<PAGE>
FUND TYPE:
- -------------------------------------
Stock
INVESTMENT OBJECTIVE:
- -------------------------------------
Total return through capital appreciation and
current income
PRUDENTIAL
UTILITY
[LOGO]
FUND
- ---------------------------------------------------------------
PROSPECTUS: FEBRUARY 1, 2000
As with all mutual funds, the Securities
and Exchange Commission has not
approved or disapproved the Fund's
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
1 Principal Risks
3 Evaluating Performance
4 Fees and Expenses
6 HOW THE FUND INVESTS
6 Investment Objective and Policies
7 Other Investments and Strategies
10 Investment Risks
13 HOW THE FUND IS MANAGED
13 Board of Directors
13 Manager
13 Investment Adviser
13 Portfolio Manager
14 Distributor
15 FUND DISTRIBUTIONS AND TAX ISSUES
15 Distributions
16 Tax Issues
17 If You Sell or Exchange Your Shares
19 HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUND
19 How to Buy Shares
27 How to Sell Your Shares
31 How to Exchange Your Shares
33 FINANCIAL HIGHLIGHTS
33 Class A Shares
34 Class B Shares
35 Class C Shares
36 Class Z Shares
38 THE PRUDENTIAL MUTUAL FUND FAMILY
FOR MORE INFORMATION (Back Cover)
</TABLE>
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PRUDENTIAL UTILITY FUND [ICON] (800) 225-1852
<PAGE>
RISK/RETURN SUMMARY
- -------------------------------------
This section highlights key information about the PRUDENTIAL UTILITY FUND, which
we refer to as "the Fund." The Fund is a series of Prudential Sector Funds, Inc.
("the Company"). Additional information follows this summary.
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is TOTAL RETURN THROUGH A COMBINATION OF CAPITAL
APPRECIATION AND CURRENT INCOME. This means we seek investments whose price will
increase as well as pay the Fund dividends and other income. We normally invest
at least 80% of the Fund's total assets in equity-related and investment-grade
debt securities of utility companies. These include electric, gas, gas pipeline,
telephone, telecommunications, water, cable, airport, seaport and toll road
companies. Some of these securities are issued by foreign companies.
We also may use derivatives for hedging or to improve the Fund's returns.
While we make every effort to achieve our objective, we can't guarantee success.
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. The Fund is
subject to risks of the utility industry, such as inflation and regulatory
changes, because it concentrates its investments in utility securities. Since
the Fund is a sector fund, its holdings can vary significantly from broad market
indexes and performance of the Fund can deviate from the performance of the
indexes. Since we invest in stocks, there is the risk that the price of 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 or
a sector of them could go down. Stock markets are volatile.
Our investments in investment-grade debt securities involve market risk and
credit risk. Market risk, which may affect an industry, a sector or the entire
market, is the possibility that the market value of an investment may move up or
down and that its movement may occur quickly or
- -------------------------------------------------------------------
WE'RE VALUE INVESTORS
In deciding which stocks to buy, we use what is known as a value investment
style. That is, we invest in stocks that we believe are undervalued, given the
company's earnings, assets, cash flow and dividends. We consider selling a
security if it has increased to the point where we no longer consider it to be
undervalued.
- -------------------------------------------------------------------
- --------------------------------------------------------------------------------
1
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
unpredictably. Credit risk is the possibility that an issuer of a debt
obligation fails to pay the Fund interest or principal.
Since the Fund invests in foreign securities, there are additional risks.
Foreign markets are often more volatile than U.S. markets and are generally not
subject to regulatory requirements comparable to U.S. issuers. Changes in
currency exchange rates can reduce or increase market performance.
Some of our investment strategies--such as using derivatives--involve
above-average risks. The Fund may use risk management techniques to try to
preserve assets or enhance return. Derivatives may not fully offset the
underlying positions and this could result in losses to the Fund that would not
otherwise have occurred.
Like any mutual fund, an investment in the Fund could lose value, and you
could lose money. For more detailed information about the risks associated with
the Fund, see "How the Fund Invests--Investment Risks."
An investment in the Fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
- -------------------------------------------------------------------
2 PRUDENTIAL UTILITY FUND [ICON] (800) 225-1852
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
EVALUATING PERFORMANCE
A number of factors--including risk--can affect how the Fund performs. The
following bar chart shows the Fund's performance for each full calendar year of
operation for the last 10 years. The bar chart and table below demonstrate the
risk of investing in the Fund by showing how returns can change from year to
year and by showing how the Fund's average annual returns compare with those of
a stock index and a group of similar mutual funds. Past performance does not
mean that the Fund will achieve similar results in the future.
ANNUAL RETURNS* (CLASS B SHARES)
- -------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1990 -6.48%
1991 19.01%
1992 9.02%
1993 15.34%
1994 -8.51%
1995 24.80%
1996 21.16%
1997 26.80%
1998 7.18%
1999 3.17%
BEST QUARTER:12.96% (2nd quarter of 1999)
WORST QUARTER: -7.56% (3rd quarter of 1990)
</TABLE>
* THESE ANNUAL RETURNS DO NOT INCLUDE SALES CHARGES. IF THE SALES CHARGES WERE
INCLUDED, THE ANNUAL RETURNS WOULD BE LOWER THAN THOSE SHOWN.
AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-99)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1 YR 5 YRS 10 YRS SINCE INCEPTION
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares -1.28% 15.90% N/A 11.49% (since 1-22-90)
Class B shares -1.83% 16.11% 10.50% 15.69% (since 8-10-81)
Class C shares 1.14% 15.98% N/A 13.31% (since 8-1-94)
Class Z shares 4.19% N/A N/A 15.48% (since 3-1-96)
S&P 500(2) 21.03% 18.39% 12.50% N/A(2)
Lipper Average(3) 15.82% 28.54% 18.19% N/A(3)
</TABLE>
1 THE FUND'S RETURNS ARE AFTER DEDUCTION OF SALES CHARGES AND EXPENSES.
2 THE STANDARD & POOR'S 500 COMPOSITE STOCK PRICE INDEX (S&P 500)--AN
UNMANAGED INDEX OF 500 STOCKS OF LARGE U.S. COMPANIES--GIVES A BROAD LOOK
AT HOW STOCK PRICES HAVE PERFORMED. THESE RETURNS DO NOT INCLUDE THE EFFECT
OF ANY SALES CHARGES OR OPERATING EXPENSES OF A MUTUAL FUND. THE RETURNS
WOULD BE LOWER IF THEY INCLUDED THE EFFECT OF SALES CHARGES AND OPERATING
EXPENSES. S&P 500 RETURNS SINCE THE INCEPTION OF EACH CLASS ARE 19.18% FOR
CLASS A, 18.25% FOR CLASS B, 25.97% FOR CLASS C AND 26.60% FOR CLASS Z
SHARES. SOURCE: LIPPER INC.
3 THE LIPPER AVERAGE IS BASED ON THE AVERAGE RETURN OF ALL MUTUAL FUNDS IN
THE LIPPER UTILITY FUNDS CATEGORY AND DOES NOT INCLUDE THE EFFECT OF ANY
SALES CHARGES. AGAIN, THESE RETURNS WOULD BE LOWER IF THEY INCLUDED THE
EFFECT OF SALES CHARGES. LIPPER RETURNS SINCE THE INCEPTION OF EACH CLASS
ARE 13.26% FOR CLASS A, 13.47% FOR CLASS B, 16.59% FOR CLASS C AND 17.42%
FOR CLASS Z SHARES. SOURCE: LIPPER INC.
- --------------------------------------------------------------------------------
3
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
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 the Fund--Class A, B, C and Z. 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 Fund."
SHAREHOLDER FEES(1) (PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS Z
- ------------------------------------------------------------------------------
<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 .40% .40% .40% .40%
+ Distribution and service
(12b-1) fees .30%(4) 1.00% 1.00% None
+ Other expenses .13% .13% .13% .13%
= Total annual Fund
operating expenses .83% 1.53% 1.53% .53%
- Fee waiver or expense
reimbursement .05% None None None
= NET ANNUAL FUND OPERATING
EXPENSES .78%(4) 1.53% 1.53% .53%
</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 FISCAL YEAR ENDING 11-30-00, THE DISTRIBUTOR OF THE FUND 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.
- -------------------------------------------------------------------
4 PRUDENTIAL UTILITY FUND [ICON] (800) 225-1852
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
EXAMPLE
This example will help you compare the fees and expenses of the Fund's different
share classes and compare the cost of investing in the Fund with the cost of
investing in other mutual funds.
The example assumes that you invest $10,000 in the 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 the
Fund's operating expenses remain the same, except for the Distributor's
reduction of distribution and service (12b-1) fees for Class A shares during the
first year. Although your actual costs may be higher or lower, based on these
assumptions, your costs would be:
<TABLE>
<CAPTION>
- ----------------------------------------------------------
1 YR 3 YRS 5 YRS 10 YRS
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $576 $747 $993 $1,470
Class B shares $656 $783 $934 $1,546
Class C shares $354 $579 $926 $1,905
Class Z shares $ 54 $170 $296 $ 665
</TABLE>
You would pay the following expenses on the same investment if you did not sell
your shares:
<TABLE>
<CAPTION>
- ----------------------------------------------------------
1 YR 3 YRS 5 YRS 10 YRS
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $576 $747 $933 $1,470
Class B shares $156 $483 $834 $1,546
Class C shares $254 $579 $926 $1,905
Class Z shares $ 54 $170 $296 $ 665
</TABLE>
- --------------------------------------------------------------------------------
5
<PAGE>
HOW THE FUND INVESTS
- -------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is TOTAL RETURN THROUGH A COMBINATION OF CAPITAL
APPRECIATION AND CURRENT INCOME. This means we seek investments whose price will
increase as well as pay the Fund dividends and other income. While we make every
effort to achieve our objective, we can't guarantee success.
In pursuing our objective, we normally invest at least 80% of the Fund's
total assets in EQUITY-RELATED AND DEBT SECURITIES OF UTILITY COMPANIES. This
means that we concentrate on companies in the electric, gas, gas pipeline,
telephone, telecommunication, water, cable, airport, seaport and toll road
industries. We buy equity-related securities including common stocks;
nonconvertible preferred stocks; American Depositary Receipts (ADRs); warrants
and rights that can be exercised to obtain stocks; investments in various types
of business ventures, including partnerships and joint ventures; real estate
investment trusts (REITs); and similar securities.
We may also buy convertible securities. These are securities--like bonds,
corporate notes and preferred stocks--that we can convert into the company's
common stock or some other equity security. Generally, we consider selling a
security when it has increased in value to the point where it is no longer
undervalued in the opinion of the investment adviser.
Our investment in debt securities, including corporate and government bonds,
is limited to those rated investment-grade by a major rating service (such as
BBB/Baa or above by Standard & Poor's Ratings Group or Moody's Investors
Service, Inc., respectively) or, if not rated, to those we believe are of
comparable quality. Obligations rated Baa have speculative characteristics. If
the rating of a bond is downgraded after the Fund purchases it (or if the bond
is no longer rated), we will not have to sell the bond, but we will take this
into consideration in deciding whether the Fund should continue to hold the
bond.
- -------------------------------------------------------------------
OUR TOTAL RETURN STRATEGY
We look for stocks of companies that we believe will produce both above-average
earnings and dividend growth over the long term. We also try to diversify within
the utility industry to take advantage of opportunities that have arisen from
deregulation.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
6 PRUDENTIAL UTILITY FUND [ICON] (800) 225-1852
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
FOREIGN SECURITIES
We may invest up to 30% of the Fund's total assets in FOREIGN SECURITIES,
including money market instruments and other investment-grade fixed-income
securities, stocks and other equity-related securities. For purposes of the 30%
limit, we do not consider ADRs and other similar receipts or shares to be
foreign securities.
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 Fund. To obtain a copy, see the back cover page
of this prospectus.
The Fund's investment objective is a fundamental policy that cannot be
changed without shareholder approval. The Board can change investment policies
that are not fundamental.
OTHER INVESTMENTS AND STRATEGIES
In addition to the principal strategies, we also may use the following
investment strategies to try to increase the Fund's returns or protect its
assets if market conditions warrant.
NON-UTILITY INVESTMENTS
Under normal circumstances, the Fund may invest up to 20% of its total assets in
securities of issuers not in the utility industry. These include stocks and
fixed-income obligations, like corporate and government bonds and money market
instruments.
TEMPORARY DEFENSIVE INVESTMENTS
In response to adverse market, economic or political conditions, we may
temporarily invest up to 100% of the Fund's assets in money market instruments
or short-term municipal obligations. 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
The 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
- --------------------------------------------------------------------------------
7
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
stated time. This creates a fixed return for the Fund and is, in effect, a loan
by the Fund.
DERIVATIVE STRATEGIES
We may use various derivative strategies to try to improve the Fund's returns or
protect its assets. 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, the 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 or to increase return consistent with the
Fund's overall investment objective. The 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 may use may not match the
Fund's underlying holdings.
OPTIONS. The Fund may purchase and sell put and call options on equity
securities and stock indexes and foreign 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 or currencies in exchange for a premium. The
Fund will sell only covered options.
FUTURES CONTRACTS AND RELATED OPTIONS
FOREIGN CURRENCY FORWARD CONTRACTS. The Fund may purchase and sell stock and
bond index futures contracts and related options on stock and bond index
futures. The 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. The Fund also may 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.
- -------------------------------------------------------------------
8 PRUDENTIAL UTILITY FUND [ICON] (800) 225-1852
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
For more information about these strategies, see the SAI, "Description of
the Funds, Their Investments and Risks--Risk Management and Return Enhancement
Strategies."
ADDITIONAL STRATEGIES
The Fund also follows certain policies when it BORROWS MONEY (the Fund can
borrow up to 20% of the value of its total assets); LENDS ITS SECURITIES to
others (the Fund can lend up to 33% of the value of its total assets, including
collateral received in the transaction); and HOLDS ILLIQUID SECURITIES (the Fund
may hold up to 15% of its net assets in illiquid securities, including
securities with legal or contractual restrictions on resale, those without a
readily available market and repurchase agreements with maturities longer than
seven days). The Fund is subject to certain investment restrictions that are
fundamental policies, and cannot be changed without shareholder approval. For
more information about these restrictions, see the SAI.
- --------------------------------------------------------------------------------
9
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
INVESTMENT RISKS
As noted, all investments involve risk, and investing in the Fund is no
exception. Since the Fund's holdings can vary significantly from broad market
indexes, performance of the Fund can deviate from performance of the indexes.
This chart outlines the key risks and potential rewards of the Fund's principal
investments and certain other non-principal investments the Fund 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 UTILITY COMPANIES -- Inflationary and other -- Potential for both
AT LEAST 80% cost increases in current income and
fuel and capital appreciation
other operating ex- -- Utilities are
penses regulated by the
-- Utilities' earnings government so
growth may be slower earnings are more
than broad market in- consistent and less
dexes. Deregulation susceptible to
of utility companies economic cycles
may affect their -- Most utility stocks
earnings have higher yields
-- Changes in regulatory than other sectors of
environment the market
-- See equity-related -- Deregulation of
securities and fixed- utility companies
income obligations may present
opportunities for
significant capital
appreciation
- --------------------------------------------------------------------------------------------------
EQUITY-RELATED SECURITIES -- Individual stocks -- Historically, stocks
UP TO 100% could lose value have outperformed
-- The equity markets other investments
could go down, over the long term
resulting in a -- Generally, economic
decline in value of growth means higher
the Fund's invest- corporate profits,
ments which lead to an
-- Companies that pay increase in stock
dividends may not do prices, known as
so if they don't have capital appreciation
profits or adequate -- May be a source of
cash flow dividend income
-- Changes in economic or
political conditions,
both domestic and
international, may
result in a decline
in value of the
Fund's investments
- --------------------------------------------------------------------------------------------------
</TABLE>
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10 PRUDENTIAL UTILITY FUND [ICON] (800) 225-1852
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
INVESTMENT TYPE (CONT'D)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
- --------------------------------------------------------------------------------------------------
FIXED-INCOME OBLIGATIONS -- The Fund's holdings, -- Bonds have generally
UP TO 100% share price, yield outperformed money
and total return may market instruments
fluctuate in response over the long term,
to bond market with less risk than
movements stocks
-- Credit risk--the risk -- Most bonds will rise
that the default of in value when
an issuer would leave interest rates fall
the Fund with unpaid -- Regular interest
interest or income
principal. The lower -- Investment-grade bonds
a bond's quality, the have a lower risk of
higher its potential default than junk
volatility bonds
-- Market risk--the risk -- High-quality debt
that the market value obligations
of an investment may generally are more
move up or down, secure than stocks
sometimes rapidly or since companies must
unpredictably. Market pay their debts
risk may affect an before they pay
industry, a sector or dividends
the market as a whole -- Principal and interest
-- Interest rate on government
risk--the risk that securities may be
the value of most guaranteed by the
bonds will fall when issuing government
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
- --------------------------------------------------------------------------------------------------
FOREIGN SECURITIES -- Foreign markets, econ- -- Investors can
UP TO 30% omies and political participate in the
systems may not be as growth of foreign
stable as in the U.S. markets and companies
-- Currency risk--chang- operating in those
ing values of foreign markets
currencies can cause -- Changing values of
losses foreign currencies
-- May be less liquid -- Opportunities for
than U.S. stocks and diversification
bonds
-- Differences in foreign
laws, accounting
standards, public
information, custody
and settlement prac-
tices provide less
reliable information
on foreign
investments and
involve more risk
- --------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
11
<PAGE>
HOW THE FUND INVESTS
- ------------------------------------------------
INVESTMENT TYPE (CONT'D)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
- --------------------------------------------------------------------------------------------------
DERIVATIVES -- Derivatives such as -- The Fund could make
PERCENTAGE VARIES futures, options and money and protect
foreign currency for- against losses if the
ward contracts that investment analysis
are used for hedging proves correct
purposes may not -- Derivatives that
fully offset the involve leverage
underlying positions could generate
and this could result substantial gains at
in losses to the Fund low cost
that would not have -- One way to manage the
otherwise occurred Fund's risk/return
-- Derivatives used for balance is by locking
risk management may in the value of an
not have the intended investment ahead of
effects and may time
result in losses or
missed oppor-
tunities
-- The other party to a
derivatives contract
could default
-- Derivatives that
involve leverage
could magnify losses
-- Certain types of
derivatives involve
costs to the Fund
that can reduce
returns
- --------------------------------------------------------------------------------------------------
ILLIQUID SECURITIES -- May be difficult to -- May offer a more at-
UP TO 15% OF NET ASSETS value precisely tractive yield or
-- May be difficult to potential for growth
sell at the time or than more widely
price desired traded securities
- --------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS -- Limits potential for -- May preserve the
UP TO 100% ON A TEMPORARY BASIS capital appreciation Fund's assets
-- See credit risk and
market risk
- --------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------
12 PRUDENTIAL UTILITY FUND [ICON] (800) 225-1852
<PAGE>
HOW THE FUND IS MANAGED
- -------------------------------------
BOARD OF DIRECTORS
The Company's Board of Directors oversees the actions of the Manager, Investment
Adviser and Distributor and decides on general policies. The Board also oversees
the Company's officers, who conduct and supervise the daily business operations
of the Fund.
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM)
GATEWAY CENTER THREE, 100 MULBERRY STREET
NEWARK, NJ 07102-4077
Under a management agreement with the Fund, PIFM manages the Fund's
investment operations and administers its business affairs. PIFM also is
responsible for supervising the Fund's investment adviser. For the fiscal period
ended November 30, 1999, the Fund paid PIFM annualized management fees of .40%
of the Fund's average net assets.
PIFM and its predecessors have served as manager or administrator to
investment companies since 1987. As of December 31, 1999, PIFM served as the
manager to all 43 of the Prudential mutual funds, and as manager or
administrator to 22 closed-end investment companies, with aggregate assets of
approximately $75.6 billion.
INVESTMENT ADVISER
The Prudential Investment Corporation, called Prudential Investments, is the
Fund's investment adviser and has served as an investment adviser to investment
companies since 1984. Its address is Prudential Plaza, 751 Broad Street, Newark,
NJ 07102. PIFM has responsibility for all investment advisory services,
supervises Prudential Investments and pays Prudential Investments for its
services.
PORTFOLIO MANAGER
DAVID A. KIEFER, CFA, a Managing Director of Prudential Investments, has managed
the Fund since 1994. He joined Prudential in 1986. Mr. Kiefer holds a B.S. from
Princeton University and an M.B.A. from Harvard Business School. He was awarded
the Chartered Financial Analyst (CFA) designation.
As a value investor who concentrates on total return, Mr. Kiefer looks for
companies that will produce a combination of current income and capital
appreciation.
- --------------------------------------------------------------------------------
13
<PAGE>
HOW THE FUND IS MANAGED
- ------------------------------------------------
DISTRIBUTOR
Prudential Investment Management Services LLC (PIMS) distributes the Fund's
shares under a Distribution Agreement with the Fund. The Fund has Distribution
and Service Plans under Rule 12b-1 of the Investment Company Act. Under the
Plans and the Distribution Agreement, PIMS pays the expenses of distributing the
Fund's Class A, B, C and Z shares and provides certain shareholder support
services. The 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.
- -------------------------------------------------------------------
14 PRUDENTIAL UTILITY FUND [ICON] (800) 225-1852
<PAGE>
FUND DISTRIBUTIONS
AND TAX ISSUES
- -------------------------------------
Investors who buy shares of the Fund should be aware of some important tax
issues. For example, the 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. Dividends
and distributions from the Fund also may be subject to state and local income
tax in the state where you live.
Also, if you sell shares of the 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
The Fund distributes DIVIDENDS of any net investment income to shareholders
typically every quarter. For example, if the 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 the Fund will be taxed as ordinary income whether
or not they are reinvested in the Fund.
The Fund also distributes realized net CAPITAL GAINS to shareholders--
typically once a year. Capital gains are generated when the Fund sells its
assets for a profit. For example, if the 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
the 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, Fund 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
- --------------------------------------------------------------------------------
15
<PAGE>
FUND DISTRIBUTIONS
AND TAX ISSUES
- ------------------------------------------------
the Transfer Agent. Otherwise, if your account is with a broker, you will
receive a credit to your account. Either way, the distributions 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 the 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 the Fund with your taxpayer
identification number and certifications as to your tax status, and you fail to
do this, or if you are otherwise subject to backup withholding, we will withhold
and pay to the U.S. Treasury 31% of your distributions and sale proceeds.
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 the 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
- -------------------------------------------------------------------
16 PRUDENTIAL UTILITY FUND [ICON] (800) 225-1852
<PAGE>
FUND DISTRIBUTIONS
AND TAX ISSUES
- ------------------------------------------------
soon thereafter received a distribution. That is not so because when dividends
are paid out, the value of each share of the Fund decreases by the amount of the
dividend to reflect the payout although this may not be apparent because the
value of each share of the Fund also will be affected by the market changes, if
any. 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 OR TAX-DEFERRED 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 the 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 the Fund for a loss, you may have a capital loss,
which you may use to offset certain capital gains you have.
+$ CAPITAL GAIN
(taxes owed)
RECEIPTS
OR
FROM SALE
-$ CAPITAL LOSS
(offset against gain)
If you sell shares and realize a loss, you will not be permitted to use the
loss to the extent you replace the shares (including pursuant to the
reinvestment of a dividend) within a 61-day period (beginning 30 days before the
sale of the shares). If you acquire shares of the Fund and sell your shares
within 90 days, you may not be allowed to include certain charges incurred in
acquiring the shares for purposes of calculating gain or loss realized upon the
sale of the shares.
- --------------------------------------------------------------------------------
17
<PAGE>
FUND DISTRIBUTIONS
AND TAX ISSUES
- ------------------------------------------------
Exchanging your shares of the 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 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.
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.
- -------------------------------------------------------------------
18 PRUDENTIAL UTILITY FUND [ICON] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND EXCHANGE
SHARES OF THE FUND
- -------------------------------------
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 the 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 the Fund, see the back
cover page of this prospectus. We have the right to reject any purchase order
(including an exchange into the Fund) or suspend or modify the 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 the 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 each year are higher
than 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
- --------------------------------------------------------------------------------
19
<PAGE>
HOW TO BUY, SELL AND EXCHANGE
SHARES OF THE FUND
- ------------------------------------------------
-- 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.
SHARE CLASS COMPARISON. Use this chart to help you compare the Fund's 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>
- -------------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS Z
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Minimum purchase amount(1) $1,000 $1,000 $2,500 None
Minimum amount for $100 $100 $100 None
subsequent purchases(1)
Maximum initial sales charge 5% of the None 1% of the None
public public
offering price offering price
Contingent Deferred Sales None If sold during: 1% on sales None
Charge (CDSC)(2) Year 1 5% made within
Year 2 4% 18 months of
Year 3 3% purchase(2)
Year 4 2%
Years 5/6 1%
Year 7 0%
Annual distribution and .30 of 1% 1% 1% None
service (12b-1) fees shown (.25 of 1%
as a percentage of average currently)
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)." CLASS C SHARES
BOUGHT BEFORE NOVEMBER 2, 1998 HAVE A 1% CDSC IF SOLD WITHIN ONE YEAR.
3 THESE DISTRIBUTION FEES ARE PAID FROM THE 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. FOR THE FISCAL YEAR
ENDING 11-30-00, THE DISTRIBUTOR OF THE FUND 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.
- -------------------------------------------------------------------
20 PRUDENTIAL UTILITY FUND [ICON] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND EXCHANGE
SHARES OF THE FUND
- ------------------------------------------------
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 how the sales
charge decreases as the amount of your investment increases.
<TABLE>
- ---------------------------------------------------------------------------------------------------
SALES CHARGE AS % SALES CHARGE AS % DEALER
OF OFFERING PRICE OF AMOUNT INVESTED REALLOWANCE
AMOUNT OF PURCHASE
- ---------------------------------------------------------------------------------------------------
<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 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
current 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 the Fund and other Prudential mutual funds within 13 months.
The Distributor may reallow Class A's sales charge to dealers.
- --------------------------------------------------------------------------------
21
<PAGE>
HOW TO BUY, SELL AND EXCHANGE
SHARES OF THE FUND
- ------------------------------------------------
BENEFIT PLANS. Certain group retirement and savings plans may purchase Class A
shares without the initial sales charge if they meet the required minimum for
amount of assets, average account balance or number of eligible employees. For
more information about these requirements, call Prudential at (800) 353-2847.
MUTUAL FUND PROGRAMS. The initial sales charge will be waived for investors in
certain programs sponsored by broker-dealers, 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, or
-- Mutual fund "supermarket" programs where the sponsor links its
clients' accounts to a master account in the sponsor's name and the
sponsor charges a fee for its services.
Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in
the Fund in connection with different pricing options for their programs.
Investors should consider carefully any separate transaction and other fees
charged by these programs in connection with investing in each available share
class before selecting a share class.
OTHER TYPES OF INVESTORS. Other investors pay no sales charge, including certain
officers, employees or agents of Prudential and its affiliates, Prudential
mutual funds, the subadvisers of the Prudential mutual funds and registered
representatives and employees 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. Certain group retirement plans may purchase Class C shares
without the initial sales charge. For more information, call Prudential at
(800) 353-2847.
- -------------------------------------------------------------------
22 PRUDENTIAL UTILITY FUND [ICON] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND EXCHANGE
SHARES OF THE FUND
- ------------------------------------------------
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 (Prudential Securities) 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, or
-- 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
BENEFIT PLANS. Certain group retirement plans may purchase Class Z shares if
they meet the required minimum for amount of assets, average account balance or
number of eligible employees. For more information about these requirements,
call Prudential at (800) 353-2847.
MUTUAL FUND PROGRAMS. Class Z shares also can be purchased by participants in
any fee-based program or trust program sponsored by Prudential or an affiliate
that includes the Fund as an available option. Class Z shares also can be
purchased by investors in certain programs sponsored by broker-dealers,
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, links its clients' accounts to a master account
in the sponsor's name and charges its clients a management,
consulting or other fee for its services, or
-- Mutual fund "supermarket" programs, where the sponsor links its
clients' accounts to a master account in the sponsor's name and the
sponsor charges a fee for its services.
- --------------------------------------------------------------------------------
23
<PAGE>
HOW TO BUY, SELL AND EXCHANGE
SHARES OF THE FUND
- ------------------------------------------------
Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in
the Fund in connection with different pricing options for their programs.
Investors should consider carefully any separate transaction and other fees
charged by these programs in connection with investing in each available share
class before selecting a share class.
OTHER TYPES OF INVESTORS. Class Z shares can be purchased by any of the
following:
-- 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,
-- Current and former Directors/Trustees of the Prudential mutual funds
(including the Company), and
-- Prudential, with an investment of $10 million or more.
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 A or 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
will also 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."
- -------------------------------------------------------------------
24 PRUDENTIAL UTILITY FUND [ICON] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND EXCHANGE
SHARES OF THE FUND
- ------------------------------------------------
STEP 3: UNDERSTANDING THE PRICE YOU'LL PAY
The price you pay for each share of the 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 our shares once each business day at 4:15 p.m. New
York Time on days that the New York Stock Exchange (NYSE) is open for trading.
The NYSE is closed on national holidays and Good Friday. Because the Fund
invests in foreign securities, its NAV can change on days when you cannot buy or
sell shares. 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 the Fund's portfolio do not materially affect the NAV.
WHAT PRICE WILL YOU PAY FOR SHARES OF THE 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.
- -------------------------------------------------------------------
- --------------------------------------------------------------------------------
25
<PAGE>
HOW TO BUY, SELL AND EXCHANGE
SHARES OF THE FUND
- ------------------------------------------------
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, the 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 the 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 the 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
- -------------------------------------------------------------------
26 PRUDENTIAL UTILITY FUND [ICON] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND EXCHANGE
SHARES OF THE FUND
- ------------------------------------------------
through Prudential. Eligible investors who apply for PruTector coverage after
the initial 6-month enrollment period will need to provide satisfactory evidence
of insurability. This insurance is subject to other restrictions and is not
available in all states.
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available that will
provide you with monthly, quarterly, semi-annual or annual redemption 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 Fund. 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 the Fund for cash (in the form of a check) at any
time, subject to certain restrictions.
When you sell shares of the 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, your broker 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
- --------------------------------------------------------------------------------
27
<PAGE>
HOW TO BUY, SELL AND EXCHANGE
SHARES OF THE FUND
- ------------------------------------------------
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.
RESTRICTIONS ON SALES
There are certain times when you may not be able to sell shares of the 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 signature guaranteed by an "eligible
guarantor institution." An "eligible guarantor institution" includes any bank,
broker-dealer or credit union. 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 (one year for Class C shares purchased before November 2,
1998), 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
(five years for Class B shares purchased before January 22, 1990) and
18 months for Class C shares (one year for Class C shares purchased
before November 2, 1998)
-- Amounts representing the cost of shares held beyond the CDSC period
(six years for Class B shares and 18 months for Class C shares)
-- Amounts representing the cost of shares acquired prior to July 1,
1985.
- -------------------------------------------------------------------
28 PRUDENTIAL UTILITY FUND [ICON] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND EXCHANGE
SHARES OF THE FUND
- ------------------------------------------------
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.
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 (one year for Class C shares purchased
before November 2, 1998). 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, 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."
- --------------------------------------------------------------------------------
29
<PAGE>
HOW TO BUY, SELL AND EXCHANGE
SHARES OF THE FUND
- ------------------------------------------------
WAIVER OF THE CDSC--CLASS C SHARES
BENEFIT PLANS. The CDSC will be waived for purchases by certain group retirement
plans for which Prudential or brokers not affiliated with Prudential provide
administrative or recordkeeping services. The CDSC also will be waived for
certain redemptions by benefit plans sponsored by Prudential and its affiliates.
For more information, call Prudential at (800) 353-2847.
REDEMPTION IN KIND
If the sales of Fund 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 the Fund's 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
qualified 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."
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
- -------------------------------------------------------------------
30 PRUDENTIAL UTILITY FUND [ICON] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND EXCHANGE
SHARES OF THE FUND
- ------------------------------------------------
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 the 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.
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.
- --------------------------------------------------------------------------------
31
<PAGE>
HOW TO BUY, SELL AND EXCHANGE
SHARES OF THE FUND
- ------------------------------------------------
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 the
Fund's investments. When market timing occurs, the 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 the Fund will have to invest.
When, in our opinion, such activity would have a disruptive effect on portfolio
management, the Fund reserves the right to refuse purchase orders and exchanges
into the Fund by any person, group or commonly controlled account. The decision
may be based upon dollar amount, volume and frequency of trading. The Fund may
notify a market timer of rejection of an exchange or purchase order after the
day the order is placed. If the 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.
- -------------------------------------------------------------------
32 PRUDENTIAL UTILITY FUND [ICON] (800) 225-1852
<PAGE>
FINANCIAL HIGHLIGHTS
- -------------------------------------
The financial highlights will help you evaluate the Fund's financial
performance. The TOTAL RETURN in each chart represents the rate that a
shareholder earned on an investment in that share class of the Fund, assuming
reinvestment of all dividends and other distributions. The information is for
each share class for the periods indicated.
Review each chart with the financial statements and report of independent
accountants, which appear in the annual report and the SAI and are available
upon request. Additional performance information for each share class is
contained in the annual report, which you can receive at no charge.
CLASS A SHARES
The financial highlights were audited by PricewaterhouseCoopers LLP,
independent accountants, whose report was unqualified.
CLASS A SHARES (FISCAL PERIODS ENDED 11-30(1))
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING
PERFORMANCE 1999(3) 1998(3) 1997(3) 1996(3) 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
YEAR $12.06 $12.33 $10.88 $9.87 $8.27 $9.72
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .27 .30 .34 .32 .30 .31
Net realized and unrealized
gains (losses) on investment
and foreign currency
transactions .14 .69 2.53 1.80 1.79 (1.06)
TOTAL FROM INVESTMENT
OPERATIONS .41 .99 2.87 2.12 2.09 (.75)
- -------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment
income (.27) (.32) (.32) (.32) (.30) (.32)
Distributions in excess of
net investment income (.03) -- -- -- -- --
Distributions from net
realized gains (1.15) (.94) (1.10) (.79) (.19) (.36)
Distributions in excess of
net realized gains -- -- -- -- -- (.02)
TOTAL DISTRIBUTIONS (1.45) (1.26) (1.42) (1.11) (.49) (.70)
NET ASSET VALUE, END OF YEAR $11.02 $12.06 $12.33 $10.88 $9.87 $8.27
TOTAL RETURN(2) 3.64% 7.98% 27.77% 22.09% 25.74% (7.89)%
- -------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(000,000) $2,440 $2,741 $2,583 $2,023 $1,709 $254
Average net assets (000,000) $2,691 $2,652 $2,201 $1,786 $1,440 $294
RATIOS TO AVERAGE NET ASSETS:
Expenses, including
distribution fees(4) .78%(5) .78% .82% .86% .88% .88%
Expenses, excluding
distribution fees .53%(5) .53% .57% .61% .63% .63%
Net investment income 2.45%(5) 2.43% 2.95% 3.10% 3.12% 3.37%
Portfolio turnover 19% 17% 15% 17% 14% 15%
</TABLE>
1 FISCAL PERIODS BEFORE 1999 ENDED ON DECEMBER 31. INFORMATION FOR 1999 IS
FOR 11 MONTHS.
2 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER DISTRIBUTIONS,
BUT DOES NOT INCLUDE THE EFFECT OF SALES CHARGES. IT IS CALCULATED ASSUMING
SHARES ARE PURCHASED ON THE FIRST DAY AND SOLD ON THE LAST DAY OF EACH YEAR
REPORTED. TOTAL RETURNS FOR PERIODS OF LESS THAN ONE FULL YEAR ARE NOT
ANNUALIZED.
3 CALCULATED BASED ON WEIGHTED AVERAGE SHARES OUTSTANDING DURING THE YEAR.
4 THE DISTRIBUTOR OF THE FUND AGREED TO LIMIT ITS DISTRIBUTION FEES TO .25 OF
1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES.
5 ANNUALIZED.
- --------------------------------------------------------------------------------
33
<PAGE>
FINANCIAL HIGHLIGHTS
- -------------------------------------
CLASS B SHARES
The financial highlights were audited by PricewaterhouseCoopers LLP,
independent accountants, whose report was unqualified.
CLASS B SHARES (FISCAL YEARS ENDED 11-30(1))
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1999(3) 1998(3) 1997(3) 1996(3) 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $12.05 $12.32 $10.88 $9.87 $8.26 $9.69
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .19 .21 .25 .24 .22 .24
Net realized and unrealized gains
(losses) on investment and
foreign currency transactions .13 .69 2.53 1.80 1.80 (1.05)
TOTAL FROM INVESTMENT OPERATIONS .32 .90 2.78 2.04 2.02 (.81)
- ---------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment
income (.19) (.23) (.24) (.24) (.22) (.24)
Distributions in excess of net
investment income (.01) -- -- -- -- --
Distributions from net realized
gains (1.15) (.94) (1.10) (.79) (.19) (.36)
Distributions in excess of net
realized gains -- -- -- -- -- (.02)
TOTAL DISTRIBUTIONS (1.35) (1.17) (1.34) (1.03) (.41) (.62)
NET ASSET VALUE, END OF YEAR $11.02 $12.05 $12.32 $10.88 $9.87 $8.26
TOTAL RETURN(2) 2.98% 7.18% 26.80% 21.16% 24.80% (8.51)%
- ---------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000,000) $1,306 $1,990 $2,132 $2,137 $2,355 $3,526
Average net assets (000,000) $1,691 $2,120 $2,059 $2,184 $2,450 $4,152
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution
fees 1.53%(4) 1.53% 1.57% 1.61% 1.63% 1.63%
Expenses, excluding distribution
fees .53%(4) .53% .57% .61% .63% .63%
Net investment income 1.71%(4) 1.67% 2.20% 2.35% 2.37% 2.62%
Portfolio turnover 19% 17% 15% 17% 14% 15%
</TABLE>
1 FISCAL YEARS BEFORE 1999 ENDED ON DECEMBER 31. INFORMATION FOR 1999 IS FOR
11 MONTHS.
2 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER DISTRIBUTIONS,
BUT DOES NOT INCLUDE THE EFFECT OF SALES CHARGES. IT IS CALCULATED ASSUMING
SHARES ARE PURCHASED ON THE FIRST DAY AND SOLD ON THE LAST DAY OF EACH YEAR
REPORTED. TOTAL RETURNS FOR PERIODS OF LESS THAN ONE FULL YEAR ARE NOT
ANNUALIZED.
3 CALCULATED BASED ON WEIGHTED AVERAGE SHARES OUTSTANDING DURING THE YEAR.
4 ANNUALIZED.
- -------------------------------------------------------------------
34 PRUDENTIAL UTILITY FUND [ICON] (800) 225-1852
<PAGE>
FINANCIAL HIGHLIGHTS
- -------------------------------------
CLASS C SHARES
The financial highlights were audited by PricewaterhouseCoopers LLP,
independent accountants, whose report was unqualified.
CLASS C SHARES (FISCAL PERIODS ENDED 11-30(1))
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING
PERFORMANCE 1999(4) 1998(4) 1997(4) 1996(4) 1995 1994(5)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $12.05 $12.32 $10.88 $9.87 $8.26 $9.30
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .19 .21 .25 .24 .22 .11
Net realized and unrealized gains
(losses) on investment and
foreign currency transactions .13 .69 2.53 1.80 1.80 (.69)
TOTAL FROM INVESTMENT OPERATIONS .32 .90 2.78 2.04 2.02 (.58)
- -------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment
income (.19) (.23) (.24) (.24) (.22) (.13)
Distributions in excess of net
investment income (.01) -- -- -- -- --
Distributions from net realized
gains (1.15) (.94) (1.10) (.79) (.19) (.31)
Distributions in excess of net
realized gains -- -- -- -- -- (.02)
TOTAL DISTRIBUTIONS (1.35) (1.17) (1.34) (1.03) (.41) (.46)
NET ASSET VALUE, END OF PERIOD $11.02 $12.05 $12.32 $10.88 $9.87 $8.26
TOTAL RETURN(2) 2.98% 7.18% 26.80% 21.16% 24.80% (6.27)%
- -------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996 1995 1994(5)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000) $20,550 $27,072 $13,490 $6,001 $3,455 $787
Average net assets (000) $24,448 $20,309 $9,424 $4,517 $2,181 $433
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution
fees 1.53%(3) 1.53% 1.57% 1.61% 1.63% 1.70%(3)
Expenses, excluding distribution
fees .53%(3) .53% .57% .61% .63% .70%(3)
Net investment income 1.71%(3) 1.71% 2.20% 2.35% 2.37% 2.65%(3)
Portfolio turnover 19% 17% 15% 17% 14% 15%
</TABLE>
1 FISCAL PERIODS BEFORE 1999 ENDED ON DECEMBER 31. INFORMATION FOR 1999 IS
FOR 11 MONTHS.
2 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER DISTRIBUTIONS,
BUT DOES NOT INCLUDE THE EFFECT OF SALES CHARGES. IT IS CALCULATED ASSUMING
SHARES ARE PURCHASED ON THE FIRST DAY AND SOLD ON THE LAST DAY OF EACH
PERIOD REPORTED. TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT
ANNUALIZED.
3 ANNUALIZED.
4 CALCULATED BASED ON WEIGHTED AVERAGE SHARES OUTSTANDING DURING THE YEAR.
5 INFORMATION SHOWN IS FOR THE PERIOD 8-1-94 (WHEN CLASS C SHARES WERE FIRST
OFFERED) THROUGH 12-31-94.
- --------------------------------------------------------------------------------
35
<PAGE>
FINANCIAL HIGHLIGHTS
- -----------------------------------------------------
CLASS Z SHARES
The financial highlights were audited by PricewaterhouseCoopers LLP,
independent accountants, whose report was unqualified.
CLASS Z SHARES (FISCAL PERIODS ENDED 11-30(1))
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1999(5) 1998(5) 1997(5) 1996(2),(5)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $12.07 $12.34 $10.88 $10.05
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .30 .34 .36 .29
Net realized and unrealized gains on
investment and foreign currency
transactions .13 .69 2.54 1.67
TOTAL FROM INVESTMENT OPERATIONS .43 1.03 2.90 1.96
- ------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.30) (.36) (.34) (.34)
Distributions in excess of net
investment income (.03) -- -- --
Distributions from net realized gains (1.15) (.94) (1.10) (.79)
TOTAL DISTRIBUTIONS (1.48) (1.30) (1.44) (1.13)
NET ASSET VALUE, END OF PERIOD $11.02 $12.07 $12.34 $10.88
TOTAL RETURN(3) 3.91% 8.24% 28.15% 20.11%
- ------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996(2)
- ------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000) $35,201 $46,642 $41,904 $34,446
Average net assets (000) $42,002 $46,093 $35,994 $34,291
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees .53%(4) .53% .57% .61%(4)
Expenses, excluding distribution fees .53%(4) .53% .57% .61%(4)
Net investment income 2.70%(4) 2.68% 3.20% 3.35%(4)
Portfolio turnover 19% 17% 15% 17%
</TABLE>
1 FISCAL PERIODS BEFORE 1999 ENDED ON DECEMBER 31. INFORMATION FOR 1999 IS
FOR 11 MONTHS.
2 INFORMATION SHOWN IS FOR THE PERIOD 3-1-96 (WHEN CLASS Z SHARES WERE FIRST
OFFERED) THROUGH 12-31-96.
3 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER DISTRIBUTIONS,
BUT DOES NOT INCLUDE THE EFFECT OF SALES CHARGES. IT IS CALCULATED ASSUMING
SHARES ARE PURCHASED ON THE FIRST DAY AND SOLD ON THE LAST DAY OF EACH
PERIOD REPORTED. TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT
ANNUALIZED.
4 ANNUALIZED.
5 CALCULATED BASED ON WEIGHTED AVERAGE SHARES OUTSTANDING DURING THE PERIOD.
- -------------------------------------------------------------------
36 PRUDENTIAL UTILITY FUND [ICON] (800) 225-1852
<PAGE>
- -------------------------------------
[This page has been left blank intentionally.]
- --------------------------------------------------------------------------------
37
<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 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 FUNDS
PRUDENTIAL TAX-MANAGED EQUITY FUND
PRUDENTIAL 20/20 FOCUS FUND
NICHOLAS-APPLEGATE FUND, INC.
NICHOLAS-APPLEGATE GROWTH EQUITY FUND
TARGET FUNDS
LARGE CAPITALIZATION GROWTH FUND
LARGE CAPITALIZATION VALUE FUND
SMALL CAPITALIZATION GROWTH FUND
SMALL CAPITALIZATION VALUE 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.
PRUDENTIAL GLOBAL GROWTH FUND
PRUDENTIAL INTERNATIONAL VALUE FUND
PRUDENTIAL JENNISON INTERNATIONAL GROWTH FUND
GLOBAL UTILITY FUND, INC.
TARGET FUNDS
INTERNATIONAL EQUITY FUND
GLOBAL BOND FUNDS
PRUDENTIAL GLOBAL TOTAL RETURN FUND, INC.
PRUDENTIAL INTERNATIONAL BOND FUND, INC.
- ---------------------------------------------------------------------------
38 PRUDENTIAL UTILITY FUND [ICON] (800) 225-1852
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
- -------------------------------------
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
TARGET FUNDS
TOTAL RETURN BOND FUND
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
- --------------------------------------------------------------------------------
39
<PAGE>
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40 PRUDENTIAL UTILITY FUND [ICON] (800) 225-1852
<PAGE>
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41
<PAGE>
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42 PRUDENTIAL UTILITY FUND [ICON] (800) 225-1852
<PAGE>
- ------------------------------------------------
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43
<PAGE>
- ------------------------------------------------
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44 PRUDENTIAL UTILITY FUND [ICON] (800) 225-1852
<PAGE>
- ------------------------------------------------
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- --------------------------------------------------------------------------------
45
<PAGE>
FOR MORE INFORMATION:
- --------------------------------------------------------------------------------
Please read this prospectus before you invest in the 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) 482-7555
(if calling from outside the U.S.)
- --------------------------------
Outside Brokers Should Contact:
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC
P.O. BOX 15035
NEW BRUNSWICK, NJ 08906-5035
(800) 778-8769
- ------------------------------------
Visit Prudential's Web Site At:
http://www.prudential.com
- --------------------------------
Additional information about the Fund 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 the 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 20549-0102
(The SEC charges a fee to copy documents.)
By Electronic Request:
[email protected]
In Person:
Public Reference Room in
Washington, DC
(For hours of operation, call 1-202-942-8090.)
Via the Internet:
on the Edgar Database at
http://www.sec.gov
- --------------------------------
<TABLE>
<CAPTION>
CUSIP Nos.: Quotron Symbols:
<S> <C>
Class A: 74437K814 PRUAX
Class B: 74437K822 PRUTX
Class C: 74437K830 --
Class Z: 74437K848 PRUZX
</TABLE>
Investment Company Act File No.:
811-3175
MF105A [LOGO] Printed on Recycled Paper
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 1, 2000
Prudential Sector Funds, 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 February 1,
2000, 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
<TABLE>
<CAPTION>
PAGE
--------
<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-21
Control Persons and Principal Holders of Securities......... B-24
Investment Advisory and Other Services...................... B-25
Brokerage Allocation and Other Practices.................... B-31
Capital Shares, Other Securities and Organization........... B-33
Purchase, Redemption and Pricing of Fund Shares............. B-34
Shareholder Investment Account.............................. B-44
Net Asset Value............................................. B-49
Taxes, Dividends and Distributions.......................... B-50
Performance Information..................................... B-52
Financial Statements........................................ B-55
Report of Independent Accountants........................... B-70
Appendix I--General Investment Information.................. I-1
Appendix II--Historical Performance Data.................... II-1
</TABLE>
- --------------------------------------------------------------------------------
MF188B
<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>
B-2
<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
B-3
<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, indexes, 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 indexes 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.
B-6
<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.
B-7
<PAGE>
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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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.
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A Fund will enter into repurchase transactions only with parties meeting
creditworthiness standards approved by the investment adviser. 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. If a
Fund were to exceed this limit, the investment adviser would take prompt action
to reduce the Fund's holdings in illiquid securities to no more than 15% of its
net assets, as required by applicable law. Illiquid securities include
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
B-16
<PAGE>
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 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 rate for the fiscal period ended
November 30, 1999 was 19% and for the fiscal year ended December 31, 1998 was
17%. Prudential Financial Services Fund's portfolio turnover rate for the fiscal
period ended November 30, 1999 was 39%, Prudential Health Sciences Fund's
portfolio turnover rate for the fiscal period ended November 30, 1999 was 61%
and Prudential
B-17
<PAGE>
Technology Fund's portfolio turnover rate for the fiscal period ended
November 30, 1999 was 38%. 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 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.
B-18
<PAGE>
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
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.
B-19
<PAGE>
8. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter under
certain federal securities laws.
9. Make investments for the purpose of exercising control or management.
10. Invest in securities of other investment companies, except by purchases
in the open market involving only customary brokerage commissions and as a
result of which not more than 5% of its total assets (taken at current value)
would be invested in such securities, or except as part of a merger,
consolidation or other acquisition.
11. Invest in interests in oil, gas or other mineral exploration or
development programs, although it may invest in the common stocks of companies
which invest in or sponsor such programs.
12. Make loans, except through (i) the purchase of bonds, debentures,
commercial paper, corporate notes and similar evidences of indebtedness of a
type commonly sold privately to financial institutions, (ii) the lending of its
portfolio securities, as described under "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.
B-20
<PAGE>
MANAGEMENT OF THE COMPANY
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) WITH THE COMPANY DURING PAST 5 YEARS
- ------------------------ ---------------- ---------------------
<S> <C> <C>
Delayne Dedrick Gold (61) Director Marketing and Management Consultant
*Robert F. Gunia (53) Vice President and Chief Administrative Officer (since June 1999)
Director of Prudential Investments; 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); formerly Senior Vice
President (March 1987-May 1999) of Prudential
Securities Incorporated (Prudential
Securities); and 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.
Douglas H. McCorkindale (60) 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.
Thomas T. Mooney (58) 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 and
Northeast Midwest Institute.
Stephen P. Munn (57) 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).
*David R. Odenath, Jr. (42) Director Officer in Charge, President, Chief Executive
Officer and Chief Operating Officer (since
June 1999), PIFM; Senior Vice President
(since June 1999), Prudential; Senior Vice
President (August 1993-May 1999), PaineWebber
Group, Inc.
</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 (56) 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.
Robin B. Smith (60) 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.
*John R. Strangfeld, Jr. President and Director Chief Executive Officer, Chairman, President
(45) and Director (since January 1990), of The
Prudential Investment Corporation, Executive
Vice President (since February 1998),
Prudential Global Asset Management Group of
Prudential, and Chairman (since August 1989),
Pricoa Capital Group; formerly various
positions to Chief Executive Officer
(November 1994-December 1998), Private Asset
Management Group of Prudential and Senior
Vice President (January 1986-August 1989),
Prudential Capital Group, a unit of
Prudential.
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
(May 1989-March 1991) of Time Magazine,
President, Publisher and Chief Executive
Officer of The Detroit News
(February 1986-August 1989) and member of the
Advisory Board, Chase Manhattan
Bank-Westchester.
Clay T. Whitehead (61) Director President, National Exchange Inc. (new
business development firm) (since May 1983).
</TABLE>
B-22
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) WITH THE COMPANY DURING PAST 5 YEARS
- ------------------------ ---------------- ---------------------
<S> <C> <C>
Marguerite E.H. Morrison Secretary Vice President and Associate General Counsel
(43) (since December 1996) of PIFM; Vice President
and Associate General Counsel of Prudential
Securities; formerly Vice President and
Associate General Counsel (June
1991-September 1996) of Prudential Mutual
Fund Management, Inc.
Grace C. Torres (40) Treasurer and Principal First Vice President (since December 1996) of
Financial and PIFM; First Vice President (since March 1993)
Accounting Officer of Prudential Securities; formerly First Vice
President (March 1994-September 1996) of
Prudential Mutual Fund Management, Inc.
Stephen M. Ungerman (46) 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.
** 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(s) 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 75.
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
period ended November 30, 1999 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, 1999.
B-23
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL 1999
COMPENSATION
FROM COMPANY
AGGREGATE AND FUND
COMPENSATION COMPLEX PAID
NAME OF DIRECTOR FROM COMPANY TO DIRECTORS
- ---------------- ------------ ----------------
<S> <C> <C>
Edward D. Beach(2) $5,000 $ 142,500(43/70)*
Delayne Dedrick Gold $5,000 $ 144,500(43/70)*
Robert F. Gunia(1) -- None
Douglas H. McCorkindale** $5,000 $ 80,000(24/49)*
Thomas T. Mooney** $5,000 $ 129,500(35/75)*
Stephen P. Munn $5,000 $ 62,250(29/53)*
David R. Odenath, Jr.(1) -- None
Richard A. Redeker $5,000 $ 95,000(29/53)
Robin B. Smith** $5,000 $ 96,000(32/44)*
John R. Strangfeld, Jr.(1) -- None
Louis A. Weil, III $5,000 $ 96,000(29/53)*
Clay T. Whitehead $5,000 $ 77,000(38/66)*
</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, 1999 includes amounts deferred at the election of
Directors under the funds' deferred compensation plans. Including accrued
interest, total compensation amounted to $97,916, $135,102 and $156,478 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.
(2) Mr. Beach retired on December 31, 1999.
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 January 14, 2000, the Directors and officers of the Company, as a
group, owned less than 1% of the outstanding shares of each Fund.
As of January 14, 2000, Prudential Securities was record holder of 3,253
Class A shares (or 0.14% of the outstanding Class A shares), 5,065,723 Class B
shares (or 90% of the outstanding Class B shares), 2,837,214 Class C shares (or
97% of the outstanding Class C shares) and 533,009 Class Z shares (or 99.9% of
the outstanding Class Z shares) of Prudential Financial Services Fund.
As of January 14, 2000, Prudential Securities was record holder of 2,976,876
Class A shares (or 90% of the outstanding Class A shares), 7,796,339 Class B
shares (or 92% of the outstanding Class B shares), 4,247,611 Class C shares (or
97% of the outstanding Class C shares) and 761,029 Class Z shares (or 99.9% of
the outstanding Class Z shares) of Prudential Health Sciences Fund.
As of January 14, 2000, Prudential Securities was record holder of 5,433,833
Class A shares (or 83% of the outstanding Class A shares), 12,857,408 Class B
shares (or 87% of the outstanding Class B shares), 5,638,302 Class C shares (or
97% of the outstanding Class C shares) and 1,086,188 Class Z shares (or 99.9% of
the outstanding Class Z shares) of Prudential Technology Fund.
B-24
<PAGE>
As of January 14, 2000, Prudential Securities was record holder of
74,966,919 Class A shares (or 31.2% of the outstanding Class A shares),
43,816,287 Class B shares (or 38.2% of the outstanding Class B shares),
1,346,081 Class C shares (or 71.4% of the outstanding Class C shares) and
499,789 Class Z shares (or 15.2% of the outstanding Class Z shares) of
Prudential Utility Fund.
In the event of any meetings of shareholders, Prudential Securities will
forward, or cause to the forwarding of, proxy material to the beneficial owners
for which it is the record holder.
The following shareholder owned 5% of the outstanding shares of any class of
any Fund as of January 14, 2000: New Moon Investments Ltd., 802 West Bay Road,
P.O. Box 2003, Georgetown, Grand Cayman, Cayman Islands BWI held 120,887 Class
A shares (5.3% of the outstanding Class A shares) of Prudential Financial
Services Fund.
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
December 31, 1999, PIFM managed and/or administered open-end and closed-end
management investment companies with assets of approximately $75.6 billion.
According to the Investment Company Institute, as of September 30, 1999, the
Prudential Mutual Funds were the 20th 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 and dividend distribution 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 has hired The
Prudential Investment Corporation, doing business as Prudential Investments, to
provide subadvisory services to the Funds. PIFM also has hired Jennison
Associates LLC to provide subadvisory services to Prudential Health Sciences
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
B-25
<PAGE>
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 four 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 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 fiscal period ended November 30, 1999 and for the fiscal years ended
December 31, 1998 and 1997, Prudential Utility Fund paid management fees to PIFM
of $16,318,008, $19,099,006 and $17,370,271, respectively. For the fiscal period
ended November 30, 1999, Prudential Financial Services Fund paid management fees
to PIFM of $302,913. For the period ended November 30, 1999, Prudential Health
Sciences Fund paid management fees to PIFM of $488,906. For the period ended
November 30, 1999, Prudential Technology Fund paid management fees to PIFM of
$631,240.
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
B-26
<PAGE>
supervises PI's and Jennison's performance of such services. PI was reimbursed
by PIFM for the reasonable costs and expenses incurred by PI in furnishing
investment advisory services to each Fund through December 31, 1999. Effective
January 1, 2000, PI is paid by PIFM at the annual rate of .30 of 1% of
Prudential Utility Fund's average daily net assets up to $250 million, .238 of
1% of the Fund's average net assets from $250 million to $750 million, .203 of
1% of average net assets from $750 million to $1.5 billion, .170 of 1% of
average daily net assets from $1.5 billion to $2 billion, .140 of 1% of average
net assets from $2 billion to $4 billion, .122 of 1% of average net assets from
$4 billion to $6 billion and .105 of 1% of average net assets over $6 billion.
Effective January 1, 2000, PI is paid by PIFM at an annual rate of .375 of 1% of
Prudential Financial Services Fund's and Prudential Technology Fund's respective
average daily net assets and at the annual rate of .375 of 1% of the Enhanced
Index portfolio of Prudential Health Science Fund's average daily net assets.
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. For the fiscal period ended November 30, 1999, Jennison received
$99,018 out of the management fees received by PIFM from Prudential Health
Sciences Fund.
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
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-
B-27
<PAGE>
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 period ended November 30, 1999, the Distributor received
payments of $6,157,192 under Prudential Utility Fund's Class A Plan. For the
fiscal period ended November 30, 1999, the Distributor received payments of
$22,399 under Prudential Financial Services Fund's Class A Plan. For the fiscal
period ended November 30, 1999, the Distributor received payments of $33,788
under Prudential Health Science Fund's Class A Plan. For the fiscal period ended
November 30, 1999, the Distributor received payments of $48,488 under Prudential
Technology Fund's Class A Plan. These amounts were primarily expended for
payment of account servicing fees to financial advisers and other persons who
sell Class A shares of the applicable Fund. For the fiscal periods ended
November 30, 1999, the Distributor also received approximately $395,400,
$682,100, $938,000 and $1,286,500 in initial sales charges in connection with
the sale of Prudential Utility Fund's, Prudential Financial Services Fund's,
Prudential Health Sciences Fund's and Prudential Technology 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 periods ended November 30, 1999, the
Distributor received $15,469,787, $186,461, $314,109 and $412,580 on behalf of
Prudential Utility Fund, Prudential Financial Services Fund, Prudential Health
Sciences Fund and Prudential Technology Fund, respectively, under the Class B
Plans. For the fiscal periods ended November 30, 1999, the Distributor spent
approximately the following amounts on behalf of each such Fund.
<TABLE>
<CAPTION>
APPROXIMATE
COMPENSATION TO TOTAL
PRUSEC FOR AMOUNT
COMMISSION COMMISSION SPENT BY
PAYMENTS TO PAYMENTS TO DISTRIBUTOR
FINANCIAL REPRESENTATIVES AND ON BEHALF OF
FUND PRINTING ADVISERS OVERHEAD COSTS OTHER EXPENSES FUND
- -------------------------------- -------- ----------- -------------- ------------------- ------------
<S> <C> <C> <C> <C> <C>
Prudential Utility Fund......... $28,600 $4,039,300 $ 673,500 $1,652,000 $6,393,400
Prudential Financial Services
Fund........................... $ 0 $ 46,700 $2,111,900 $ 119,900 $2,278,500
Prudential Health Sciences
Fund........................... $ 0 $ 537,957 $2,818,981 $ 159,100 $3,516,038
Prudential Technology Fund...... $ 0 $ 767,259 $3,363,795 $ 315,421 $4,446,475
</TABLE>
The Distributor also receives the proceeds of contingent deferred sales
charges paid by holders of Class B shares upon certain redemptions of Class B
shares. For the fiscal periods ended November 30, 1999, the Distributor received
approximately $1,878,700, $51,200, $68,500 and $72,000 in contingent deferred
sales charges attributable to Class B shares of Prudential Utility Fund,
Prudential Financial Services Fund, Prudential Health Sciences Fund and
Prudential Technology Fund, respectively.
B-28
<PAGE>
CLASS C PLAN. For the fiscal periods ended November 30, 1999, the
Distributor received $223,717, $106,852, $173,368 and $196,230 under the
Class C Plans of Prudential Utility Fund, Prudential Financial Services Fund,
Prudential Health Sciences Fund and Prudential Technology Fund, respectively.
For the fiscal periods ended November 30, 1999, the Distributor spent
approximately the following amounts on behalf of each such Fund.
<TABLE>
<CAPTION>
APPROXIMATE
COMPENSATION TO TOTAL
PRUSEC FOR AMOUNT
COMMISSION COMMISSION SPENT BY
PAYMENTS TO PAYMENTS TO DISTRIBUTOR
FINANCIAL REPRESENTATIVES AND ON BEHALF OF
FUND PRINTING ADVISERS OVERHEAD COSTS OTHER EXPENSES FUND
- --------------------------------- -------- ----------- -------------- ------------------- ------------
<S> <C> <C> <C> <C> <C>
Prudential Utility Fund.......... $ 400 $ 161,300 $ 31,600 $ 11,400 $ 204,700
Prudential Financial Services
Fund............................ $ 0 $ 200 $ 365,300 $ 1,800 $ 367,300
Prudential Health Sciences
Fund............................ $ 0 $ 118,112 $ 423,177 $ 2,524 $ 543,813
Prudential Technology Fund....... $ 0 $ 163,310 $ 451,437 $ 1,420 $ 616,167
</TABLE>
The Distributor also receives an initial sales charge and the proceeds of
contingent deferred sales charges paid by investors upon certain redemptions of
Class C shares. For the fiscal periods ended November 30, 1999, the Distributor
received approximately $53,300, $17,700, $23,000 and $24,000 in contingent
deferred sales charges attributable to Class C shares of the Prudential Utility
Fund, Prudential Financial Services Fund, Prudential Health Sciences Fund and
Prudential Technology Fund, respectively. For the fiscal periods ended
November 30, 1999, the Distributor also received approximately $13,400,
$296,000, $438,300 and $490,800 in initial sales charges in connection with the
sale of Class C shares of Prudential Utility Fund, Prudential Financial Services
Fund, Prudential Health Sciences Fund and Prudential Technology Fund,
respectively.
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.
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.
B-29
<PAGE>
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 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 for Prudential Utility Fund and $9.00 per shareholder
account for the other three Funds, 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.
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 providers. Although
no Fund has experienced any material problems with the services provided by the
Manager, Distributor, Transfer Agent or Custodian as a result of the change from
1999 to 2000, there remains a possibility that computer software systems in use
might be impaired or unavailable 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 future
adverse impact on a Fund, the Manager, the Distributor, the Transfer Agent and
the Custodian have advised the Funds that they have completed necessary changes
to their computer systems in connection with the year 2000. The Funds' service
providers (or other securities market participants) may experience future
material problems in connection with the year 2000. The Company and its Board
have instructed the Funds' principal service providers to monitor and report
year 2000 problems.
Additionally, issuers of securities generally, as well as those purchased by
a Fund, may confront year 2000 compliance issues at some later time 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 the Fund.
B-30
<PAGE>
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.
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 favorable
price and efficient 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
B-31
<PAGE>
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 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 11 months ended November 30, 1999 and the two
years ended December 31, 1998.
<TABLE>
<CAPTION>
11 MONTHS
ENDED
NOVEMBER 30, YEAR ENDED DECEMBER 31,
1999 1998 1997
------------- ----------- -----------
<S> <C> <C> <C>
Total brokerage commissions paid by the Fund.............. $3,466,203 $2,394,964 $3,375,707
Total brokerage commissions paid to Prudential
Securities............................................... $ 107,745 $ 24,552 $ 78,360
Percentage of total brokerage commissions paid to
Prudential Securities.................................... 3.11% 1.03% 2.32%
</TABLE>
The table below sets forth information concerning payment of commissions by
Prudential Financial Services Fund, Prudential Health Sciences Fund and
Prudential Technology Fund, including the amount of such commissions paid to
Prudential Securities, for the period ended November 30, 1999:
<TABLE>
<CAPTION>
FISCAL PERIOD ENDED
NOVEMBER 30, 1999
------------------------------------
PRUDENTIAL PRUDENTIAL
FINANCIAL HEALTH PRUDENTIAL
SERVICES SCIENCES TECHNOLOGY
FUND FUND FUND
---------- ---------- ----------
<S> <C> <C> <C>
Total brokerage commissions paid by the Fund.............. $ 182,933 $ 50,155 $ 138,291
Total brokerage commissions paid to Prudential
Securities............................................... $ 0 $ 0 $ 2,862
Percentage of total brokerage commissions paid to
Prudential Securities.................................... 0% 0% 2%
</TABLE>
Prudential Utility Fund, Prudential Financial Services Fund, Prudential
Health Sciences Fund and Prudential Technology Fund effected approximately
2.84%, 0%, 0% and 0.7% of the total dollar amount of their transactions
involving the payment of commissions to Prudential Securities during the periods
ended November 30, 1999, respectively. Of the total brokerage commissions paid
during that period, $134,174, $21,139, $0 and $1,215 (3.8%, 11.5%, 0% and 0.87%)
were paid to firms which provide research, statistical or other services to PI
or affiliates on behalf of Prudential Utility Fund,
B-32
<PAGE>
Prudential Financial Services Fund, Prudential Health Sciences Fund and
Prudential Technology Fund, respectively. 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 November 30, 1999. As of November 30, 1999, Prudential
Utility Fund held debt securities of the following: Bear, Stearns & Co. Inc.,
$1,548,183; Deutsche Bank Securities Corp., $221,169; Goldman, Sachs & Co.,
$1,548,183; and Warburg Dillon Read LLC, $1,493,465; Prudential Financial
Services Fund held debt securities of the following: Bear, Stearns & Co. Inc.,
$36,685; Deutsche Bank Securities Corp., $5,245; Goldman, Sachs & Co., $36,685;
and Warburg Dillon Read LLC, $35,385; Prudential Health Sciences Fund held debt
securities of the following: Bear, Stearns & Co. Inc., $93,644; Deutsche Bank
Securities Inc., $13,378; Goldman, Sachs & Co., $93,644; and Warburg Dillon Read
LLC, $90,334; and Prudential Technology Fund held debt securities of the
following: Bear, Stearns & Co. Inc., $3,193,227; Deutsche Bank Securities Inc.,
$456,175; Goldman, Sachs & Co., $3,193,227; and Warburg Dillon Read LLC,
$3,080,371.
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.
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,
B-33
<PAGE>
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, fund and 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.
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.
B-34
<PAGE>
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 the NAV at November 30, 1999, the maximum offering price
of the Fund's shares is as follows:
<TABLE>
<CAPTION>
PRUDENTIAL PRUDENTIAL
PRUDENTIAL FINANCIAL HEALTH PRUDENTIAL
UTILITY SERVICES SCIENCES TECHNOLOGY
FUND FUND FUND FUND
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
CLASS A
Net asset value and redemption price per Class A
share.................................................. $11.02 $9.36 $10.86 $13.44
Maximum sales charge (5% of offering price)............. .58 .49 .57 .71
------ ----- ------ ------
Maximum offering price to public........................ $11.60 $9.85 $11.43 $14.15
====== ===== ====== ======
CLASS B
Net asset value, offering price and redemption price per
Class B share*......................................... $11.02 $9.33 $10.83 $13.40
====== ===== ====== ======
CLASS C
Net asset value and redemption price per Class C
share*................................................. $11.02 $9.33 $10.83 $13.40
Sales charge (1% of offering price)..................... .11 .09 .11 .14
------ ----- ------ ------
Offering price to public................................ $11.13 $9.42 $10.94 $13.54
====== ===== ====== ======
CLASS Z
Net asset value, redemption price and offering price per
Class Z share.......................................... $11.02 $9.36 $10.88 $13.46
====== ===== ====== ======
</TABLE>
- ------------
* Class B and Class C shares are subject to a contingent deferred sales charge
on certain redemptions.
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
B-35
<PAGE>
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. Certain group retirement and savings plans may purchase
Class A shares without the initial sales charge, if they meet the required
minimum for amount of assets, average account balance or number of eligible
employees. For more information about these requirements, call Prudential at
(800) 353-2847.
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,
- members of the Board of Directors of Prudential,
- real estate brokers, agents and employees or real estate brokerage
companies affiliated with The Prudential Real Estate Affiliates who
maintain an account at Prudential Securities, Prusec or with the Transfer
Agent,
- 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,
- 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").
Broker-dealers, investment advisers or financial planners sponsoring
fee-based programs (such as mutual fund "wrap" or asset allocation programs and
mutual fund "supermarket" programs) may offer their clients more than one
B-36
<PAGE>
class of shares in a Fund in connection with different pricing options for their
programs. Investors should consider carefully any separate transaction and other
fees charged by these programs in connection with investing in each available
share class before selecting a share class.
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
- 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.
LETTERS OF INTENT. Reduced sales charges also are available to investors (or
an eligible group of related investors) 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 no longer qualify to purchase Class A shares
at net asset value by entering into a 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 or
its affiliates and through your broker will not be aggregated to determine the
reduced sales charge.
An Investment Letter of Intent permits a purchaser to establish a total
investment goal to be achieved by any number of investments over a
thirteen-month period. Each investment made during the period will receive the
reduced sales charge applicable to the amount represented by the goal, as if it
were a single investment. Escrowed Class A shares
B-37
<PAGE>
totaling 5% of the dollar amount of the Letter of Intent will be held by the
Transfer Agent in the name of the purchaser. The effective date of an Investment
Letter of Intent may be back-dated up to 90 days, in order that any investments
made during this 90-day period, valued at the purchaser's cost, can be applied
to the fulfillment of the Letter of Intent goal.
The Investment Letter of Intent does not obligate the investor to purchase,
nor a Fund to sell, the indicated amount. In the event the Letter of Intent goal
is not achieved within the thirteen-month period, the purchaser is required to
pay the difference between the sales charge otherwise applicable to the
purchases made during this period and sales 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 be granted
subject to confirmation of the investor's holdings. Letters of Intent are not
available to individual participants in any retirement or group plans.
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
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. Certain group retirement plans may purchase Class C shares
without the initial sales charge. For more information, call Prudential at
(800) 353-2847.
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
BENEFIT PLANS. Certain group retirement plans may purchase Class Z shares if
they meet the required minimum for amount of assets, average account balance or
number of eligible employees. For more information about these requirements,
call Prudential at (800) 353-2847.
B-38
<PAGE>
MUTUAL FUND PROGRAMS. Class Z shares also can be purchased by participants
in any fee-based program or trust program sponsored by Prudential or an
affiliate that includes mutual funds as investment options and the Fund as an
available option. Class Z shares also can be purchased by investors in certain
programs sponsored by broker-dealers, 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, links its clients' accounts to a master account in the
sponsor's name and charges its clients a management, consulting or other
fee for its services
- Mutual fund "supermarket" programs where the sponsor links its clients'
accounts to a master account in the sponsor's name and the sponsor charges
a fee for its services.
Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in
the Fund in connection with different pricing options for their programs.
Investors should consider carefully any separate transaction and other fees
charged by these programs in connection with investing in each available share
class before selecting a share class.
OTHER TYPES OF INVESTORS. Class Z shares also are available for purchase by
the following categories of investors:
- 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 investment option
- current and former Directors/Trustees of the Prudential Mutual Funds
(including the Company)
- 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.
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.
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.
Rights of accumulation may be applied across the classes of the Prudential
Mutual Funds. 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 reduced
sales charge is calculated using the maximum offering price (net asset value
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.
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.
B-39
<PAGE>
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 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 Board of Directors determines 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 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 Board of
Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose account
has a net asset value of less than $500 due to a redemption. The Fund will give
such shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No CDSC will be imposed on any such
involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares 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 same 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
B-40
<PAGE>
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>
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.
B-41
<PAGE>
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
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. For more information, call Prudential at (800) 353-2847.
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 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 (a copy of the trust agreement
mental impairment which can be identifying the grantor will be required as
expected to result in death or to be well)) is permanently disabled. The letter must
of long-continued and indefinite also indicate the date of disability.
duration.
Distribution from an IRA or A copy of the distribution form from the
403(b) 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>
B-42
<PAGE>
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 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
BENEFIT PLANS. The CDSC will be waived for redemptions by certain group
retirement plans for which Prudential or brokers not affiliated with Prudential
provide administrative or recordkeeping services. The CDSC also will be waived
for certain redemptions by benefit plans sponsored by Prudential and its
affiliates. For more information, call Prudential at (800) 353-2847.
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.
B-43
<PAGE>
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.
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 at net asset value per share. 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 dividends or
distributions in cash may subsequently reinvest any 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 reinvestment will be made at the NAV
per share next determined after receipt of the check by the Transfer Agent.
Shares purchased with reinvested dividends and/or distributions will not be
subject to any CDSC upon redemption.
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.
B-44
<PAGE>
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 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 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
B-45
<PAGE>
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. 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.
B-46
<PAGE>
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)
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, quarterly, semi-annual or annual redemption 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 systematic 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 systematic 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
- ------------
(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.
(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>
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.
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.
B-48
<PAGE>
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 indexes) are valued at the
last sale price of such exchange system on the day of valuation or, if there was
no sale on such day, the mean between the last bid and asked prices on such day,
or at the bid price 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 indexes 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
B-49
<PAGE>
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
Each Fund is qualified as, intends to remain qualified as, and has elected
to be treated 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 under the Internal
Revenue Code 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
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) distribute to its shareholders at least 90% of its net investment income and
net short-term capital 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 advance of the receipt of
cash with respect to interest or cause gains to be treated as ordinary income.
Certain futures contracts and certain listed options (referred to as
Section 1256 Contracts) held by the Funds will be required to be "marked to
market" for federal income tax purposes; that is, treated as having been sold at
their fair market value on the last day of the Fund's taxable year. 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 indexes 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.
B-50
<PAGE>
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, thereby
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 NAV of a share of the Fund on
the reinvestment date.
Any dividends or distributions paid shortly after a purchase by an investor
may have the effect of reducing the per share net asset value of the investor's
shares by the per share amount of the dividends or distributions. Furthermore,
such dividends or distributions, although in effect a return of capital, are
subject to federal income taxes. In addition, dividends and capital gains
distributions also may be subject to state and local 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 distributions 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. 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.
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
B-51
<PAGE>
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 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.
Shareholders are advised to consult their own tax advisers with respect to
the federal, state and local tax consequences resulting from their 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 November 30, 1999.
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
-------- -------- -------- -----------------
<S> <C> <C> <C> <C>
Class A............................................. (0.30)% 15.53% N/A 11.57% (1/22/90)
Class B............................................. (0.81) 15.76 11.03% 15.75 (8/10/81)
Class C............................................. 2.15 15.63 N/A 13.50 (8/1/94)
Class Z............................................. 5.22 N/A N/A 15.77 (3/1/96)
</TABLE>
B-52
<PAGE>
No average annual total returns are provided for Prudential Financial
Services Fund, Financial Health Sciences Fund or Prudential Technology Fund
since they have not had investment operations for an entire year.
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.
Below are the aggregate total returns for the Prudential Utility Fund's
share classes for the periods ended November 30, 1999.
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
-------- -------- -------- -------------------
<S> <C> <C> <C> <C>
Class A........................................... 4.94% 116.62% N/A 209.52% (1/22/90)
Class B........................................... 4.19 108.83 184.77% 1,355.26 (8/10/81)
Class C........................................... 4.19 108.83 N/A 98.35 (8/1/94)
Class Z........................................... 5.22 N/A N/A 73.12 (3/1/96)
</TABLE>
Below are the aggregate total returns for the other Funds' share classes for
the period from June 30, 1999 (commencement of investment operations) through
November 30, 1999.
<TABLE>
<CAPTION>
PRUDENTIAL PRUDENTIAL PRUDENTIAL
FINANCIAL SERVICES HEALTH SCIENCES TECHNOLOGY
FUND FUND FUND
------------------ --------------- ----------
<S> <C> <C> <C>
Class A................................................ (6.40)% 8.60% 37.59%
Class B................................................ (6.70)% 8.30% 37.19%
Class C................................................ (6.70)% 8.30% 37.19%
Class Z................................................ (6.30)% 8.80% 37.79%
</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:
<TABLE>
<S> <C> <C>
a - b
YIELD = 2[( --------- +1)TO THE POWER OF 6 - 1]
cd
</TABLE>
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,
1999 were 1.90%, 1.27%, 1.25% and 2.25% for Class A, Class B, Class C and
Class Z shares, respectively.
B-53
<PAGE>
ADVERTISING. Advertising materials for a Fund may include biographical
information relating to its portfolio manager(s), and may include or refer to
commentary by the Fund's manager(s) concerning investment style, investment
discipline, asset growth, current or past business experience, business
capabilities, political, economic or financial conditions and other matters of
general interest to investors. Advertising materials for a Fund also may include
mention of The Prudential Insurance Company of America, its affiliates and
subsidiaries, and reference the assets, products and services of those entities.
From time to time, advertising materials for a Fund may include information
concerning retirement and investing for retirement, may refer to the approximate
number of Fund shareholders and may refer to Lipper rankings or Morningstar
ratings, other related analysis supporting those ratings, other industry
publications, business periodicals and market indexes. In addition, advertising
materials may reference studies or analyses performed by the Manager or its
affiliates. Advertising materials for sector funds, funds that focus on market
capitalizations, index funds and international/global funds may discuss the
potential benefits and risks of that investment style. Advertising materials for
fixed-income funds may discuss the benefits and risks of investing in the bond
market including discussions of credit quality, duration and maturity.
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 COMMON STOCKS LONG-TERM GOV'T. BONDS INFLATION
COMPARISON OF DIFFERENT
TYPES OF INVESTMENTS
OVER THE LONG TERM
<S> <C> <C> <C>
(12/31/1925-12/31/1999) 11.4% 5.1% 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-54
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
PORTFOLIO OF INVESTMENTS AS OF NOVEMBER 30, 1999 PRUDENTIAL UTILITY FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- --------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--107.2%
COMMON STOCKS--106.5%
- --------------------------------------------------------------------------------
BUSINESS SERVICES--1.7%
2,357,500 Convergys Corp.(a) $ 64,389,219
- --------------------------------------------------------------------------------
DIVERSIFIED MANUFACTURING--1.9%
215,000 Mannesmann AG (ADR) (Germany) 44,702,147
1,610,700 Viag AG (Germany) 26,609,624
--------------
71,311,771
- --------------------------------------------------------------------------------
ELECTRICAL POWER--48.0%
350,000 AES Corp.(a)/(b) 20,278,125
1,391,600 Allegheny Energy Inc. 40,356,400
1,400,000 Avista Corp.(b) 22,750,000
2,616,885 CINergy Corp. 66,239,902
975,400 Cleco Corp. 31,822,425
2,485,000 CMS Energy Corp.(b) 82,626,250
1,153,381 Companhia Energetica de Minas
Gerais-Cemig (ADR) (Brazil) 21,866,143
2,000,000 Constellation Energy Group Inc. 58,875,000
2,982,000 DPL, Inc. 53,303,250
1,477,411 Duke Energy Co. 74,886,270
2,914,400 Edison International 77,231,600
3,383,500 Enel SpA (ADR) (Italy) 14,962,733
4,365,400 Energy East Corp. 102,586,900
3,105,100 FirstEnergy Corp. 72,387,644
320,200 FPL Group, Inc. 14,008,750
2,982,000 Iberdrola SA (Spain)(b) 41,574,205
3,276,900 Illinova Corp. 105,270,412
1,800,000 Korea Electric Power Corp. (ADR)
(Korea) 36,000,000
10,023,805 National Power PLC (United
Kingdom) 64,492,482
6,436,800 Niagara Mohawk Holdings Inc. 96,552,000
2,728,853 NiSource Inc. 51,336,547
6,958,900 Northeast Utilities 147,006,762
1,547,405 NSTAR 64,217,308
1,666,700 PECO Energy Co. 54,896,931
- --------------------------------------------------------------------------------
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- --------------------------------------------------------------------------------
2,061,500 Pinnacle West Capital Corp. $ 68,416,031
2,541,700 Public Service Company of New
Mexico 42,255,763
717,900 RGS Energy Group Inc. 16,018,144
10,157,888 ScottishPower PLC (United Kingdom) 89,736,573
2,927,066 Sempra Energy 54,150,721
2,123,840 Sierra Pacific Resources 38,096,380
44,000 Texas Utilities Co. 1,575,750
2,496,800 Unicom Corp. 79,741,550
1,760,140 UniSource Energy Corp. 19,801,575
--------------
1,825,320,526
- --------------------------------------------------------------------------------
GAS DISTRIBUTION--7.1%
2,427,404 British Gas PLC (ADR) (United
Kingdom) 65,236,482
515,600 Eastern Enterprises 29,260,300
696,400 Energen Corp. 13,405,700
1,999,992 KeySpan Corp.(b) 51,374,794
2,169,300 MCN Corp. 54,096,919
805,700 NICOR Inc. 27,947,719
619,600 Washington Gas Light Co. 17,348,800
303,450 Yankee Energy System, Inc. 12,953,522
--------------
271,624,236
- --------------------------------------------------------------------------------
GAS PIPELINES--24.5%
4,186,650 Coastal Corp. 147,579,412
2,406,900 Columbia Energy Group 151,032,975
358,200 Consolidated Natural Gas Co. 22,969,575
5,097,100 El Paso Energy Corp. 196,238,350
1,949,400 Equitable Resources, Inc. 67,863,488
4,489,450 Kinder Morgan, Inc. 91,191,953
4,347,500 Questar Corp. 74,722,656
4,073,000 TransCanada Pipelines, Ltd.
(Canada)(b) 44,902,476
1,467,100 Western Gas Resources, Inc. 16,596,569
3,521,022 Williams Companies, Inc. 118,834,493
--------------
931,931,947
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-55
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
PORTFOLIO OF INVESTMENTS AS OF NOVEMBER 30, 1999 PRUDENTIAL UTILITY FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- --------------------------------------------------------------------------------
OIL & GAS EXPLORATION/PRODUCTION--3.0%
1,000,000 Alberta Energy Co., Ltd. (Canada) $ 29,250,000
1,100,000 Devon Energy Corp.(b) 38,775,000
1,630,410 EEX Corp. 4,279,826
1,505,700 Pioneer Natural Resources Co.(b) 12,516,131
2,100,000 Union Pacific Resources Group Inc. 27,431,250
--------------
112,252,207
- --------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUST--1.8%
1,800,400 Crescent Real Estate Equities Co. 30,494,275
964,100 Equity Residential Properties
Trust 38,744,769
--------------
69,239,044
- --------------------------------------------------------------------------------
TELECOMMUNICATIONS--17.8%
2,103,300 AT&T Corp.(b) 117,521,887
805,400 BCE Inc. (Canada) 54,465,175
1,000,000 Bell Atlantic Corp. 63,312,500
675,316 COMSAT Corp. 12,831,004
2,631,100 Global Crossing Ltd.(a)/(b) 114,781,737
500,000 GTE Corp. 36,500,000
1,451,300 Millicom International Cellular SA
(Luxembourg)(a)/(b) 68,211,100
710,000 Philippine Long Distance Telephone
Co. (ADR) (Philippines)(b) 14,555,000
2,212,050 SBC Communications Inc. 114,888,347
269,200 Telecomunicacoes Brasileiras SA
(ADR) (Brazil)(b) 24,429,900
607,800 Telefonos de Mexico, SA (ADR)
(Mexico)(b) 56,259,488
--------------
677,756,138
- --------------------------------------------------------------------------------
WATER--0.7%
3,502,900 Azurix Corp.(a) 24,958,163
--------------
Total common stocks
(cost $2,822,435,395) 4,048,783,251
--------------
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- --------------------------------------------------------------------------------
PREFERRED STOCKS--0.6%
- --------------------------------------------------------------------------------
GAS PIPELINES--0.6%
705,700 KN Energy, Inc.
Conv., 8.25%
(cost $30,345,100) $ 23,023,462
--------------
- --------------------------------------------------------------------------------
<CAPTION>
PRINCIPAL
AMOUNT
(000)
<C> <S> <C>
CORPORATE BONDS--0.1%
- --------------------------------------------------------------------------------
ELECTRICAL POWER--0.1%
5,000 Texas Utilities Electric Co.
9.75%, 5/1/21
(cost $5,000,000) 5,380,000
--------------
Total long-term investments
(cost $2,857,780,495) 4,077,186,713
--------------
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS--6.4%
- --------------------------------------------------------------------------------
COMMERCIAL PAPER--3.2%
10,000 Barton Capital Corp.(c)
5.94%, 1/21/00 9,915,850
37,000 Cox Enterprises Inc.(c)
5.85%, 12/1/99 37,000,000
30,000 Heller Financial Inc.(c)
6.05%, 1/12/00 29,788,250
Kerr-McGee Credit Corp.(c)
12,000 6.45%, 1/14/00 11,905,400
11,000 6.50%, 1/13/00 10,914,597
KeySpan Corp.(c)
7,000 6.50%, 1/12/00 6,949,917
15,000 6.50%, 1/12/00 14,886,250
--------------
Total commercial paper
(cost $121,360,264) 121,360,264
--------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-56
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
PRUDENTIAL UTILITY FUND
PORTFOLIO OF INVESTMENTS AS OF NOVEMBER 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) DESCRIPTION VALUE (NOTE 1)
- --------------------------------------------------------------------------------
<C> <S> <C>
REPURCHASE AGREEMENT--0.1%
$ 4,811 Joint Repurchase Agreement
Account,
5.51%, 12/1/99
(cost $4,811,000; Note 5) $ 4,811,000
--------------
- --------------------------------------------------------------------------------
TIME DEPOSITS--3.1%
50,000 Bank of Montreal(c)
5.96%, 1/14/00 50,000,000
15,694 Suntrust Bank(c)
5.5625%, 12/1/99 15,694,000
50,000 Svenska Handelsbanken(c)
6.07%, 1/14/00 50,000,000
--------------
Total time deposits
(cost $115,694,000) 115,694,000
--------------
Total short-term investments
(cost $241,865,264) 241,865,264
--------------
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS--113.6%
(cost $3,099,645,759; Note 4) 4,319,051,977
Other liabilities in excess
of assets--(13.6%) (517,432,122)
--------------
Net Assets--100% $3,801,619,855
--------------
--------------
</TABLE>
- ---------------
(a) Non-income producing.
(b) Portion of securities on loan, see Note 4.
(c) Represents security, or portion thereof, purchased with cash collateral
received for securities on loan.
ADR--American Depository Receipt.
AG--Aktiengesellschaft (German Corporation).
PLC--Public Limited Company (British Corporation).
SA-- Sociedad Anomia (Spanish Corporation) or Societe Anonyme (French
Corporation).
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-57
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES PRUDENTIAL UTILITY FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS NOVEMBER 30, 1999
-----------------
<S> <C>
Investments, at value (cost $3,099,645,759).......................................... $ 4,319,051,977
Receivable for investments sold...................................................... 79,808,574
Dividends and interest receivable.................................................... 10,848,172
Receivable for Fund shares sold...................................................... 2,558,599
Receivable for securities lending income............................................. 710,605
Deferred expenses and other assets................................................... 103,822
-----------------
Total assets...................................................................... 4,413,081,749
-----------------
LIABILITIES
Dividends payable.................................................................... 347,881,458
Payable to broker for collateral for securities on loan.............................. 235,149,494
Payable for investments purchased.................................................... 13,945,351
Payable for Fund shares reacquired................................................... 7,899,573
Securities lending rebate payable.................................................... 2,094,190
Distribution fee payable............................................................. 1,781,772
Management fee payable............................................................... 1,412,196
Accrued expenses and other liabilities............................................... 972,585
Foreign withholding taxes payable.................................................... 325,275
-----------------
Total liabilities................................................................. 611,461,894
-----------------
NET ASSETS........................................................................... $ 3,801,619,855
-----------------
-----------------
Net assets were comprised of:
Common stock, at par.............................................................. $ 3,450,696
Paid-in capital in excess of par.................................................. 2,516,794,238
-----------------
2,520,244,934
Distributions in excess of net investment income.................................. (3,375,858)
Accumulated net realized gain on investments...................................... 65,354,529
Net unrealized appreciation on investments and foreign currencies................. 1,219,396,250
-----------------
Net assets, November 30, 1999........................................................ $ 3,801,619,855
-----------------
-----------------
Class A:
Net asset value and redemption price per share
($2,439,551,593 / 221,469,877 shares of common stock issued and outstanding)... $11.02
Maximum sales charge (5% of offering price)....................................... .58
-----------------
Maximum offering price to public.................................................. $11.60
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per share
($1,306,316,906 / 118,540,662 shares of common stock issued and outstanding)... $11.02
-----------------
-----------------
Class C:
Net asset value and redemption price per share
($20,550,251 / 1,865,037 shares of common stock issued and outstanding)........ $11.02
Sales charge (1% of offering price)............................................... .11
-----------------
Offering price to public.......................................................... $11.13
-----------------
-----------------
Class Z:
Net asset value, offering price and redemption price per share
($35,201,105 / 3,194,027 shares of common stock issued and outstanding)........ $11.02
-----------------
-----------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-58
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
STATEMENT OF OPERATIONS PRUDENTIAL UTILITY FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ELEVEN MONTHS
ENDED YEAR ENDED
NET INVESTMENT INCOME NOVEMBER 30, 1999 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
Income
Dividends (net of foreign withholding taxes of $1,616,312 and $3,291,897,
respectively)...................................................................... $ 127,112,916 $ 141,305,902
Interest............................................................................. 3,303,573 13,926,018
Income from securities loaned (net of rebate of $8,791,540).......................... 1,213,143 --
----------------- -----------------
Total income...................................................................... 131,629,632 155,231,920
----------------- -----------------
Expenses
Management fee....................................................................... 16,318,008 19,099,006
Distribution fee--Class A............................................................ 6,157,192 6,629,270
Distribution fee--Class B............................................................ 15,469,787 21,200,458
Distribution fee--Class C............................................................ 223,717 203,090
Transfer agent's fees and expenses................................................... 4,335,000 5,315,000
Reports to shareholders.............................................................. 400,000 460,000
Custodian's fees and expenses........................................................ 350,000 580,000
Insurance............................................................................ 72,000 86,000
Legal fees and expenses.............................................................. 45,000 45,000
Registration fees.................................................................... 45,000 90,000
Audit fee and expenses............................................................... 32,000 32,000
Directors' fees...................................................................... 32,000 40,000
Miscellaneous........................................................................ 14,714 26,885
----------------- -----------------
Total expenses.................................................................... 43,494,418 53,806,709
----------------- -----------------
Net investment income................................................................... 88,135,214 101,425,211
----------------- -----------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS
Net realized gain (loss) on:
Investment transactions.............................................................. 401,993,750 391,925,240
Foreign currency transactions........................................................ (145,576) 486,292
----------------- -----------------
401,848,174 392,411,532
----------------- -----------------
Net change in unrealized appreciation (depreciation) of:
Investments.......................................................................... (349,243,538) (137,478,889)
Foreign currencies................................................................... (35,101) 168,826
----------------- -----------------
(349,278,639) (137,310,063)
----------------- -----------------
Net gain on investments and foreign currencies.......................................... 52,569,535 255,101,469
----------------- -----------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................................... $ 140,704,749 $ 356,526,680
----------------- -----------------
----------------- -----------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-59
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS PRUDENTIAL UTILITY FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ELEVEN MONTHS YEAR ENDED DECEMBER 31,
ENDED -----------------------
INCREASE (DECREASE) NOVEMBER 30, 1999 1998 1997
----------------- -------------- --------------
<S> <C> <C> <C>
Operations
Net investment income................................................ $ 88,135,214 $ 101,425,211 $ 111,754,871
Net realized gain on investments..................................... 401,848,174 392,411,532 412,749,671
Net change in unrealized appreciation (depreciation) of
investments....................................................... (349,278,639) (137,310,063) 539,842,910
------------------ -------------- --------------
Net increase in net assets resulting from operations................. 140,704,749 356,526,680 1,064,347,452
------------------ -------------- --------------
Dividends and distributions (Note 1)
Dividends from net investment income
Class A........................................................... (64,280,177) (68,056,406) (60,645,408)
Class B........................................................... (25,800,181) (37,778,258) (40,354,565)
Class C........................................................... (392,291) (384,643) (200,787)
Class Z........................................................... (1,080,264) (1,307,870) (1,038,271)
------------------ -------------- --------------
(91,552,913) (107,527,177) (102,239,031)
------------------ -------------- --------------
Distributions in excess of net investment income
Class A........................................................... (2,268,012) -- --
Class B........................................................... (910,314) -- --
Class C........................................................... (13,841) -- --
Class Z........................................................... (38,115) -- --
------------------ -------------- --------------
(3,230,282) -- --
------------------ -------------- --------------
Distributions from net realized capital gains
Class A........................................................... (257,055,029) (197,560,744) (211,158,424)
Class B........................................................... (144,261,482) (153,950,412) (182,907,714)
Class C........................................................... (2,290,179) (1,758,047) (998,463)
Class Z........................................................... (3,815,172) (3,456,422) (3,229,427)
------------------ -------------- --------------
(407,421,862) (356,725,625) (398,294,028)
------------------ -------------- --------------
Fund share transactions (net of share conversions) (Note 5)
Proceeds from shares sold............................................ 338,658,783 598,995,199 413,071,389
Net asset value of shares issued in reinvestment of dividends and
distributions..................................................... 141,116,049 426,138,453 459,144,179
Cost of shares reacquired............................................ (1,120,939,298) (883,989,695) (865,755,515)
------------------ -------------- --------------
Net increase (decrease) in net assets from Fund share transactions... (641,164,466) 141,143,957 6,460,053
------------------ -------------- --------------
Total increase (decrease)............................................... (1,002,664,774) 33,417,835 570,274,446
NET ASSETS
Beginning of period..................................................... 4,804,284,629 4,770,866,794 4,200,592,348
------------------ -------------- --------------
End of period(a)........................................................ $ 3,801,619,855 $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-60
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL UTILITY FUND
- --------------------------------------------------------------------------------
Prudential Sector Funds, Inc. (the "Company"), formerly known as Prudential
Utility Fund, Inc., is registered under the Investment Company Act of 1940 as an
open-end management investment company. The Company presently consists of four
separate funds, one of which is Prudential Utility Fund (the "Fund"). Subsequent
to December 31, 1998 (the Company's prior fiscal year-end), the Company changed
its fiscal year-end to November 30. The Fund is diversified and 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
Company and the Fund in the preparation of its financial statements.
SECURITIES VALUATION: Securities traded on an exchange and NASDAQ National
Market System 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 based upon procedures adopted by the 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 Company's policy that its custodian or designated
subcustodians under triparty repurchase agreements, as the case may be, takes
possession of the underlying collateral securities, the value of which exceeds
the principal amount of the repurchase transaction, including accrued interest.
If the seller defaults and the value of the collateral declines or if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
All securities are valued as of 4:15 P.M., New York time.
FOREIGN CURRENCY TRANSLATION: The books and records of the Fund are maintained
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on
the following basis:
(i) market value of investment securities, other assets and liabilities--at the
closing daily rate of exchange;
(ii) purchases and sales of investment securities, income and expenses--at the
rate of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the period, the Fund does not isolate that
portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of securities held at the end of the period. Similarly, the Fund does not
isolate the effect of changes in foreign exchange rates from the fluctuations
arising from changes in the market prices of portfolio securities sold during
the period.
Net realized gains 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 and liabilities at period 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 discount 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. The Company's
expenses are allocated to the
- --------------------------------------------------------------------------------
B-61
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL UTILITY FUND
- --------------------------------------------------------------------------------
respective Funds on the basis of relative net assets except for expenses that
are charged directly at a Fund level.
Net investment income (other than distribution fees) and unrealized and realized
gains or losses are allocated daily to each class of shares based upon the
relative proportion of net assets of each class at the beginning of the day.
DIVIDENDS AND DISTRIBUTIONS: Dividends from net investment income are declared
and paid quarterly. The Fund will distribute at least annually any net capital
gains in excess of capital loss carryforwards. Dividends and distributions are
recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
SECURITIES LENDING: The Fund may lend securities to broker-dealers. The loans
are secured by collateral at least equal at all times to the market value of the
securities loaned. Loans are subject to termination at the option of the
borrower or the Fund. Upon termination of the loan, the borrower will return to
the lender securities identical to the loaned securities. The Fund may bear the
risk of delay in recovery of, or even loss of rights in, the securities loaned
should the borrower of the securities fail financially. The Fund receives
compensation, net of any rebate, for lending its securities in the form of fees
or it retains a portion of interest on the investment of any cash received as
collateral. The Fund also continues to receive interest and dividends on the
securities loaned and any gain or loss in the market price of the securities
loaned that may occur during the term of the loan. Prudential Securities
Incorporated ("PSI") is the securities lending agent for the Fund. For the
eleven months ended November 30, 1999, PSI has been compensated approximately
$266,500 for these services. As of November 30, 1999, approximately $54,600 of
such compensation was due to PSI.
TAXES: For federal income tax purposes, each fund in the Company is treated as a
separate taxpaying entity. 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 Company 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 for the Fund
of applying this statement was to decrease undistributed net investment income
and increase accumulated net realized gain on investments by $145,576 for
realized foreign currency losses during the eleven months ended November 30,
1999. Net investment income, net realized gains and net assets were not affected
by this change.
- ------------------------------------------------------------
NOTE 2. AGREEMENTS
The Company 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 Company has a distribution agreement with Prudential Investment Management
Services LLC ("PIMS"), which acts as the distributor of the Class A, Class B,
Class C and Class Z shares. The Company compensates 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. Prior to June 1, 1998, PSI was the distributor and served the
Fund under the same terms and conditions as PIMS. The distribution fees for
Class A, B and C shares are 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 Company compensates PIMS for
distribution-related activities at an annual rate of up to .30 of 1%, 1%
- --------------------------------------------------------------------------------
B-62
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL UTILITY FUND
- --------------------------------------------------------------------------------
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
eleven months ended November 30, 1999.
PIMS and PSI have advised the Fund that they received the following amounts in
front-end sales charges:
<TABLE>
<CAPTION>
ELEVEN MONTHS YEAR ENDED
ENDED 11/30/99 12/31/98
--------------- ----------
<S> <C> <C>
Class A....................... $ 395,400 $1,167,500
Class C....................... 53,300 14,700
</TABLE>
From these fees, PIMS paid such sales charges to dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PIMS and PSI have advised the Fund that they received the following amounts in
contingent deferred sales charges:
<TABLE>
<CAPTION>
ELEVEN MONTHS YEAR ENDED
ENDED 11/30/99 12/31/98
--------------- ----------
<S> <C> <C>
Class B....................... $ 1,878,700 $1,683,000
Class C....................... 13,400 10,500
</TABLE>
PSI, PIFM, PIC and PIMS are wholly owned subsidiaries of The Prudential
Insurance Company of America ("Prudential").
As of March 11, 1999, the Fund, along with other affiliated registered
investment companies (the "Funds"), entered into a syndicated credit agreement
("SCA") with an unaffiliated lender. The maximum commitment under the SCA is $1
billion. Interest on any borrowings will be at market rates. The Funds pay a
commitment fee at an annual rate of .065 of 1% on the unused portion of the
credit facility, which is accrued and paid quarterly on a pro rata basis by the
Funds. The SCA expires on March 9, 2000. Prior to March 11, 1999, the Funds had
a credit agreement with a maximum commitment of $200,000,000. The commitment fee
was .055 of 1% on the unused portion of the credit facility. The Fund did not
borrow any amounts pursuant to either agreement during the eleven months ended
November 30, 1999. The purpose of the agreements is to serve as an alternative
source of funding for capital share redemptions.
- ------------------------------------------------------------
NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES
Prudential Mutual Fund Services LLC ("PMFS"), a wholly owned subsidiary of PIFM,
serves as the Company's transfer agent. During the eleven months ended November
30, 1999, the Fund incurred fees of approximately $3,800,600 for the services of
PMFS. As of November 30, 1999, approximately $332,200 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 eleven months ended November 30, 1999, PSI earned approximately $107,700
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 eleven months ended November 30, 1999, were $814,388,576 and
$1,496,254,785, respectively, and 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 November 30, 1999 was
$3,102,138,535 and, accordingly, net unrealized appreciation for federal income
tax purposes was $1,216,913,442 (gross unrealized appreciation--$1,369,606,221;
gross unrealized depreciation--$152,692,779).
As of November 30, 1999, the Fund had securities on loan with an aggregate
market value of $219,166,943. The Fund received $235,149,494 in cash as
collateral for securities on loan which was used to purchase highly liquid
short-term investments in accordance with the Fund's securities lending
procedures.
- ------------------------------------------------------------
NOTE 5. JOINT REPURCHASE AGREEMENT ACCOUNT
The Company, 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 November
30, 1999, the Fund had a 0.7% undivided interest in the joint account. The
undivided interest for the Fund represents $4,811,000 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., 5.68%, in the principal amount of $210,000,000,
repurchase price $210,033,133, due 12/1/99. The value of the collateral
including accrued interest was $214,561,994.
Deutsche Bank Securities Corp., 5.41%, in the principal amount of $30,000,000,
repurchase price $30,004,508, due 12/1/99. The value of the collateral including
accrued interest was $30,600,246.
- --------------------------------------------------------------------------------
B-63
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL UTILITY FUND
- --------------------------------------------------------------------------------
Goldman, Sachs & Co., 5.45%, in the principal amount of $210,000,000, repurchase
price $210,031,792, due 12/1/99. The value of the collateral including accrued
interest was $214,200,305.
Warburg Dillon Read LLC, 5.42%, in the principal amount of $202,578,000,
repurchase price $202,608,499, due 12/1/99. The value of the collateral
including accrued interest was $206,633,395.
- ------------------------------------------------------------
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. 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 800 million shares of $.01 par value per share common stock authorized
which consists of 400 million shares of Class A common stock, 300 million shares
of Class B common stock, 50 million shares of Class C common stock and 50
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>
Eleven months ended November 30,
1999:
Shares sold..................... 14,785,271 $ 181,083,952
Shares issued in reinvestment of
dividends and distributions... 7,855,395 89,975,001
Shares reacquired............... (44,526,267) (531,780,531)
------------ ---------------
Net decrease in shares
outstanding before
conversion.................... (21,885,601) (260,721,578)
Shares issued upon conversion
from Class B.................. 16,038,997 193,752,614
------------ ---------------
Net decrease in shares
outstanding................... (5,846,604) $ (66,968,964)
------------ ---------------
------------ ---------------
<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
------------ ---------------
------------ ---------------
<CAPTION>
Class B
- --------------------------------
<S> <C> <C>
Eleven months ended November 30,
1999:
Shares sold..................... 10,783,081 $ 126,624,035
Shares issued in reinvestment of
dividends and distributions... 4,297,088 48,815,688
Shares reacquired............... (45,653,985) (543,633,642)
------------ ---------------
Net decrease in shares
outstanding before
conversion.................... (30,573,816) (368,193,919)
Shares reacquired upon
conversion into Class A....... (16,065,511) (193,752,614)
------------ ---------------
Net decrease in shares
outstanding................... (46,639,327) $ (561,946,533)
------------ ---------------
------------ ---------------
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)
------------ ---------------
------------ ---------------
</TABLE>
- --------------------------------------------------------------------------------
B-64
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL UTILITY FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B SHARES AMOUNT
- -------------------------------- ------------ ---------------
<S> <C> <C>
Year ended December 31, 1997:
Shares sold..................... 14,991,815 $ 170,422,061
Shares issued in reinvestment of
dividends and distributions... 18,013,110 205,416,554
Shares reacquired............... (31,804,005) (362,886,857)
------------ ---------------
Net increase in shares
outstanding before
conversion.................... 1,200,920 12,951,758
Shares reacquired upon
conversion into Class A....... (24,674,366) (284,415,438)
------------ ---------------
Net decrease in shares
outstanding................... (23,473,446) $ (271,463,680)
------------ ---------------
------------ ---------------
<CAPTION>
Class C
- --------------------------------
<S> <C> <C>
Eleven months ended November 30,
1999:
Shares sold..................... 1,061,776 $ 12,462,807
Shares issued in reinvestment of
dividends and distributions... 62,086 706,720
Shares reacquired............... (1,506,051) (17,415,310)
------------ ---------------
Net decrease in shares
outstanding................... (382,189) $ (4,245,783)
------------ ---------------
------------ ---------------
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
------------ ---------------
------------ ---------------
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 SHARES AMOUNT
- -------------------------------- ------------ ---------------
<S> <C> <C>
Eleven months ended November 30,
1999:
Shares sold..................... 1,557,947 $ 18,487,989
Shares issued in reinvestment of
dividends and distributions... 141,150 1,618,640
Shares reacquired............... (2,370,022) (28,109,815)
------------ ---------------
Net decrease in shares
outstanding................... (670,925) $ (8,003,186)
------------ ---------------
------------ ---------------
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-65
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
FINANCIAL HIGHLIGHTS PRUDENTIAL UTILITY FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------
ELEVEN MONTHS
ENDED YEAR ENDED DECEMBER 31,
NOVEMBER 30, --------------------------------------------------
1999(b) 1998(b) 1997(b) 1996(b) 1995 1994
------------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....................... $ 12.06 $12.33 $10.88 $ 9.87 $ 8.27 $ 9.72
----- ------- ------- ------- ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income...................................... .27 .30 .34 .32 .30 .31
Net realized and unrealized gains (losses) on investment
and foreign currency transactions....................... .14 .69 2.53 1.80 1.79 (1.06)
----- ------- ------- ------- ------ ------
Total from investment operations........................ .41 .99 2.87 2.12 2.09 (.75)
----- ------- ------- ------- ------ ------
LESS DISTRIBUTIONS
Dividends from net investment income....................... (.27) (.32) (.32) (.32) (.30) (.32)
Distributions in excess of net investment income........... (.03) -- -- -- -- --
Distributions from net realized gains...................... (1.15) (.94) (1.10) (.79) (.19) (.36)
Distributions in excess of net realized gains.............. -- -- -- -- -- (.02)
----- ------- ------- ------- ------ ------
Total distributions..................................... (1.45) (1.26) (1.42) (1.11) (.49) (.70)
----- ------- ------- ------- ------ ------
Net asset value, end of period............................. $ 11.02 $12.06 $12.33 $10.88 $ 9.87 $ 8.27
----- ------- ------- ------- ------ ------
----- ------- ------- ------- ------ ------
TOTAL RETURN(a)............................................ 3.64% 7.98% 27.77% 22.09% 25.74% (7.89)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000,000)........................ $2,440 $2,741 $2,583 $2,023 $1,709 $254
Average net assets (000,000)............................... $2,691 $2,652 $2,201 $1,786 $1,440 $294
Ratios to average net assets:
Expenses, including distribution fees................... .78%(c) .78% .82% .86% .88% .88%
Expenses, excluding distribution fees................... .53%(c) .53% .57% .61% .63% .63%
Net investment income................................... 2.45%(c) 2.43% 2.95% 3.10% 3.12% 3.37%
For Class A, B, C and Z shares:
Portfolio turnover rate................................. 19% 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. Total returns for periods less than one full year are not
annualized.
(b) Calculated based upon weighted average shares outstanding during the year.
(c) Annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-66
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
FINANCIAL HIGHLIGHTS PRUDENTIAL UTILITY FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B
------------------------------------------------------------------
ELEVEN MONTHS
ENDED YEAR ENDED DECEMBER 31,
NOVEMBER 30, --------------------------------------------------
1999(b) 1998(b) 1997(b) 1996(b) 1995 1994
------------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......................... $ 12.05 $12.32 $10.88 $ 9.87 $ 8.26 $ 9.69
----- ------- ------- ------- ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income........................................ .19 .21 .25 .24 .22 .24
Net realized and unrealized gains (losses) on investment
and foreign currency transactions......................... .13 .69 2.53 1.80 1.80 (1.05)
----- ------- ------- ------- ------ ------
Total from investment operations.......................... .32 .90 2.78 2.04 2.02 (.81)
----- ------- ------- ------- ------ ------
LESS DISTRIBUTIONS
Dividends from net investment income......................... (.19) (.23) (.24) (.24) (.22) (.24)
Distributions in excess of net investment income............. (.01) -- -- -- -- --
Distributions from net realized gains........................ (1.15) (.94) (1.10) (.79) (.19) (.36)
Distributions in excess of net realized gains................ -- -- -- -- -- (.02)
----- ------- ------- ------- ------ ------
Total distributions....................................... (1.35) (1.17) (1.34) (1.03) (.41) (.62)
----- ------- ------- ------- ------ ------
Net asset value, end of period............................... $ 11.02 $12.05 $12.32 $10.88 $ 9.87 $ 8.26
----- ------- ------- ------- ------ ------
----- ------- ------- ------- ------ ------
TOTAL RETURN(a).............................................. 2.98% 7.18% 26.80% 21.16% 24.80% (8.51)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000,000).......................... $1,306 $1,990 $2,132 $2,137 $2,355 $3,526
Average net assets (000,000)................................. $1,691 $2,120 $2,059 $2,184 $2,450 $4,152
Ratios to average net assets:
Expenses, including distribution fees..................... 1.53%(c) 1.53% 1.57% 1.61% 1.63% 1.63%
Expenses, excluding distribution fees..................... .53%(c) .53% .57% .61% .63% .63%
Net investment income..................................... 1.71%(c) 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. Total returns for periods less than one full year are not
annualized.
(b) Calculated based upon weighted average shares outstanding during the year.
(c) Annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-67
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
FINANCIAL HIGHLIGHTS PRUDENTIAL UTILITY FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS C
-------------------------------------------------------------------
AUGUST 1,
ELEVEN MONTHS 1994(d)
ENDED YEAR ENDED DECEMBER 31, THROUGH
NOVEMBER 30, ------------------------------------ DECEMBER 31,
1999(b) 1998(b) 1997(b) 1996(b) 1995 1994
------------- ------- ------- ------- ------ ------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $ 12.05 $ 12.32 $ 10.88 $ 9.87 $ 8.26 $ 9.30
------ ------- ------- ------- ------ -----
INCOME FROM INVESTMENT OPERATIONS
Net investment income....................................... .19 .21 .25 .24 .22 .11
Net realized and unrealized gains (losses) on investment
and foreign currency transactions........................ .13 .69 2.53 1.80 1.80 (.69)
------ ------- ------- ------- ------ -----
Total from investment operations......................... .32 .90 2.78 2.04 2.02 (.58)
------ ------- ------- ------- ------ -----
LESS DISTRIBUTIONS
Dividends from net investment income........................ (.19) (.23) (.24) (.24) (.22) (.13)
Distributions in excess of net investment income............ (.01) -- -- -- -- --
Distributions from net realized gains....................... (1.15) (.94) (1.10) (.79) (.19) (.31)
Distributions in excess of net realized gains............... -- -- -- -- -- (.02)
------ ------- ------- ------- ------ -----
Total distributions...................................... (1.35) (1.17) (1.34) (1.03) (.41) (.46)
------ ------- ------- ------- ------ -----
Net asset value, end of period.............................. $ 11.02 $ 12.05 $ 12.32 $10.88 $ 9.87 $ 8.26
------ ------- ------- ------- ------ -----
------ ------- ------- ------- ------ -----
TOTAL RETURN(a)............................................. 2.98% 7.18% 26.80% 21.16% 24.80% (6.27)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............................. $20,550 $27,072 $13,490 $6,001 $3,455 $ 787
Average net assets (000).................................... $24,448 $20,309 $ 9,424 $4,517 $2,181 $ 433
Ratios to average net assets:
Expenses, including distribution fees.................... 1.53%(c) 1.53% 1.57% 1.61% 1.63% 1.70%(c)
Expenses, excluding distribution fees.................... .53%(c) .53% .57% .61% .63% .70%(c)
Net investment income.................................... 1.71%(c) 1.71% 2.20% 2.35% 2.37% 2.65%(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 returns for periods 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.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-68
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
FINANCIAL HIGHLIGHTS PRUDENTIAL UTILITY FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class Z
------------------------------------------------------
MARCH 1,
ELEVEN MONTHS YEAR ENDED 1996(d)
ENDED DECEMBER 31, THROUGH
NOVEMBER 30, ------------------- DECEMBER 31,
1999(b) 1998(b) 1997(b) 1996(b)
------------- ------- ------- ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................ $ 12.07 $ 12.34 $ 10.88 $ 10.05
------ ------- ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income........................................... .30 .34 .36 .29
Net realized and unrealized gains (losses) on investment and
foreign currency transactions................................ .13 .69 2.54 1.67
------ ------- ------- ------
Total from investment operations............................. .43 1.03 2.90 1.96
------ ------- ------- ------
LESS DISTRIBUTIONS
Dividends from net investment income............................ (.30) (.36) (.34) (.34)
Distributions in excess of net investment income................ (.03) -- -- --
Distributions from net realized gains........................... (1.15) (.94) (1.10) (.79)
------ ------- ------- ------
Total distributions.......................................... (1.48) (1.30) (1.44) (1.13)
------ ------- ------- ------
Net asset value, end of period.................................. $ 11.02 $ 12.07 $ 12.34 $ 10.88
------ ------- ------- ------
------ ------- ------- ------
TOTAL RETURN(a)................................................. 3.91% 8.24% 28.15% 20.11%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................................. $35,201 $46,642 $41,904 $ 34,446
Average net assets (000)........................................ $42,002 $46,093 $35,994 $ 34,291
Ratios to average net assets:
Expenses, including distribution fees........................ .53%(c) .53% .57% .61%(c)
Expenses, excluding distribution fees........................ .53%(c) .53% .57% .61%(c)
Net investment income........................................ 2.70%(c) 2.68% 3.20% 3.35%(c)
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total return for periods of less than one full year are not
annualized.
(b) Calculated based upon weighted average shares outstanding during the period.
(c) Annualized.
(d) Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-69
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
REPORT OF INDEPENDENT ACCOUNTANTS PRUDENTIAL UTILITY FUND
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Prudential Sector Funds, Inc.--
Prudential Utility Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Sector Funds,
Inc.--Prudential Utility Fund (the "Fund") at November 30, 1999, and the results
of its operations, the changes in its net assets 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 November 30, 1999 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
January 17, 2000
- --------------------------------------------------------------------------------
B-70
<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
1/1/1926 THROUGH 12/31/1999
<S> <C> <C> <C> <C> <C>
Small Stocks Common Stocks Long-Term Bonds Treasury Bills Inflation
1926
1936
1946
1956
1966
1976
1986
1999 $6,640.79 $2,845.63 $40.22 $15.64 $9.40
</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 1989
through 1999. The total returns of the indexes 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 any 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>
'89 '90 '91 '92 '93 '94 '95 '96 '97 '98
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT
TREASURY
BONDS(1) 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) 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) 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) 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2% 11.4% 12.8% 1.6%
- ----------------------------------------------------------------------------------------------------------------------------------
WORLD
GOVERNMENT
BONDS(5) (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 18.8 24.9 30.9 11.0 10.3 9.9 5.5 8.7 17.1 8.4
<S> <C>
'99
- ---------------------
U.S. GOVERNMENT
TREASURY
BONDS(1) (2.56)%
- ---------------------
U. S. GOVERNMENT
MORTGAGE
SECURITIES(2) 1.86%
- ---------------------
U.S. INVESTMENT GRADE
CORPORATE
BONDS(3) (1.96)%
- ---------------------
U.S.
HIGH YIELD
CORPORATE
BONDS(4) 2.39%
- ---------------------
WORLD
GOVERNMENT
BONDS(5) (5.07)%
- ---------------------
- ---------------------
DIFFERENCE BETWEEN
HIGHEST
AND LOWEST RETURN
PERCENT 7.46
</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. Source: Lipper Inc.
4 LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by S&P or Fitch Investors
Service). All bonds in the index have maturities of at least one year.
5 SALOMON 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, 1999. It does not represent
the performance of any Prudential Mutual Fund.
AVERAGE ANNUAL TOTAL RETURNS OF MAJOR WORLD STOCK MARKETS 12/31/1985 -
12/31/1999 (IN U.S. DOLLARS)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Sweden 22.70%
Hong Kong 20.37%
Spain 20.11%
Netherland 18.63%
Belgium 18.41%
France 17.69%
USA 17.39%
UK 16.41%
Europe 16.28%
Switzerland 15.58%
Sing/Mlysia 15.07%
Denmark 14.72%
Germany 13.29%
Australia 11.68%
Italy 11.39%
Canada 11.10%
Japan 9.59%
Norway 8.91%
Austria 7.09%
</TABLE>
Source: Morgan Stanley Capital International (MSCI) and Lipper Inc. as of
12/31/99. Used with permission. Morgan Stanley Country indexes are unmanaged
indexes 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 indexes.
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.
<TABLE>
<S> <C>
Capital Appreciation
and Reinvesting
Dividends $474,094
Capital Appreciation
only $159,597
</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 Composite Stock Price 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
indexes.
II-3
<PAGE>
WORLD STOCK MARKET CAPITALIZATION BY REGION
WORLD TOTAL : $20.7 TRILLION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Canada 2.1%
Europe 32.5%
U.S. 49.0%
Pacific Basin 16.4%
</TABLE>
Source: Morgan Stanley Capital International, December 31, 1999. 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.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
LONG TERM U.S. TREASURY BOND YIELD IN PERCENT (1926-1999)
<S> <C>
1926
1936
1946
1956
1966
1976
1986
1996
1999
</TABLE>
Source: Ibbotson Associates. Used with permission. All rights reserved. This
chart illustrates the historical yield of the long-term U.S. Treasury Bond from
1926-1999. 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.
401(k) Plan Assets $10.5 Bil.
IRA Plans Value $20.0 Bil.
Mutual Fund Assets $13.5 Bil.
1990's
Market Value of shares on the NYSE $17.3 Bil.
401(k) Plan Assets $81.0 Bil.
IRA Plans Value $1.3 Tril.
Mutual Fund Assets $5.7 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>
<S> <C>
Sci & Tech 23.62
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
OVER 10 YEARS ENDING 12/31/98
<S> <C> <C> <C> <C>
LIPPER FINANCIAL SERVICES LIPPER 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>
..................................................................................................
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
..................................................................................................
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
..................................................................................................
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
