<PAGE>
(ICON)
Prudential
Financial
Services
Fund
ANNUAL
REPORT
Nov. 30, 1999
(LOGO)
<PAGE>
A Message from the Fund's President January 7, 2000
(PHOTO)
Dear Shareholder,
The U.S. economy is approaching the record for the longest continued
period of expansion in its history. After the U.S. Federal Reserve
Bank reduced interest rates in 1998 to help protect the financial
system during a crisis of confidence, investors expected the Fed
to push up interest rates again. The fear of rising interest
rates hurt bank stocks. Investors were also concerned about
the creditworthiness of borrowers as the long economic expansion
aged. Overall, financial sector stocks declined during our reporting
period.
Prudential Financial Services Fund was designed to be sensitive
to the factors driving Standard & Poor's SuperComposite 1500
Financials Index--an index that includes large-, mid-, and
small-cap stocks. About half of the Fund's assets are managed
to reflect the company size and industry composition of that
Index. From the June 30, 1999 inception of the Fund to November
30, the Index declined by 7.00%. Prudential Financial Services
Fund Class A shares fell by not quite as much, returning -6.40%,
in line with the Lipper Average of financial sector
funds (-6.32%).
The relative strength of the Fund's regional bank stocks
and of two of its largest holdings, Americredit and Capital
One Financial, was offset by the poor performance of some of
its insurance and financial services companies.
The period between the inception of this Fund and November 30
has been essentially a falling stock market, with only the
outsized returns on technology stocks pulling the average
positive. Financials performed poorly, but were not among
the worst-performing sectors. In the future, there are
likely to be periods when its relative performance is
both stronger and weaker. Sector investing may enhance
the performance of a diversified portfolio, but it should
be part of a broader asset allocation strategy. Prudential
recommends that shareholders consult their financial
advisors periodically to review their allocations.
Yours sincerely,
John R. Strangfeld
President
Prudential Sector Funds, Inc.--Prudential Financial Services Fund
<PAGE>
Performance Review
(PHOTO) (PHOTO)
Patrick O'Brien and Mark Stumpp
Fund Managers
Investment Goals and Style
Prudential Financial Services Fund seeks to achieve
long-term capital appreciation by investing primarily
in securities of companies in the banking and financial
services group of industries. The Fund has two approximately
equal portfolios. Mark Stumpp manages an enhanced index
portfolio consisting of securities selected from those
in the benchmark Standard & Poor's SuperComposite 1500
Financials Index. Quantitative models are used to create
a sample that is representative of the Index, but with
overweighted and underweighted holdings designed to
increase the likelihood of performing better than
the benchmark. Patrick O'Brien manages a concentrated
portfolio, holding a relatively small number of
securities in which he has the highest confidence.
The financial markets have been acting skittish. One factor
is the fear of rising interest rates. We think many investors
exaggerate the damage that rising interest rates do to lenders'
income, but they do exacerbate credit concerns. Stock investors
have been avoiding stocks of smaller or troubled companies to
an extent not seen since the early 1990s. Although the
general outlook for the financial sector is good, stock
prices in the sector reflected these credit concerns, as
well as fear of rising interest rates.
Banks
Both the enhanced index and concentrated portfolios of
the Fund were underweighted in both money center and
regional banks on November 30, 1999, compared to the
S&P 1500 Financials Index. Of course, the concentrated
portfolio had a much more distinct de-emphasis. We are
not pessimistic about the banks' business fundamentals,
but are wary of the lack of a visible source of earnings
growth. Over our reporting period, this underweighting
helped our performance, as the banking industry trailed
the market by quite a bit. Nonetheless, some of our bank
stocks--Credit Lyonnais, Bank One, and UnionBanCal (Union
Bank of California)--made particularly large contributions
to our return. The latter two are regional U.S. banks.
Credit Lyonnais had been poorly managed as a government-
owned bank. It was privatized under new management earlier
in 1999, with most of its bad loans segregated into a
separate entity. The stock performed well, and we took
our profits in December after the close of our reporting
period.
Our return was hurt by our investment in Hanvit Bank, a
Korean bank that owned a substantial part of Daewoo.
Daewoo's debts turned out to be larger than had been
publicly known. Although the loss will be significant,
the market is also reacting to the uncertainty about
Daewoo's status. We expect the situation to clarify
in 2000, with some recovery in Hanvit's stock.
Insurance
We also had de-emphasized insurance companies in our
concentrated portfolio. Pricing in the important
property/casualty business has been declining for
10 to 12 years, and companies are reporting poor
results. As they lose money, the amount of insurance
that can be written by the group in the aggregate
drops--some companies leave the business while others
no longer have the reserves to write new policies. As
capacity to write policies drops, pricing will correct.
That appears to be happening now, and our commitment to
the industry has increased since the close of the
reporting period.
<PAGE>
Some of the insurance companies we did hold had a
negative impact. Fremont General was a nationwide
insurance company operating in niche markets,
including workers' compensation. Its California
workers' compensation business was losing money.
Fremont, which had claimed to be adequately covered
by reinsurance, was not covered. We sold most of our
holding.
Savings and loans
Savings and loan stocks are very inexpensive compared to
the sector as a whole. We have a strong focus on the group.
It is a volatile industry whose prices respond sharply to
changes in its business environment. Prices have been
declining in anticipation of higher interest rates, and
we expect to invest more when we think the group is
approaching a market bottom.
Financial services
Our financial services holdings made the strongest
contribution to our returns. Americredit, Capital
One, MBNA, and Providian are among the largest holdings
in our concentrated portfolio (see table of Five Largest
Holdings). These consumer credit companies are benefiting
from the strong economy and high levels of consumer
spending. If the U.S. economy continues on the path
of moderate growth that many economists expect, we
think this group will continue to do well.However,
our return was hurt by our investment in Conseco, a
diversified financial services company that bought
Green Tree Financial, the largest lender for mobile
homes in the United States. When the credit markets
tightened up, Conseco was unable to "securitize" Green
Tree's loans (convert them into salable bonds) and so
had liquidity problems. In December (after the end of
our reporting period), Conseco's debt was upgraded by
two ratings companies.
Our investment banks--notably Lehman Brothers and
Goldman Sachs--are benefiting from the booming stock
market and significant stock offerings and acquisition
activity. Their primary business is advising on stock
issuance and merger and acquisition activity. They had
a very good year, and their share prices reflected that.
Government agencies that lend for housing and student
loans also have had strong performances. SLM Holding
("Sallie Mae"),
<TABLE>
Performance at a Glance
<CAPTION>
Cumulative Total Returns1 As of 11/30/99
Since Inception2 Since Inception2
(Without sales charge) (With sales charge)
<S> <C> <C>
Class A -6.40% (-6.50%) -11.08% (-11.18%)
Class B -6.70 (-6.80) -11.37 (-11.46)
Class C -6.70 (-6.80) -8.56 (-8.65)
Class Z -6.40 -6.40
Lipper Financial Services Fd. Avg.3 -6.32 N/A
</TABLE>
Past performance is not indicative of future results.
Principal and investment return will fluctuate so that
an investor's shares, when redeemed, may be worth more
or less than their original cost.
1 Source: Prudential Investments Fund Management LLC and
Lipper Inc. Since the Fund has been in existence less than
one year, no average annual total returns are presented.
The Fund charges a maximum front-end sales charge of 5%
for Class A shares. Class B shares are subject to a
declining contingent deferred sales charge (CDSC) of
5%, 4%, 3%, 2%, 1%, and 1% for six years. Class B shares
will automatically convert to Class A shares, on a
quarterly basis, approximately seven years after
purchase. Class C shares are subject to a front-end
sales charge of 1% and a CDSC of 1% for 18 months.
Class Z shares are not subject to a sales charge or
distribution and service (12b-1) fees. Without waiver
of management fees and/or expense subsidization, the
Fund's cumulative total returns would have been lower
as indicated in parentheses ( ).
2 Inception date: Class A, B, C, and Z, 6/30/99.
3 The Lipper Since Inception return is for all funds
in each share class in the Financial Services Fund
category. The Lipper average is unmanaged. Financial
Services funds invest 65% of their equity securities
in companies engaged in providing financial services,
including, but not limited to, banks, finance companies,
insurance companies, and securities/brokerage firms.
1
<PAGE>
Review Cont'd.
which was fully privatized in 1997, serves the student
loan market with funding and operational support. It is
among our largest holdings.
Looking Ahead
The U.S. economy is beginning to slow of its own accord,
so the Federal Reserve may leave interest rates alone,
which would be helpful to financial services stocks.
Should the Fed increase rates, or the global demand for
capital push them up, bank stocks can be expected to
suffer. However, the improving global economic situation
means that credit spreads are likely to come down from
levels that are near historical highs. The world is no
longer as dangerous a place to lend as it appeared in
1998. This trend should help financial stocks. In short,
the improving global economy has both positive and negative
aspects--positive through the impact on credit evaluations,
and negative through the impact on interest rates. We will
be monitoring the balance of these offsetting trends.
Portfolio Composition
Expressed as a percentage of net assets
as of 11/30/99
Financial Services 44.9%
Banks 33.9
Insurance 13.7
Savings & Loans 5.0
Miscellaneous 1.8
Cash & Equivalents 0.7
Five Largest Holdings--Concentrated Portfolio As of 11/30/99
Security/Industry Group
% of Total Concentrated
Portfolio Market Value Comments
AmeriCredit
Financial Services
10.8% The only sub-prime auto lender to
survive the four- to five-year shakeout.
A specialist in sub-prime lending,
AmeriCredit now has little competition.
Credit quality is improving while originations
are growing at about 40% a year. A large
contributor to our return this reporting
period.
Capital One Financial
Financial Services
7.7% Well-run, rapidly growing credit
card company. Can tailor an offering
to a customer from among its 6,000
different cards. Purchased at a
low price/earnings ratio, made a
large contribution to our return
in this reporting period.
SLM Holding
Financial Services
5.8% Commonly known as "Sallie Mae," buys
student loans from their originators
and also provides account servicing
and other operational support for
federally guaranteed student loans.
MBNA
Financial Services
4.9% Master of the affinity group niche
among credit card issuers--the most
profitable niche. Affinity groups
have lower default and attrition
rates than other groups. MBNA
also made a substantial contribution
to our return this period.
Providian
Financial Services
4.5% Specializes in issuing secured credit
cards at relatively high interest rates
to customers who have poor credit
histories. With secured cards, customers
first establish savings accounts that
serve as security for the loans.
Pricing is adjusting to the borrower's
risk profile. Net income grew 55% in
1998.
<TABLE>
Five Largest Holdings--Enhanced Index Portfolio As of 11/30/99
<CAPTION>
Industry % of Total Enhanced % of S&P SC
Security Group Index Market Value Financials Index*
<S> <C> <C> <C>
Citigroup, Inc. Financial Svcs. 9.4 10.2
American International Group, Inc. Insurance 8.2 9.1
Bank of America Corp. Financial Banks 5.8 5.7
Morgan Stanley Dean Witter Financial Svcs. 3.9 3.8
Wells Fargo Financial Banks 3.7 4.3
</TABLE>
*Source: Standard & Poor's, based on data retrieved by Factset.
2
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
Portfolio of Investments as
of November 30, 1999 PRUDENTIAL FINANCIAL SERVICES FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--99.3%
COMMON STOCKS
- ------------------------------------------------------------
Banks - Major--20.7%
51,800 Bank of America Corp. $ 3,030,300
16,800 Bank of New York Co., Inc. 669,900
34,700 Bank One Corp. 1,223,175
6,200 BB&T Corp. 199,175
35,700 Chase Manhattan Corp. 2,757,825
5,500 Comerica, Inc. 291,500
31,600 First Union Corp. 1,222,525
60,301 FleetBoston Financial Corp. 2,280,132
23,300 KeyCorp 629,100
10,300 Mellon Financial Corp. 375,306
4,900 Morgan (J.P.) Securites, Inc. 644,350
16,900 National City Corp. 421,444
8,800 PNC Bank Corp. 490,600
2,600 Republic New York Corp. 183,788
5,100 SouthTrust Corp. 197,944
80,700 Sovereign Bancorp, Inc. 716,212
2,700 State Street Corp. 198,281
7,800 Summit Bancorp. 254,475
8,000 SunTrust Banks, Inc. 559,000
84,200 U.S. Bancorp. 2,878,587
4,400 Wachovia Corp. 340,725
41,700 Wells Fargo & Co. 1,939,050
-------------
21,503,394
- ------------------------------------------------------------
Banks - Mid-sized--10.4%
9,400 AmSouth Bancorp. 212,088
32,300 Bank United Corp. 1,150,687
2,600 Compass Bancshares, Inc. 65,975
65,000 Credit Lyonnais(a) (France) 2,171,896
7,800 Fifth Third Bancorp. 546,000
3,300 First Security Corp. 92,813
200 First Virginia Banks, Inc. 9,075
19,336 Firstar Corp. 502,736
354,000 Hanvit Bank GDR(a) 2,168,250
24,600 Hibernia Corp. 312,112
1,600 Marshall & Ilsley Corp. 107,100
1,700 Mercantile Bankshares Corp. $ 58,491
1,400 Northern Trust Corp. 135,538
39,700 Pacific Century Financial Corp. 779,112
6,100 Regions Financial Corp. 167,369
2,800 Synovus Financial Corp. 56,000
49,300 Union Bank of California N.A. 2,172,281
3,400 Union Planters Corp. 144,925
-------------
10,852,448
- ------------------------------------------------------------
Banks - Smaller--2.8%
1,600 Associated BancCorp. 62,500
100 Banknorth Group, Inc. 3,047
95,800 BankUnited Financial Corp.(a) 835,256
15,800 BostonFed Bancorp, Inc. 258,725
900 CCB Financial Corp. 39,038
500 Centura Banks, Inc. 23,250
200 Chittenden Corp. 6,463
3,900 City National Corp 140,644
2,000 Cullen/Frost Bankers, Inc. 57,000
2,200 FirstMerit Corp. 57,131
4,017 Hudson United Bancorp. 124,025
700 Keystone Financial, Inc. 16,450
6,800 North Fork Bancorp., Inc. 136,850
37,000 Philadelphia Consolidated Holding
Corp.(a) 541,125
6,100 Provident Bankshares Corp. 120,856
3,300 Provident Financial Group, Inc. 130,144
9,200 Riggs National Corp. 130,525
1,400 Silicon Valley Bancshares 51,537
1,700 Susquehanna Bancshares, Inc. 29,431
1,900 Union Acceptance Corp.(a) 14,131
200 United Bankshares, Inc. 4,950
1,200 Whitney Holding Corp. 45,600
1,300 Zions Bancorp 83,931
-------------
2,912,609
- ------------------------------------------------------------
Financial Companies--23.4%
331,000 Americredit Corp.(a) 5,627,000
17,300 Associates First Capital Corp. 575,225
88,600 Capital One Financial Corp. 4,125,437
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 3
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
Portfolio of Investments as
of November 30, 1999 PRUDENTIAL FINANCIAL SERVICES FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Financial Companies (cont'd.)
4,700 Countrywide Credit Industries, Inc. $ 132,188
25,700 Fannie Mae 1,712,263
64,500 First Sierra Financial, Inc.(a) 1,374,656
39,500 Freddie Mac 1,950,312
35,500 Hilb, Rogal & Hamilton Co. 962,938
12,600 Household International, Inc. 498,488
125,800 MBNA Corp. 3,176,450
7,000 Metris Cos., Inc. 221,375
123,000 Onyx Acceptance Corporation(a) 891,750
63,700 SLM Holding Corp. 3,157,131
-------------
24,405,213
- ------------------------------------------------------------
Financial Services - Diversified--13.8%
11,200 American Express Co. 1,694,700
30 Berkshire Hathaway, Inc. (Class
A)(a) 1,719,000
300 Berkshire Hathaway, Inc. (Class
B)(a) 559,500
90,000 Blackrock, Inc.(a) 1,653,750
111,200 Citigroup, Inc. 5,990,900
34,400 Providian Financial Corp. 2,721,900
-------------
14,339,750
- ------------------------------------------------------------
Insurance - Accident & Health--1.0%
4,600 Aflac, Inc. 220,225
9,900 Torchmark Corp. 314,325
14,736 UnumProvident Corp. 479,841
-------------
1,014,391
- ------------------------------------------------------------
Insurance - Brokers/Services--0.6%
4,900 Aon Corp. 174,869
700 Blanch (E.W.) Holdings, Inc. 40,600
5,500 Marsh & McLennan Cos., Inc. 432,437
-------------
647,906
- ------------------------------------------------------------
Insurance - Life--2.7%
6,600 American General Corp. 483,863
48,500 Conseco, Inc. 982,125
4,590 Delphi Financial Group, Inc.(a) 142,290
1,200 Jefferson-Pilot Corp. 81,450
4,900 Lincoln National Corp. $ 204,269
1,000 Protective Life Corp. 32,000
23,500 Reinsurance Group of America, Inc. 721,156
4,700 ReliaStar Financial Corp. 204,450
-------------
2,851,603
- ------------------------------------------------------------
Insurance - Multi-line--5.9%
32,700 Allstate Corp. 856,331
41,625 American International Group, Inc. 4,297,781
4,400 CIGNA Corp. 361,900
10,100 Hartford Financial Services Group,
Inc. 471,544
400 Old Kent Financial Corp. 16,225
2,500 SAFECO Corp. 59,219
1,300 Unitrin, Inc. 48,506
-------------
6,111,506
- ------------------------------------------------------------
Insurance - Property & Casualty--2.1%
5,900 Allmerica Financial Corp. 325,606
7,000 American Financial Group, Inc. 188,562
3,747 Chubb Corp. 200,699
200 Cincinnati Financial Corp. 6,700
9,200 Everest Reinsurance Holdings, Inc. 218,500
31,700 Fremont General Corp. 160,481
5,400 Loews Corp. 345,600
19,400 Old Republic International Corp. 242,500
7,900 Selective Insurance Group, Inc. 138,250
12,900 St. Paul Cos., Inc. 389,419
-------------
2,216,317
- ------------------------------------------------------------
Insurance - Specialty--1.4%
6,300 Ambac Financial Group, Inc. 343,350
8,800 Enhance Financial Services Group,
Inc. 150,700
4,500 Fidelity National Financial, Inc. 67,781
3,500 First American Financial Corp. 45,063
7,400 MBIA, Inc. 370,000
2,300 MGIC Investment Corp. 129,950
600 Radian Group, Inc. 29,325
5,450 The PMI Group, Inc. 272,159
-------------
1,408,328
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 4
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
Portfolio of Investments as
of November 30, 1999 PRUDENTIAL FINANCIAL SERVICES FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Investment Bankers/Brokers/Services--7.3%
8,400 Bear Stearns & Co., Inc. $ 342,825
300 Dain Rauscher Corp. 14,606
1,800 E* TRADE Group, Inc.(a) 54,113
1,700 Edwards (A.G.), Inc. 50,575
16,000 Goldman Sachs & Co. 1,202,000
26,100 Lehman Brothers, Inc. 1,993,387
10,500 Merrill Lynch, Pierce, Fenner &
Smith, Inc. 846,562
16,800 Morgan Stanley Dean Witter 2,026,500
8,600 PaineWebber, Inc. 337,013
700 Raymond James Financial, Inc. 13,169
19,600 Schwab (Charles) Corp. 743,575
-------------
7,624,325
- ------------------------------------------------------------
Investment Managers--0.4%
700 Eaton Vance Corp. 25,156
6,500 Franklin Resources, Inc. 204,344
5,700 T. Rowe Price & Associates, Inc. 205,200
-------------
434,700
- ------------------------------------------------------------
Miscellaneous--1.8%
18,100 First Data Corp. 782,825
36,700 Speedway Motorsports, Inc.(a) 1,048,244
-------------
1,831,069
- ------------------------------------------------------------
Savings & Loan Associations--5.0%
8,600 Astoria Financial Corp. 271,169
200 Carolina First Corp. 4,088
54,695 Charter One Financial, Inc.(a) 1,186,198
3,500 Commercial Federal Corp. $ 63,656
17,000 Dime Bancorp, Inc. 310,250
2,700 Golden West Financial Corp. 272,531
10,500 GreenPoint Financial Corp. 265,781
6,000 MAF Bancorp., Inc. 133,125
1,000 TCF Financial Corp. 28,313
58,300 Washington Mutual, Inc. 1,690,700
7,800 Webster Financial Corp. 207,675
55,000 Westcorp 807,812
-------------
5,241,298
-------------
Total long-term investments
(cost $106,243,129) 103,394,857
-------------
SHORT-TERM INVESTMENT--0.1%
- ------------------------------------------------------------
Principal Amount
(000)
REPURCHASE AGREEMENT
$ 114 Joint Repurchase Agreement Account,
5.51%, 12/1/99
(cost $114,000; Note 5) 114,000
- ------------------------------------------------------------
Total Investments--99.4%
(cost $106,357,129; Note 4) 103,508,857
Other assets in excess of
liabilities--0.6% 673,401
-------------
Net Assets--100% $ 104,182,258
-------------
-------------
</TABLE>
- ---------------
(a) Non-income producing security.
GDR--Global Depository Receipt.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 5
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
Statement of Assets and Liabilities PRUDENTIAL FINANCIAL SERVICES FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets November 30, 1999
<S> <C>
Investments, at value (cost $106,357,129)............................................................... $ 103,508,857
Foreign currency, at value ($2,167,107)................................................................. 2,106,788
Receivable for investments sold......................................................................... 1,733,275
Receivable for Fund shares sold......................................................................... 511,439
Prepaid expenses and other assets....................................................................... 87,686
Dividends and interest receivable....................................................................... 82,567
-----------------
Total assets......................................................................................... 108,030,612
-----------------
Liabilities
Payable for investments purchased....................................................................... 2,288,991
Bank overdraft.......................................................................................... 977,326
Payable for Fund shares reacquired...................................................................... 296,777
Accrued expenses........................................................................................ 163,077
Distribution fee payable................................................................................ 69,506
Management fee payable.................................................................................. 52,677
-----------------
Total liabilities.................................................................................... 3,848,354
-----------------
Net Assets.............................................................................................. $ 104,182,258
-----------------
-----------------
Net assets were comprised of:
Common stock, at par................................................................................. $ 111,606
Paid-in capital in excess of par..................................................................... 110,090,244
-----------------
110,201,850
Accumulated net realized loss on investments......................................................... (3,111,001)
Net unrealized depreciation on investments and foreign currencies.................................... (2,908,591)
-----------------
Net assets, November 30, 1999........................................................................... $ 104,182,258
-----------------
-----------------
Class A:
Net asset value and redemption price per share
($22,050,199 / 2,356,793 shares of common stock issued and outstanding)........................... $9.36
Maximum sales charge (5% of offering price).......................................................... .49
-----------------
Maximum offering price to public..................................................................... $9.85
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per share
($50,252,013 / 5,387,808 shares of common stock issued and outstanding)........................... $9.33
-----------------
-----------------
Class C:
Net asset value and redemption price per share
($26,938,531 / 2,888,275 shares of common stock issued and outstanding)........................... $9.33
Sales charge (1% of offering price).................................................................. .09
-----------------
Offering price to public............................................................................. $9.42
-----------------
-----------------
Class Z:
Net asset value, offering price and redemption price per share
($4,941,515 / 527,726 shares of common stock issued and outstanding).............................. $9.36
-----------------
-----------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 6
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
PRUDENTIAL FINANCIAL SERVICES FUND
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, 1999(a)
Through
Net Investment Loss November 30, 1999
<S> <C>
Income
Dividends................................ $ 588,803
Interest................................. 80,470
-----------------
Total income.......................... 669,273
-----------------
Expenses
Management fee........................... 302,913
Distribution fee--Class A................ 22,399
Distribution fee--Class B................ 186,461
Distribution fee--Class C................ 106,852
Transfer agent's fees and expenses....... 82,000
Custodian's fees and expenses............ 67,000
Amortization of prepaid offering costs... 63,000
Audit fee and expenses................... 26,000
Reports to shareholders.................. 17,000
Legal fees and expenses.................. 13,000
Organizational expenses.................. 12,500
Directors' fees.......................... 12,000
Miscellaneous............................ 1,736
-----------------
Total expenses........................ 912,861
Less: Management fee waiver.............. (60,582)
-----------------
Net expenses.......................... 852,279
-----------------
Net investment loss......................... (183,006)
-----------------
Realized and Unrealized Gain (Loss)
on Investments and Foreign Currency
Transactions
Net realized gain (loss) on:
Investment transactions.................. (3,105,832)
Foreign currency transactions............ 1,381
-----------------
(3,104,451)
-----------------
Net unrealized depreciation on:
Investments.............................. (2,848,272)
Foreign currencies....................... (60,319)
-----------------
(2,908,591)
-----------------
Net loss on investments and foreign
currencies............................... (6,013,042)
-----------------
Net Decrease in Net Assets
Resulting from Operations................... $(6,196,048)
-----------------
-----------------
- ---------------
(a) Commencement of investment operations.
</TABLE>
PRUDENTIAL SECTOR FUNDS, INC.
PRUDENTIAL FINANCIAL SERVICES FUND
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, 1999(a)
Increase (Decrease) in Through
Net Assets November 30, 1999
<S> <C>
Operations
Net investment loss..................... $ (183,006)
Net realized loss on investments and
foreign currency transactions........ (3,104,451)
Net unrealized depreciation of
investments and foreign currency
transactions......................... (2,908,591)
-----------------
Net increase (decrease) in net assets
resulting from operations............ (6,196,048)
-----------------
Fund share transactions (net of share
conversions) (Note 6)
Net proceeds from shares sold........... 122,605,417
Cost of shares reacquired............... (12,227,111)
-----------------
Net increase in net assets from Fund
share transactions................... 110,378,306
-----------------
Total increase............................. 104,182,258
Net Assets
Beginning of period(a)..................... --
-----------------
End of period.............................. $ 104,182,258
-----------------
-----------------
- ---------------
(a) Commencement of investment operations.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 7
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
Notes to Financial Statements PRUDENTIAL FINANCIAL SERVICES 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 Financial Services Fund (the 'Fund').
The Fund is non-diversified and its investment objective is long-term capital
appreciation. It seeks to achieve this objective by investing primarily in
equities of companies that provide financial services.
- ------------------------------------------------------------
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 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 last bid price on
such day in the absence of an asked price. Securities traded in the
over-the-counter market (including securities listed on exchanges whose primary
market is believed to be over-the-counter) are valued by an independent pricing
agent or principal market maker. Short-term securities which mature in more than
60 days are valued based on current market quotations. Short-term securities
which mature in 60 days or less are valued at amortized cost. Securities for
which reliable market quotations are not readily available are valued by the
Valuation Committee or Board of Directors in consultation with the manager or
subadviser.
In connection with transactions in repurchase agreements with U.S. financial
institutions, it is the Company's policy that its custodian or designated
subcustodians, as the case may be under triparty repurchase agreements, takes
possession of the underlying collateral securities, the value of which exceeds
the principal amount of the repurchase transaction, including accrued interest.
To the extent that any repurchase transaction exceeds one business day, the
value of the collateral is marked-to-market on a daily basis to ensure the
adequacy of the collateral. 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. Accordingly, realized foreign currency gains (losses) are included
in the reported net realized gains (losses) on investment transactions.
Net realized gains or losses on foreign currency transactions represent net
foreign exchange gains or losses from sales and maturities of short-term
securities, disposition of foreign currency, gains or losses realized between
the trade and settlement dates of security transactions, and the difference
between amounts of dividends, interest and foreign withholding taxes recorded on
the Fund's books and the U.S. dollar equivalent amounts actually received or
paid. Net currency gains and losses from valuing foreign currency denominated
assets, except portfolio securities, and liabilities (other than investments) at
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. 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 respective Funds on the basis of relative net assets except for expenses
that are charged directly at a Fund level.
- --------------------------------------------------------------------------------
8
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
Notes to Financial Statements PRUDENTIAL FINANCIAL SERVICES FUND
- --------------------------------------------------------------------------------
Net investment income or loss (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: The Fund expects to pay dividends of net investment
income and distributions of net realized gains, if any, annually. Dividends and
distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
Taxes: For federal income tax purposes, each fund in the Company is treated as a
separate taxpaying entity. It is the Fund's policy 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.
Offering and Organization Costs: The Fund incurred approximately $162,500 in
connection with the organization of the Fund. Organization costs of $12,500 were
expensed and offering costs of $150,000 are being amortized over a period of 12
months ending June 2000.
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 loss by
$183,006, increase accumulated net realized loss on investments by $6,550 and
decrease paid-in-capital by $176,456 for realized foreign currency gains, a net
operating loss and certain expenses not deductible for tax purposes during the
period 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 to PIFM is computed daily and payable monthly at an
annual rate of .75 of 1% of the average daily net assets of the Fund. PIFM has
agreed to waive a portion (.15 of 1% of the Fund's average daily net assets) of
its management fee, which amounted to $60,582 ($.005 per share) for the period
ended November 30, 1999. The Fund is not required to reimburse PIFM for such
waiver.
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 of the Fund. The Fund 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. 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 Fund compensates PIMS for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%
of the average daily net assets of the Class A, B and C shares, respectively.
Such expenses under the Plans were .25 of 1% of average daily net assets of the
Class A shares and 1% of the average daily net assets of both the Class B and C
shares for the period ended November 30, 1999.
PIMS has advised the Fund that it received approximately $682,100 and $296,000
in front-end sales charges resulting from sales of Class A and Class C shares,
respectively, during the period ended November 30, 1999. From these fees, PIMS
paid such sales charges to affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PIMS has advised the Fund that for the period ended November 30, 1999, it
received approximately $51,200 and $17,700 in contingent deferred sales charges
imposed upon redemptions by certain Class B and Class C shareholders,
respectively.
PIFM, PIMS and PIC are wholly owned subsidiaries of The Prudential Insurance
Company of America ('Prudential').
- ------------------------------------------------------------
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 period
- --------------------------------------------------------------------------------
9
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
Notes to Financial Statements PRUDENTIAL FINANCIAL SERVICES FUND
- --------------------------------------------------------------------------------
ended November 30, 1999, the Fund incurred fees of approximately $75,100 for the
services of PMFS. As of November 30, 1999, approximately $15,600 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.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the period ended November 30, 1999, were $146,979,273 and $37,630,312,
respectively.
The federal income tax basis of the Fund's investments at November 30, 1999 was
$106,699,839 and, accordingly, net unrealized depreciation for federal income
tax purposes was $3,190,982 (gross unrealized appreciation--$5,804,282; gross
unrealized depreciation--$8,995,264).
For federal income tax purposes, the Fund had a capital loss carryforward as of
November 30, 1999, of approximately $2,019,000 which expires in 2007.
Accordingly, no capital gains distributions are expected to be paid to
shareholders until future net gains have been realized in excess of such
carryforward.
The Fund will elect for United States federal income tax purposes, to treat net
short-term capital losses of approximately $744,000 incurred in the one month
ended November 30, 1999 as having been incurred in the following fiscal year.
- ------------------------------------------------------------
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 .02% undivided interest in the joint account. The
undivided interest for the Fund represented $114,000 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 Inc., 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.
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, Inc., 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 400 million shares of $.01 par value per share common stock divided
into four classes, designated Class A, Class B, Class C and Class Z common
stock, each of which consists of 100 million authorized shares.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- -------------------------------- ------------ ---------------
<S> <C> <C>
June 30, 1999(a)through
November 30, 1999:
Shares sold..................... 2,858,418 $ 28,192,142
Shares reacquired............... (502,545) (4,744,998)
------------ ---------------
Net increase in shares
outstanding before
conversion.................... 2,355,873 23,447,144
Shares issued upon conversion
from Class B.................. 920 8,172
------------ ---------------
Net increase in shares
outstanding................... 2,356,793 $ 23,455,316
------------ ---------------
------------ ---------------
</TABLE>
- ---------------
(a) Commencement of investment operations.
- --------------------------------------------------------------------------------
10
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
Notes to Financial Statements PRUDENTIAL FINANCIAL SERVICES FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Shares Amount
- -------------------------------- ------------ ---------------
<S> <C> <C>
June 30, 1999(a)through
November 30, 1999:
Shares sold..................... 5,716,187 $ 56,000,581
Shares reacquired............... (327,458) (3,022,153)
------------ ---------------
Net increase in shares
outstanding before
conversion.................... 5,388,729 52,978,428
Shares reacquired upon
conversion into Class A....... (921) (8,172)
------------ ---------------
Net decrease in shares
outstanding................... 5,387,808 $ 52,970,256
------------ ---------------
------------ ---------------
<CAPTION>
Class C
- --------------------------------
<S> <C> <C>
June 30, 1999(a)through
November 30, 1999:
Shares sold..................... 3,189,081 $ 31,470,302
Shares reacquired............... (300,806) (2,814,482)
------------ ---------------
Net increase in shares
outstanding................... 2,888,275 $ 28,655,820
------------ ---------------
------------ ---------------
<CAPTION>
Class Z
- --------------------------------
<S> <C> <C>
June 30, 1999(a)through
November 30, 1999:
Shares sold..................... 703,918 $ 6,942,392
Shares reacquired............... (176,192) (1,645,478)
------------ ---------------
Net increase in shares
outstanding................... 527,726 $ 5,296,914
------------ ---------------
------------ ---------------
</TABLE>
- ---------------
(a) Commencement of investment operations.
- --------------------------------------------------------------------------------
11
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
Financial Highlights PRUDENTIAL FINANCIAL SERVICES FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B Class C
----------------- ----------------- -----------------
June 30, 1999(c) June 30, 1999(c) June 30, 1999(c)
Through Through Through
November 30, 1999 November 30, 1999 November 30, 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......................... $ 10.00 $ 10.00 $ 10.00
------ ------ ------
Income from investment operations
Net investment income (loss)................................. --(b) (.02) (.02)
Net realized and unrealized losses on investment and foreign
currency transactions..................................... (.64) (.65) (.65)
------ ------ ------
Total from investment operations.......................... (.64) (.67) (.67)
------ ------ ------
Net asset value, end of period............................... $ 9.36 $ 9.33 $ 9.33
------ ------ ------
------ ------ ------
TOTAL RETURN(a).............................................. (6.40)% (6.70)% (6.70)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............................. $22,050 $50,252 $26,939
Average net assets (000)..................................... $21,235 $44,194 $25,325
Ratios to average net assets:(d)(e)
Expenses, including distribution fees..................... 1.58% 2.33% 2.33%
Expenses, excluding distribution fees..................... 1.33% 1.33% 1.33%
Net investment income..................................... .09% (.69)% (.66)%
For Class A, B, C and Z shares:
Portfolio turnover rate................................... 39%
<CAPTION>
Class Z
-----------------
June 30, 1999(c)
Through
November 30, 1999
-----------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......................... $ 10.00
-----
Income from investment operations
Net investment income (loss)................................. .01
Net realized and unrealized losses on investment and foreign
currency transactions..................................... (.65)
-----
Total from investment operations.......................... (.64)
-----
Net asset value, end of period............................... $ 9.36
-----
-----
TOTAL RETURN(a).............................................. (6.40)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............................. $ 4,941
Average net assets (000)..................................... $ 4,972
Ratios to average net assets:(d)(e)
Expenses, including distribution fees..................... 1.33%
Expenses, excluding distribution fees..................... 1.33%
Net investment income..................................... .35%
For Class A, B, C and Z shares:
Portfolio turnover rate...................................
</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 return for periods of less than one full year are not
annualized.
(b) Less than $.005 per share.
(c) Commencement of investment operations.
(d) Net of management fee waiver.
(e) Annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 12
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
Report of Independent Accountants PRUDENTIAL FINANCIAL SERVICES FUND
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Prudential Sector Funds, Inc.--Prudential Financial Services 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 Financial Services Fund (the 'Fund') at November 30, 1999, and
the results of its operations, the changes in its net assets and the financial
highlights for the period June 30, 1999 (commencement of operations) through
November 30, 1999, 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 audit. We conducted our audit 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 audit, which included confirmation of securities at November
30, 1999 by correspondence with the custodian and brokers, provides a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
January 17, 2000
- --------------------------------------------------------------------------------
13
<PAGE>
Getting the Most from Your Prudential Mutual Fund
Some mutual fund shareholders won't ever read this--they
don't read annual and semiannual reports. It's quite
understandable. These annual and semiannual reports
are prepared to comply with federal
regulations, and are often written in language that
is difficult to understand. So, when most people run
into those particularly daunting sections of these
reports, they don't read them.
We think that's a mistake.
At Prudential Mutual Funds, we've made some changes
to our report to make it easier to understand and
more pleasant to read. We hope you'll find it
profitable to spend a few minutes familiarizing
yourself with your investment. Here's what you'll
find in the report:Performance at a Glance
Since an investment's performance is often a
shareholder's primary concern, we present performance
information in two different formats. You'll find it
first on the "Performance at a Glance" page where we
compare the Fund and the comparable average
calculated by Lipper, Inc., a nationally recognized
mutual fund rating agency. We report both the cumulative
total returns and the average annual total returns. The
cumulative total return is the total amount of income and
appreciation the Fund has achieved in various time periods.
The average annual total return is an annualized representation
of the Fund's performance. It gives you an idea of how much the
Fund has earned in an average year for a given time period. Under
the performance box, you'll see legends that explain the
performance information, whether fees and sales charges have
been included in returns, and the inception dates for the Fund's
share classes.
See the performance comparison charts at the back of the report
for more performance information. Please keep in mind that past
performance is not indicative of future results.
Portfolio Manager's Report
The portfolio manager, who invests your money for you, reports
on successful--and not-so-successful--strategies in this section
of your report. Look for recent purchases and sales here, as well
as information about the sectors the portfolio manager
favors, and any changes that are on the drawing board.
Portfolio of Investments
This is where the report begins to appear technical, but it's
really just a listing of each security held at the end of the
reporting period, along with valuations and other information.
Please note that sometimes we discuss a security in the
Portfolio Manager's Report that doesn't appear in this listing
because it was sold before the close of the reporting period.
<PAGE>
Statement of Assets and Liabilities
The balance sheet shows the assets (the value of the Fund's
holdings), liabilities (how much the Fund owes), and net assets
(the Fund's equity, or holdings after the Fund pays its debts)
as of the end of the reporting period. It also shows how we
calculate the net asset value per share for each class of shares.
The net asset value is reduced by payment of your dividend,
capital gain, or other distribution, but remember that the
money or new shares are being paid or issued to you. The net
asset value fluctuates daily, along with the value of every
security in the portfolio.
Statement of Operations
This is the income statement, which details income (mostly
interest and dividends earned) and expenses (including what
you pay us to manage your money). You'll also see capital
gains here--both realized and unrealized.
Statement of Changes in Net Assets
This schedule shows how income and expenses translate into
changes in net assets. The Fund is required to pay out the
bulk of its income to shareholders every year, and this
statement shows you how we do it--through dividends and
distributions--and how that affects the net assets. This
statement also shows how money from investors flowed into
and out of the Fund.
Notes to Financial Statements
This is the kind of technical material that can intimidate
readers, but it does contain useful information. The Notes
provide a brief history and explanation of your Fund's
objectives. In addition, they outline how Prudential Mutual
Funds prices securities. The Notes also explain who manages
and distributes the Fund's shares and, more importantly, how
much they are paid for doing so. Finally, the Notes explain
how many shares are outstanding and the number issued and
redeemed over the period.
Financial Highlights
This information contains many elements from prior pages, but
on a per-share basis. It is designed to help you understand how
the Fund performed, and to compare this year's performance and
expenses to those of prior years.
Independent Auditor's Report
Once a year, an outside auditor looks over our books and
certifies that the information is fairly presented and
complies with generally accepted accounting principles.
Tax Information
This is information which we report annually about how much
of your total return is taxable. Should you have any questions,
you may want to consult a tax adviser.
Performance Comparison
These charts are included in the annual report and are
required by the Securities Exchange Commission. Performance
is presented here as a hypothetical $10,000 investment in the
Fund since its inception or for 10 years (whichever is shorter). To help
you put that return in context, we are required to include the
performance of an unmanaged, broad-based securities index as
well. The index does not reflect the cost of buying the securities
it contains or the cost of managing a mutual fund. Of course, the
index holdings do not mirror those of the Fund--the index is a
broad-based reference point commonly used by investors to measure
how well they are doing. A definition of the selected index is
also provided. Investors cannot invest directly in an index.
<PAGE>
Comparing a $10,000 Investment
- ------------------------------------------------------------------
Prudential Financial Services Fund vs. the S&P SuperComposite 1500
and the S&P SC Financials Index
Class A
(GRAPH)
Class A
(GRAPH)
Past performance is not indicative of future results. Principal
and investment return will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their
original cost.
These graphs compare a $10,000 investment in the Prudential
Financial Services Fund (Class A, B, C, and Z shares) with
a similar investment in the Standard & Poor's SuperComposite
1500 Index (S&P SuperComposite 1500) and the Standard & Poor's
SuperComposite Financials Index (S&P SC Financials Index) by
portraying the initial account values of Class A, B, C, and
Z shares at the commencement of operations (June 30, 1999),
and at the end of the fiscal year (November 30), as measured
on a quarterly basis. For purposes of the graphs, and unless
otherwise indicated, it has been assumed that (a) the maximum
applicable front-end sales charge was deducted from the
initial $10,000 investment in Class A and C shares; (b)
the maximum applicable contingent deferred sales charges
were deducted from the value of the investment in Class B
and Class C shares, assuming full redemption on November
30, 1999; (c) all recurring fees (including management fees)
were deducted; and (d) all dividends and distributions were
reinvested. Class B shares will automatically convert to
Class A shares, on a quarterly basis, approximately seven
years after purchase. Class Z shares are not subject to a
sales charge or distribution and service
(12b-1) fees. Since the Fund has been in existence less
than one year, no average annual total returns are presented.
<PAGE>
Class C
(GRAPH)
Class Z
(GRAPH)
The S&P SuperComposite 1500 is an unmanaged index that
is a combination of the S&P 500 Index (Standard & Poor's
500 Index comprises 500 large, established, publicly
traded stocks), the S&P Mid-Cap 400 Index (Standard &
Poor's Mid-Cap 400 Index measures the performance of
the 400 largest companies outside of the S&P 500), and
the S&P SmallCap 600 Index (Standard & Poor's 600 Index
comprises 600 small capitalization stocks) which provides
a broad representation of the entire U.S. market,
representing 87% of total U.S. equity market
capitalization. The S&P SC Financials Index is
an unmanaged capitalization-weighted index that
measures the performance of the financials sector
of the S&P SuperComposite 1500. Both Index returns
include the reinvestment of all dividends, but do
not include the effect of sales charges or operating
expenses of a mutual fund. The securities in the S&P
SuperComposite 1500 and the S&P SC Financials Index
may differ substantially from the securities in
the Fund. These indexes are not the only ones that
may be used to characterize performance of equity
funds, and other indexes may portray different
comparative performance. Investors cannot invest
directly in an index.
These graphs are furnished to you in accordance
with SEC regulations.
<PAGE>
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
http://www.prudential.com
Class NASDAQ Cusip
A -- 74437K103
B -- 74437K202
C -- 74437K301
Z -- 74437K400
Directors
Delayne Dedrick Gold
Robert F. Gunia
Douglas H. McCorkindale
Thomas T. Mooney
Stephen P. Munn
David R. Odenath, Jr.
Richard A. Redeker
Robin B. Smith
John R. Strangfeld
Louis A. Weil, III
Clay T. Whitehead
Officers
John R. Strangfeld, President
Robert F. Gunia, Vice President
Grace C. Torres, Treasurer
Marguerite E.H. Morrison, Secretary
Stephen M. Ungerman, Assistant Treasurer
Manager
Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street, Newark, NJ 07102-4077
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza, Newark, NJ 07102-3777
Distributor
Prudential Investment Management Services LLC
Gateway Center Three
100 Mulberry Street, Newark, NJ 07102-4077
Custodian
State Street Bank and Trust Company
One Heritage Drive, North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services LLC
P.O. Box 15005, New Brunswick, NJ 08906
Independent Accountants
PricewaterhouseCoopers LLP
1177 Avenue of the Americas, New York, NY 10036
Legal Counsel
Gardner, Carton & Douglas
Quaker Tower
321 North Clark Street, Chicago, IL 60610-4795
Prudential Investments is a unit of The Prudential
Insurance Company of America, 751 Broad Street,
Newark, NJ 07102.
The views expressed in this report and information
about the Fund's portfolio holdings are for the period
covered by this report and are subject to change thereafter.
This report is not authorized for distribution to
prospective investors unless preceded or accompanied
by a current prospectus.
MF188E
<PAGE>
(ICON)
Prudential
Health
Sciences
Fund
ANNUAL
REPORT
Nov. 30, 1999
(LOGO)
<PAGE>
A Message from the Fund's President January 7, 2000
(PHOTO)
Dear Shareholder,
As the average age increases in countries with developed economies,
the market for health- care products and services continues to
grow. Prudential Health Sciences Fund provides a way to participate
in that sector of the economy. The Fund was designed to be sensitive
to the factors driving the Standard & Poor's SuperComposite Health
Care Index (S&P SC Health Care Index)--an index that includes large-,
mid-, and small-cap health-related stocks. About half of the Fund's
assets are managed to reflect the company size and industry
composition of that Index. From the June 30, 1999 inception
of the Fund to November 30, however, the Index return has
been essentially flat (a gain of only 0.54%), despite sound
business fundamentals and considerable consolidation activity
in the pharmaceutical industry, its dominant component. This
group was hurt by concerns that the U.S. government would
fund Medicare coverage of drugs, an action that could
decrease pricing power for the industry. In addition, money
flowed out of the sector into areas such as technology,
which is a perceived beneficiary of the "new economy."
Other than healthcare, all sectors--except technology and
communication services--had negative returns during the
period.
Nonetheless, the Lipper Health/Biotechnology Average of
health sector mutual fund returns gained 6.83%. Prudential
Health Sciences Fund's Class A shares topped that by nearly
two percentage points with a return of 8.60%. Its superior
performance came from its concentrated portfolio, including
biotechnology stocks, such as Amgen and ViroPharma, and
Internet-related healthcare stocks, such as Allscripts
and Sciquest. The portfolio managers describe their strategy
in their report on the following pages.
This reporting period has been essentially one of a falling
stock market, with only the outsized returns on technology
stocks pulling the average positive. In this environment,
the return of Prudential Health Sciences Fund should be
viewed as very strong.
Despite the health sector's flat return over our reporting
period, it had the third best performance of S&P SuperComposite
1500 sectors. There are likely to be periods when its relative
performance is either stronger or weaker. Sector investing may
enhance the performance of a diversified portfolio, but it
should be part of a broader asset allocation strategy.
Prudential recommends that shareholders consult their
financial advisors periodically to review their allocations.
Yours sincerely,
John R. Strangfeld
President
Prudential Sector Funds, Inc.--Prudential Health Sciences Fund
<PAGE>
Performance Review
(PHOTO) (PHOTO) (PHOTO)
Kathleen McCarragher, David Chan,
and John Van Belle, Ph.D
Fund Managers
Investment Goals and Style
Prudential Health Sciences Fund seeks to achieve long-term
capital appreciation. It invests primarily in securities
of companies in the drug, healthcare, medicine, medical
device, and biotechnology industries. The Fund creates
two approximately equal portfolios: John Van Belle manages
an enhanced index portfolio consisting of securities
selected from those in the benchmark Standard & Poor's
SuperComposite Health Care Index (S&P SC Health Care
Index). Quantitative models are used to create
a sample that is representative of the Index, but
with overweighted and underweighted holdings designed
to increase the likelihood of performing better than
the benchmark. David Chan and Kathleen McCarragher
actively manage a concentrated portfolio,
holding a relatively small number of securities in
which they have the highest confidence.
The sector core
Large drug companies dominate the S&P SC Health Care
Index, with only five companies accounting for 51% of
its performance, and the next five accounting for a
further 25%. Nine of these 10 are drug companies.
As of November 30, these companies made
up eight of the 10 largest holdings of Prudential
Health Sciences Fund as well (including both the
enhanced index and concentrated portfolios). Although
this focus on drug companies is intended to hold down
the difference between the Fund's return
and the Index, the Fund outperformed the sector by a
large margin, primarily due to the selection of biotechnology
and Internet-related stocks in its concentrated portfolio.
New products from biotechnology
The biotechnology industry has developed a host of new products
with strong earnings potential. ViroPharma was among the
concentrated portfolio's largest holdings at period end,
and among the largest contributors to the Fund's superior
performance. Its oral drug Pleconaril is in late-phase
clinical trial for treating viral meningitis and viral
respiratory infections, and could reach the market as
early as late 2000.
Amgen, another large contributor to our return, is one of
the largest biotechnology companies. It continues to
introduce new products, investing a fourth of its sales
revenues on research and development. It is launching a
new drug--NESP--that is expected to be a blockbuster. NESP
is a long-acting version of its best-selling anti-anemia
drug Epogen, which also allows the company to enter new
multibillion dollar markets in the oncology field. It also
can market NESP directly in Europe, whereas Epogen's European
rights had been licensed to another firm. We also had a
substantial boost from QLT PhotoTherapeutics, which will
soon launch Visudyne, the first treatment for the wet form
of macular degeneration that can lead to blindness.
We project sales of more than $500 million a year.
The Internet even in a health fund?
Internet technology is expected to transform healthcare as
much as it is changing other industries. A large contribution
to our return came from Allscripts, which made its initial
public offering of stock in July, and saw its shares appreciate by
83% by November 30. The gain actually began in October, as
investors began to understand the potential of its "TouchScript"
product, which allows physicians to prescribe and reorder drugs
over the Internet using a small, wireless handheld device.
Physicians can prescribe drugs with
<PAGE>
three touches on this device, and the prescription can
be checked for compliance with an HMO's list of approved
drugs, as well as for interactions with other drugs that
might cause safety problems.
We also benefited from our holdings in Sciquest.com. This
healthcare business-to-business Internet site allows
research laboratories to purchase laboratory supplies
and chemical reagents. It offers access to more than
8,000 suppliers and 550,000 products.
And some negative impacts. We had some losses as well.
Some, such as Quintiles Transnational, we sold. It had
an unexpected and unexplained earnings shortfall. We no
longer believed we had a clear view of its earnings power,
so we sold the stock and took our losses. In other cases,
we thought falling prices represented buying opportunities.
We own Aviron, which has a flu vaccine that can be delivered
through a nasal spray. This has great potential for vaccinating
children for the flu--a largely unserved market today.
Manufacturing problems delayed the drug's introduction
and the share price fell, but we think the earnings
potential remains. Visx stock declined because many
investors were uncertain about its ability to enforce its patents
on laser vision correction, a view we do not share.
Performance at a Glance
<TABLE>
Cumulative Total Returns1 As of 11/30/99
<CAPTION>
Since Inception2 Since Inception2
(Without sales charge) (With sales charge)
<S> <C> <C>
Class A 8.60% 3.17%
Class B 8.30 3.30
Class C 8.30 6.22
Class Z 8.80 8.80
Lipper Health/
Biotechnology Fd. Avg.3 7.00 N/A
</TABLE>
Past performance is not indicative of future results. Principal
and investment return will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
1 Source: Prudential Investments Fund Management LLC and Lipper
Inc. Since the Fund has been in existence less than one year,
no average annual total returns are presented. The Fund charges
a maximum front-end sales charge of 5% for Class A shares.
Class B shares are subject to a declining contingent deferred
sales charge (CDSC) of 5%, 4%, 3%, 2%, 1%, and 1% for six years.
Class B shares will automatically convert to Class A shares, on
a quarterly basis, approximately seven years after
purchase. Class C shares are subject to a front-end sales
charge of 1% and a CDSC of 1% for 18 months. Class Z shares
are not subject to a sales charge or distribution and service
(12b-1) fees.
2 Inception date: Class A, B, C, and Z, 6/30/99.
3 The Lipper Since Inception return is for all funds in each
share class in the Health/Biotechnology Fund category. The
Lipper average is unmanaged. Health/Biotechnology funds
invest at least 65% of their assets in equity securities
of companies engaged in healthcare, medicine, and biotechnology.
1
<PAGE>
Review Cont'd.
After the end of our reporting period, we added
substantially to our holdings.
Looking Ahead
The valuations (relative value in terms of how much earnings,
book value, and cash flow an invested dollar buys) of the drug
industry are very attractive, and the business outlook is good.
The outlook for stock prices should be favorable.
Nonetheless, the year 2000 is an election year, and drug costs
may become part of the political debate. If that should happen,
there may be some volatility in share prices over the short term,
but we believe they are likely to recover from any
turbulence.
We continue to find biotechnology companies with attractive
new products. We think there is tremendous growth potential
here.
Five Largest Holdings--Concentrated Portfolio As of 11/30/99
Security/Security Group
% of Total Concentrated
Portfolio Market Value Comments
Warner-Lambert Co.
Pharmaceuticals
8.6% Agreed to be acquired by American Home
Products, but faces a hostile offer
from Pfizer. Will be acquired by
one or the other, with attractive earnings
growth prospects for the resulting company.
Pfizer, Inc.
Pharmaceuticals
8.4% A solid performer as a standalone company,
is trying to acquire Warner-Lambert. If
successful, this acquisition should
solidify earnings prospects in the +20%
range for the next few years. However, after
our reporting date, we sold our entire
concentrated portfolio position, preferring
to approach the combination through ownership
of Warner-Lambert.
Glaxo Wellcome PLC
Pharmaceuticals
7.2% Expected to launch two blockbuster drugs in
2000: Lotronex for irritable bowel syndrome,
and Advair, a combination product for asthma.
These should restore healthy sales and profit
growth. Expected to be an active participant
in the ongoing consolidation of the industry.
American Home Products Corp.
Pharmaceuticals
7.0% Starting next year, should launch a series of
new products. Should Pfizer win in its offer
for Warner-Lambert, and the courts approve the
acquisition, AHP should receive a breakup fee
of up to $2 billion.
Bristol-Myers Squibb Co.
Pharmaceuticals
6.2% A large drug company with good prospects for
new products and earnings growth. Will be
launching many new drugs over the next two
years, notably Vanlev, a new treatment for
hypertension that could have billion-dollar
potential.
Portfolio Composition
Expressed as a percentage of net assets as of 11/30/99
Pharmaceuticals 63.9%
Biotechnology 11.7
Medical Specialties 8.3
Hospital Management 5.0
Medical Devices/Equipment 3.6
Miscellaneous 1.6
Cash & Equivalents 5.9
<TABLE>
Five Largest Holdings--Enhanced Index Portfolio As of 11/30/99
<CAPTION>
% of Total Enhanced % of S&P SC
Security Industry Group Index Market Value Health Care Index*
<S> <C> <C> <C>
Merck & Co., Inc. Pharmaceuticals 13.7 13.8
Bristol-Myers Squibb Co. Pharmaceuticals 10.6 10.9
Pfizer, Inc. Pharmaceuticals 10.4 10.5
Johnson & Johnson Medical Specialties 10.3 10.5
Lilly (Eli) & Co. Pharmaceuticals 5.8 5.9
</TABLE>
*Source: Standard & Poor's, based on data retrieved by Factset.
2
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
Portfolio of Investments as
of November 30, 1999 PRUDENTIAL HEALTH SCIENCES FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--94.1%
COMMON STOCKS
- ------------------------------------------------------------
Biotechnology--11.7%
102,200 Amgen, Inc.(a) $ 4,656,487
319,900 Aviron(a) 5,138,394
7,500 Bio-Technology General Corp.(a) 90,000
13,600 Biogen, Inc.(a) 993,650
11,400 Chiron Corp.(a) 374,062
2,300 Enzo Biochem, Inc.(a) 60,088
7,800 Genentech, Inc.(a) 669,825
13,000 Genzyme Corp.(a) 468,000
1,600 Idec Pharmaceuticals Corp.(a) 202,800
2,900 Incyte Pharmaceuticals, Inc.(a) 84,100
3,600 Liposome Company, Inc.(a) 44,775
4,500 Organogenesis, Inc.(a) 41,906
2,500 Protein Design Labs, Inc.(a) 100,000
50,900 QLT Photo Therapeutics, Inc.(a) 2,271,412
2,900 Regeneron Pharmaceuticals, Inc.(a) 22,113
238,800 ViroPharma Inc.(a) 5,850,600
------------
21,068,212
- ------------------------------------------------------------
Drug/Medical/Dental Distribution--0.2%
1,500 DENTSPLY International, Inc. 35,906
2,700 Invacare Corp. 56,869
9,800 Sybron International Corp.(a) 240,713
------------
333,488
- ------------------------------------------------------------
Healthcare Information Services--1.4%
2,600 Pharmaceutical Product Development,
Inc.(a) 32,175
4,200 Rural/Metro Corp.(a) 23,888
73,000 SciQuest.com, Inc.(a) 2,409,000
------------
2,465,063
- ------------------------------------------------------------
Hospital Management--5.0%
8,000 Aetna, Inc. 437,000
87,000 Allscripts Inc.(a) 3,142,875
7,900 Beverly Enterprises, Inc.(a) 31,600
34,300 Columbia/HCA Healthcare Corp. $ 934,675
4,000 Covance, Inc.(a) 43,500
4,700 Coventry Health Care, Inc.(a) 27,025
2,600 Express Scripts, Inc.(a) 131,950
6,800 First Health Group Corp.(a) 171,275
9,500 Foundation Health Systems, Inc.(a) 80,156
21,000 Health Management Associates,
Inc.(a) 258,562
5,500 Humana, Inc. 38,500
5,200 Integrated Health Services, Inc. 1,950
14,800 Lincare Holdings, Inc.(a) 419,950
13,100 Magellan Health Services, Inc.(a) 81,875
6,800 Manor Care, Inc.(a) 136,425
4,000 Orthodontic Centers of America,
Inc.(a) 48,750
45,200 Oxford Health Plans, Inc.(a) 662,462
1,900 Pacificare Health Systems, Inc.(a) 88,944
4,000 Parexel International Corp.(a) 48,000
1,700 Pediatrix Medical Group, Inc.(a) 13,175
6,600 PhyCor, Inc.(a) 9,900
3,200 Renal Care Group, Inc.(a) 65,600
2,100 Sierra Health Services, Inc.(a) 19,688
15,600 Tenet Healthcare Corp.(a) 348,075
15,800 Trigon Healthcare, Inc.(a) 465,113
17,200 United Healthcare Corp. 893,325
2,100 Universal Health Services, Inc. 69,169
4,200 US Oncology, Inc.(a) 19,819
7,200 Wellpoint Health Networks, Inc.(a) 414,450
------------
9,103,788
- ------------------------------------------------------------
Medical Devices/Equipment--3.6%
3,900 Allergan, Inc. 383,662
600 Bausch & Lomb, Inc. 32,888
4,300 Beckman Coulter, Inc. 205,325
6,900 Biomet, Inc.(a) 218,644
20,300 Boston Scientific Corp.(a) 428,837
1,700 Datascope Corp. 63,059
15,900 Guidant Corp. 795,000
65,272 Medtronic, Inc. 2,537,449
2,900 Sola International, Inc.(a) 41,325
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 3
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
Portfolio of Investments as
of November 30, 1999 PRUDENTIAL HEALTH SCIENCES FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Medical Devices/Equipment (cont'd.)
200 Spacelabs Medical, Inc.(a) $ 2,775
3,700 Summit Technology, Inc.(a) 70,994
22,200 Visx, Inc.(a) 1,721,887
1,800 Wesley Jessen Visioncare, Inc.(a) 51,413
------------
6,553,258
- ------------------------------------------------------------
Medical Specialties--8.3%
2,500 Acuson Corp.(a) 28,906
4,500 Adac Laboratories 52,594
3,700 Alza Corp.(a) 159,794
3,400 Bard (C.R.), Inc. 184,662
17,200 Baxter International, Inc. 1,162,075
9,300 Becton, Dickinson & Co. 253,425
2,200 Cooper Company, Inc. 55,550
306,300 Cygnus Inc.(a) 3,043,856
1,700 Diagnostic Products Corp. 42,819
2,300 Hanger Orthopedic Group, Inc.(a) 23,575
3,800 Idexx Laboratories, Inc.(a) 70,300
84,942 Johnson & Johnson 8,812,732
13,300 Mallinckrodt, Inc. 442,225
2,800 Mentor Corp. 65,450
3,600 Respironics, Inc.(a) 28,575
5,400 Safeskin Corp.(a) 65,475
11,600 STERIS Corp.(a) 150,800
4,800 Stryker Corp. 273,300
3,300 Varian Medical Systems, Inc. 86,213
------------
15,002,326
- ------------------------------------------------------------
Pharmaceuticals--63.9%
94,600 Abbott Laboratories 3,594,800
2,400 Alpharma, Inc. 76,800
203,900 American Home Products Corp. 10,602,800
2,100 Barr Laboratories, Inc.(a) $ 66,150
2,800 Biomatrix, Inc.(a) 65,800
204,800 Bristol-Myers Squibb Co. 14,963,200
3,600 Cephalon, Inc.(a) 80,100
3,700 Cor Therapeutics, Inc.(a) 73,075
5,400 Dura Pharmaceuticals, Inc.(a) 70,369
58,900 Forest Laboratories, Inc.(a) 3,014,944
900 Gilead Sciences, Inc.(a) 43,200
116,700 Glaxo Wellcome PLC, ADR (United
Kingdom) 6,936,356
11,200 Ivax Corp. 227,500
3,600 Jones Pharma, Inc. 124,650
146,100 Lilly (Eli) & Co. 10,482,675
33,065 Medimmune, Inc.(a) 3,974,000
197,500 Merck & Co., Inc. 15,503,750
3,600 North American Vaccine, Inc.(a) 19,800
467,000 Pfizer, Inc. 16,899,562
29,200 Pharmacia & Upjohn, Inc. 1,596,875
3,300 Roberts Pharmaceutical Corp.(a) 106,631
99,000 Schering-Plough Corp. 5,061,375
44,500 Sepracor, Inc.(a) 4,322,062
900 Syncor International Corp.(a) 25,256
61,700 Transkaryotic Therapies, Inc.(a) 2,834,344
63,400 Vertex Pharmaceuticals, Inc.(a) 1,684,063
145,000 Warner-Lambert Co. 13,004,687
1,000 Watson Pharmaceuticals, Inc.(a) 37,188
------------
115,492,012
------------
Total long-term investments
(cost $156,886,490) 170,018,147
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 4
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
Portfolio of Investments as
of November 30, 1999 PRUDENTIAL HEALTH SCIENCES FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
SHORT-TERM INVESTMENTS--6.2%
- ------------------------------------------------------------
Corporate Bonds--6.0%
$ 4,316 General Electric Capital Corp.
5.50%, 12/1/99 $ 4,316,000
2,000 General Motors Acceptance Corp.
5.00%, 12/1/99 2,000,000
4,500 Ford Motor Credit Corp.
5.51%, 12/1/99 4,500,000
------------
Total corporate bonds
(cost $10,816,000) 10,816,000
- ------------------------------------------------------------
Repurchase Agreement--0.2%
291 Joint Repurchase Agreement Account,
5.51%, 12/1/99
(cost $291,000) 291,000
------------
Total short-term investments
(cost $11,107,000) 11,107,000
------------
- ------------------------------------------------------------
Total Investments--100.3%
(cost $167,993,490; Note 4) 181,125,147
Liabilities in excess of
other assets--(0.3%) (486,627)
------------
Net Assets--100% $180,638,520
------------
------------
</TABLE>
- ---------------
(a) Non-income producing security.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 5
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
Statement of Assets and Liabilities PRUDENTIAL HEALTH SCIENCES FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets November 30, 1999
<S> <C>
Investments, at value (cost $167,993,490)............................................................... $ 181,125,147
Cash.................................................................................................... 3,894
Receivable for Fund shares shold........................................................................ 1,011,125
Receivable for investments sold......................................................................... 1,006,403
Dividends and interest receivable....................................................................... 149,074
Deferred offering costs and other assets................................................................ 87,937
-----------------
Total assets......................................................................................... 183,383,580
-----------------
Liabilities
Payable for investments purchased....................................................................... 1,908,801
Payable for Fund shares repurchased..................................................................... 318,438
Accrued expenses........................................................................................ 315,475
Distribution fees payable............................................................................... 115,772
Management fee payable.................................................................................. 86,574
-----------------
Total liabilities.................................................................................... 2,745,060
-----------------
Net Assets.............................................................................................. $ 180,638,520
-----------------
-----------------
Net assets were comprised of:
Common stock, at par................................................................................. $ 166,653
Paid-in capital in excess of par..................................................................... 166,034,666
-----------------
166,201,319
Accumulated net realized gain on investments......................................................... 1,305,544
Net unrealized appreciation on investments........................................................... 13,131,657
-----------------
Net assets, November 30, 1999........................................................................... $ 180,638,520
-----------------
-----------------
Class A:
Net asset value and redemption price per share
($36,645,407 / 3,372,849 shares of common stock issued and outstanding)........................... $10.86
Maximum sales charge (5% of offering price).......................................................... 0.57
-----------------
Maximum offering price to public..................................................................... $11.43
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per share
($89,061,032 / 8,223,673 shares of common stock issued and outstanding)........................... $10.83
-----------------
-----------------
Class C:
Net asset value and redemption price per share
($46,550,746 / 4,298,411 shares of common stock issued and outstanding)........................... $10.83
Sales charge (1% of offering price).................................................................. 0.11
-----------------
Offering price to public............................................................................. $10.94
-----------------
-----------------
Class Z:
Net asset value, offering price and redemption price per share
($8,381,335 / 770,379 shares of common stock issued and outstanding).............................. $10.88
-----------------
-----------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 6
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
PRUDENTIAL HEALTH SCIENCES FUND
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, 1999(a)
Through
Net Investment Income November 30, 1999
<S> <C>
Income
Dividends (net of foreign witholding
tax of $6,224)..................... 550,793
Interest.............................. 204,475
-----------------
Total income.......................... 755,268
-----------------
Expenses
Management fee........................ 488,906
Distribution fee--Class A............. 33,788
Distribution fee--Class B............. 314,109
Distribution fee--Class C............. 173,368
Registration fees..................... 188,000
Transfer agent's fees and expenses.... 108,000
Reports to shareholders............... 67,000
Custodian's fees and expenses......... 65,000
Audit fee and expenses................ 25,000
Legal fees and expenses............... 12,500
Organizational expenses............... 12,500
Directors' fees....................... 2,000
Miscellaneous......................... 5,259
-----------------
Total expenses..................... 1,495,430
Less: Management fee waiver (Note
2)................................. (97,781)
-----------------
Net expenses....................... 1,397,649
-----------------
Net investment loss...................... (642,381)
-----------------
Realized and Unrealized Gain
(Loss) on Investments
Net realized gain on investment
transactions.......................... 1,720,697
Net change in unrealized appreciation on
investments........................... 13,131,657
-----------------
Net gain on investments.................. 14,852,354
-----------------
Net Increase in Net Assets
Resulting from Operations................ $ 14,209,973
-----------------
-----------------
- ---------------
(a) Commencement of investment operations.
</TABLE>
PRUDENTIAL SECTOR FUNDS, INC.
PRUDENTIAL HEALTH SCIENCES FUND
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, 1999(a)
Increase Through
in Net Assets November 30, 1999
<S> <C>
Operations
Net investment loss....................... $ (642,381)
Net realized gain on investments.......... 1,720,697
Net change in unrealized appreciation on
investments............................ 13,131,657
-----------------
Net increase in net assets resulting from
operations............................. 14,209,973
-----------------
Fund share transactions
Net proceeds from shares sold............. 180,151,042
Cost of shares reacquired................. (13,722,495)
-----------------
Net increase in net assets from Fund share
transactions........................... 166,428,547
-----------------
Total increase............................... 180,638,520
Net Assets
Beginning of period.......................... --
-----------------
End of period................................ $ 180,638,520
-----------------
-----------------
- ---------------
(a) Commencement of investment operations.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 7
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
Notes to Financial Statements PRUDENTIAL HEALTH SCIENCES FUND
- --------------------------------------------------------------------------------
Prudential Sector Funds, Inc. (the 'Company') formerly Prudential Utility Fund,
Inc. is registered under the Investment Company Act of 1940 as an open-end
management investment company. The Company currently consists of four separate
funds, one of which is Prudential Health Sciences Fund (the 'Fund'). Investment
operations commenced on June 30, 1999. The Fund is non-diversified and it's
investment objective is long-term capital appreciation which is sought 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.
- ------------------------------------------------------------
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 listed on a securities exchange and NASDAQ
National Market System securities are valued at the last sales price on the day
of valuation, or, if there was no sale on such day, the mean between the last
bid and asked prices on such day or at the bid price on such day in the absence
of an asked price. Corporate bonds and U.S. Government securities are valued on
the basis of valuations provided by a pricing service or principal market
makers. Options 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 sales prices as of the
close of trading on the applicable commodities exchange. Any security for which
a reliable market quotation is unavailable is valued at fair value as determined
in good faith by or under the direction of the Fund's Board of Directors.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost which approximates market value.
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 take
possession of the underlying collateral securities, the value of which exceeds
the principal amount of the repurchase transaction including accrued interest.
To the extent that any repurchase transaction exceeds one business day, the
value of the collateral is marked-to-market on a daily basis to ensure the
adequacy of the collateral. 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.
Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
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. 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 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: The Fund expects to pay dividends of net investment
income and distributions of net realized capital gains, if any, annually.
Dividends and distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
Taxes: For federal income tax purposes, each fund in the Company is treated as a
separate tax paying entity. It is the Fund's policy to meet the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable net income and net capital gains, if any, 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.
Offering and Organization Costs: The Fund incurred approximately $162,500 in
connection with the organization of the Fund. Organization costs of $12,500 were
expensed and offering costs of $150,000 are being amortized over a period of 12
months ending June 2000.
Reclassification of Capital Accounts: The Company accounts and reports for
distributions to shareholders in accordance with 'Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by
- --------------------------------------------------------------------------------
8
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
Notes to Financial Statements PRUDENTIAL HEALTH SCIENCES FUND
- --------------------------------------------------------------------------------
Investment Companies.' The effect on the Fund of applying this statement was to
decrease accumulated net investment loss by $642,381, decrease paid in capital
in excess of par by $227,228 and decrease accumulated net realized gain on
investments by $415,153 due to a tax operating loss and certain expenses not
deductible for tax purposes. Net investment loss, net realized gains and net
assets were not affected by this change.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM has entered into a subadvisory agreements with The Prudential
Investment Corporation ('PIC') and Jennison Associates LLC ('Jennison'). Each
subadviser furnishes investment advisory services in connection with the
management of the Fund. PIFM pays for the cost of the subadviser's services, the
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 .75 of 1% of the Fund's average daily net assets. PIC is reimbursed by
PIFM for its reasonable costs and expenses incurred in providing services to a
portion of the Fund's assets. Jennison is compensated by PIFM for its services
at the rate of .30 of 1% of the average daily net assets of the portion of the
Fund that Jennison manages up to and including $300 million and .25 of 1% of
such average daily net assets in excess of $300 million.
PIFM has agreed to waive a portion (.15 of 1% of the Fund's average daily net
assets) of its management fee, which amounted to $97,781 ($.0059 per share) for
the period ended November 30, 1999. The Fund is not required to reimburse PIFM
for such waiver.
The Fund 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 Fund 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. The distribution fees 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 Fund compensates PIMS for
distribution-related activities at an annual rate of up to .30% of 1%, 1% and 1%
of the average daily net assets of the Class A, B and C shares, respectively.
Such expenses under the Plans were .25 of 1%, 1% and 1% of the average daily net
assets of the Class A, B and C shares, respectively, for the period ended
November 30, 1999.
PIMS has advised the Fund that it received approximately $938,000 and $438,300
in front-end sales charges resulting from sales of Class A shares and Class C
shares, respectively, during the period ended November 30, 1999. From these
fees, PIMS paid such sales charges to dealers, which in turn paid commissions to
salespersons and incurred other distribution costs.
PIMS has advised the Fund that for the period ended November 30, 1999, it
received approximately $68,500 and $23,000 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PIFM, PIC, PIMS and Jennison are wholly owned subsidiaries of The Prudential
Insurance Company of America.
- ------------------------------------------------------------
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 period ended November 30,
1999, the Fund incurred fees of approximately $99,000 for the services of PMFS.
As of November 30, 1999, approximately $21,000 of such fees were due to PMFS.
Transfer agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to nonaffiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the period ended November 30, 1999 were $246,192,576 and $91,026,783,
respectively.
The federal income tax basis of the Fund's investments at November 30, 1999 was
$169,481,246 and, accordingly, net unrealized appreciation for federal income
tax purposes was $11,643,901 (gross unrealized appreciation--$16,467,387; gross
unrealized depreciation--$4,823,486).
- ------------------------------------------------------------
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
- --------------------------------------------------------------------------------
9
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
Notes to Financial Statements PRUDENTIAL HEALTH SCIENCES FUND
- --------------------------------------------------------------------------------
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 has a 0.04% undivided interest in the repurchase
agreements in the joint account. The undivided interest for the Fund represents
$291,000 principal amount. As of such date, the repurchase agreements in the
joint account and the value of the collateral therefore 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 Inc., 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.
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 will 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 charge
and are offered exclusively for sale to a limited group of investors.
There are 400 million shares of common stock, $.01 par value per share, divided
into four classes, designated Class A, Class B, Class C and Class Z common
stock, each of which consists of 100 million authorized shares.
As of November 30, 1999 PIFM owned 10 Class A shares, 10 Class B shares, 10
Class C shares and 10 Class Z shares.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- --------------------------------------- --------- -----------
<S> <C> <C>
June 30, 1999(a) through
November 30, 1999:
Shares sold............................ 3,887,815 $38,863,218
Shares reacquired...................... (517,941) (5,221,019)
--------- -----------
Net increase in shares outstanding
before conversion.................... 3,369,874 33,642,199
Shares issued upon conversion from
Class B.............................. 2,975 30,317
--------- -----------
Net increase in shares outstanding..... 3,372,849 $33,672,516
--------- -----------
--------- -----------
<CAPTION>
Class B
- ---------------------------------------
<S> <C> <C>
June 30, 1999(a) through
November 30, 1999:
Shares sold............................ 8,576,932 $85,677,986
Shares reacquired...................... (350,278) (3,570,092)
--------- -----------
Net increase in shares outstanding
before conversion.................... 8,226,654 82,107,894
Shares reacquired upon conversion into
Class A.............................. (2,981) (30,317)
--------- -----------
Net increase in shares outstanding..... 8,223,673 $82,077,577
--------- -----------
--------- -----------
<CAPTION>
Class C
- ---------------------------------------
<S> <C> <C>
June 30, 1999(a) through
November 30, 1999:
Shares sold............................ 4,638,743 $46,390,371
Shares reacquired...................... (340,332) (3,446,453)
--------- -----------
Net increase in shares outstanding..... 4,298,411 $42,943,918
--------- -----------
--------- -----------
<CAPTION>
Class Z
- ---------------------------------------
<S> <C> <C>
June 30, 1999(a) through
November 30, 1999:
Shares sold............................ 917,727 $ 9,219,467
Shares reacquired...................... (147,348) (1,484,931)
--------- -----------
Net increase in shares outstanding..... 770,379 $ 7,734,536
--------- -----------
--------- -----------
</TABLE>
- ---------------
(a) Commencement of investment operations.
- --------------------------------------------------------------------------------
10
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
Financial Highlights PRUDENTIAL HEALTH SCIENCES FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B Class C
---------------- ---------------- ----------------
June 30, 1999(b) June 30, 1999(b) June 30, 1999(b)
Through Through Through
November 30, November 30, November 30,
1999 1999 1999
---------------- ---------------- ----------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......................... $ 10.00 $ 10.00 $ 10.00
------ ------ ------
Income from investment operations
Net investment loss(d)....................................... (.02) (.05) (.05)
Net realized and unrealized gain on investment
transactions.............................................. .88 .88 .88
------ ------ ------
Total from investment operations.......................... .86 .83 .83
------ ------ ------
Net asset value, end of period............................... $ 10.86 $ 10.83 $ 10.83
------ ------ ------
------ ------ ------
TOTAL RETURN(a):............................................. 8.60% 8.30% 8.30%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............................. $ 36,646 $ 89,061 $ 46,551
Average net assets (000)..................................... $ 32,032 $ 74,448 $ 41,090
Ratios to average net assets(c)/(d):
Expenses, including distribution fees..................... 1.59% 2.34% 2.34%
Expenses, excluding distribution fees..................... 1.34% 1.34% 1.34%
Net investment loss....................................... (.43)% (1.20)% (1.18)%
Portfolio turnover rate...................................... 61% 61% 61%
<CAPTION>
Class Z
----------------
<S> <C>
June 30, 1999(b)
Through
November 30,
1999
----------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......................... $10.00
-----
Income from investment operations
Net investment loss(d)....................................... (.01)
Net realized and unrealized gain on investment
transactions.............................................. .89
-----
Total from investment operations.......................... .88
-----
Net asset value, end of period............................... $10.88
-----
-----
TOTAL RETURN(a):............................................. 8.80%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............................. $8,381
Average net assets (000)..................................... $6,932
Ratios to average net assets(c)/(d):
Expenses, including distribution fees..................... 1.34%
Expenses, excluding distribution fees..................... 1.34%
Net investment loss....................................... (.20)%
Portfolio turnover rate...................................... 61%
</TABLE>
- ---------------
(a) Total return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes reinvestment
of dividends and distributions. Total returns for periods of less than a
full year are not annualized.
(b) Commencement of investment operations.
(c) Annualized.
(d) Net of management fee waiver.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 11
<PAGE>
PRUDENTIALSECTOR FUNDS, INC.
Report of Independent Accountants PRUDENTIAL HEALTH SCIENCES FUND
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Prudential Sector Funds, Inc.--Prudential Health Sciences 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 Health Sciences Fund (the 'Fund') at November 30, 1999, and the
results of its operations, the changes in its net assets and the financial
highlights for the period June 30, 1999 (commencement of operations) through
November 30, 1999, 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 audit. We conducted our audit 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 audit, which included confirmation of securities at November
30, 1999 by correspondence with the custodian and brokers, provides a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
January 17, 2000
- --------------------------------------------------------------------------------
12
<PAGE>
Getting the Most from Your Prudential Mutual Fund
Some mutual fund shareholders won't ever read this--they
don't read annual and semiannual reports. It's quite
understandable. These annual and semiannual reports are
prepared to comply with federal regulations, and are often
written in language that is difficult to understand. So, when
most people run into those particularly daunting sections of
these reports, they don't read them.
We think that's a mistake.
At Prudential Mutual Funds, we've made some changes to our
report to make it easier to understand and more pleasant to
read. We hope you'll find it profitable to spend a few minutes
familiarizing yourself with your investment. Here's what you'll
find in the report:
Performance at a Glance
Since an investment's performance is often a shareholder's primary
concern, we present performance information in two different
formats. You'll find it first on the "Performance at a Glance"
page where we compare the Fund and the comparable average
calculated by Lipper, Inc., a nationally recognized mutual
fund rating agency. We report both the cumulative total
returns and the average annual total returns. The cumulative
total return is the total amount of income and appreciation
the Fund has achieved in various time periods. The average
annual total return is an annualized representation of the
Fund's performance. It gives you an idea of how much the Fund
has earned in an average year for a given time period. Under
the performance box, you'll see legends that explain the
performance information, whether fees and sales charges
have been included in returns, and the inception dates
for the Fund's share classes.
See the performance comparison charts at the back of the
report for more performance information. Please keep in
mind that past performance is not indicative of future results.
Portfolio Manager's Report
The portfolio manager, who invests your money for you, reports
on successful--and not-so-successful--strategies in this
section of your report. Look for recent purchases and sales
here, as well as information about the sectors the portfolio
manager favors, and any changes that are on the drawing board.
Portfolio of Investments
This is where the report begins to appear technical, but it's
really just a listing of each security held at the end of the
reporting period, along with valuations and other information.
Please note that sometimes we discuss a security in the
Portfolio Manager's Report that doesn't appear in this listing
because it was sold before the close of the reporting period.
<PAGE>
Statement of Assets and Liabilities
The balance sheet shows the assets (the value of the Fund's
holdings), liabilities (how much the Fund owes), and net
assets (the Fund's equity, or holdings after the Fund pays
its debts) as of the end of the reporting period. It also
shows how we calculate the net asset value per share for
each class of shares. The net asset value is reduced by
payment of your dividend, capital gain, or other distribution,
but remember that the money or new shares are being paid or
issued to you. The net asset value fluctuates daily, along
with the value of every security in the portfolio.
Statement of Operations
This is the income statement, which details income (mostly
interest and dividends earned) and expenses (including what
you pay us to manage your money). You'll also see capital
gains here--both realized and unrealized.
Statement of Changes in Net Assets
This schedule shows how income and expenses translate into
changes in net assets. The Fund is required to pay out the
bulk of its income to shareholders every year, and this
statement shows you how we do it--through dividends and
distributions--and how that affects the net assets. This
statement also shows how money from investors flowed into
and out of the Fund.
Notes to Financial Statements
This is the kind of technical material that can intimidate
readers, but it does contain useful information. The Notes
provide a brief history and explanation of your Fund's
objectives. In addition, they outline how Prudential Mutual
Funds prices securities. The Notes also explain who manages
and distributes the Fund's shares and, more importantly, how
much they are paid for doing so. Finally, the Notes explain
how many shares are outstanding and the number issued and
redeemed over the period.
Financial Highlights
This information contains many elements from prior pages,
but on a per-share basis. It is designed to help you understand
how the Fund performed, and to compare this year's performance
and expenses to those of prior years.
Independent Auditor's Report
Once a year, an outside auditor looks over our books and
certifies that the information is fairly presented and
complies with generally accepted accounting principles.
Tax Information
This is information which we report annually about how much
of your total return is taxable. Should you have any questions,
you may want to consult a tax adviser.
Performance Comparison
These charts are included in the annual report and are
required by the Securities Exchange Commission. Performance
is presented here as a hypothetical $10,000 investment in
the Fund since its inception or for 10 years (whichever is
shorter). To help you put that return in context, we are
required to include the performance of an unmanaged,
broad-based securities index as well. The index does
not reflect the cost of buying the securities it contains
or the cost of managing a mutual fund. Of course, the index
holdings do not mirror those of the Fund--the index is a
broad-based reference point commonly used by investors to
measure how well they are doing. A definition of the
selected index is also provided. Investors cannot invest
directly in an index.
<PAGE>
Getting the Most from Your Prudential Mutual Fund
How many times have you read these reports--or other financial
materials-- and stumbled across a word that you don't understand?
Many shareholders have run into the same problem. We'd like
to help. So we'll use this space from time to time to explain
some of the words you might have read, but not understood. And
if you have a favorite word that no one can explain to your
satisfaction, please write to us.
Basis Point: 1/100th of 1%. For example, one-half of one
percent is 50 basis points.
Collateralized Mortgage Obligations (CMOs): Mortgage-backed
bonds that separate mortgage pools into different maturity
classes, called tranches. These instruments are sensitive
to changes in interest rates and homeowner refinancing activity. They
are subject to prepayment and maturity extension risk.
Derivatives: Securities that derive their value from other
securities. The rate of return of these financial instruments
rises and falls--sometimes very suddenly--in response to
changes in some specific interest rate, currency, stock,
or other variable.
Discount Rate: The interest rate charged by the Federal
Reserve on loans to member banks.
Federal Funds Rate: The interest rate charged by one bank
to another on overnight loans.
Futures Contract: An agreement to purchase or sell a
specific amount of a commodity or financial instrument
at a set price at a specified date in the future.
Leverage: The use of borrowed assets to enhance return.
The expectation is that the interest rate charged on borrowed
funds will be lower than the return on the investment. While
leverage can increase profits, it can also magnify losses.
Liquidity: The ease with which a financial instrument (or
product) can be bought or sold (converted into cash) in
the financial markets.
Price/Earnings Ratio: The price of a share of stock divided
by the earnings per share for a 12-month period.
Option: An agreement to purchase or sell something, such as
shares of stock, by a certain time for a specified price. An
option need not be exercised.
Spread: The difference between two values; often used to
describe the difference between "bid" and "asked" prices
of a security, or between the yields of two similar maturity
bonds.
Yankee Bond: A bond sold by a foreign company or government in
the U.S. market and denominated in U.S. dollars.
<PAGE>
Comparing a $10,000 Investment
- -----------------------------------------------------------------
Prudential Health Sciences Fund vs. the S&P SuperComposite 1500
and the S&P SC Health Care Index
Class A
(GRAPH)
Class B
(GRAPH)
Past performance is not indicative of future results. Principal and
investment return will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
These graphs compare a $10,000 investment in the Prudential Health
Sciences Fund (Class A, B, C, and Z shares) with a similar investment
in the Standard & Poor's SuperComposite 1500 Index (S&P SuperComposite
1500) and the Standard & Poor's SuperComposite Health Care Index
(S&P SC Health Care Index) by portraying the initial account values
of Class A, B, C, and Z shares at the commencement of operations
(June 30, 1999), and at the end of the fiscal year (November 30),
as measured on a quarterly basis. For purposes of the graphs, and
unless otherwise indicated, it has been assumed that (a) the
maximum applicable front-end sales charge was deducted from
the initial $10,000 investment in Class A and Class C shares;
(b) the maximum applicable contingent deferred sales charges
were deducted from the value of the investment in Class B and
Class C shares, assuming full redemption on November 30, 1999;
(c) all recurring fees (including management fees) were deducted;
and (d) all dividends and distributions were reinvested. Class
B shares will automatically convert to Class A shares, on a
quarterly basis, approximately seven years after purchase.
Class Z shares are not subject to a sales charge or distribution
and service (12b-1) fees. Since the Fund has been in existence
less than one year, no average annual total returns are presented.
<PAGE>
Class C
(GRAPH)
Class Z
(GRAPH)
The S&P SuperComposite 1500 is an unmanaged index that is a
combination of the S&P 500 Index (Standard & Poor's 500
Index comprises 500 large, established, publicly traded
stocks), the S&P Mid-Cap 400 Index (Standard & Poor's Mid-Cap
400 Index measures the performance of the 400 largest
companies outside of the S&P 500), and the S&P SmallCap
600 Index (Standard & Poor's 600 Index comprises 600 small
capitalization stocks) which provides a broad representation
of the entire U.S. market, representing 87% of total U.S.
equity market capitalization. The S&P SC Health Care Index
is an unmanaged capitalization-weighted index that measures
the performance of the healthcare sector of the S&P
SuperComposite 1500. Both Index returns include
the reinvestment of all dividends, but do not include
the effect of sales charges or operating expenses of a
mutual fund. The securities in the S&P SuperComposite 1500
and the S&P SC Health Care Index may differ substantially
from the securities in the Fund. These indexes are not the
only ones that may be used to characterize performance of
equity funds, and other indexes may portray different
comparative performance. Investors cannot invest directly
in an index.
These graphs are furnished to you in accordance with SEC regulations.
<PAGE>
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
http://www.prudential.com
Class NASDAQ Cusip
A -- 74437K509
B -- 74437K608
C -- 74437K707
Z -- 74437K806
Directors
Delayne Dedrick Gold
Robert F. Gunia
Douglas H. McCorkindale
Thomas T. Mooney
Stephen P. Munn
David R. Odenath, Jr.
Richard A. Redeker
Robin B. Smith
John R. Strangfeld
Louis A. Weil, III
Clay T. Whitehead
Officers
John R. Strangfeld, President
Robert F. Gunia, Vice President
Grace C. Torres, Treasurer
Marguerite E.H. Morrison, Secretary
Stephen M. Ungerman, Assistant Treasurer
Manager
Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street, Newark, NJ 07102-4077
Investment Advisers
Jennison Associates LLC
466 Lexington Avenue, New York, NY 10017
The Prudential Investment Corporation
Prudential Plaza, Newark, NJ 07102-3777
Distributor
Prudential Investment Management Services LLC
Gateway Center Three
100 Mulberry Street, Newark, NJ 07102-4077
Custodian
State Street Bank and Trust Company
One Heritage Drive, North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services LLC
P.O. Box 15005, New Brunswick, NJ 08906
Independent Accountants
PricewaterhouseCoopers LLP
1177 Avenue of the Americas, New York, NY 10036
Legal Counsel
Gardner, Carton & Douglas
Quaker Tower
321 North Clark Street, Chicago, IL 60610-4795
Prudential Investments is a unit of The Prudential
Insurance Company of America, 751 Broad Street,
Newark, NJ 07102.
The views expressed in this report and information
about the Fund's portfolio holdings are for the
period covered by this report and are subject to
change thereafter.
This report is not authorized for distribution to
prospective investors unless preceded or accompanied
by a current prospectus.
MF188E3
<PAGE>
(ICON)
Prudential
Technology
Fund
ANNUAL
REPORT
Nov. 30, 1999
(LOGO)
<PAGE>
A Message from the Fund's President January 7, 2000
- -------------------------------------------------------------------------------
(PHOTO)
Dear Shareholder,
During the five-month reporting period since Prudential Technology Fund's
inception on June 30, 1999, technology stocks had an amazing run. Shares of
technology companies of all capitalizations markedly outperformed other
sectors. In the Standard & Poor's SuperComposite 1500 Index (S&P SuperComposite
1500)--an index that includes large-, mid-, and small-cap stocks--the
technology sector's 18.76% gain over this period was almost five times the
return of the second-best performing sector. Eight of the 11 S&P SuperComposite
1500 market sectors declined during this interval. It was a good time to be in
a technology mutual fund.
About half of Prudential Technology Fund's assets are managed to reflect the
company size and industry composition of the S&P SuperComposite Technology
Index, so the 37.59% gain of its Class A shares--about twice the Index
performance--was quite impressive. It was in line with the 38.27% Lipper
Average of technology mutual funds over this period. The Fund benefited from
having underweighted computer hardware companies, correctly anticipating a
slowdown in corporate PC spending in the second half of 1999. Oracle, the
leading mainframe computer database company, was a large holding and among the
market leaders. JDS Uniphase, a large-cap photonics company, was another of the
Fund's largest holdings that rose substantially. The Fund also benefited from
its mid-cap companies such as Checkfree Holdings, which provides Internet bill
payment. However, the Fund's largest holding, Microsoft, which has had
astounding long-term gains in recent years, lagged in this extraordinary market
because it was embroiled in an antitrust case. Moreover, some of the Fund's
smaller holdings had difficulties.
I'd like to remind investors that technology stock performance in this
reporting period has been very unusual by historical standards. Moreover, in
December after the end of our reporting period, technology stocks continued
their year-end run at a pace that astonished investment professionals.
Shareholders should not assume that gains of this magnitude can be sustained
for long, or that one sector can continue indefinitely to lead the market by a
large margin. They should also be aware that the technology sector has been
very volatile. Sector investing may enhance the performance of a diversified
portfolio, but it should be part of a broader asset allocation strategy.
Prudential recommends that shareholders consult with their financial advisors
periodically to review their allocations.
Yours sincerely,
John R. Strangfeld
President
Prudential Sector Funds, Inc.--Prudential Technology Fund
<PAGE>
Performance Review
- -------------------------------------------------------------------------------
(PHOTOS)
Susan Hirsch, Jeff Rose and Ted Lockwood
Fund Managers
Investment Goals and Style
Prudential Technology Fund seeks to achieve long-term capital appreciation. It
invests primarily in securities of companies that its portfolio managers expect
will derive a substantial portion of their sales from products or services in
technology and technology-related activities. The Fund creates two
approximately equal portfolios. Ted Lockwood manages an enhanced index
portfolio consisting of securities selected from those in the benchmark
Standard & Poor's SuperComposite Technology Index (S&P SC Technology Index).
Quantitative models are used to create a sample that is representative of the
Index, but with overweighted and underweighted holdings designed to increase
the likelihood of performing better than the benchmark. Jeff Rose and Susan
Hirsch manage a concentrated portfolio, holding a relatively small number of
securities in which they have the highest confidence.
The sector giants
The Fund's three largest holdings at period end were also the three largest
companies (by market capitalization) in the S&P SC Technology Index--Microsoft,
Cisco Systems, and Intel. The five largest companies in the Index make up 43%
of its total capitalization, so they will be well represented in the Fund's
holdings, although often not to the extent that they dominate the Index.
Microsoft's stock return over our reporting period was held to a modest 3.5%
by concerns about the government's antitrust case against it and by delays in
the introduction of its Windows 2000 operating system, but Cisco and Intel had
returns well above the sector average.
How we play the Internet
It is clear that the Internet is revolutionizing the way we live and the way we
do business; it is less clear which companies will benefit from it in the long
run, and still less clear which have earnings prospects that justify their
current share prices. In our concentrated portfolio, we have de-emphasized the
business-to- consumer Internet stocks, such as Amazon.com, Yahoo, and eBay,
which have already had dramatic price appreciation on little or no earnings.
Instead, we have focused our Internet holdings on business-to-business services
that are growing by leaps and bounds.
For example, Checkfree Holdings provides services that enable electronic and
Internet-based transactions. In November, it announced an agreement to provide
payment infrastructure for Intuit's (makers of Quicken) new services. Another
large contributor, Microstrategy, makes software to analyze large-volume
transaction data to facilitate decision-making. It allows companies to use
website response patterns or cash register data to recommend new products to
heir customers or to make product and marketing plans. Network Solutions
registers Internet domain names and does network consulting. Its stock dropped
60% after it lost its monopoly on name registration in April, but it
subsequently regained a partial monopoly and is introducing premium-priced
services such as a two-day turnaround in name changes. Internet Capital Group
invests in different business-to-business electronic commerce start-ups. It
tries to achieve synergism among the companies in which it invests. These
firms were all among the leading contributors to our return over our reporting
period. So was a more traditional business-to-business firm, Oracle, which
provides the database software that powers many corporate information systems
and websites (see table of Five Largest Holdings).
<PAGE>
We also buy infrastructure
Another way we benefit from the growth of the Internet without trying to pick
end-service winners is by investing in firms that provide the infrastructure
that makes advanced telecommunications and computing work. JDS Uniphase (see
table of Five Largest Holdings) makes hardware that increases the carrying
capacity, or bandwidth, of optical cables. Its business grows with increased
demand for new digital services.
We anticipated the IT investment cycle
We knew that companies were investing heavily in their computer systems early
in 1999 in order to avoid any difficulties associated with Y2K bugs (computer
malfunctions due to programs that can't handle dates after 1999). We expected
such spending to fall off in the second half of the year as the transition
date approached and computer budgets were exhausted. Consequently, we avoided
most computer companies in our concentrated portfolio. Sure enough, computer
spending fell off, and the stocks of computer hardware companies didn't keep up
with the other large technology groups.
Our concentrated portfolio de-emphasizes the giants
We believe that the very largest technology companies, although their business
fundamentals are
Performance at a Glance
Cumulative Total Returns1 As of 11/30/99
<TABLE>
<CAPTION>
Since Inception2 Since Inception2
(Without sales charge) (With sales charge)
<S> <C> <C>
Class A 37.59% 30.71%
Class B 37.19 32.19
Class C 37.19 34.82
Class Z 37.79 37.79
Lipper Science & Technology Fd. Avg.3 38.27 N/A
</TABLE>
Past performance is not indicative of future results. Principal and investment
return will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost.
1 Source: Prudential Investments Fund Management LLC and Lipper Inc. Since the
Fund has been in existence less than one year, no average annual total returns
are presented. The Fund charges a maximum front-end sales charge of 5% for
Class A shares. Class B shares are subject to a declining contingent deferred
sales charge (CDSC) of 5%, 4%, 3%, 2%, 1%, and 1% for six years. Class B shares
will automatically convert to Class A shares, on a quarterly basis,
approximately seven years after purchase. Class C shares are subject to a
front-end sales charge of 1% and a CDSC of 1% for 18 months. Class Z shares are
not subject to a sales charge or distribution and service (12b-1) fees.
2 Inception date: Class A, B, C, and Z, 6/30/99.
3 The Lipper Since Inception return is for all funds in each share class in the
Science & Technology Fund category. The Lipper average is unmanaged. Science &
Technology funds invest 65% of their equity portfolio in science and technology
stocks.
1
<PAGE>
Review Cont'd.
- -------------------------------------------------------------------------------
sound, already are priced to reflect those gains. In our concentrated
portfolio, we tend to prefer companies slightly smaller. We also hold some even
smaller companies, such as Veeco Instruments (microelectronics equipment) and
Plexus (a contract electronics manufacturer), both of which had large gains. In
addition, because of the exuberant market this year in initial public offerings
(IPOs), we acquired several small positions in new firms that appreciated
rapidly. Although individually these holdings were too small to affect our
return much, in the aggregate they had an impact.
Technology stocks can fall in price as well as rise. Among our negative
performers were GST Telecommunications, which is combating lawsuits related to
former executives, and Remec.
Active management in a volatile environment
This has been an unusual period for technology stocks. The exceptionally strong
investor interest led many technology companies to make their IPOs of stock at
an earlier stage of their development than they would have made at other times.
Because of the intense demand, only small positions in these IPOs were
available to any one investor, and many of the stocks rose sharply after
issuance.
Five Largest Holdings--Concentrated Portfolio As of 11/30/99
<TABLE>
<CAPTION>
Security/Industry Group
% of Total Concentrated
Portfolio Market Value Comments
<S> <C>
Motorola
Communications Equipment Primarily mobile telephones and semiconductors.
4.8% Benefiting from the build-up of cellular systems,
particularly in the United States and China, and
helped by Asia's economic revival. Expanding its
software capacities to add Internet access to its
phones.
JDS Uniphase A leading provider of hardware for fiberoptic
Electronics communications, its chips increase the carrying
4.5% capacity of optical fibers. Sales grew 61%
in fiscal year 1999; stock rose 176% over our
reporting period.
Veritas Software World's largest supplier of computer data
Computer Software storage management software, which increases
4.5% the efficiency and reliability of data storage
such as hard disk drives. Sales grew 74% in 1998;
profits grew 127%; stock rose 189% over our
reporting period.
Oracle Leading developer of large database software
Computer Software systems; provides consulting and support services
4.4% for the systems. Business-to-business services
for Internet use, such as integrated online data
systems. Seventh largest firm on S&P 1500
Technology Index and sixth highest return over
our reporting period.
BMC Software Software tools for managing mainframe computer
Computer Software systems, including website servers and electronic
4.0% commerce. Improves the efficiency and reliability
of computer systems. In fiscal year 1999, sales
increased 79%, profits 119%.
</TABLE>
Five Largest Holdings--Enhanced Index Portfolio As of 11/30/99
<TABLE>
<CAPTION>
Industry % of total Enhanced % of S&P SC
Security Group Index Market Value Technology Index*
<S> <C> <C> <C>
Microsoft Computer Software 14.3 14.1
Cisco Systems Communications Equipment 9.0 8.9
Intel Electronics 7.8 7.7
Lucent Technologies Communications Equipment 6.8 6.8
International Business Machines Computer Hardware 5.7 5.7
</TABLE>
*Source: Standard & Poor's, based on data retrieved by Factset.
2
<PAGE>
In consequence, we have held a larger number of small positions than we
anticipated. Moreover, prudent investment of the sizable and rapid inflows of
funds required diversification in our actively managed portfolio. In addition,
in the very volatile market for technology stocks, we managed some of our
positions very aggressively. This, too, although in keeping with the spirit of
the actively managed portfolio, required less concentrated holdings. The
strategy has been very successful.
Looking Ahead
As Asia and Europe begin to focus on productivity improvement, as U.S. industry
had done over the past decade, large new markets are opening up. Moreover,
wireless telecommunications and electronic commerce are relatively new
developments that are currently sweeping through the United States. The
opportunities for profit growth are still plentiful, and we believe technology
stocks can continue to lead the markets. Nonetheless, stocks of many of the
larger companies already are priced in anticipation of substantial growth. We
think there are greater opportunities among some of the smaller firms whose
prospects are not yet as widely known.
In late October, technology stocks began a steep climb that continued through
the end of 1999. We believe this was, in part, a focus on companies that could
increase revenues in a low-inflation environment. However, it also may be due
to two more transient factors. Many investors were expecting technology
spending to stop as the year 2000 approached, because few companies would want
to change their computer systems close to the calendar turnover. In fact, the
impact was modest, and this positive surprise may have helped tech stocks. In
addition, the Federal Reserve Bank reacted to uncertainties about the calendar
change by allowing a large increase in the money supply, much of which flowed
to technology investments. Consequently, the prices of some technology stocks
have gotten ahead of their business fundamentals. We anticipate a volatile year
2000, and are tempering our enthusiastic long-term outlook with near-term
caution.
Additional Performance Tracking Tools
You can access comprehensive information about the performance of your
Prudential mutual fund 24 hours a day through our website and automated phone
service. At www.prudential.com/investing, you'll find the daily closing values,
changes from the previous day, and quarterly performance for all of our retail
mutual funds. Other available resources include daily, monthly, and quarterly
market commentary.
Daily fund values are also a toll-free call away from any touch-tone phone.
Call (800) 225-1852 and follow the voice prompts to obtain mutual fund closing
values and yields. You can even set up a personalized "watch list" to track
specific Prudential mutual funds.
Portfolio Composition
Expressed as a percentage of net assets as of 11/30/99
Computer Software 26.3%
Electronic Components 17.2
Telecommunication Equipment 12.3
Networking 9.8
Computer Hardware 9.4
Internet 8.0
Computer Services 6.4
Telecommunication Services 5.4
Data Processing & Reproduction 3.4
Broadcasting 1.5
Cash and Equivalents 0.3
<PAGE>
Portfolio of Investments as of PRUDENTIAL SECTOR FUNDS, INC.
November 30, 1999 PRUDENTIAL TECHNOLOGY FUND
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--99.7%
COMMON STOCKS
- ------------------------------------------------------------
Broadcasting--1.5%
20,000 AT&T Corp. - Liberty Media Group,
Class A(a) $ 836,250
68,300 CBS Corp.(a) 3,551,600
------------
4,387,850
- ------------------------------------------------------------
Computer Hardware--9.4%
6,100 Apple Computer, Inc.(a) 597,037
96,800 Dell Computer Corp.(a) 4,162,400
12,200 Eastman Kodak Co. 754,875
14,800 Gateway, Inc.(a) 1,130,350
43,400 Hewlett-Packard Co. 4,117,575
77,700 International Business Machines
Corp. 8,007,956
200 Kronos, Inc. 10,375
600 Kulicke & Soffa Industries(a) 21,413
5,100 Lexmark International Group, Inc.(a) 423,300
300 Micros Systems, Inc.(a) 15,169
1,400 S3, Inc.(a) 11,725
4,000 Storage Technology Corp.(a) 79,000
34,500 Sun Microsystems, Inc.(a) 4,562,625
1,800 Tektronix, Inc. 61,200
82,200 Teradyne, Inc.(a) 3,580,837
200 Watkins Johnson Co. 7,763
22,200 Xerox Corp. 600,787
900 Zebra Technologies Corp.(a) 54,338
------------
28,198,725
- ------------------------------------------------------------
Computer Services--6.4%
700 Affiliated Computer Services,
Inc.(a) 26,206
6,000 Ceridian Corp.(a) 129,750
75,300 Checkfree Holdings Corp.(a) 4,946,269
1,400 Ciber, Inc.(a) 29,838
5,300 Comdisco, Inc. 127,863
51,100 Compaq Computer Corp. 1,248,756
5,400 Computer Sciences Corp.(a) 352,350
21,600 Concord Communications, Inc.(a) 572,400
600 DBT Online, Inc.(a) 11,550
2,500 DST Systems, Inc.(a) $ 157,344
20,500 Electronic Data Systems Corp. 1,318,406
5,900 Equifax, Inc. 146,025
400 Factset Research Systems, Inc. 24,800
12,400 Gemstar International Group Ltd.(a) 1,398,100
1,400 Imation Corp.(a) 45,063
24,000 Knight Trimark Group, Inc.(a) 988,500
400 Lason, Inc.(a) 9,750
900 Medquis, Inc.(a) 25,650
1,200 National Computer Systems, Inc. 46,050
800 National Data Corp. 26,200
13,500 Paychex, Inc. 539,156
2,100 PE Corp. 171,412
61,300 Plexus Corp.(a) 2,413,687
200 QRS Corp.(a) 11,625
27,500 Safeguard Scientifics, Inc.(a) 3,055,937
5,100 Sapient Corp.(a) 395,250
2,200 Shared Medical Systems Corp. 96,250
12,400 Sykes Enterprises, Inc.(a) 495,225
1,100 Technology Solutions Co.(a) 30,113
700 The BISYS Group, Inc.(a) 40,556
12,900 Unisys Corp.(a) 370,875
1,800 Whittman-Hart, Inc.(a) 110,588
------------
19,361,544
- ------------------------------------------------------------
Computer Software--26.3%
5,600 Adobe Systems, Inc. 384,650
95,800 BMC Software, Inc.(a) 6,975,437
1,600 Cambridge Technology Partners,
Inc.(a) 23,000
8,100 Citrix Systems, Inc.(a) 768,487
700 Clarify, Inc.(a) 65,242
28,500 Computer Associates International,
Inc. 1,852,500
25,500 Compuware Corp.(a) 862,219
1,000 Dendrite International, Inc.(a) 27,500
20,600 Electronic Arts, Inc.(a) 2,160,425
43,100 EMC Corp.(a) 3,601,544
300 Filenet Corp.(a) 6,000
900 Harbinger Corp.(a) 15,806
400 Henry Jack & Associates 15,825
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 4
<PAGE>
Portfolio of Investments as of PRUDENTIAL SECTOR FUNDS, INC.
November 30, 1999 PRUDENTIAL TECHNOLOGY FUND
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Computer Software (cont'd.)
600 HNC Software, Inc.(a) $ 42,600
700 Hyperion Solutions Corp.(a) 19,163
30,000 I2 Technologies, Inc.(a) 2,550,000
300 Intermediate Telephone, Inc. 5,981
34,100 Intertrust Technologies Corp.(a) 4,383,981
55,500 Intuit, Inc.(a) 2,775,000
4,800 Keane, Inc. 129,600
1,300 Macromedia, Inc.(a) 85,475
2,300 Mentor Graphics Corp.(a) 20,700
1,200 Mercury Interactive Corp.(a) 99,750
1,400 Metasolv Software, Inc.(a) 86,363
284,000 Microsoft Corp.(a) 25,857,312
24,400 Microstrategy, Inc.(a) 2,989,000
1,400 National Instruments Corp.(a) 42,000
2,900 Novell, Inc.(a) 56,731
164,500 Oracle Corp.(a) 11,155,156
2,100 Peoplesoft, Inc.(a) 39,506
4,400 Phone.Com, Inc.(a) 638,000
1,300 Policy Management Systems(a) 26,163
300 Progress Software Corp.(a) 11,963
27,000 Rational Software Corp.(a) 1,380,375
4,900 RealNetworks, Inc.(a) 683,550
600 Remedy Corp.(a) 20,925
9,500 Siebel Systems, Inc.(a) 666,187
5,700 Structural Dynamics Research(a) 60,741
92,400 Veritas Software Corp.(a) 8,460,375
400 Verity, Inc.(a) 41,388
800 Visio Corp.(a) 28,700
------------
79,115,320
- ------------------------------------------------------------
Data Processing & Reproduction--3.4%
111,400 American Management Systems, Inc.(a) 3,272,375
25,200 Automatic Data Processing, Inc. 1,244,250
200 Fair Issac & Co., Inc. 8,500
16,900 First Data Corp. 730,925
8,600 Fiserv, Inc.(a) 305,300
256,300 Informix Corp.(a) 2,819,300
76,600 Tech Data Corp.(a) 1,876,700
------------
10,257,350
Electronic Components--17.2%
900 Advanced Micro Devices, Inc.(a) $ 25,425
500 Alpha Industries, Inc.(a) 30,250
14,700 Altera Corp.(a) 791,962
20,000 Anadigics, Inc.(a) 900,000
30,900 Analog Devices, Inc.(a) 1,774,819
400 Analogic Corp. 11,938
19,700 Applied Materials, Inc.(a) 1,919,519
4,600 Applied Power, Inc. 146,913
3,900 Arrow Electronics, Inc.(a) 89,213
11,500 Atmel Corp.(a) 515,344
1,769 Avnet, Inc. 97,184
1,000 Burr-Brown Corp.(a) 44,313
1,200 C-Cube Microsystems, Inc.(a) 53,719
700 Coherent, Inc.(a) 18,550
39,800 Conexant Systems, Inc.(a) 2,358,150
4,300 Cypress Semiconductor Corp.(a) 117,175
800 Dallas Semiconductor Corp. 46,150
46,000 Digital River, Inc.(a) 1,403,000
600 Electroglas, Inc.(a) 17,081
700 Etec Systems, Inc.(a) 30,100
11,500 Flextronics International Ltd.(a) 953,781
52,800 Galileo Technology Ltd.(a) 1,204,500
1,200 General Semiconductor, Inc. 16,500
200 Gerber Scientific, Inc. 3,850
600 Helix Technology Corp. 24,291
300 Hutchinson Technology(a) 5,550
4,400 Integrated Device Technology,
Inc.(a) 103,675
197,100 Intel Corp. 15,115,106
1,400 International Rectifier Corp.(a) 28,350
500 Kent Electronics Corp.(a) 11,469
24,300 KLA-Tencor Corp.(a) 2,054,869
51,300 Lattice Semiconductor Corp.(a) 2,295,675
8,100 Linear Technology Corp. 575,606
1,800 Litton Industries, Inc.(a) 80,663
65,400 LSI Logic Corp.(a) 3,952,612
32,000 Maxim Integrated Products(a) 2,570,000
1,000 Methode Eletronics, Inc., Class A 27,000
1,200 Micrel, Inc.(a) 59,100
8,500 Microchip Technology, Inc.(a) 538,687
11,100 Micron Technology, Inc.(a) 745,087
52,800 National Semiconductor Corp.(a) 2,244,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 5
<PAGE>
Portfolio of Investments as of PRUDENTIAL SECTOR FUNDS, INC.
November 30, 1999 PRUDENTIAL TECHNOLOGY FUND
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Electronic Components (cont'd.)
6,600 Novellus Systems, Inc.(a) $ 542,025
10,300 Photronics, Inc.(a) 248,488
3,100 Qlogic Corp.(a) 350,687
16,200 Raytheon Co.(a) 497,137
3,400 SDL, Inc.(a) 553,350
7,900 Seagate Technology, Inc.(a) 292,300
400 Silicon Valley Group, Inc.(a) 5,725
100 Speedfam-Ipec, Inc.(a) 1,188
8,400 Synopsys, Inc.(a) 607,950
28,752 Texas Instruments, Inc. 2,761,989
800 Trimble Navigation Ltd.(a) 13,500
100 Ultratech Stepper, Inc.(a) 1,894
35,300 Veeco Instruments, Inc.(a) 1,460,537
8,200 Vitesse Semiconductor Corp.(a) 369,512
3,000 W.W. Grainger, Inc. 141,375
5,900 Waters Corp.(a) 289,100
8,000 Xilinx, Inc.(a) 716,000
------------
51,853,933
- ------------------------------------------------------------
Internet--8.0%
179,300 America Online, Inc.(a) 13,032,869
62,100 At Home Corp.(a) 3,011,850
18,900 Covad Communications Group(a) 981,619
10,000 Go2Net, Inc.(a) 730,625
11,100 Internet Capital Group, Inc.(a) 1,864,800
6,300 Intervu, Inc.(a) 392,175
22,000 Media Metrix, Inc.(a) 814,000
16,600 Network Solutions, Inc.(a) 2,488,962
700 Retek, Inc.(a) 47,469
1,000 RSA Security, Inc.(a) 37,250
20,300 Spyglass, Inc.(a) 576,012
------------
23,977,631
- ------------------------------------------------------------
Networking--9.8%
18,000 3Com Corp.(a) 716,625
7,700 Adaptec, Inc.(a) 414,838
1,200 Anixter International, Inc.(a) 24,450
100 Apex, Inc.(a) 2,350
100 Auspex Sys, Inc.(a) 1,225
3,300 C Cor.Net Corp.(a) $ 168,506
400 Cable Design Technologies(a) 9,575
500 Cabletron Systems(a) 11,469
30,800 CIENA Corp.(a) 1,353,275
185,800 Cisco Systems, Inc.(a) 16,571,037
200 Concord Communications, Inc.(a) 10,700
7,500 Extreme Networks, Inc.(a) 497,813
1,700 Finistar Corp.(a) 195,925
4,400 Ikon Office Solutions, Inc. 29,425
31,400 JDS Uniphase Corp.(a) 7,182,750
6,200 Legato Systems, Inc.(a) 418,694
35,000 MMC Networks, Inc. 689,062
4,700 Network Appliance, Inc.(a) 553,131
2,600 Sycamore Networks, Inc.(a) 577,200
700 Xircom, Inc.(a) 36,750
------------
29,464,800
- ------------------------------------------------------------
Telecommunication Services--5.4%
84,700 Global Telesystems Group, Inc.(a) 2,705,106
49,300 GST Telecommunications, Inc.(a) 422,131
300 Intervoice-Brite, Inc.(a) 4,519
28,000 MCI WorldCom, Inc.(a) 2,315,250
92,200 Motorola, Inc. 10,533,850
10,850 Pac-West Telecomm, Inc.(a) 276,675
------------
16,257,531
- ------------------------------------------------------------
Telecommunication Equipment--12.3%
200 Adaptive Broadband Corp.(a) 7,950
12,900 ADC Telecommunications, Inc.(a) 687,731
11,600 Adtran, Inc.(a) 452,400
700 Allen Telecom, Inc.(a) 6,563
1,100 Aspect Communications Corp.(a) 36,300
900 Billing Concepts Corp.(a) 4,978
200 Brightpoint, Inc.(a) 2,213
318,100 Cellstar Corp.(a) 3,061,712
1,600 Commscope, Inc.(a) 67,400
49,100 Comverse Technology, Inc.(a) 5,934,962
1,700 Digital Microwave Corp.(a) 26,775
6,800 General Instrument Corp.(a) 445,400
2,100 Harris Corp. 44,100
129,700 Lucent Technologies, Inc. 9,476,206
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 6
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
PRUDENTIAL TECHNOLOGY FUND
Portfolio of Investments as of November 30, 1999
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Telecommunications Equipment (cont'd.)
9,200 Microcell Telecommunications(a) $ 270,250
29,300 Millicom International Cellular SA 1,377,100
18,000 Nokia Corp. (ADR) 2,487,375
50,200 Nortel Networks Corp. 3,714,800
100 P-Com, Inc.(a) 563
500 Plantronics, Inc.(a) 31,500
7,400 Qualcomm, Inc.(a) 2,681,112
151,100 Remec, Inc.(a) 1,935,969
2,700 Scientific-Atlanta, Inc. 157,444
800 Telecorp Pcs, Inc.(a) 28,850
21,800 Telephone and Data System, Inc. 2,903,487
18,500 Tellabs, Inc.(a) 1,200,188
------------
37,043,328
------------
Total long-term investments
(cost $236,846,740) 299,918,012
------------
Principal
Amount
(000)
- ------------------------------------------------------------
SHORT-TERM INVESTMENT--3.3%
REPURCHASE AGREEMENT
- ------------------------------------------------------------
$ 9,923 Joint Repurchase Agreement Account,
5.51%, 12/1/99
(cost $9,923,000; Note 5) 9,923,000
------------
Total Investments--103.0%
(cost $246,769,740; Note 4) 309,841,012
Liabilities in excess of other
assets--(3.0%) (8,984,737)
------------
Net Assets--100% $300,856,275
------------
------------
</TABLE>
- ---------------
(a) Non-income producing.
ADR--American Depository Receipt.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 7
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
Statement of Assets and Liabilities PRUDENTIAL TECHNOLOGY FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets November 30, 1999
<S> <C>
Investments, at value (cost $246,769,740)............................................................... $ 309,841,012
Cash.................................................................................................... 177,822
Receivable for Fund shares sold......................................................................... 6,411,778
Receivable for investments sold......................................................................... 1,312,823
Prepaid expenses and other assets....................................................................... 88,169
Dividends and interest receivable....................................................................... 26,121
-----------------
Total assets......................................................................................... 317,857,725
-----------------
Liabilities
Payable for investments purchased....................................................................... 8,670,459
Distribution payable.................................................................................... 6,868,051
Payable for Fund shares reacquired...................................................................... 823,555
Accrued expenses........................................................................................ 323,227
Distribution fee payable................................................................................ 179,244
Management fee payable.................................................................................. 136,914
-----------------
Total liabilities.................................................................................... 17,001,450
-----------------
Net Assets.............................................................................................. $ 300,856,275
-----------------
-----------------
Net assets were comprised of:
Common stock, at par................................................................................. $ 224,320
Paid-in capital in excess of par..................................................................... 235,820,593
-----------------
236,044,913
Accumulated net realized gain on investments......................................................... 1,740,090
Net unrealized appreciation on investments........................................................... 63,071,272
-----------------
Net assets, November 30, 1999........................................................................... $ 300,856,275
-----------------
-----------------
Class A:
Net asset value and redemption price per share
($65,990,754 / 4,909,934 shares of common stock issued and outstanding)........................... $13.44
Maximum sales charge (5% of offering price).......................................................... .71
-----------------
Maximum offering price to public..................................................................... $14.15
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per share
($155,801,491 / 11,625,985 shares of common stock issued and outstanding)......................... $13.40
-----------------
-----------------
Class C:
Net asset value and redemption price per share
($66,352,660 / 4,951,395 shares of common stock issued and outstanding)........................... $13.40
Sales charge (1% of offering price).................................................................. .14
-----------------
Offering price to public............................................................................. $13.54
-----------------
-----------------
Class Z:
Net asset value, offering price and redemption price per share
($12,711,370 / 944,685 shares of common stock issued and outstanding)............................. $13.46
-----------------
-----------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 8
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
PRUDENTIAL TECHNOLOGY FUND
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, 1999(a)
Through
Net Investment Loss November 30, 1999
<S> <C>
Income
Dividends (net of foreign withholding
taxes of $248)........................ $ 79,351
Interest................................. 310,563
-----------------
Total income.......................... 389,914
-----------------
Expenses
Management fee........................... 631,240
Distribution fee--Class A................ 48,988
Distribution fee--Class B................ 412,580
Distribution fee--Class C................ 196,230
Registration fees........................ 155,000
Transfer agent's fees and expenses....... 123,000
Custodian's fees and expenses............ 70,000
Amortization of prepaid offering cost.... 63,000
Reports to shareholders.................. 50,000
Audit fee and expenses................... 26,000
Legal fees and expenses.................. 13,000
Organizational expenses.................. 12,500
Directors' fees.......................... 12,000
Miscellaneous............................ 3,780
-----------------
Total expenses....................... 1,817,318
Less: Management fee waiver.............. (126,248)
-----------------
Net expenses......................... 1,691,070
-----------------
Net investment loss......................... (1,301,156)
-----------------
Realized and Unrealized Gain
on Investments
Net realized gain on investment
transactions............................. 9,670,846
Net unrealized appreciation of
investments.............................. 63,071,272
-----------------
Net gain on investments..................... 72,742,118
-----------------
Net Increase in Net Assets
Resulting from Operations................... $71,440,962
-----------------
-----------------
- ---------------
(a) Commencement of investment operations.
</TABLE>
PRUDENTIAL SECTOR FUNDS, INC.
PRUDENTIAL TECHNOLOGY FUND
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, 1999(a)
Increase in Through
Net Assets November 30, 1999
<S> <C>
Operations
Net investment loss..................... $ (1,301,156)
Net realized gain on investments........ 9,670,846
Net change in unrealized appreciation of
investments.......................... 63,071,272
-----------------
Net increase in net assets resulting
from operations...................... 71,440,962
-----------------
Distributions from net realized capital
gains
Class A.............................. (1,498,101)
Class B.............................. (3,542,180)
Class C.............................. (1,538,490)
Class Z.............................. (289,280)
-----------------
(6,868,051)
-----------------
Fund share transactions (net of share
conversions) (Note 6)
Proceeds from shares sold............... 260,789,621
Cost of shares reacquired............... (24,506,257)
-----------------
Net increase in net assets from Fund
share transactions................... 236,283,364
-----------------
Total increase............................. 300,856,275
Net Assets
Beginning of period........................ 0
-----------------
End of period.............................. $ 300,856,275
-----------------
-----------------
- ---------------
(a) Commencement of investment operations.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 9
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
Notes to Financial Statements PRUDENTIAL TECHNOLOGY 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 diversified management investment company. The Company presently
consists of four Portfolios: Prudential Financial Services Fund, Prudential
Health Sciences Fund, Prudential Utility Fund and Prudential Technology Fund
(the 'Fund'). The Fund is non-diversified and its investment objective is to
seek long-term capital appreciation. The Fund seeks to achieve this objective by
investing primarily in equity securities of technology companies. Technology
companies include companies that will derive a substantial portion of their
sales from products or services in technology and technology-related activities.
- ------------------------------------------------------------
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 or Board of Directors in consultation with the manager or
subadviser.
In connection with transactions in repurchase agreements with U.S. financial
institutions, it is the Company's policy that its custodian or designated
subcustodians, as the case may be under triparty repurchase agreements, takes
possession of the underlying collateral securities, the value of which exceeds
the principal amount of the repurchase transaction, including accrued interest.
If the seller defaults and the value of the collateral declines or if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
All securities are valued as of 4:15 P.M., New York time.
Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis. The Fund
amortizes discounts on purchases of debt securities as adjustments to interest
income. Expenses are recorded on the accrual basis which may require the use of
certain estimates by management.
Net investment income (other than distribution fees) and unrealized and realized
gains or losses are allocated daily to each class of shares based upon the
relative proportion of net assets of each class at the beginning of the day.
Dividends and Distributions: The Fund expects to pay dividends of net investment
income and distributions of net realized capital gains, if any, annually.
Dividends and distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
Taxes: For federal income tax purposes, each fund in the Company is treated as a
separate tax paying entity. It is the Fund's policy 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.
Offering and Organization Costs: The Fund incurred approximately $162,500 in
connection with the organization of the Fund. Organization costs of $12,500 were
expensed and offering costs of $150,000 are being amortized over a period of 12
months ending June 2000.
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 loss by
$1,301,156, decrease accumulated net realized gain by $1,062,705, and decrease
paid-in-capital by $238,451 for certain expenses not deductible for federal
income tax purposes and a tax operating loss during the period ended November
30, 1999. Net investment income, net realized gains and net assets were not
affected by this change.
- --------------------------------------------------------------------------------
10
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
Notes to Financial Statements PRUDENTIAL TECHNOLOGY FUND
- --------------------------------------------------------------------------------
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 .75% of the Fund's average daily net assets. PIFM has agreed to waive a
portion (.15 of 1% of the Fund's average daily net assets) of its management fee
which amounted to $126,248 ($.006 per share for Class A, B, C and Z shares) for
the period ended November 30, 1999. The Fund is not required to reimburse PIFM
for such waiver.
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 Fund 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. 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 Fund compensates PIMS for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%
of the average daily net assets of the Class A, B and C shares, respectively.
Such expenses under the Plans were .25 of 1%, 1% and 1% of the average daily net
assets of the Class A, B and C shares, respectively, for the period ended
November 30, 1999.
PIMS has advised the Fund that it received approximately $1,286,500 and $490,800
in front-end sales charges resulting from sales of Class A and Class C shares,
respectively, during the period ended November 30, 1999. From these fees, PIMS
paid such sales charges to dealers, which in turn paid commissions to
salespersons and incurred other distribution costs.
PIMS has advised the Fund that for the period ended November 30, 1999, it
received approximately $72,000 and $24,000 in contingent deferred sales charges
imposed upon redemptions by certain Class B and Class C shareholders,
respectively.
PIFM, PIMS and PIC are wholly owned subsidiaries of The Prudential Insurance
Company of America.
- ------------------------------------------------------------
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 period ended November 30,
1999, the Fund incurred fees of approximately $122,200 for the services of PMFS.
As of November 30, 1999, approximately $29,100 of such fees were due to PMFS.
Transfer agent fees and expenses in the Statement of Operations also include
certain out-of-pocket expenses paid to nonaffiliates.
For the period ended November 30, 1999, Prudential Securities Incorporated, a
wholly owned subsidiary of the Prudential Insurance Company of America, earned
approximately $2,900 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 period ended November 30, 1999, were $300,546,593 and $73,370,698,
respectively.
The federal income tax basis of the Fund's investments at November 30, 1999 was
$247,878,492 and, accordingly, net unrealized appreciation for federal income
tax purposes was $61,962,520 (gross unrealized appreciation--$67,688,045; gross
unrealized depreciation--$5,725,525).
- ------------------------------------------------------------
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 1.52% undivided interest in the joint account. The
undivided interest for the Fund represents $9,923,000 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.
- --------------------------------------------------------------------------------
11
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
Notes to Financial Statements PRUDENTIAL TECHNOLOGY FUND
- --------------------------------------------------------------------------------
Deutsche Bank Securities Inc., 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.
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 400 million shares of common stock, $.01 par value per share, divided
into four classes, designated Class A, Class B, Class C and Class Z common
stock, each of which consists of 100 million authorized shares.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- -------------------------------- ------------ ---------------
<S> <C> <C>
June 30, 1999(a) through
November 30, 1999:
Shares sold..................... 6,084,868 $ 64,145,519
Shares reacquired............... (1,188,102) (13,262,726)
------------ ---------------
Net increase in shares
outstanding before
conversion.................... 4,896,766 50,882,793
Shares issued upon conversion
from Class B.................. 13,168 149,719
------------ ---------------
Net increase in shares
outstanding................... 4,909,934 $ 51,032,512
------------ ---------------
------------ ---------------
<CAPTION>
Class B Shares Amount
- -------------------------------- ------------ ---------------
<S> <C> <C>
June 30, 1999(a) through
November 30, 1999:
Shares sold..................... 12,089,533 $ 129,326,211
Shares reacquired............... (450,357) (5,371,488)
------------ ---------------
Net increase in shares
outstanding before
conversion.................... 11,639,176 123,954,723
Shares reacquired upon
conversion into Class A....... (13,191) (149,719)
------------ ---------------
Net increase in shares
outstanding................... 11,625,985 $ 123,805,004
------------ ---------------
------------ ---------------
<CAPTION>
Class C
- --------------------------------
<S> <C> <C>
June 30, 1999(a) through
November 30, 1999:
Shares sold..................... 5,292,766 $ 55,378,868
Shares reacquired............... (341,371) (3,851,186)
------------ ---------------
Net increase in shares
outstanding................... 4,951,395 $ 51,527,682
------------ ---------------
------------ ---------------
<CAPTION>
Class Z
- --------------------------------
<S> <C> <C>
June 30, 1999(a) through
November 30, 1999:
Shares sold..................... 1,125,739 $ 11,939,023
Shares reacquired............... (181,054) (2,020,857)
------------ ---------------
Net increase in shares
outstanding................... 944,685 $ 9,918,166
------------ ---------------
------------ ---------------
- ---------------
(a) Commencement of investment operations.
</TABLE>
- --------------------------------------------------------------------------------
12
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
Financial Highlights PRUDENTIAL TECHNOLOGY FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B Class C
----------------- ----------------- -----------------
June 30, 1999(b) June 30, 1999(b) June 30, 1999(b)
Through Through Through
November 30, 1999 November 30, 1999 November 30, 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......................... $ 10.00 $ 10.00 $ 10.00
------ ------- ------
Income from investment operations
Net investment loss(d)....................................... (0.04) (0.06) (0.07)
Net realized and unrealized gains on investment and foreign
currency transactions..................................... 3.80 3.78 3.79
------ ------- ------
Total from investment operations.......................... 3.76 3.72 3.72
------ ------- ------
Less distributions
Distributions from net realized gains........................ (0.32) (0.32) (0.32)
------ ------- ------
Net asset value, end of period............................... $ 13.44 $ 13.40 $ 13.40
------ ------- ------
------ ------- ------
TOTAL RETURN(a).............................................. 37.59% 37.19% 37.19%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............................. $65,991 $ 155,801 $66,353
Average net assets (000)..................................... $46,443 $ 97,787 $46,510
Ratios to average net assets(c)(d):
Expenses, including distribution fees..................... 1.47% 2.22% 2.22%
Expenses, excluding distribution fees..................... 1.22% 1.22% 1.22%
Net investment loss....................................... (1.00)% (1.75)% (1.75)%
Portfolio turnover rate................................... 38%
<CAPTION>
Class Z
-----------------
<S> <C>
June 30, 1999(b)
Through
November 30, 1999
-----------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......................... $ 10.00
------
Income from investment operations
Net investment loss(d)....................................... (0.03)
Net realized and unrealized gains on investment and foreign
currency transactions..................................... 3.81
------
Total from investment operations.......................... 3.78
------
Less distributions
Distributions from net realized gains........................ (0.32)
------
Net asset value, end of period............................... $ 13.46
------
------
TOTAL RETURN(a).............................................. 37.79%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............................. $12,711
Average net assets (000)..................................... $ 8,743
Ratios to average net assets(c)(d):
Expenses, including distribution fees..................... 1.22%
Expenses, excluding distribution fees..................... 1.22%
Net investment loss....................................... (.75)%
Portfolio turnover rate...................................
</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 of less than a full year are not
annualized.
(b) Commencement of investment operations.
(c) Annualized.
(d) Net of management fee waiver.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 13
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
Report of Independent Accountants PRUDENTIAL TECHNOLOGY FUND
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Prudential Sector Funds, Inc.--Prudential Technology 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 Technology Fund (the 'Fund') at November 30, 1999, and the
results of its operations, the changes in its net assets and the financial
highlights for the period June 30, 1999 (commencement of operations) through
November 30, 1999, 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 audit. We conducted our audit 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 audit, which included confirmation of securities at November
30, 1999, by correspondence with the custodian and brokers, provides a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
January 17, 2000
PRUDENTIAL SECTOR FUNDS, INC.
Tax Information (Unaudited) PRUDENTIAL TECHNOLOGY FUND
- --------------------------------------------------------------------------------
We are required by Internal Revenue Code to advise you within 60 days of the
Fund's fiscal year end (November 30, 1999) as to the federal tax status of
dividends paid by the Fund during its fiscal year ended November 30, 1999.
During 1999, the Fund paid to Class A, B, C and Z shares a short-term capital
gain distribution of $.32 which is taxable as ordinary income. Further, we wish
to advise you that 0% of the ordinary income dividends paid in 1999 qualified
for the corporate dividends received deduction available to corporate taxpayers.
For the purpose of preparing your annual federal income tax return, however, you
should report the amounts as reflected on the appropriate Form 1099-DIV or
substitute 1099-DIV.
- --------------------------------------------------------------------------------
14
<PAGE>
Getting the Most from Your Prudential Mutual Fund
How many times have you read these reports--or other financial materials--and
stumbled across a word that you don't understand?
Many shareholders have run into the same problem. We'd like to help. So we'll
use this space from time to time to explain some of the words you might have
read, but not understood. And if you have a favorite word that no one can
explain to your satisfaction, please write to us.
Basis Point: 1/100th of 1%. For example, one-half of one percent is 50 basis
points.
Collateralized Mortgage Obligations (CMOs): Mortgage-backed bonds that separate
mortgage pools into different maturity classes, called tranches. These
instruments are sensitive to changes in interest rates and homeowner
refinancing activity. They are subject to prepayment and maturity extension
risk.
Derivatives: Securities that derive their value from other securities. The rate
of return of these financial instruments rises and falls--sometimes very
suddenly--in response to changes in some specific interest rate, currency,
stock, or other variable.
Discount Rate: The interest rate charged by the Federal Reserve on loans to
member banks.
Federal Funds Rate: The interest rate charged by one bank to another on
overnight loans.
Futures Contract: An agreement to purchase or sell a specific amount of a
commodity or financial instrument at a set price at a specified date in the
future.
Leverage: The use of borrowed assets to enhance return. The expectation is that
the interest rate charged on borrowed funds will be lower than the return on
the investment. While leverage can increase profits, it can also magnify
losses.
Liquidity: The ease with which a financial instrument (or product) can be
bought or sold (converted into cash) in the financial markets.
Price/Earnings Ratio: The price of a share of stock divided by the earnings per
share for a 12-month period.
Option: An agreement to purchase or sell something, such as shares of stock, by
a certain time for a specified price. An option need not be exercised.
Spread: The difference between two values; often used to describe the
difference between "bid" and "asked" prices of a security, or between the
yields of two similar maturity bonds.
Yankee Bond: A bond sold by a foreign company or government in the U.S. market
and denominated in U.S. dollars.
<PAGE>
Comparing a $10,000 Investment
- -------------------------------------------------------------------------------
Prudential Technology Fund vs. the S&P SuperComposite 1500 Index and
the S&P SC Technology Index
Class A
(GRAPH)
Class B
(GRAPH)
Past performance is not indicative of future results. Principal and investment
return will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
These graphs compare a $10,000 investment in the Prudential Technology Fund
(Class A, B, C, and Z shares) with a similar investment in the Standard &
Poor's SuperComposite 1500 Index (S&P SuperComposite 1500) and the Standard &
Poor's SuperComposite Technology Index (S&P SC Technology Index) by portraying
the initial account values of Class A, B, C, and Z shares at the commencement
of operations (June 30, 1999), and at the end of the fiscal year (November 30),
as measured on a quarterly basis. For purposes of the graphs, and unless
otherwise indicated, it has been assumed that (a) the maximum applicable
front-end sales charge was deducted from the initial $10,000 investment in
Class A and Class C shares; (b) the maximum applicable contingent deferred
sales charges were deducted from the value of the investment in Class B and
Class C shares, assuming full redemption on November 30, 1999; (c) all
recurring fees (including management fees) were deducted; and (d) all dividends
and distributions were reinvested. Class B shares will automatically convert
to Class A shares, on a quarterly basis, approximately seven years after
purchase. Class Z shares are not subject to a sales charge or distribution and
service (12b-1) fees. Since the Fund has been in existence less than one year,
no average annual total returns are presented.
<PAGE>
Class C
(GRAPH)
Class Z
(GRAPH)
The S&P SuperComposite 1500 is an unmanaged index that is a combination of the
S&P 500 Index(Standard & Poor's 500 Index comprises 500 large,established,
publicly traded stocks), the S&P Mid-Cap 400 Index (Standard & Poor's Mid-Cap
400 Index measures the performance of the 400 largestcompanies outside of the
S&P 500), and the S&P SmallCap 600 Index (Standard & Poor's 600 Index comprises
600 small capitalization stocks) which provides a broad representation of the
entire U.S. market, representing 87% of total U.S. equity market
capitalization. The S&P SC Technology Index is an unmanaged capitalization-
weighted index that measures the performance of the technology sector of the
S&P SuperComposite 1500. Both Index returns include thereinvestment of all
dividends, but do not include the effect of sales charges or operating expenses
of a mutual fund. The securities in the S&P SuperComposite 1500 and the S&P SC
Technology Index may differ substantially from the securities in the Fund.
These indexes are not the only ones that may be used to characterize
performance of equity funds, and other indexes may portray different
comparative performance. Investors cannot invest directly in an index.
These graphs are furnished to you in accordance with SEC regulations.
<PAGE>
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
http://www.prudential.com
Class NASDAQ Cusip
A -- 74437K889
B -- 74437K871
C -- 74437K863
Z -- 74437K855
Directors
Delayne Dedrick Gold
Robert F. Gunia
Douglas H. McCorkindale
Thomas T. Mooney
Stephen P. Munn
David R. Odenath, Jr.
Richard A. Redeker
Robin B. Smith
John R. Strangfeld
Louis A. Weil, III
Clay T. Whitehead
Officers
John R. Strangfeld, President
Robert F. Gunia, Vice President
Grace C. Torres, Treasurer
Marguerite E.H. Morrison, Secretary
Stephen M. Ungerman, Assistant Treasurer
Manager
Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street, Newark, NJ 07102-4077
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza, Newark, NJ 07102-3777
Distributor
Prudential Investment Management Services LLC
Gateway Center Three
100 Mulberry Street, Newark, NJ 07102-4077
Custodian
State Street Bank and Trust Company
One Heritage Drive, North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services LLC
P.O. Box 15005, New Brunswick, NJ 08906
Independent Accountants
PricewaterhouseCoopers LLP
1177 Avenue of the Americas, New York, NY 10036
Legal Counsel
Gardner, Carton & Douglas
Quaker Tower
321 North Clark Street, Chicago, IL 60610-4795
Prudential Investments is a unit of The Prudential Insurance Company of
America, 751 Broad Street, Newark, NJ 07102.
The views expressed in this report and information about the Fund's portfolio
holdings are for the period covered by this report and are subject to change
thereafter.
This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus.
MF188E5
<PAGE>
(ICON)
Prudential
Utility
Fund
ANNUAL
REPORT
Nov. 30, 1999
(LOGO)
<PAGE>
A Message from the Fund's President January 7, 2000
- -------------------------------------------------------------------------------
(PHOTO)
Dear Shareholder,
This has been an unusual year for utility stocks. Historically, many investors
bought them for their steady dividends and inflation protection, but the sector
has been transformed in recent years. The benchmarks for the Prudential Utility
Fund show a strangely wide disparity: the Fund itself returned 3.64% over the
11 months ended November 30, 1999. This was a substantially higher return than
the S&P 500 Utility Index, which fell 12.97% over that period. But the Lipper
Utility Fund Average, reflecting the performance of utility sector mutual
funds, was a surprising 10.52%.
How could this be? How could the average utility mutual fund perform so much
better than the average stock in the utility sector? The answer appears to be
located in the separate S&P 500 Communication Services sector, the second-best
performing sector over this period. It returned 20.25%. In a period in which
investors strongly favored technology stocks, even when their earnings were
low or nonexistent, a similar preference affected the stocks in which a utility
fund might invest.
A Wall Street Journal article by Amy Hughes (November 9, 1999) reports that
"...many utility funds have evolved into go-go growth funds, driven primarily
by telecommunications stocks. Telecommunications, cable, and indirect Internet
plays, on average, represent about 40% of the holdings in the 38 utility funds
followed by...Morningstar...Telecommunications stocks trade at richer prices
than electric or energy stocks, and are more volatile. So far this year,
utility funds are twice as volatile as they were in 1995...the group yields
much less dividend income than it did just three years ago..."
We agree and believe that in this environment, a utility fund ought to maintain
the sector's historical focus on less volatile stocks and companies with more
stable earnings growth. Prudential Utility Fund Portfolio Manager David
Kiefer's value-oriented strategy is consistent with this approach. He explains
in the following report why he currently favors electric and gas utilities in
his balance. Prudential offers other funds for investors who prefer the
volatile technology sector. Consult your financial professional to see if one
of these funds may be right for you.
Yours sincerely,
John R. Strangfeld
President
Prudential Sector Funds, Inc.--Prudential Utility Fund
<PAGE>
Performance Review
- -------------------------------------------------------------------------------
(PHOTO)
David A. Kiefer
Fund Manager
Investment Goals and Style
Prudential Utility Fund invests in stocks of utility companies--primarily
electric, natural gas, gas pipeline, telephone and telecommunications, water,
cable, airport, seaport, and toll road companies--both in the United States and
abroad. Utility investments can be affected by government regulations, the
price of fuel, environmental factors, and interest rates. Foreign investments
are subject to additional risks, including currency, political and social
risks, and illiquidity. There can be no assurance that the Fund's investment
objective of total return through a combination of capital appreciation and
current income will be achieved. After the end of its last fiscal reporting
period, the Prudential Utility Fund, Inc. became a portfolio of the Prudential
Sector Funds, Inc. It is now known as the Prudential Utility Fund, and its
fiscal year end is now November 30.
We focus on value
The three major industries in the utility sector--electric, gas, and
telecommunications--had greatly differing stock performance in 1999. All are
undergoing rapid consolidation and regulatory change, but the competitive
dynamics and business fundamentals in each are quite different, and we believe
favor the electric and gas industries. This split is why they are in separate
S&P 500 sectors. Nonetheless, electric and gas stocks underperformed telecoms
strikingly during our reporting period, reflecting the extraordinary
concentration of market favor in technology and technology-related businesses.
We view electric utilities as stable investments because their business is
relatively steady through the peaks and troughs of an economic cycle, and
because their higher-than-average dividend yields add some stability to their
returns. However, the stock market doesn't always treat electric stocks
evenly, and 1999 was their worst underperformance, compared to the S&P 500
Index, in the last 50 years. Investors ignored their bright future.
For example, the S&P 500 Index sectors had very different business
fundamentals: the average profit per share for the S&P Utility Index (made up
of gas and electric stocks) was $2.51--more than twice the $1.04 earnings for
communications services companies. The price/earnings ratio (a measure of
traditional investment value) was 16.2 times earnings for the S&P Utility
Index, but 28.0 times earnings for S&P Communication Services. For our
holdings, which include some of each but are predominantly gas and electric
stocks, the price/earnings ratio was 17.3 times. (By comparison, the S&P 500
overall was a high 29.2 times earnings.)
Where's the growth?
These statistics reflect very optimistic views of the earnings prospects for
telecommunications stocks. We think that growth investors have been buying
telecommunications because they believe that new services will increase demand
greatly, and powerful consolidated companies will be able to extract premium
pricing. We believe, on the other hand, that the barriers to head-on
competition, which are considerable for the energy utilities and should enable
them to grow at a very healthy pace, are becoming nonexistent in
tele-communications. We suspect that deadly competition will limit pricing
power, constraining profit growth. The risk/reward tradeoff looks unattractive
to us.
<PAGE>
Performance at a Glance
For this reason, we have kept our investments in this sector modest, and have
focused on strong, well-managed companies such as AT&T, Frontier Communications
(taken over in 1999 at a high premium by Global Crossing), Bell Atlantic, and
Telefonos de Mexico. They shared in the strong sector performance over our
reporting period, and made substantial contributions to our return. However,
we believe that over the longer run, our gas and electric stocks should give
our shareholders good growth prospects at relatively inexpensive prices.
Power shortage means opportunity for gas
Many parts of the United States were threatened with brownouts and blackouts
last summer due to a national power shortage. The measure of adequacy to meet
peak demand is the capital reserve margin. This was as high as 40% in the
mid-1980s, but is now below the 12.5% value taken as a minimum by the North
America Electricity Reliability Council. Assuming a modest 1.8% growth in
demand, we estimate it could take $20 billion to $30 billion in new plants over
the next five years to get above a 12.5% capital reserve margin. The bulk of
these plants--about 90%--will be gas fired because burning natural gas is
cheaper and less polluting than burning oil or coal. This will boost the demand
for natural gas and should lead to dramatic revenue and profit growth for
companies that transport it. Four of our five largest holdings are gas pipeline
companies.
Electricity--healthy and growing stronger
In addition to gas companies, the companies that will benefit from the power
shortage are electric companies with gas-fired excess capacity today and quick
builders of new plants. About 41% of our assets--our largest sector
commitment--were invested in domestic and foreign electric companies.
Cumulative Total Returns1 As of 11/30/99
<TABLE>
<CAPTION>
Eleven Five Ten Since
Months Years Years Inception2
<S> <C> <C> <C> <C>
Class A 3.64% 116.62% N/A 209.52%
Class B 2.98 108.83 184.77% 1355.26
Class C 2.98 108.83 N/A 98.35
Class Z 3.91 N/A N/A 73.12
Lipper Utility Fd. Avg.3 10.52 124.99 234.58 ***
</TABLE>
Average Annual Total Returns1 As of 12/31/99
<TABLE>
<CAPTION>
One Five Ten Since
Year Years Years Inception2
<S> <C> <C> <C> <C>
Class A -1.28% 15.90% N/A 11.49%
Class B -1.83 16.11 10.50% 15.69
Class C 1.14 15.98 N/A 13.31
Class Z 4.19 N/A N/A 15.48
</TABLE>
Past performance is not indicative of future results. Principal and investment
return will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost.
1 Source: Prudential Investments Fund Management LLC and Lipper Inc. The
cumulative total returns do not take into account sales charges. The average
annual total returns do take into account applicable sales charges. The Fund
charges a maximum front-end sales charge of 5% for Class A shares. Class B
shares are subject to a declining contingent deferred sales charge (CDSC) of
5%, 4%, 3%, 2%, 1%, and 1% for six years. Class B shares will automatically
convert to Class A shares, on a quarterly basis, approximately seven years
after purchase. Class C shares are subject to a front-end sales charge of 1%
and a CDSC of 1% for 18 months. Class Z shares are not subject to a sales
charge or distribution and service (12b-1) fees.
2 Inception dates: Class A, 1/22/90; Class B, 8/10/81; Class C, 8/1/94; and
Class Z, 3/1/96.
3 Lipper average returns are for all funds in each share class for the
eleven-month, five-, and ten-year periods in the Utility Fund category. The
Lipper average is unmanaged. Utility funds invest at least 65% of their equity
portfolios in utility shares.
***Lipper Since Inception returns are 240.06% for Class A; 713.53% for Class
B; 122.63% for Class C; and 76.21% for Class Z, based on all funds in each
share class.
1
<PAGE>
Review Cont'd.
- -------------------------------------------------------------------------------
The sector combines above-market dividend yield and growing earnings with the
advantage of industry consolidation. We expect the national power shortage to
result in higher electricity prices. Higher prices and rising demand mean
profit growth.
The Federal Energy Regulatory Commission has been transforming the regulatory
environment to create a free market in electricity generation carried by a
transmission system open to all. This is promoting a widespread restructuring
of the industry, with companies focusing on functions in which they are strong,
and selling off their other functions. We believe that we are well positioned
for the considerable amount of merger and acquisition activity with our focus
on companies with either strong management or undervalued physical assets.
Over the reporting period, for example, we benefited from the sale of Sonat,
Frontier, and Pacificorp to acquirers. Our largest electricity companies are
Northeast Utilities and Illinova--both of which are involved in merger and
acquisition activity--and Energy East.
Looking Ahead
The power shortage in the United States means swifter profit growth for its gas
and electric companies. Nonetheless, they sell for slightly more than half of
the price/earnings ratio of the S&P 500 overall. This is remarkable investment
value. The recent stock market trend in which the most expensive stocks become
even more expensive is unlikely to continue forever. Good value will attract
buyers. There are few values now to compare with those in the utility sector.
Portfolio Composition
Expressed as a percentage of total net assets as of 11/30/99
U.S. Electric 37%
U.S. Natural Gas 28
Foreign Utilities 16
U.S. Telecommunications 11
U.S. Misc. 4
U.S. Exploration & Production 2
Cash 2
Five Largest Holdings Expressed as a percentage of net assets as of 11/30/99
Security/Industry
% of Net Assets Comments
El Paso Energy The largest gas pipeline system in the United States
Natural Gas by mileage. Well exposed to the burgeoning demand
4.8% for natural gas as large numbers of gas-fired plants
are built and gas increases its penetration of the
home heating market.
Columbia Energy Group Gas pipelines from the Gulf of Mexico to the
Natural Gas northeast United States and retail distribution
3.7% in key states with positive regulatory environments.
Sold its wholesale business to Enron to improve its
strategic focus. Good collection of assets. Target
of at least one takeover bid.
Coastal Corp. Diversified energy company with about half its
Natural Gas earnings from gas pipelines. Also refines oil and
3.6% owns 1,550 branded retail outlets for gasoline.
Same gas exposure as El Paso, but with a smaller
pipeline business. Has great exploration and
production subsidiary that is expected to increase
production by 20% a year over the next few years.
Northeast Utilities New England's largest electric utility, selling
Electricity its power plants to focus on distribution. Merging
3.6% with Con Ed at a price 34% above the closing price
before news of the merger talks was released.
Williams Companies Owns the largest U.S. gas pipeline system (by
Gas Pipelines volume), and has used its rights of way to build
2.9% a modern fiberoptic telecommuni-cations
network--the fourth largest in the United States. It
sold 14% of the network in a September IPO.
2
<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
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. 3
<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
--------------
PREFERRED STOCKS--0.6%
- ------------------------------------------------------------
Gas Pipelines--0.6%
705,700 KN Energy, Inc.
Conv., 8.25%
(cost $30,345,100) $ 23,023,462
--------------
- ------------------------------------------------------------
Principal
Amount
(000)
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. 4
<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. 5
<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. 6
<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. 7
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
Statement of Changes in Net Assets PRUDENTIAL UTILITY FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Eleven Months
Ended Year Ended December 31,
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. 8
<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
- --------------------------------------------------------------------------------
9
<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%
- --------------------------------------------------------------------------------
10
<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.
- --------------------------------------------------------------------------------
11
<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
- --------------------------------
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>
- --------------------------------------------------------------------------------
12
<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
- --------------------------------
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>
- --------------------------------------------------------------------------------
13
<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
------------- ------- ------- ------- ------
<S> <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
----- ------- ------- ------- ------
Income from investment operations
Net investment income........................................... .27 .30 .34 .32 .30
Net realized and unrealized gains (losses) on investment and
foreign currency transactions................................ .14 .69 2.53 1.80 1.79
----- ------- ------- ------- ------
Total from investment operations............................. .41 .99 2.87 2.12 2.09
----- ------- ------- ------- ------
Less distributions
Dividends from net investment income............................ (.27) (.32) (.32) (.32) (.30)
Distributions in excess of net investment income................ (.03) -- -- -- --
Distributions from net realized gains........................... (1.15) (.94) (1.10) (.79) (.19)
Distributions in excess of net realized gains................... -- -- -- -- --
----- ------- ------- ------- ------
Total distributions.......................................... (1.45) (1.26) (1.42) (1.11) (.49)
----- ------- ------- ------- ------
Net asset value, end of period.................................. $ 11.02 $12.06 $12.33 $10.88 $ 9.87
----- ------- ------- ------- ------
----- ------- ------- ------- ------
TOTAL RETURN(a)................................................. 3.64% 7.98% 27.77% 22.09% 25.74%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000,000)............................. $2,440 $2,741 $2,583 $2,023 $1,709
Average net assets (000,000).................................... $2,691 $2,652 $2,201 $1,786 $1,440
Ratios to average net assets:
Expenses, including distribution fees........................ .78%(c) .78% .82% .86% .88%
Expenses, excluding distribution fees........................ .53%(c) .53% .57% .61% .63%
Net investment income........................................ 2.45%(c) 2.43% 2.95% 3.10% 3.12%
For Class A, B, C and Z shares:
Portfolio turnover rate...................................... 19% 17% 15% 17% 14%
<CAPTION>
1994
------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................ $ 9.72
------
Income from investment operations
Net investment income........................................... .31
Net realized and unrealized gains (losses) on investment and
foreign currency transactions................................ (1.06)
------
Total from investment operations............................. (.75)
------
Less distributions
Dividends from net investment income............................ (.32)
Distributions in excess of net investment income................ --
Distributions from net realized gains........................... (.36)
Distributions in excess of net realized gains................... (.02)
------
Total distributions.......................................... (.70)
------
Net asset value, end of period.................................. $ 8.27
------
------
TOTAL RETURN(a)................................................. (7.89)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000,000)............................. $254
Average net assets (000,000).................................... $294
Ratios to average net assets:
Expenses, including distribution fees........................ .88%
Expenses, excluding distribution fees........................ .63%
Net investment income........................................ 3.37%
For Class A, B, C and Z shares:
Portfolio turnover rate...................................... 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. 14
<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
------------- ------- ------- ------- ------
<S> <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
----- ------- ------- ------- ------
Income from investment operations
Net investment income........................................... .19 .21 .25 .24 .22
Net realized and unrealized gains (losses) on investment and
foreign currency transactions................................ .13 .69 2.53 1.80 1.80
----- ------- ------- ------- ------
Total from investment operations............................. .32 .90 2.78 2.04 2.02
----- ------- ------- ------- ------
Less distributions
Dividends from net investment income............................ (.19) (.23) (.24) (.24) (.22)
Distributions in excess of net investment income................ (.01) -- -- -- --
Distributions from net realized gains........................... (1.15) (.94) (1.10) (.79) (.19)
Distributions in excess of net realized gains................... -- -- -- -- --
----- ------- ------- ------- ------
Total distributions.......................................... (1.35) (1.17) (1.34) (1.03) (.41)
----- ------- ------- ------- ------
Net asset value, end of period.................................. $ 11.02 $12.05 $12.32 $10.88 $ 9.87
----- ------- ------- ------- ------
----- ------- ------- ------- ------
TOTAL RETURN(a)................................................. 2.98% 7.18% 26.80% 21.16% 24.80%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000,000)............................. $1,306 $1,990 $2,132 $2,137 $2,355
Average net assets (000,000).................................... $1,691 $2,120 $2,059 $2,184 $2,450
Ratios to average net assets:
Expenses, including distribution fees........................ 1.53%(c) 1.53% 1.57% 1.61% 1.63%
Expenses, excluding distribution fees........................ .53%(c) .53% .57% .61% .63%
Net investment income........................................ 1.71%(c) 1.67% 2.20% 2.35% 2.37%
<CAPTION>
1994
------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................ $ 9.69
------
Income from investment operations
Net investment income........................................... .24
Net realized and unrealized gains (losses) on investment and
foreign currency transactions................................ (1.05)
------
Total from investment operations............................. (.81)
------
Less distributions
Dividends from net investment income............................ (.24)
Distributions in excess of net investment income................ --
Distributions from net realized gains........................... (.36)
Distributions in excess of net realized gains................... (.02)
------
Total distributions.......................................... (.62)
------
Net asset value, end of period.................................. $ 8.26
------
------
TOTAL RETURN(a)................................................. (8.51)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000,000)............................. $3,526
Average net assets (000,000).................................... $4,152
Ratios to average net assets:
Expenses, including distribution fees........................ 1.63%
Expenses, excluding distribution fees........................ .63%
Net investment income........................................ 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. 15
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
Financial Highlights PRUDENTIAL UTILITY FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
------------------------------------------------------------
Eleven Months
Ended Year Ended December 31,
November 30, ------------------------------------------
1999(b) 1998(b) 1997(b) 1996(b) 1995
------------- ------- ------- ------- ------
<S> <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
------ ------- ------- ------- ------
Income from investment operations
Net investment income........................................... .19 .21 .25 .24 .22
Net realized and unrealized gains (losses) on investment and
foreign currency transactions................................ .13 .69 2.53 1.80 1.80
------ ------- ------- ------- ------
Total from investment operations............................. .32 .90 2.78 2.04 2.02
------ ------- ------- ------- ------
Less distributions
Dividends from net investment income............................ (.19) (.23) (.24) (.24) (.22)
Distributions in excess of net investment income................ (.01) -- -- -- --
Distributions from net realized gains........................... (1.15) (.94) (1.10) (.79) (.19)
Distributions in excess of net realized gains................... -- -- -- -- --
------ ------- ------- ------- ------
Total distributions.......................................... (1.35) (1.17) (1.34) (1.03) (.41)
------ ------- ------- ------- ------
Net asset value, end of period.................................. $ 11.02 $ 12.05 $ 12.32 $10.88 $ 9.87
------ ------- ------- ------- ------
------ ------- ------- ------- ------
TOTAL RETURN(a)................................................. 2.98% 7.18% 26.80% 21.16% 24.80%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................................. $20,550 $27,072 $13,490 $6,001 $3,455
Average net assets (000)........................................ $24,448 $20,309 $ 9,424 $4,517 $2,181
Ratios to average net assets:
Expenses, including distribution fees........................ 1.53%(c) 1.53% 1.57% 1.61% 1.63%
Expenses, excluding distribution fees........................ .53%(c) .53% .57% .61% .63%
Net investment income........................................ 1.71%(c) 1.71% 2.20% 2.35% 2.37%
<CAPTION>
August 1,
1994(d)
Through
December 31,
1994
------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................ $ 9.30
-----
Income from investment operations
Net investment income........................................... .11
Net realized and unrealized gains (losses) on investment and
foreign currency transactions................................ (.69)
-----
Total from investment operations............................. (.58)
-----
Less distributions
Dividends from net investment income............................ (.13)
Distributions in excess of net investment income................ --
Distributions from net realized gains........................... (.31)
Distributions in excess of net realized gains................... (.02)
-----
Total distributions.......................................... (.46)
-----
Net asset value, end of period.................................. $ 8.26
-----
-----
TOTAL RETURN(a)................................................. (6.27)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................................. $ 787
Average net assets (000)........................................ $ 433
Ratios to average net assets:
Expenses, including distribution fees........................ 1.70%(c)
Expenses, excluding distribution fees........................ .70%(c)
Net investment income........................................ 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. 16
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
Financial Highlights PRUDENTIAL UTILITY FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class Z
------------------------------------------------------
March 1,
Eleven Months Year Ended December 1996(d)
Ended 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. 17
<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
- --------------------------------------------------------------------------------
18
<PAGE>
PRUDENTIAL SECTOR FUNDS, INC.
Tax Information (Unaudited) PRUDENTIAL UTILITY FUND
- --------------------------------------------------------------------------------
We are required by Internal Revenue Code to advise you within 60 days of the
Fund's fiscal year end (November 30, 1999) as to the federal tax status of
dividends paid by the Fund during its fiscal year ended November 30, 1999.
During the fiscal year ended November 30, 1999, the Fund paid dividends of $1.45
per Class A share, $1.35 per Class B share, $1.35 per Class C share and $1.48
per Class Z share. Of these amounts, $1.15 per Class A, B, C and Z shares
represent distributions from long-term capital gains which is taxable at 20%
rate gain. The remaining $.30 per Class A share, $.20 per Class B share, $.20
per Class C share and $.33 per Class Z share represent dividends from ordinary
income (net investment income and short-term capital gains). Further, we wish to
advise you that 99.79% of the ordinary income dividends paid in the fiscal year
ended November 30, 1999, qualified for the corporate dividends received
deduction available to corporate taxpayers.
For the purpose of preparing your annual federal income tax return, however, you
should report the amounts as reflected on the appropriate Form 1099-DIV or
substitute 1099-DIV.
- --------------------------------------------------------------------------------
19
<PAGE>
Comparing a $10,000 Investment
- ---------------------------------------------
Prudential Utility Fund vs. the S&P 500 Index
Class A
(GRAPH)
Average Annual Total Returns
With Sales Load As of 11/30/99
Since Inception 11.57%
Five Years 15.53%
One Year - 0.30%
Without Sales Load As of 11/30/99
Since Inception 12.15%
Five Years 16.72%
One Year 4.94%
(Class B)
(GRAPH)
Average Annual Total Returns
With Sales Load As of 11/30/99
Since Inception 15.75%
Ten Years 11.03%
Five Years 15.76%
One Year -0.81%
Without Sales Load As of 11/30/99
Since Inception 15.75%
Ten Years 11.03%
Five Years 15.87%
One Year 4.19%
Past performance is not indicative of future results. Principal and investment
return will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost. The information beneath the graphs
is designed to give you an idea of how much the Fund's returns can fluctuate
from year to year by measuring the best and worst calendar years in terms of
total annual return since inception of each share class (or for the past ten
years for Class B shares).
These graphs compare a $10,000 investment in the Prudential Utility Fund (Class
A, B, C, and Z shares) with a similar investment in the Standard & Poor's 500
Composite Stock Price Index (S&P 500 Index) by portraying the initial account
values of Class A, C, and Z shares at the commencement of operations, at the
beginning of the ten-year period for Class B shares, and at the end of the
fiscal year (November 30), as measured on a quarterly basis, beginning in 1990
for Class A, 1989 for Class B, 1994 for Class C, and 1996 for Class Z shares.
For purposes of the graphs, and unless otherwise indicated, it has been assumed
that (a) the maximum applicable front-end sales charge was deducted from the
initial $10,000 investment in Class A and Class C
<PAGE>
(Class C)
(GRAPH)
Average Annual Total Returns
With Sales Load As of 11/30/99
Since Inception 13.50%
Five Years 15.63%
One Year 2.15%
Without Sales Load As of 11/30/99
Since Inception 13.71%
Five Years 15.87%
One Year 4.19%
(Class Z)
(GRAPH)
Average Annual Total Returns
As of 11/30/99
Since Inception 15.77%
One Year 5.22%
shares; (b) the maximum applicable contingent deferred sales charges were
deducted from the value of the investment in Class B and Class C shares,
assuming full redemption on November 30, 1999; (c) all recurring fees
(including management fees) were deducted; and (d) all dividends and
distributions were reinvested. Class B shares will automatically convert to
Class A shares, on a quarterly basis, approximately seven years after purchase.
This conversion feature is not reflected in the graphs. Class Z shares are not
subject to a sales charge or distribution and service (12b-1) fees.
The S&P 500 Index is an unmanaged index of 500 stocks of large U.S. companies
that gives a broad look at how stock prices have performed. The Index returns
include the reinvestment of all dividends, but do not include the effect of
sales charges or operating expenses of a mutual fund. The securities in the
Index may differ substantially from the securities in the Fund. The Index is
not the only one that may be used to characterize performance of equity funds,
and other indexes may portray different comparative performance. Investors
cannot invest directly in an index.
These graphs are furnished to you in accordance with SEC regulations.
<PAGE>
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
http://www.prudential.com
Class NASDAQ Cusip
A PRUAX 74437K814
B PRUTX 74437K822
C -- 74437K830
Z PRUZX 74437K848
Directors
Delayne Dedrick Gold
Robert F. Gunia
Douglas H. McCorkindale
Thomas T. Mooney
Stephen P. Munn
David R. Odenath, Jr.
Richard A. Redeker
Robin B. Smith
John R. Strangfeld
Louis A. Weil, III
Clay T. Whitehead
Officers
John R. Strangfeld, President
Robert F. Gunia, Vice President
Grace C. Torres, Treasurer
Marguerite E.H. Morrison, Secretary
Stephen M. Ungerman, Assistant Treasurer
Manager
Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street, Newark, NJ 07102-4077
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
751 Broad Street, Newark, NJ 07102-3777
Distributor
Prudential Investment Management Services LLC
Gateway Center Three
100 Mulberry Street, Newark, NJ 07102-4077
Custodian
State Street Bank and Trust Company
One Heritage Drive, North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services LLC
P.O. Box 15005, New Brunswick, NJ 08906
Independent Accountants
PricewaterhouseCoopers LLP
1177 Avenue of the Americas, New York, NY 10036
Legal Counsel
Gardner, Carton & Douglas
Quaker Tower
321 North Clark Street, Chicago, IL 60610-4795
Prudential Investments is a unit of The Prudential Insurance Company of
America, 751 Broad Street, Newark, NJ 07102.
The views expressed in this report and information about the Fund's portfolio
holdings are for the period covered by this report and are subject to change
thereafter.
This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus.
MF105E
