 13,243,847
1,460,000 Millicom International Cellular
S.A. (Luxembourg)(a) 50,917,500
2,054,050 SBC Communications, Inc. 110,148,431
600,000 Swisscom AG (ADR) 25,537,500
371,400 Telecomunicacoes Brasileiras S.A.
(ADR)(a) (Brazil) 26,996,138
1,211,500 Telefonos de Mexico, S.A. (ADR)
(Mexico) $ 58,984,906
---------------
628,955,347
---------------
Total common stocks
(cost $3,008,754,872) 4,569,700,535
---------------
PREFERRED STOCKS--1.5%
- ------------------------------------------------------------
Gas Pipelines--0.6%
710,000 KN Energy Inc. 26,669,375
- ------------------------------------------------------------
Telecommunications--0.9%
475,000 Nortel Inversora S.A.,
Convertible, 10.00% (Argentina) 24,700,000
398,000 Philippine Long Distance Telephone
Co. Convertible (GDR) (The
Philippines) 18,905,000
---------------
43,605,000
---------------
Total preferred stocks
(cost $70,380,000) 70,274,375
---------------
Principal
Amount
(000)
- ------------------------------------------------------------
BONDS--1.4%
- ------------------------------------------------------------
Electrical Power--0.3%
$ 10,000 Niagara Mohawk Power Corp.,
9.50%, 3/1/21 10,646,100
5,000 Texas Utilities Co.,
9.75%, 5/1/21 5,596,750
---------------
16,242,850
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-55
<PAGE>
PRUDENTIAL UTILITY FUND, INC.
Portfolio of Investments as of December 31, 1998
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Oil & Gas Exploration--0.1%
$ 2,000 Oryx Energy Co.,
9.50%, 11/1/99 $ 2,053,000
- ------------------------------------------------------------
U.S. Government Obligations--1.0%
43,000 United States Treasury Bond
6.375%, 8/15/27 49,422,910
---------------
Total bonds
(cost $59,909,042) 67,718,760
---------------
Total long-term investments
(cost $3,139,043,914) 4,707,693,670
---------------
SHORT-TERM INVESTMENT--2.0%
- ------------------------------------------------------------
Repurchase Agreement
96,072 Joint Repurchase Agreement
Account,
4.69%, 1/4/99
(cost $96,072,000; Note 5) 96,072,000
---------------
- ------------------------------------------------------------
Total Investments--100.0%
(cost $3,235,115,914; Note 4) 4,803,765,670
Other assets in excess of
liabilities 518,959
---------------
Net Assets--100% $ 4,804,284,629
---------------
---------------
</TABLE>
- ---------------
(a) Non-income producing.
ADR--American Depository Receipt.
GDR--Global Depository Receipt.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-56
<PAGE>
Statement of Assets and Liabilities PRUDENTIAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets December 31, 1998
<S> <C>
Investments, at value (cost $3,235,115,914)............................................................. $ 4,803,765,670
Cash.................................................................................................... 66,804
Dividends and interest receivable....................................................................... 14,945,959
Receivable for Fund shares sold......................................................................... 3,375,742
Receivable for investments sold......................................................................... 26,275
Prepaid expenses and other assets....................................................................... 101,816
-----------------
Total assets......................................................................................... 4,822,282,266
-----------------
Liabilities
Payable for Fund shares reacquired...................................................................... 9,565,315
Payable for investments purchased....................................................................... 3,298,340
Distribution fee payable................................................................................ 2,286,948
Management fee payable.................................................................................. 1,596,993
Accrued expenses........................................................................................ 1,004,436
Foreign withholding taxes payable....................................................................... 245,605
-----------------
Total liabilities.................................................................................... 17,997,637
-----------------
Net Assets.............................................................................................. $ 4,804,284,629
-----------------
-----------------
Net assets were comprised of:
Common stock, at par................................................................................. $ 3,986,086
Paid-in capital in excess of par..................................................................... 3,157,423,314
-----------------
3,161,409,400
Undistributed net investment income.................................................................. 3,417,699
Accumulated net realized gain on investments......................................................... 70,782,641
Net unrealized appreciation on investments and foreign currencies.................................... 1,568,674,889
-----------------
Net assets, December 31, 1998........................................................................... $ 4,804,284,629
-----------------
-----------------
Class A:
Net asset value and redemption price per share
($2,740,649,789 / 227,316,481 shares of common stock issued and outstanding)...................... $12.06
Maximum sales charge (5% of offering price).......................................................... .63
-----------------
Maximum offering price to public..................................................................... $12.69
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per share
($1,989,921,641 / 165,179,989 shares of common stock issued and outstanding)...................... $12.05
-----------------
-----------------
Class C:
Net asset value and redemption price per share
($27,071,611 / 2,247,226 shares of common stock issued and outstanding)........................... $12.05
Sales charge (1% of offering price).................................................................. .12
-----------------
Offering price to public............................................................................. $12.17
-----------------
-----------------
Class Z:
Net asset value, offering price and redemption price per share
($46,641,588 / 3,864,952 shares of common stock issued and outstanding)........................... $12.07
-----------------
-----------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-57
<PAGE>
PRUDENTIAL UTILITY FUND, INC.
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income December 31, 1998
<S> <C>
Income
Dividends (net of foreign withholding
taxes of $3,291,897)............... $ 141,305,902
Interest.............................. 13,926,018
-----------------
Total income....................... 155,231,920
-----------------
Expenses
Management fee........................ 19,099,006
Distribution fee--Class A............. 6,629,270
Distribution fee--Class B............. 21,200,458
Distribution fee--Class C............. 203,090
Transfer agent's fees and expenses.... 5,315,000
Custodian's fees and expenses......... 580,000
Reports to shareholders............... 460,000
Registration fees..................... 90,000
Insurance............................. 86,000
Legal fees............................ 45,000
Directors' fees....................... 40,000
Audit fee and expenses................ 32,000
Miscellaneous......................... 26,885
-----------------
Total expenses..................... 53,806,709
-----------------
Net investment income.................... 101,425,211
-----------------
Realized and Unrealized Gain (Loss)
on Investments and Foreign Currency
Transactions
Net realized gain (loss) on:
Investment transactions............... 391,925,240
Foreign currency transactions......... 486,292
-----------------
392,411,532
-----------------
Net change in unrealized appreciation (depreciation) on:
Investments........................... (137,478,889)
Foreign currencies.................... 168,826
-----------------
(137,310,063)
-----------------
Net gain on investments and foreign
currencies............................ 255,101,469
-----------------
Net Increase in Net Assets
Resulting from Operations................ $ 356,526,680
-----------------
-----------------
</TABLE>
PRUDENTIAL UTILITY FUND, INC.
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended December 31,
in Net Assets 1998 1997
<S> <C> <C>
Operations
Net investment income...... $ 101,425,211 $ 111,754,871
Net realized gain on
investments............. 392,411,532 412,749,671
Net change in unrealized
appreciation
(depreciation) of
investments............. (137,310,063) 539,842,910
-------------- -----------------
Net increase in net assets
resulting from
operations.............. 356,526,680 1,064,347,452
-------------- -----------------
Dividends and distributions
(Note 1)
Dividends from net
investment income
Class A................. (68,056,406) (60,645,408)
Class B................. (37,778,258) (40,354,565)
Class C................. (384,643) (200,787)
Class Z................. (1,307,870) (1,038,271)
-------------- -----------------
(107,527,177) (102,239,031)
-------------- -----------------
Distributions from net
realized capital gains
Class A................. (197,560,744) (211,158,424)
Class B................. (153,950,412) (182,907,714)
Class C................. (1,758,047) (998,463)
Class Z................. (3,456,422) (3,229,427)
-------------- -----------------
(356,725,625) (398,294,028)
-------------- -----------------
Fund share transactions (net of
share conversions) (Note 6)
Proceeds from shares
sold.................... 598,995,199 413,071,389
Net asset value of shares
issued in reinvestment
of dividends and
distributions........... 426,138,453 459,144,179
Cost of shares
reacquired.............. (883,989,695) (865,755,515)
-------------- -----------------
Net increase in net assets
from Fund share
transactions............ 141,143,957 6,460,053
-------------- -----------------
Total increase................ 33,417,835 570,274,446
Net Assets
Beginning of year............. 4,770,866,794 4,200,592,348
-------------- -----------------
End of year(a)................ $4,804,284,629 $ 4,770,866,794
-------------- -----------------
-------------- -----------------
(a) Includes undistributed net
investment income of...... $ 3,417,699 $ 9,335,543
-------------- -----------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-58
<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: Securities traded on an exchange and NASDAQ National
Market Securities are valued at the last reported sales price on the exchange or
system on which they are traded or, if no sale was reported on that date, at the
mean between the last reported bid and asked prices or at the bid price on such
day in the absence of an asked price. Securities traded in the over-the-counter
market (including securities listed on exchanges whose primary market is
believed to be over-the-counter) are valued by an independent pricing agent or
principal market maker. 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. Securities for which
reliable market quotations are not readily available are valued by the Valuation
Committee or Board of Directors in consultation with the manager or subadviser.
In connection with transactions in 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 U.S. 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
- --------------------------------------------------------------------------------
B-59
<PAGE>
Notes to Financial Statements PRUDENTIAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
net capital gains in excess of capital loss carryforwards. Dividends and
distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
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 increase undistributed net investment income by $184,122,
decrease accumulated net realized gain on investments by $25,078,864 and
increase paid-in-capital by $24,894,742 for realized foreign currency gains and
for redemptions utilized as distributions for federal income tax purposes during
the year ended December 31, 1998. 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 had a distribution agreement with Prudential Securities Incorporated
('PSI'), which acted as the distributor of the Class A, Class B, Class C and
Class Z shares of the Fund through May 31, 1998. Prudential Investment
Management Services LLC ('PIMS') became the distributor of the Fund effective
June 1, 1998 and is serving the Fund under the same terms and conditions as
under the agreement with PSI. The Fund compensated PSI and PIMS for distributing
and servicing the Fund's Class A, Class B and Class C shares, pursuant to plans
of distribution (the 'Class A, B and C Plans'), regardless of expenses actually
incurred by them. The distribution fees for Class A, B and C shares were accrued
daily and payable monthly. No distribution or service fees are paid to PIMS as
distributor of the Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PIMS 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, 1998.
PSI and PIMS have advised the Fund that they received approximately $1,167,500
and $14,700 in front-end sales charges resulting from sales of Class A and Class
C shares, respectively, during the year ended December 31, 1998. From these
fees, PSI and PIMS paid such sales charges to dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI and PIMS have advised the Fund that for the year ended December 31, 1998,
they received approximately $1,683,000 and $10,500 in contingent deferred sales
charges imposed upon redemptions by certain Class B and Class C shareholders,
respectively.
PSI, PIFM, PIMS 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, 1998. 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, 1998 and has been extended through February 28, 1999 under the same
terms.
- --------------------------------------------------------------------------------
B-60
<PAGE>
Notes to Financial Statements PRUDENTIAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
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, 1998,
the Fund incurred fees of approximately $4,358,300 for the services of PMFS. As
of December 31, 1998, approximately $360,700 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, 1998, PSI earned approximately $24,600 in
brokerage commissions from portfolio transactions executed on behalf of the
Fund.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the year ended December 31, 1998, were $777,205,059 and $860,819,895,
respectively.
The federal income tax basis of the Fund's investments at December 31, 1998 was
$3,239,570,632 and, accordingly, net unrealized appreciation for federal income
tax purposes was $1,564,195,038 (gross unrealized appreciation--$1,721,146,534;
gross unrealized depreciation--$156,951,496).
- ------------------------------------------------------------
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, 1998, the
Fund had a 13.96% undivided interest in the joint account. The undivided
interest for the Fund represents $96,072,000 in principal amount. As of such
date, each repurchase agreement in the joint account and the collateral therefor
were as follows:
Bear Stearns & Co., Inc., 4.75%, in the principal amount of $165,000,000,
repurchase price $165,087,083, due 1/4/99. The value of the collateral including
accrued interest was $169,478,699.
Deutsche Bank Securities Inc., 4.80%, in the principal amount of $100,000,000,
repurchase price $100,053,333, due 1/4/99. The value of the collateral including
accrued interest was $102,001,052.
Goldman Sachs & Co., 4.25%, in the principal amount of $93,088,000, repurchase
price $93,131,958, due 1/4/99. The value of the collateral including accrued
interest was $94,950,662.
Morgan (J.P.) Securities Inc., 4.75%, in the principal amount of $165,000,000,
repurchase price $165,087,083, due 1/4/99. The value of the collateral including
accrued interest was $168,300,696.
Warburg Dillon Read, Inc., 4.75%, in the principal amount of $165,000,000,
repurchase price $165,087,083, due 1/4/99. The value of the collateral including
accrued interest was $168,529,699.
- ------------------------------------------------------------
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 front-end
sales charge of 1% and a contingent deferred sales charge of 1% during the first
18 months. Prior to November 2, 1998, Class C shares were 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, 1998:
Shares sold..................... 19,037,525 $ 237,779,818
Shares issued in reinvestment of
dividends and distributions... 19,621,888 242,393,959
Shares reacquired............... (29,837,592) (374,504,596)
------------ ---------------
Net increase in shares
outstanding before
conversion.................... 8,821,821 105,669,181
Shares issued upon conversion
from Class B.................. 9,025,214 109,890,889
------------ ---------------
Net increase in shares
outstanding................... 17,847,035 $ 215,560,070
------------ ---------------
------------ ---------------
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
------------ ---------------
------------ ---------------
</TABLE>
- --------------------------------------------------------------------------------
B-61
<PAGE>
Notes to Financial Statements PRUDENTIAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Shares Amount
- -------------------------------- ------------ ---------------
<S> <C> <C>
Year ended December 31, 1998:
Shares sold..................... 24,489,734 $ 307,013,338
Shares issued in reinvestment of
dividends and distributions... 14,344,999 177,016,698
Shares reacquired............... (37,529,567) (468,939,125)
------------ ---------------
Net increase in shares
outstanding before
conversion.................... 1,305,166 15,090,911
Shares reacquired upon
conversion into Class A....... (9,136,008) (109,890,889)
------------ ---------------
Net decrease in shares
outstanding................... (7,830,842) $ (94,799,978)
------------ ---------------
------------ ---------------
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)
------------ ---------------
------------ ---------------
<CAPTION>
Class C
- --------------------------------
Year ended December 31, 1998:
Shares sold..................... 1,692,797 $ 21,154,562
Shares issued in reinvestment of
dividends and distributions... 161,515 1,983,980
Shares reacquired............... (701,686) (8,661,428)
------------ ---------------
Net increase in shares
outstanding................... 1,152,626 $ 14,477,114
------------ ---------------
------------ ---------------
<CAPTION>
Class C Shares Amount
- -------------------------------- ------------ ---------------
<S> <C> <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
------------ ---------------
------------ ---------------
<CAPTION>
Class Z
- --------------------------------
Year ended December 31, 1998:
Shares sold..................... 2,632,084 $ 33,047,481
Shares issued in reinvestment of
dividends and distributions... 383,622 4,743,816
Shares reacquired............... (2,547,360) (31,884,546)
------------ ---------------
Net increase in shares
outstanding................... 468,346 $ 5,906,751
------------ ---------------
------------ ---------------
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
------------ ---------------
------------ ---------------
</TABLE>
- --------------------------------------------------------------------------------
B-62
<PAGE>
Financial Highlights PRUDENTIAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
-----------------------------------------------------
Year Ended December 31,
-----------------------------------------------------
1998(b) 1997(b) 1996(b) 1995 1994
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year......... $12.33 $10.88 $ 9.87 $ 8.27 $ 9.72
------- ------- ------- ------ ------
Income from investment operations
Net investment income...................... .30 .34 .32 .30 .31
Net realized and unrealized gains (losses)
on investment and foreign currency
transactions............................ .69 2.53 1.80 1.79 (1.06)
------- ------- ------- ------ ------
Total from investment operations........ .99 2.87 2.12 2.09 (.75)
------- ------- ------- ------ ------
Less distributions
Dividends from net investment income....... (.32) (.32) (.32) (.30) (.32)
Distributions from net realized gains...... (.94) (1.10) (.79) (.19) (.36)
Distributions in excess of net realized
gains................................... -- -- -- -- (.02)
------- ------- ------- ------ ------
Total distributions..................... (1.26) (1.42) (1.11) (.49) (.70)
------- ------- ------- ------ ------
Net asset value, end of year............... $12.06 $12.33 $10.88 $ 9.87 $ 8.27
------- ------- ------- ------ ------
------- ------- ------- ------ ------
TOTAL RETURN(a)............................ 7.98% 27.77% 22.09% 25.74% (7.89)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000,000).......... $2,741 $2,583 $2,023 $1,709 $254
Average net assets (000,000)............... $2,652 $2,201 $1,786 $1,440 $294
Ratios to average net assets:
Expenses, including distribution fees... .78% .82% .86% .88% .88%
Expenses, excluding distribution fees... .53% .57% .61% .63% .63%
Net investment income................... 2.43% 2.95% 3.10% 3.12% 3.37%
For Class A, B, C and Z shares:
Portfolio turnover rate................. 17% 15% 17% 14% 15%
</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-63
<PAGE>
Financial Highlights PRUDENTIAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
-----------------------------------------------------
Year Ended December 31,
-----------------------------------------------------
1998(b) 1997(b) 1996(b) 1995 1994
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year......... $12.32 $10.88 $ 9.87 $ 8.26 $ 9.69
------- ------- ------- ------ ------
Income from investment operations
Net investment income...................... .21 .25 .24 .22 .24
Net realized and unrealized gains (losses)
on investment and foreign currency
transactions............................ .69 2.53 1.80 1.80 (1.05)
------- ------- ------- ------ ------
Total from investment operations........ .90 2.78 2.04 2.02 (.81)
------- ------- ------- ------ ------
Less distributions
Dividends from net investment income....... (.23) (.24) (.24) (.22) (.24)
Distributions from net realized gains...... (.94) (1.10) (.79) (.19) (.36)
Distributions in excess of net realized
gains................................... -- -- -- -- (.02)
------- ------- ------- ------ ------
Total distributions..................... (1.17) (1.34) (1.03) (.41) (.62)
------- ------- ------- ------ ------
Net asset value, end of year............... $12.05 $12.32 $10.88 $ 9.87 $ 8.26
------- ------- ------- ------ ------
------- ------- ------- ------ ------
TOTAL RETURN(a)............................ 7.18% 26.80% 21.16% 24.80% (8.51)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000,000).......... $1,990 $2,132 $2,137 $2,355 $3,526
Average net assets (000,000)............... $2,120 $2,059 $2,184 $2,450 $4,152
Ratios to average net assets:
Expenses, including distribution fees... 1.53% 1.57% 1.61% 1.63% 1.63%
Expenses, excluding distribution fees... .53% .57% .61% .63% .63%
Net investment income................... 1.67% 2.20% 2.35% 2.37% 2.62%
</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-64
<PAGE>
Financial Highlights PRUDENTIAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class Z
------------------------------------------------------------ -------------------
August 1,
1994(d) Year Ended December
Year Ended December 31, Through 31,
------------------------------------------- December 31, -------------------
1998(b) 1997(b) 1996(b) 1995 1994 1998(b) 1997(b)
------- ------- ------- ------- ------------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....... $ 12.32 $ 10.88 $ 9.87 $ 8.26 $ 9.30 $ 12.34 $ 10.88
------- ------- ------- ------- ------ ------- -------
Income from investment operations
Net investment income...................... .21 .25 .24 .22 .11 .34 .36
Net realized and unrealized gains (losses)
on investment and foreign currency
transactions............................ .69 2.53 1.80 1.80 (.69) .69 2.54
------- ------- ------- ------- ------ ------- -------
Total from investment operations........ .90 2.78 2.04 2.02 (.58) 1.03 2.90
------- ------- ------- ------- ------ ------- -------
Less distributions
Dividends from net investment income....... (.23) (.24) (.24) (.22 ) (.13) (.36) (.34)
Distributions from net realized gains...... (.94) (1.10) (.79) (.19 ) (.31) (.94) (1.10)
Distributions in excess of net realized
gains................................... -- -- -- -- (.02) -- --
------- ------- ------- ------- ------ ------- -------
Total distributions..................... (1.17) (1.34) (1.03) (.41 ) (.46) (1.30) (1.44)
------- ------- ------- ------- ------ ------- -------
Net asset value, end of period............. $ 12.05 $ 12.32 $ 10.88 $ 9.87 $ 8.26 $ 12.07 $ 12.34
------- ------- ------- ------- ------ ------- -------
------- ------- ------- ------- ------ ------- -------
TOTAL RETURN(a)............................ 7.18% 26.80% 21.16% 24.80 % (6.27)% 8.24% 28.15%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............ $27,072 $13,490 $ 6,001 $3,455 $ 787 $46,642 $41,904
Average net assets (000)................... $20,309 $ 9,424 $ 4,517 $2,181 $ 433 $46,093 $35,994
Ratios to average net assets:
Expenses, including distribution fees... 1.53% 1.57% 1.61% 1.63 % 1.70%(c) .53% .57%
Expenses, excluding distribution fees... .53% .57% .61% .63 % .70%(c) .53% .57%
Net investment income................... 1.71% 2.20% 2.35% 2.37 % 2.65%(c) 2.68% 3.20%
<CAPTION>
March 1,
1996(e)
Through
December 31,
1996(b)
------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....... $ 10.05
------
Income from investment operations
Net investment income...................... .29
Net realized and unrealized gains (losses)
on investment and foreign currency
transactions............................ 1.67
------
Total from investment operations........ 1.96
------
Less distributions
Dividends from net investment income....... (.34)
Distributions from net realized gains...... (.79)
Distributions in excess of net realized
gains................................... --
------
Total distributions..................... (1.13)
------
Net asset value, end of period............. $ 10.88
------
------
TOTAL RETURN(a)............................ 20.11%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............ $ 34,446
Average net assets (000)................... $ 34,291
Ratios to average net assets:
Expenses, including distribution fees... .61%(c)
Expenses, excluding distribution fees... .61%(c)
Net investment income................... 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-65
<PAGE>
Report of Independent Accountants PRUDENTIAL UTILITY 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, 1998, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the periods presented, in
conformity with 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, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 23, 1999
B-66
<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, that is, 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 12/31/98
<S> <C>
Small Stocks $5,116.95
Common Stocks $2,350.89
Long-Term Bonds $44.18
Treasury Bills $14.94
Inflation $9.16
</TABLE>
Source: Ibbotson Associates. Used with permission. 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 1988
through 1998. The total returns of the indices include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Fund or of any sector in which the
Fund invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees of
a mutual fund. See "Risk/Return Summary--Fees and Expenses" in the prospectus.
The net effect of the deduction of the operating expenses of a mutual fund on
the historical total returns, including the compounded effect over time, could
be substantial.
HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS
<TABLE>
<CAPTION>
'88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT
TREASURY
BONDS(1) 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 18.4% 2.7% 9.6% 10.0%
- ---------------------------------------------------------------------------------------------------------
U. S. GOVERNMENT
MORTGAGE
SECURITIES(2) 4.3% 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8% 5.4% 9.5% 7.0%
- ---------------------------------------------------------------------------------------------------------
U.S. INVESTMENT
GRADE
CORPORATE
BONDS(3) 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3% 3.3% 10.2% 8.6%
- ---------------------------------------------------------------------------------------------------------
U.S.
HIGH YIELD
CORPORATE
BONDS(4) 12.5% 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2% 11.4% 12.8% 1.6%
- ---------------------------------------------------------------------------------------------------------
WORLD
GOVERNMENT
BONDS(5) 2.3% (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1% (4.3%) 5.3%
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
DIFFERENCE BETWEEN
HIGHEST
AND LOWEST RETURN
PERCENT 10.2 18.8 24.9 30.9 11.0 10.3 9.9 5.5 8.7 17.1 8.4
</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. Source:
Lipper Inc.
5 SALOMON SMITH BARNEY 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 December 31, 1985 through December 31, 1998. It does not represent
the performance of any Prudential Mutual Fund.
AVERAGE ANNUAL TOTAL RETURNS OF MAJOR WORLD STOCK MARKETS 12/31/85 - 12/31/98
(IN U.S. DOLLARS)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Belgium 22.7%
Spain 22.5%
The Netherlands 20.8%
Sweden 19.9%
Switzerland 18.3%
USA 18.1%
Hong Kong 17.8%
France 17.4%
UK 16.7%
Germany 13.4%
Austria 8.9%
Japan 6.5%
</TABLE>
Source: Morgan Stanley Capital International (MSCI) and Lipper Inc. as of
12/31/98. 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.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Capital Appreciation and Reinvesting
Dividends $391,707
Capital Appreciation only $133,525
</TABLE>
Source: Lipper Inc. Used with permission. All rights reserved. This chart is
used for illustrative purposes only and is not intended to represent the past,
present or future performance of any Prudential Mutual Fund. Common stock total
return is based on the Standard & Poor's 500 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 : $15.8 TRILLION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
U.S. 51.0%
Europe 34.7%
Pacific
Basin 12.5%
Canada 1.8%
</TABLE>
Source: Morgan Stanley Capital International, December 31, 1998. 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 (1926-1998)
[CHART]
Source: Ibbotson Associates. Used with permission. All rights reserved. This
chart illustrates the historical yield of the long-term U.S. Treasury Bond from
1926-1998. 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>
MARKETING INFORMATION
PRUDENTIAL FINANCIAL SERVICES FUND:
DEMOGRAPHICS AND DEREGULATION CAN DRIVE THIS SECTOR
Studies show that 80% of a stock's performance is attributable to its
sector.(1) Companies in the financial services sector are among the fastest
growing companies today. Why such a dramatic expansion in one sector? The answer
is demographics: The postwar generation grew up: they're now in their peak
earning years, and some 78 million baby boomers have finally begun to save and
invest for retirement.(2) They've turned to the stock market to plan for the
future, and their investments are driving growth in this sector.
Since 1990, the number of mutual funds has doubled, and the money invested
in mutual funds has risen more than 400%, to over $5.7 trillion.(3) Total assets
invested in employee retirement plans has jumped from $300 billion in 1990 to an
estimated $1.5 trillion by the year 2000.(4) These trends are likely to continue
as the number of people retiring is projected to increase each year through
2012.(5) In addition, consolidation and deregulation in banking and insurance
should make those financial institutions stronger and better equipped to meet
consumer needs.
(1)Source: THE ROARING 2000'S, by Harry Dent.
(2)Source: John Waggoner, USA TODAY, 10/30/98, p. 3.
(3)Source: Investment Company Institute (ICI), 1/99.
(4)Source: Access Research, Inc., 1997 MARKETPLACE UPDATE.
(5)Source: THE ROARING 2000'S, by Harry Dent.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
ASSET AND MARKET GROWTH IS PROPELLED BY INVESTORS
<S> <C> <C>
1980's
Market Value of shares on the
NYSE $1.2 Bil.
$10.5
401(k) Plan Assets Bil.
$20.0
IRA Plans Value Bil.
$13.5
Mutual Fund Assets Bil.
1990's
Market Value of shares on the $17.3
NYSE Bil.
$81.0
401(k) Plan Assets Bil.
$1.3
IRA Plans Value Tril.
$5.7
Mutual Fund Assets Tril.
Source: Access Research Inc., 1997 MARKETPLACE
UPDATE
Source: Investment Company Institute (ICI), 1/99.
Source: New York Stock Exchange (NYSE).
</TABLE>
II-5
<PAGE>
PRUDENTIAL HEALTH SCIENCES FUND:
TARGET A RAPIDLY EXPANDING FIELD
Population trends and technology are fueling the growth of the healthcare
sector. Baby boomers are reaching a stage in life when they're becoming prime
healthcare consumers. Plus, the segment of the population that spends the most
for healthcare (those age 65 and over) has increased every year since 1940--a
trend that will escalate for at least the next 30 years.(1) These trends mean
that healthcare will assume an ever-greater portion of the nation's gross
domestic product.(2)
(1,2)Source: Statistical Abstract of the United States, 1998.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
AS AMERICA AGES, HEALTH CARE SPENDING GOES UP
<S> <C>
1970 7.1
75 8.0
80 8.9
85 10.2
90 12.1
95 13.6
97* 14.8
2000* 16.0
Source: The Wall Street Journal Almanac, 1998.
*Projections are provided for these years.
</TABLE>
II-6
<PAGE>
PRUDENTIAL TECHNOLOGY FUND:
TODAY'S INNOVATIONS BECOME TOMORROW'S NECESSITIES
In 1990, few people had even HEARD of the Internet. Cellular telephones,
then known as "portable" phones, were usually found in limousines. Home personal
computers were once also a rarity, now nearly 50% of all households own one.(1)
This broad acceptance of consumer technology is likely to continue, benefiting
innovative companies.
We've become an information-based society, and information technology is an
important component of the technology sector. This $698 billion industry now
represents over 8% of U.S. Gross Domestic Product (the value of all goods and
services within our borders).(2) This rapidly expanding industry is just one of
this Fund's exciting targets.
(1)Source: The Wall Street Journal Almanac, 1998.
(2)Source: U.S. Department of Commerce, Economics and Statistics Administration,
1999.
[CHART]
* * * *
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SCI & TECH 23.62
<S> <C>
Health/Biotech 22.79
Fin'l Svcs 21.84
Telecomm 21.08
Utility 14.40
Real Estate 8.79
Natural Resources 6.46
Gold -3.83
Avg. U.S. Stock
Fund 15.54
S&P 500 Index 18.60
</TABLE>
SOURCE: LIPPER AVERAGES -- All averages above (unless otherwise indicated) are
derived from Lipper Inc. The respective averages are based on the average return
of all funds in their category as of 12/31/98 and does not take into account
applicable sales charges. They provide a broad indicator of average annualized
total returns in their respective sector. AVERAGE U.S. STOCK FUND -- A composite
of all U.S. domestic categories, as represented by Lipper, excluding sector,
international, balanced and flexible portfolios. S&P 500 INDEX -- a weighted,
unmanaged index comprising 500 stocks, which provides a broad indicator of stock
price movements. It is not possible to directly invest in an index.
II-7
<PAGE>
GENERAL INFORMATION
There has been increasing attention by the investment community, the media
and investors on the technology, healthcare and financial services sectors. As
Barron's has noted, "... U.S. companies, especially those in technology, health
care and financial services, have above-average margins, competitive advantages
and are gaining market share around the world."* "Among the sectors with the
strongest trends in expected earnings gains are health care, technology and
financial services."**
According to Morningstar, 16 out of the top 25 performing funds in 1998 were
concentrated in less than 50 stocks.*** As of December 31, 1998, Prudential
Investments manages $5 billion in technology stocks and $7 billion in financial
services stocks. Jennison manages over $4 billion in healthcare stocks.
With respect to our index team, the group includes 17 portfolio managers and
analysts and 7 Phds. The group has over 200+ years of combined investment
related experience and manages approximately $15 billion in assets under
management.
- ------------
* Source: Barron's 1/18/99
** Source: Forbes Magazine 12/14/98
*** Morningstar Principia, 12/31/98 release
THESE SECTORS HAVE GROWN TO HALF OF THE U.S. EQUITY MARKET
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
1988
<S> <C>
Finance 8%
Healthcare 8%
Technology 10%
Other Sectors 74%
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
1998
<S> <C>
Finance 17%
Healthcare 13%
Technology 20%
Other Sectors 50%
</TABLE>
Source: Factset, US equity market represented by the S&P 500 Index. The S&P 500
Index is an unmanaged capitalization weighted index of 500 stocks designed to
measure performance of the domestic economy through changes in the market value
of 500 stocks representing all major industries.
STRONG PERFORMANCE IN THESE SECTORS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
HYPOTHETICAL GROWTH OF
$10,000
<S> <C> <C> <C> <C>
Over 10 Years Ending
12/31/98
Lipper Financial Lipper
Services Health/Bio Lipper Science & S&P 500 Index
Funds Average Funds Average Tech Funds Average
1989 $12,400 $14,634 $12,069 $13,163
1990 $10,464 $17,739 $12,147 $12,754
1991 $16,490 $30,558 $18,177 $16,631
1992 $22,127 $27,415 $20,716 $17,896
1993 $25,699 $28,586 $25,531 $19,696
1994 $24,907 $29,900 $29,185 $19,955
1995 $35,747 $44,220 $43,311 $27,445
1996 $46,844 $50,180 $52,416 $33,742
1997 $69,646 $61,355 $57,440 $44,995
1998 $73,019 $79,087 $86,972 $57,928
</TABLE>
Source: Lipper Analytical Services. Lipper averages reflect average performance
for all mutual funds tracked by Lipper Analytical Services in their respective
objectives. Lipper Science & Technology Funds include all funds tracked by
Lipper that invest at least 65% of their equity portfolio in science and
technology stock. Lipper Health/Biotechnology Funds include all funds that
invest at least 65% of their equity portfolio in healthcare, medicine and
biotechnology stocks. Lipper Financial Services Funds include all funds that
invest at least 65% of their portfolios in equity securities of companies
engaged in providing financial services, including but not limited to banks,
finance companies, insurance companies and securities brokerage firms. The S&P
500 Index is an unmanaged capitalization weighted index of 500 stocks designed
to measure performance of the broad domestic economy through changes in the
market value of 500 stocks representing all major industries. Investments cannot
be made in an index. This chart is for illustrative purposes only and is not
indicative of the past, present or future performance of any specific
investment.
II-8
<PAGE>
THE BENEFIT OF INDEXING
<TABLE>
<CAPTION>
FOR THE PERIOD ENDING 3/31/99 1 YEAR 3 YEAR 5 YEAR 10 YEAR
<S> <C> <C> <C> <C>
</TABLE>
...........................
<TABLE>
<S> <C> <C> <C> <C>
S&P 500 Technology Index 60.41 48.53 41.13 24.19
Lipper Technology Fund Average 52.33 27.27 26.12 24.59
TECHNOLOGY INDEX ADVANTAGE 8.08 21.26 15.01 -0.40
</TABLE>
...........................
<TABLE>
<S> <C> <C> <C> <C>
S&P 500 Healthcare Index 28.82 36.00 39.19 23.91
Lipper Health/Biotechnology Fund Average 4.43 13.13 19.59 20.98
HEALTHCARE INDEX ADVANTAGE 24.39 22.87 19.60 2.93
</TABLE>
...........................
<TABLE>
<S> <C> <C> <C> <C>
S&P 500 Finance Index 6.56 30.24 30.08 20.92
Lipper Financial Services Fund Average -0.53 23.61 23.98 20.73
FINANCE INDEX ADVANTAGE 7.09 6.63 6.10 0.19
</TABLE>
...........................
Sources: Standard & Poors, Lipper Inc. Lipper averages reflect average
performance for all mutual funds tracked by Lipper Analytical Services in their
respective objectives. Lipper Science & Technology Funds include all funds
tracked by Lipper that invest at least 65% of their equity portfolio in science
and technology stocks. Lipper Health/Biotechnology Funds include all funds that
invest at least 65% of their equity portfolio in healthcare, medicine and
biotechnology stocks. Lipper Financial Service Funds include all funds that
invest at least 65% of their portfolios in equity securities of companies
engaged in providing financial services, including but not limited to banks,
finance companies, insurance companies and securities brokerage firms. Each S&P
Sector Index (Technology, Healthcare & Finance) is a capitalization weighted
index of all stocks designed to measure the performance of their respective
portion of the S&P 500 Index. Past performance is not indicative of future
results. Investors cannot invest directly in an index. This chart is for
illustrative purposes only and is not indicative of the past, present or future
performance of any specific investment.
STEPS TO A SUCCESSFUL INVESTMENT STRATEGY
PRUDENTIAL'S QUANTITATIVE INVESTMENT PROCESS
[CHART]
Source: Prudential Investments
II-9
<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 "How the Fund is Managed--Manager" in
Prudential Utility Fund's Prospectus and "How the Funds are Managed--Manager" in
the other Funds' 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, 1997 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,
1997. 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 79,000 persons
worldwide, and maintains a sales force of approximately 10,100 agents and 6,500
domestic and international 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 40 million people worldwide.
Long one of the largest issuers of life insurance, Prudential has 25 million
life insurance policies in force today with a face value of almost $1 trillion.
Prudential has the largest capital base ($12.1 billion) of any life insurance
company in the United States. Prudential provides auto insurance for more than
1.5 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, 1997, Prudential had more than $370 billion in assets under
management. Prudential Investments, a business group of Prudential (of which
Prudential Mutual Funds is a key part), manages over $211 billion in assets of
institutions and individuals. In INSTITUTIONAL INVESTOR, July 1998, Prudential
was ranked eighth in terms of total assets under management as of December 31,
1997.
REAL ESTATE. The Prudential Real Estate Affiliates is one of the leading
real estate residential and commercial brokerage networks in North America and
has more than 37,000 real estate brokers and agents with over 1,400 offices
across the United States.(2)
HEALTHCARE. Over two decades ago, Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, approximately 4.9
million Americans receive healthcare from a Prudential managed care
membership.(3)
FINANCIAL SERVICES. The Prudential Savings Bank FSB, a wholly-owned
subsidiary of Prudential, has nearly $1 billion in assets and serves nearly 1.5
million customers across 50 states.
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
As of November 30, 1998, Prudential Investments Fund Management was the
eighteenth 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.
- ------------
(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 one of the subadvisers
to Prudential Diversified Funds, Prudential 20/20 Focus Fund, Prudential Sector
Funds, Inc. and The Prudential Investment Portfolios, 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, 1997.
(3)On December 10, 1998, Prudential announced its intention to sell
Prudential Health Care to Aetna Inc. for $1 billion.
III-1
<PAGE>
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.
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. Prudential Equity Fund is managed with a "value" investment
style by PIC. In 1995, Prudential Securities introduced Prudential Jennison
Growth 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.(4) 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. Investment grade bond analysts monitor the financial
viability of 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 billions in U.S. and foreign government
securities a year. PIC seeks information from government policy makers.
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.
INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 6,000 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
Annuities. As of December 31, 1998, assets held by Prudential Securities for its
clients approximated $268 billion. During 1998, over 31,000 new customer
accounts were opened each month at Prudential Securities.(5)
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 and financial planning
areas.
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.
- ------------
(4)As of December 31, 1997. The number of bonds and the size of the Fund are
subject to change.
(5)As of December 31, 1998.
III-2
