<PAGE>
As filed with the Securities and Exchange Commission on December 21, 1994
Securities Act Registration No. 33-9269
Investment Company Act Registration No. 811-4864
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [_]
[X]
POST-EFFECTIVE AMENDMENT NO. 13
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
[X]
AMENDMENT NO. 15
(Check appropriate box or boxes)
-----------
PRUDENTIAL EQUITY INCOME FUND
(Exact name of registrant as specified in charter)
ONE SEAPORT PLAZA,
NEW YORK, NEW YORK 10292
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 214-1250
S. JANE ROSE, ESQ.
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
(NAME AND ADDRESS OF AGENT FOR SERVICE)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE
DATE OF THE REGISTRATION STATEMENT.
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX):
[_] immediately upon filing pursuant to paragraph (b)
[X] on December 30, 1994 pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(i)
[_] on (date) pursuant to paragraph (a)(i)
[_] 75 days after filing pursuant to paragraph (a)(ii)
[_] on (date) pursuant to paragraph (a)(ii) of Rule 485
If appropriate, check the following box:
[_] this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment
PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940, REGISTRANT
HAS PREVIOUSLY REGISTERED AN INDEFINITE NUMBER OF SHARES OF BENEFICIAL
INTEREST, PAR VALUE $.01 PER SHARE. THE REGISTRANT FILED A NOTICE UNDER SUCH
RULE FOR ITS FISCAL YEAR ENDED OCTOBER 31, 1994 ON OR ABOUT DECEMBER 20, 1994.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
------------- --------
<C> <S> <C>
PART A
Item 1. Cover Page............................ Cover Page
Item 2. Synopsis.............................. Fund Expenses; Financial
Highlights
Item 3. Condensed Financial Information....... Fund Expenses; Financial
Highlights; How the Fund
Calculates Performance
Item 4. General Description of Registrant..... Cover Page; Financial
Highlights; How the Fund
Invests; General Information
Item 5. Management of Fund.................... Financial Highlights; How the
Fund is Managed; General
Information
Item 6. Capital Stock and Other Securities.... Taxes, Dividends and
Distributions; General
Information
Item 7. Purchase of Securities Being Offered.. Shareholder Guide; How the
Fund Values its Shares
Item 8. Redemption or Repurchase.............. Shareholder Guide; How the
Fund Values its Shares;
General Information
Item 9. Pending Legal Proceedings............. Not Applicable
PART B
Item 10. Cover Page............................ Cover Page
Item 11. Table of Contents..................... Table of Contents
Item 12. General Information and History....... General Information
Item 13. Investment Objectives and Policies.... Investment Objective and
Policies; Investment
Restrictions
Item 14. Management of the Fund................ Trustees and Officers;
Manager; Distributor
Item 15. Control Persons and Principal Holders
of Securities......................... Not Applicable
Item 16. Investment Advisory and Other
Services.............................. Manager; Distributor;
Custodian, Transfer and
Dividend Disbursing Agent and
Independent Accountants
Item 17. Brokerage Allocation and Other
Practices............................. Portfolio Transactions and
Brokerage
Item 18. Capital Stock and Other Securities.... Not Applicable
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered.............. Purchase and Redemption of
Fund Shares; Shareholder
Investment Account; Net Asset
Value
Item 20. Tax Status............................ Taxes
Item 21. Underwriters.......................... Distributor
Item 22. Calculation of Performance Data....... Performance Information
Item 23. Financial Statements.................. Financial Statements
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Post-Effective Amendment to
the Registration Statement.
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
Prudential Equity Income Fund
- -------------------------------------------------------
PROSPECTUS DATED DECEMBER 30, 1994
- -------------------------------------------------------
Prudential Equity Income Fund (the Fund) is an open-
end, diversified management investment company. Its
investment objective is both current income and capi-
tal appreciation. It seeks to achieve this objective
by investing primarily in common stocks and converti-
ble securities that provide investment income returns
above those of the Standard & Poor's 500 Stock Index
or the NYSE Composite Index. In normal circumstances,
the Fund intends to invest at least 65% of its total
assets in such securities. The balance of the Fund's
assets may be invested in other common stocks, other
securities convertible into common stocks, debt secu-
rities and certain derivatives, including options on
stocks and stock indices. Common stocks may include
securities of foreign issuers. There can be no assur-
ance that the Fund's investment objective will be
achieved. See "How the Fund Invests--Investment Objec-
tive and Policies." The Fund's address is One Seaport
Plaza, New York, New York 10292, and its telephone
number is (800) 225-1852.
The Fund's purchase and sale of put and call options
and related short-term trading may result in a high
portfolio turnover rate. These activities may be con-
sidered speculative and may result in higher risks and
costs to the Fund. The Fund may also buy and sell
stock index futures and options thereon for the pur-
pose of hedging its securities portfolio and may buy
and sell options on stock indices, in each case in ac-
cordance with limits described herein. See "How the
Fund Invests--Investment Objective and Policies."
This Prospectus sets forth concisely the information
about the Fund that a prospective investor should know
before investing. Additional information about the
Fund has been filed with the Securities and Exchange
Commission in a Statement of Additional Information,
dated December 30, 1994, which information is incorpo-
rated herein by reference (is legally considered a
part of this Prospectus) and is available without
charge upon request to the Fund, at the address or
telephone number noted above.
- -------------------------------------------------------
Investors are advised to read this Prospectus and retain it
for future reference.
- -------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EX-
CHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPEC-
TUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL EQUITY INCOME FUND?
Prudential Equity Income Fund is a mutual fund. A mutual fund pools the
resources of investors by selling its shares to the public and investing
the proceeds of such sale in a portfolio of securities designed to achieve
its investment objective. Technically, the Fund is an open-end, diversified
management investment company.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is both current income and capital
appreciation. It seeks to achieve this objective by investing primarily in
common stocks and convertible securities that provide investment income
returns above those of the Standard & Poor's 500 Stock Index or the NYSE
Composite Index. There can be no assurance that the Fund's objective will
be achieved. See "How the Fund Invests--Investment Objective and Policies"
at page 8.
RISK FACTORS AND SPECIAL CHARACTERISTICS
The Fund may invest up to 30% of its total assets in the securities of
foreign issuers and up to 35% of its total assets in fixed-income
obligations, including securities rated Baa or lower by Moody's Investors
Service or BBB or lower by Standard & Poor's Ratings Group or Duff & Phelps
Credit Rating Co. which may be subject to special risks. See "How the Fund
Invests--Investment Objective and Policies" at page 8. The Fund may also
engage in various hedging and income enhancement strategies, including
utilizing derivatives. These activities may be considered speculative and
may result in higher risks and costs to the Fund. See "How the Fund
Invests--Hedging and Income Enhancement Strategies--Risks of Hedging and
Income Enhancement Strategies" at page 12.
WHO MANAGES THE FUND?
Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the
Manager of the Fund and is compensated for its services at an annual rate
of .60 of 1% of the Fund's average daily net assets up to $500 million and
.50 of 1% of the Fund's average daily net assets in excess of $500 million.
As of November 30, 1994, PMF served as manager or administrator to 68
investment companies, including 38 mutual funds, with aggregate assets of
approximately $46 billion. The Prudential Investment Corporation (PIC or
the Subadviser) furnishes investment advisory services in connection with
the management of the Fund under a Subadvisory Agreement with PMF. See "How
the Fund is Managed--Manager" at page 14.
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor
of the Fund's Class A shares and is paid an annual distribution and service
fee which is currently being charged at the rate of .25 of 1% of the
average daily net assets of the Class A shares.
Prudential Securities Incorporated (Prudential Securities or PSI), a
major securities underwriter and securities and commodities broker, acts as
the Distributor of the Fund's Class B and Class C shares and is paid an
annual distribution and service fee at the rate of 1% of the average daily
net assets of each of the Class B and Class C shares.
See "How the Fund is Managed--Distributor" at page 15.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000
per class and $5,000 for Class C shares. The minimum subsequent investment
is $100 for all classes. There is no minimum investment requirement for
certain retirement and employee savings plans or custodial accounts for the
benefit of minors. For purchases made through the Automatic Savings
Accumulation Plan, the minimum initial and subsequent investment is $50.
See "Shareholder Guide--How to Buy Shares of the Fund" at page 21 and
"Shareholder Guide--Shareholder Services" at page 31.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund through its transfer
agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer Agent), at
the net asset value per share (NAV) next determined after receipt of your
purchase order by the Transfer Agent or Prudential Securities plus a sales
charge which may be imposed either (i) at the time of purchase (Class A shares)
or (ii) on a deferred basis (Class B or Class C shares). See "How the Fund
Values its Shares" at page 18 and "Shareholder Guide--How to Buy Shares of the
Fund" at page 21.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers three classes of shares:
. Class A Shares: Sold with an initial sales charge of up to 5% of the
offering price.
. Class B Shares: Sold without an initial sales charge but are subject to a
contingent deferred sales charge or CDSC (declining from
5% to zero of the lower of the amount invested or the
redemption proceeds) which will be imposed on certain
redemptions made within six years of purchase. Although
Class B shares are subject to higher ongoing
distribution-related expenses than Class A shares, Class
B shares will automatically convert to Class A shares
(which are subject to lower distribution-related ongoing
expenses) approximately seven years after purchase.
. Class C Shares: Sold without an initial sales charge and, for one year
after purchase, are subject to a 1% CDSC on redemptions.
Like Class B shares, Class C shares are subject to higher
ongoing distribution-related expenses than Class A shares
but do not convert to another class.
See "Shareholder Guide--Alternative Purchase Plan" at page 23.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order. However,
the proceeds of redemptions of Class B and Class C shares may be subject to a
CDSC. See "Shareholder Guide--How to Sell Your Shares" at page 26.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Fund expects to pay dividends of net investment income, if any, quarterly
and make distributions of any net capital gains at least annually. Dividends
and distributions will be automatically reinvested in additional shares of the
Fund at NAV without a sales charge unless you request that they be paid to you
in cash. See "Taxes, Dividends and Distributions" at page 19.
3
<PAGE>
FUND EXPENSES
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- --------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES+
Maximum Sales Load
Imposed on Purchases
(as a percentage of
offering price)....... 5% None None
Maximum Sales Load or
Deferred Sales Load
Imposed on Reinvested
Dividends............. None None None
Deferred Sales Load (as
a percentage of
original purchase
price or redemption
proceeds, whichever is
lower)................ None 5% during the first year, 1% on redemptions made
decreasing by 1% annually within one year of purchase
to 1% in the fifth and sixth
years and 0% the seventh
year*
Redemption Fees........ None None None
Exchange Fee........... None None None
<CAPTION>
ANNUAL FUND OPERATING
EXPENSES
(as a percentage of av- CLASS A SHARES CLASS B SHARES CLASS C SHARES **
erage net assets) -------------- -------------- -----------------
<S> <C> <C> <C>
Management Fees........ .55% .55% .55%
12b-1 Fees............. .25++ 1.00 1.00
Other Expenses......... .30 .30 .30
--- ---- ----
Total Fund Operating 1.10% 1.85% 1.85%
Expenses.............. ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming (1) 5% annual
return and (2) redemption at the end of
each time period:
Class A................................. $61 $83 $108 $177
Class B................................. $69 $88 $110 $188
Class C**............................... $29 $58 $100 $217
You would pay the following expenses on the
same investment, assuming no redemption:
Class A................................. $61 $83 $108 $177
Class B................................. $19 $58 $100 $188
Class C**............................... $19 $58 $100 $217
</TABLE>
The above example with respect to Class A and Class C shares is based on
restated data for the Fund's fiscal year ended October 31, 1994. The above
example with respect to Class B shares is based on actual data for the
Fund's fiscal year ended October 31, 1994. The example should not be
considered a representation of past or future expenses. Actual expenses
may be greater or less than those shown.
The purpose of this table is to assist investors in understanding the
various costs and expenses that an investor in the Fund will bear, whether
directly or indirectly. For more complete descriptions of the various
costs and expenses, see "How the Fund is Managed." "Other Expenses"
includes operating expenses of the Fund, such as Trustees' and
professional fees, registration fees, reports to shareholders and transfer
agency and custodian fees.
--------
* Class B shares will automatically convert to Class A shares
approximately seven years after purchase. See "Shareholder Guide--
Conversion Feature--Class B Shares."
** Estimated based on expenses expected to have been incurred if Class C
shares had been in existence during the entire fiscal year ended October
31, 1994.
+ Pursuant to rules of the National Association of Securities Dealers,
Inc., the aggregate initial sales charges, deferred sales charges and
asset-based sales charges on shares of the Fund may not exceed 6.25% of
total gross sales, subject to certain exclusions. This 6.25% limitation
is imposed on each class of the Fund rather than on a per shareholder
basis. Therefore, long-term shareholders of the Fund may pay more in
total sales charges than the economic equivalent of 6.25% of such
shareholders' investment in such shares. See "How the Fund is Managed--
Distributor."
++ Although the Class A Distribution and Service Plan provides that the
Fund may pay a distribution fee of up to .30 of 1% per annum of the
average daily net assets of the Class A shares, the Distributor has
agreed to limit its distribution fees with respect to the Class A shares
of the Fund to no more than .25 of 1% of the average daily net assets of
the Class A shares for the fiscal year ending October 31, 1995. Total
Fund Operating Expenses without such limitation would be 1.15%. See "How
the Fund is Managed--Distributor."
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS A SHARES)
The following financial highlights have been audited by Deloitte & Touche
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
following financial highlights contain selected data for a Class A share of
beneficial interest outstanding, total return, ratios to average net assets
and other supplemental data for the periods indicated. The information is
based on data contained in the financial statements.
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------
JANUARY 22,
1990*
YEAR ENDED OCTOBER 31, THROUGH
----------------------------------- OCTOBER 31,
1994 1993 1992 1991 1990
-------- -------- ------- ------ -----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORM-
ANCE:
Net asset value, beginning $ 14.38 $ 12.16 $ 12.04 $ 9.53 $10.59
of period.................. -------- -------- ------- ------ ------
INCOME FROM INVESTMENT OPER-
ATIONS
Net investment income....... .41 .47 .47 .38 .25
Net realized and unrealized
gain (loss) on
investment transactions.... .06 2.65 .60 2.50 (1.01)
-------- -------- ------- ------ ------
Total from investment oper-
ations.................... .47 3.12 1.07 2.88 (.76)
-------- -------- ------- ------ ------
LESS DISTRIBUTIONS
Dividends from net invest-
ment income................ (.29) (.46) (.47) (.37) (.30)
Distributions from net real-
ized gains................. (.53) (.44) (.48) -- --
-------- -------- ------- ------ ------
Total distributions........ (.82) (.90) (.95) (.37) (.30)
-------- -------- ------- ------ ------
Net asset value, end of pe-
riod....................... $ 14.03 $ 14.38 $ 12.16 $12.04 $ 9.53
======== ======== ======= ====== ======
TOTAL RETURN++:............. 3.48% 26.93% 9.50% 30.62% (7.36)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)...................... $150,502 $104,017 $51,165 $4,013 $1,098
Average net assets (000).... $131,398 $ 70,895 $21,931 $2,084 $ 752
Ratios to average net as-
sets:
Expenses, including distri-
bution fees............... 1.09% 1.07% 1.22% 1.37% 1.59%+
Expenses, excluding distri-
bution fees............... .85% .87% 1.02% 1.17% 1.39%+
Net investment income...... 2.97% 3.44% 3.22% 3.43% 3.12%+
Portfolio turnover.......... 70% 57% 43% 64% 58%
</TABLE>
--------
* Commencement of offering of Class A shares.
+ Annualized.
++ Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a sale
on the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a
full year are not annualized.
5
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS B SHARES)
The following financial highlights, with respect to the five-year period
ended October 31, 1994, have been audited by Deloitte & Touche LLP,
independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
following financial highlights contain selected data for a Class B share of
beneficial interest outstanding, total return, ratios to average net assets
and other supplemental data for the periods indicated. The information is
based on data contained in the financial statements.
<TABLE>
<CAPTION>
CLASS B
---------------------------------------------------------------------------------
JANUARY 22,
1987*
YEAR ENDED OCTOBER 31, THROUGH
-------------------------------------------------------------------- OCTOBER 31,
1994 1993 1992 1991 1990 1989 1988** 1987
-------- -------- -------- -------- -------- -------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, begin- $ 14.35 $ 12.14 $ 12.03 $ 9.53 $ 10.89 $ 9.63 $ 8.48 $ 9.70
ning of period......... -------- -------- -------- -------- -------- -------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income... .31 .37 .37 .30 .28 .32 .28 .18++
Net realized and
unrealized gain (loss)
on investment transac-
tions.................. (.06) 2.64 .59 2.49 (1.32) 1.26 1.47 (1.30)
-------- -------- -------- -------- -------- -------- ------- -------
Total from investment
operations............ (.37) 3.01 .96 2.79 (1.04) 1.58 1.75 (1.12)
-------- -------- -------- -------- -------- -------- ------- -------
LESS DISTRIBUTIONS
Dividends from net in-
vestment income........ (.19) (.36) (.37) (.29) (.32) (.32) (.27) (.10)
Distributions from net
realized gains......... (.53) (.44) (.48) -- -- -- (.33) --
-------- -------- -------- -------- -------- -------- ------- -------
Total distributions.... (.72) (.80) (.85) (.29) (.32) (.32) (.60) (.10)
-------- -------- -------- -------- -------- -------- ------- -------
Net asset value, end of
period................. $ 14.00 $ 14.35 $ 12.14 $ 12.03 $ 9.53 $ 10.89 $ 9.63 $ 8.48
======== ======== ======== ======== ======== ======== ======= =======
TOTAL RETURN+++:........ 2.73% 25.93% 8.55% 29.58% (9.77)% 16.68% 21.85% (11.74)%
RATIOS/SUPPLEMENTAL DA-
TA:
Net assets, end of pe-
riod (000)............. $954,951 $527,868 $190,846 $151,538 $120,032 $143,169 $60,733 $67,226
Average net assets
(000).................. $784,063 $304,898 $169,524 $136,602 $142,179 $ 84,157 $63,013 $73,823
Ratios to average net
assets:
Expenses, including
distribution fees..... 1.85% 1.87% 2.02% 2.17% 2.22% 2.08% 2.30% 2.22%+/++
Expenses, excluding
distribution fees..... .85% .87% 1.02% 1.17% 1.22% 1.12% 1.29% 1.21%+/++
Net investment income.. 2.21% 2.58% 3.05% 2.67% 2.70% 2.89% 3.19% 2.12%+/++
Portfolio turnover...... 70% 57% 43% 64% 58% 60% 35% 71%
</TABLE>
- --------
* Commencement of offering of Class B shares.
** On March 1, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as manager of the Fund.
+ Annualized.
++ Net of expense reimbursement.
+++ Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a sale
on the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a
full year are not annualized.
6
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE INDICATED PERIOD)
(CLASS C SHARES)
The following financial highlights have been audited by Deloitte & Touche
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
following financial highlights contain selected data for a Class C share of
beneficial interest outstanding, total return, ratios to average net assets
and other supplemental data for the period indicated. The information is based
on data contained in the financial statements.
<TABLE>
<CAPTION>
CLASS C
------------
AUGUST 1,
1994*
THROUGH
OCTOBER 31,
1994
------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................. $13.99
------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................................ .08
Net realized and unrealized gain (loss) on
investment transactions......................................... (.02)
------
Total from investment operations................................ .06
------
LESS DISTRIBUTIONS
Dividends from net investment income............................. (.05)
------
Net asset value, end of period................................... $14.00
======
TOTAL RETURN+:................................................... 0.45%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).................................. $1,527
Average net assets (000)......................................... $ 762
Ratios to average net assets:#
Expenses, including distribution fees........................... 2.05%**
Expenses, excluding distribution fees........................... 1.05%**
Net investment income........................................... 2.42%**
Portfolio turnover............................................... 70%
</TABLE>
--------
* Commencement of offering of Class C shares.
** Annualized.
+ 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 is not annualized.
# Since the Fund did not commence a public offering of Class C shares
until August 1, 1994, historical expenses and ratios of expenses to
average net assets of Class A and Class B shares are not necessarily
indicative of future expenses and related ratios of Class C shares.
7
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
THE INVESTMENT OBJECTIVE OF THE FUND IS BOTH CURRENT INCOME AND CAPITAL
APPRECIATION. THE FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING
PRIMARILY IN COMMON STOCKS AND CONVERTIBLE SECURITIES THAT PROVIDE INVESTMENT
INCOME RETURNS ABOVE THOSE OF THE STANDARD & POOR'S 500 STOCK INDEX OR THE
NYSE COMPOSITE INDEX. In selecting these investments, the Fund puts emphasis
on earnings, balance sheet and cash flow analyses and the relationships that
these factors have to the price and return of a given security. Under normal
circumstances, the Fund will invest at least 65% of its total assets
(determined at the time of purchase) in such securities. THERE CAN BE NO
ASSURANCE THAT SUCH OBJECTIVE WILL BE ACHIEVED. See "Investment Objective and
Policies" in the Statement of Additional Information.
THE FUND'S INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND MAY NOT BE
CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE FUND'S
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF
1940, AS AMENDED (THE INVESTMENT COMPANY ACT). FUND POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
THE BALANCE OF THE FUND'S TOTAL ASSETS MAY BE INVESTED IN OTHER COMMON
STOCKS, IN OTHER SECURITIES CONVERTIBLE INTO COMMON STOCKS, IN DEBT SECURITIES
(INCLUDING MONEY MARKET INSTRUMENTS) AND IN OPTIONS ON STOCK AND ON STOCK
INDICES. Common stocks may include securities of foreign issuers.
IN ADDITION, THE FUND MAY (I) PURCHASE AND SELL STOCK INDEX FUTURES AND
OPTIONS THEREON FOR HEDGING OR INCOME ENHANCEMENT PURPOSES OR, WITH RESPECT TO
WRITING OPTIONS ON FUTURES, TO REALIZE A GREATER RETURN (SEE "HEDGING AND
INCOME ENHANCEMENT STRATEGIES" BELOW), (II) PURCHASE SECURITIES ON A WHEN-
ISSUED OR DELAYED DELIVERY BASIS (SEE "OTHER INVESTMENTS AND POLICIES--WHEN-
ISSUED AND DELAYED DELIVERY SECURITIES" BELOW), (III) MAKE SHORT SALES
AGAINST-THE-BOX (SEE "OTHER INVESTMENTS AND POLICIES--SHORT SALES AGAINST-THE-
BOX" BELOW), AND (IV) ENTER INTO REPURCHASE AGREEMENTS (SEE "OTHER INVESTMENTS
AND POLICIES--REPURCHASE AGREEMENTS" BELOW).
CONVERTIBLE SECURITIES
A CONVERTIBLE SECURITY IS A FIXED-INCOME SECURITY (A BOND OR PREFERRED
STOCK) WHICH MAY BE CONVERTED AT A STATED PRICE WITHIN A SPECIFIED PERIOD OF
TIME INTO A CERTAIN QUANTITY OF THE COMMON STOCK OF THE SAME OR A DIFFERENT
ISSUER. Convertible securities are senior to common stocks in a corporation's
capital structure, but are usually subordinated to similar nonconvertible
securities. While providing a fixed income stream (generally higher in yield
than the income derivable from a common stock but lower than that afforded by
a similar nonconvertible security), a convertible security also affords an
investor the opportunity, through its conversion feature, to participate in
the capital appreciation attendant upon a market price advance in the
convertible security's underlying common stock.
In general, the market value of a convertible security is at least the
higher of its "investment value" (i.e., its value as a fixed-income security)
or its "conversion value" (i.e., its value upon conversion into its underlying
common stock). As a fixed-income security, a convertible security tends to
increase in market value when interest rates decline and tends to decrease in
value when interest rates rise. However, the price of a convertible security
is also influenced by the market value of the security's underlying common
stock. The price of a convertible security tends to increase as the market
value of the underlying stock rises, whereas it tends to decrease as the
market value of the underlying stock declines. While no securities investment
is without some risk, investments in convertible securities generally entail
less risk than investments in the common stock of the same issuer.
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MONEY MARKET INSTRUMENTS
THE FUND MAY INVEST UP TO 35% OF ITS TOTAL ASSETS IN MONEY MARKET
INSTRUMENTS UNDER NORMAL CIRCUMSTANCES. The Fund may invest in such
instruments without limit when the investment adviser believes that market
conditions warrant a temporary defensive investment posture or pending
investment of proceeds from sales of the Fund's shares. These instruments
include obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities; commercial paper; certificates of deposit;
bankers' acceptances and other obligations of domestic and foreign banks. Such
obligations (other than U.S. Government securities) will be rated, at the time
of purchase, within the two highest quality grades as determined by a
nationally recognized statistical rating organization, such as Moody's
Investors Service (Moody's), Standard & Poor's Ratings Group (S&P) or Duff &
Phelps Credit Rating Co. (Duff & Phelps) or, if unrated, will be of equivalent
quality in the judgment of the Fund's investment adviser.
OTHER FIXED-INCOME OBLIGATIONS
THE FUND MAY INVEST UP TO 35% OF ITS TOTAL ASSETS IN OTHER FIXED-INCOME
OBLIGATIONS. The Fund anticipates that it will primarily invest in fixed-
income securities rated A or better by Moody's or S&P or BBB+ or better by
Duff & Phelps. The Fund may also invest in fixed-income securities rated Baa
or lower by Moody's or BBB or lower by S&P or Duff & Phelps (although the Fund
will not invest in fixed-income securities rated lower than Ca, CC or CCC by
Moody's, S&P or Duff & Phelps, respectively). Subsequent to its purchase by
the Fund, a fixed-income obligation may be assigned a lower rating or cease to
be rated. Such an event would not require the elimination of the issue from
the portfolio, but the investment adviser will consider such an event in
determining whether the Fund should continue to hold the security in its
portfolio. Securities rated Baa by Moody's or BBB by S&P or Duff & Phelps have
speculative characteristics and changes in economic conditions or other
circumstances could lead to a weakened capacity to make principal and interest
payments than higher grade securities. Securities rated BB, Ba or BB+ or lower
by S&P, Moody's or Duff & Phelps, respectively, are generally considered to be
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal. A description of corporate bond ratings is
contained in the Appendix to the Statement of Additional Information. The Fund
may also invest in unrated fixed-income securities which, in the opinion of
the investment adviser, are of a quality comparable to rated securities in
which the Fund may invest.
RISKS OF INVESTING IN HIGH YIELD SECURITIES
FIXED-INCOME SECURITIES ARE SUBJECT TO THE RISK OF AN ISSUER'S INABILITY TO
MEET PRINCIPAL AND INTEREST PAYMENTS ON THE OBLIGATIONS (CREDIT RISK) AND MAY
ALSO BE SUBJECT TO PRICE VOLATILITY DUE TO SUCH FACTORS AS INTEREST RATE
SENSITIVITY AND THE MARKET PERCEPTION OF THE CREDITWORTHINESS OF THE ISSUER
(MARKET RISK). Lower rated or unrated (i.e., high yield) securities are more
likely to react to developments affecting market and credit risk than are more
highly rated securities, which react primarily to movements in the general
level of interest rates. The investment adviser considers both credit risk and
market risk in making investment decisions for the Fund. See "Investment
Objective and Policies--Risks of Investing in High Yield Securities" in the
Statement of Additional Information.
FOREIGN SECURITIES
THE FUND MAY INVEST UP TO 30% OF ITS TOTAL ASSETS IN FOREIGN MONEY MARKET
INSTRUMENTS AND DEBT AND EQUITY SECURITIES. For purposes of this limitation,
American Depositary Receipts are not deemed to be foreign securities. In many
instances, foreign securities may provide higher yields but may be subject to
greater fluctuations in price than securities of domestic issuers which have
similar maturities and quality. Under certain market conditions these invest-
ments may be less liquid than the securities of U.S. corporations and are cer-
tainly less liquid than securities issued or guaranteed by the U.S. Govern-
ment, its instrumentalities or agencies.
FOREIGN SECURITIES INVOLVE CERTAIN RISKS, WHICH SHOULD BE CONSIDERED CARE-
FULLY BY AN INVESTOR IN THE FUND. These risks include political or economic
instability in the country of the issuer, the difficulty of predicting inter-
national trade patterns, the possibility of imposition of exchange controls
and the risk of currency fluctuations. Such securities may be subject to
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<PAGE>
greater fluctuations in price than securities issued by U.S. corporations or
issued or guaranteed by the U.S. Government, its instrumentalities or agen-
cies. In addition, there may be less publicly available information about a
foreign company than about a domestic company. Foreign companies generally are
not subject to uniform accounting, auditing and financial reporting standards
comparable to those applicable to domestic companies. There is generally less
government regulation of securities exchanges, brokers and listed companies
abroad than in the United States, and, with respect to certain foreign coun-
tries, there is a possibility of expropriation, confiscatory taxation or dip-
lomatic developments which could affect investment in those countries. Final-
ly, in the event of a default of any such foreign debt obligations, it may be
more difficult for the Fund to obtain, or to enforce a judgment against, the
issuers of such securities.
If the security is denominated in a foreign currency, it may be affected by
changes in currency rates and in exchange control regulations, and costs may
be incurred in connection with conversions between currencies. The Fund may
enter into forward foreign currency exchange contracts for the purchase or
sale of foreign currency for hedging purposes. See "Investment Objective and
Policies--Special Risks Related to Forward Foreign Currency Exchange
Contracts" in the Statement of Additional Information.
HEDGING AND INCOME ENHANCEMENT STRATEGIES
THE FUND MAY ALSO ENGAGE IN VARIOUS PORTFOLIO STRATEGIES, INCLUDING
DERIVATIVES, TO REDUCE CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO
ENHANCE RETURN. THESE STRATEGIES CURRENTLY INCLUDE THE USE OF OPTIONS, FORWARD
FOREIGN CURRENCY EXCHANGE CONTRACTS AND FUTURES CONTRACTS AND OPTIONS THEREON.
The Fund's ability to use these strategies may be limited by market
conditions, regulatory limits and tax considerations and there can be no
assurance that any of these strategies will succeed. See "Investment Objective
and Policies" in the Statement of Additional Information. New financial
products and risk management techniques continue to be developed and the Fund
may use these new investments and techniques to the extent consistent with its
investment objective and policies.
OPTIONS TRANSACTIONS
THE FUND MAY PURCHASE AND WRITE (I.E., SELL) PUT AND CALL OPTIONS ON SECURI-
TIES THAT ARE TRADED ON NATIONAL SECURITIES EXCHANGES OR IN THE OVER-THE-COUN-
TER MARKET TO ENHANCE INCOME OR TO HEDGE THE FUND'S PORTFOLIO. These options
will be on equity securities and financial indices (e.g., S&P 500). The Fund
may write covered put and call options to generate additional income through
the receipt of premiums, purchase put options in an effort to protect the
value of a security that it owns against a decline in market value and pur-
chase call options in an effort to protect against an increase in the price of
securities it intends to purchase. The Fund may also purchase put and call op-
tions to offset previously written put and call options of the same series.
See "Investment Objective and Policies--Limitations on Purchase and Sale of
Stock Options, Options on Stock Indices, Stock Index Futures and Options
Thereon" in the Statement of Additional Information.
A CALL OPTION GIVES THE PURCHASER, IN EXCHANGE FOR A PREMIUM PAID, THE RIGHT
FOR A SPECIFIED PERIOD OF TIME TO PURCHASE THE SECURITIES SUBJECT TO THE
OPTION AT A SPECIFIED PRICE (THE EXERCISE PRICE OR STRIKE PRICE). The writer
of a call option, in return for the premium, has the obligation, upon exercise
of the option, to deliver, depending upon the terms of the option contract,
the underlying securities or a specified amount of cash to the purchaser upon
receipt of the exercise price. When the Fund writes a call option, the Fund
gives up the potential for gain on the underlying securities in excess of the
exercise price of the option during the period that the option is open.
A PUT OPTION GIVES THE PURCHASER, IN RETURN FOR A PREMIUM, THE RIGHT FOR A
SPECIFIED PERIOD OF TIME TO SELL THE SECURITIES SUBJECT TO THE OPTION TO THE
WRITER OF THE PUT AT THE SPECIFIED EXERCISE PRICE. The writer of the put
option, in return for the premium, has the obligation, upon exercise of the
option, to acquire the securities underlying the option at the
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<PAGE>
exercise price. The Fund might, therefore, be obligated to purchase the
underlying securities for more than their current market price.
THE FUND WILL WRITE ONLY "COVERED" OPTIONS. An option is covered if, so long
as the Fund is obligated under the option, it owns an offsetting position in
the underlying security or maintains cash, U.S. Government securities or other
liquid high-grade debt obligations in a segregated account with a value
sufficient at all times to cover its obligations. See "Investment Objective
and Policies--Limitations on Purchase and Sale of Stock Options, Options on
Stock Indices, Stock Index Futures and Options Thereon" in the Statement of
Additional Information.
THERE IS NO LIMITATION ON THE AMOUNT OF CALL OPTIONS THE FUND MAY WRITE. The
Fund has undertaken with certain state securities commissions that, so long as
shares of the Fund are registered in those states, it will not (a) write puts
having aggregate exercise prices greater than 25% of the Fund's total net
assets; or (b) purchase (i) put options on stocks not held in the Fund's
portfolio, (ii) put options on stock indices or (iii) call options on stocks
or stock indices if, after any such purchase, the aggregate premiums paid for
such options would exceed 20% of the Fund's total net assets. In addition, the
Fund will not purchase put or call options if as a result of such purchase
more than 5% of the Fund's total assets would be invested in premiums for such
options and options on futures contracts, but such restriction would not apply
to put options on securities in the Fund's portfolio.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
THE FUND MAY ENTER INTO FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS TO
PROTECT THE VALUE OF ITS PORTFOLIO AGAINST FUTURE CHANGES IN THE LEVEL OF
CURRENCY EXCHANGE RATES. The Fund may enter into such contracts on a spot
(i.e., cash) basis at the rate then prevailing in the currency exchange market
or on a forward basis, by entering into a forward contract to purchase or sell
currency. A forward contract on foreign currency is an obligation to purchase
or sell a specific currency at a future date, which may be any fixed number of
days agreed upon by the parties from the date of the contract at a price set
on the date of the contract. See "Investment Objective and Policies--Special
Risks Related to Forward Foreign Currency Exchange Contracts" in the Statement
of Additional Information.
THE FUND'S DEALINGS IN FORWARD CONTRACTS WILL BE LIMITED TO HEDGING
INVOLVING EITHER SPECIFIED TRANSACTIONS OR PORTFOLIO POSITIONS. Transaction
hedging is the purchase or sale of a forward contract with respect to specific
receivables or payables of the Fund generally arising in connection with the
purchase or sale of its portfolio securities and accruals of interest or
dividends receivable and Fund expenses. Position hedging is the sale of a
foreign currency with respect to portfolio security positions denominated or
quoted in that currency or in a different foreign currency (cross hedge).
Although there are no limits on the number of forward contracts which the Fund
may enter into, the Fund may not position hedge with respect to a particular
currency for an amount greater than the aggregate market value (determined at
the time of making any sale of foreign currency) of the securities held in its
portfolio denominated or quoted in, or currently convertible into, such
currency.
FUTURES CONTRACTS AND OPTIONS THEREON
THE FUND MAY PURCHASE AND SELL FINANCIAL FUTURES CONTRACTS AND OPTIONS
THEREON WHICH ARE TRADED ON A COMMODITIES EXCHANGE OR BOARD OF TRADE FOR
CERTAIN HEDGING, INCOME ENHANCEMENT AND RISK MANAGEMENT PURPOSES IN ACCORDANCE
WITH REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION. THESE FUTURES
CONTRACTS AND OPTIONS THEREON WILL BE ON FINANCIAL INDICES.
A STOCK INDEX FUTURES CONTRACT IS AN AGREEMENT TO PURCHASE OR SELL CASH
EQUAL TO A SPECIFIC DOLLAR AMOUNT TIMES THE DIFFERENCE BETWEEN THE VALUE OF A
SPECIFIC STOCK INDEX AT THE CLOSE OF THE LAST TRADING DAY OF THE CONTRACT AND
THE PRICE AT WHICH THE AGREEMENT IS MADE. No physical delivery of the
underlying stocks in the index is made.
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<PAGE>
UNDER REGULATIONS OF THE COMMODITY EXCHANGE ACT, INVESTMENT COMPANIES
REGISTERED UNDER THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED, ARE EXEMPT
FROM THE DEFINITION OF "COMMODITY POOL OPERATOR", SUBJECT TO COMPLIANCE WITH
CERTAIN CONDITIONS. THE EXEMPTION IS CONDITIONED UPON THE FUND'S PURCHASING
AND SELLING FUTURES CONTRACTS AND OPTIONS THEREON FOR BONA FIDE HEDGING
TRANSACTIONS, EXCEPT THAT THE FUND MAY PURCHASE AND SELL FUTURES CONTRACTS AND
OPTIONS THEREON FOR ANY OTHER PURPOSE TO THE EXTENT THAT THE AGGREGATE INITIAL
MARGIN AND OPTION PREMIUMS DO NOT EXCEED 5% OF THE LIQUIDATION VALUE OF THE
FUND'S TOTAL ASSETS. ALTHOUGH THERE ARE NO OTHER LIMITS APPLICABLE TO FUTURES
CONTRACTS, THE VALUE OF ALL FUTURES CONTRACTS SOLD WILL NOT EXCEED THE TOTAL
MARKET VALUE OF THE FUND'S PORTFOLIO.
THE FUND'S SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON DEPENDS
UPON THE INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET
AND INTEREST RATES AND REQUIRES SKILLS AND TECHNIQUES DIFFERENT FROM THOSE
USED IN SELECTING PORTFOLIO SECURITIES. The correlation between movements in
the price of a futures contract and movements in the price of the securities
being hedged is imperfect and the risk from imperfect correlation increases as
the composition of the Fund's portfolio diverges from the composition of the
relevant index. There is also a risk that the value of the securities being
hedged may increase or decrease at a greater rate than the related futures
contracts, resulting in losses to the Fund. Certain futures exchanges or
boards of trade have established daily limits on the amount that the price of
futures contracts or options thereon may vary, either up or down, from the
previous day's settlement price. These daily limits may restrict the Fund's
ability to purchase or sell certain futures contracts or options thereon on
any particular day.
THE FUND'S ABILITY TO ENTER INTO FUTURES CONTRACTS AND OPTIONS THEREON IS
LIMITED BY THE REQUIREMENTS OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED
(THE INTERNAL REVENUE CODE), FOR QUALIFICATION AS A REGULATED INVESTMENT COM-
PANY. See "Taxes" in the Statement of Additional Information.
RISKS OF HEDGING AND INCOME ENHANCEMENT STRATEGIES
PARTICIPATION IN THE OPTIONS OR FUTURES MARKETS AND IN CURRENCY EXCHANGE
TRANSACTIONS INVOLVES INVESTMENT RISKS AND TRANSACTION COSTS TO WHICH THE FUND
WOULD NOT BE SUBJECT ABSENT THE USE OF THESE STRATEGIES. If the investment ad-
viser's predictions of movements in the direction of the securities, foreign
currency and interest rate markets are inaccurate, the adverse consequences to
the Fund may leave the Fund in a worse position than if such strategies were
not used. Risks inherent in the use of options, foreign currency and futures
contracts and options on futures contracts include (1) dependence on the in-
vestment adviser's ability to predict correctly movements in the direction of
interest rates, securities prices and currency markets; (2) imperfect correla-
tion between the price of options and futures contracts and options thereon
and movements in the prices of the securities being hedged; (3) the fact that
the skills needed to use these strategies are different from those needed to
select portfolio securities; (4) the possible absence of a liquid secondary
market for any particular instrument at any time; (5) the possible need to de-
fer closing out certain hedged positions to avoid adverse tax consequences;
and (6) the possible inability of the Fund to purchase or sell a portfolio se-
curity at a time that otherwise would be favorable for it to do so, or the
possible need for the Fund to sell a portfolio security at a disadvantageous
time, due to the need for the Fund to maintain "cover" or to segregate securi-
ties in connection with hedging transactions. See "Taxes" and "Investment Ob-
jective and Policies" in the Statement of Additional Information.
OTHER INVESTMENTS AND POLICIES
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase or sell securities on a when-issued or delayed deliv-
ery basis. When-issued or delayed delivery transactions arise when securities
are purchased or sold by the Fund with payment and delivery taking place in
the future in order to secure what is considered to be an advantageous price
and yield to the Fund at the time of entering into the transaction. The Fund's
Custodian will maintain, in a segregated account of the Fund, cash, U.S. Gov-
ernment securities or
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<PAGE>
other liquid high-grade debt obligations having a value equal to or greater
than the Fund's purchase commitments; the Custodian will likewise segregate
securities sold on a delayed delivery basis. The securities so purchased are
subject to market fluctuation and no interest accrues to the purchaser during
the period between purchase and settlement. At the time of delivery of the se-
curities the value may be more or less than the purchase price and an increase
in the percentage of the Fund's assets committed to the purchase of securities
on a when-issued or delayed delivery basis may increase the volatility of the
Fund's net asset value.
SHORT SALES AGAINST-THE-BOX
The Fund may make short sales of securities or maintain a short position,
provided that at all times when a short position is open, the Fund owns an
equal amount of such securities or securities convertible into or exchangeable
for, with or without payment of any further consideration, such securities;
provided that if further consideration is required in connection with the con-
version or exchange, cash or U.S. Government securities in an amount equal to
such consideration must be put in a segregated account, for an equal amount of
the securities of the same issuer as the securities sold short (a short sale
against-the-box). Not more than 25% of the Fund's net assets (determined at
the time of the short sale) may be subject to such sales. Short sales will be
made primarily to defer realization of gain or loss for federal tax purposes.
The Fund does not intend to have more than 5% of its net assets (determined at
the time of the short sale) subject to short sales against-the-box during the
coming year.
REPURCHASE AGREEMENTS
The Fund may on occasion enter into repurchase agreements, whereby the
seller of a security agrees to repurchase that security from the Fund at a mu-
tually agreed-upon time and price. The period of maturity is usually quite
short, possibly overnight or a few days, although it may extend over a number
of months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Fund's money
is invested in the security. The Fund's repurchase agreements will at all
times be fully collateralized in an amount at least equal to the purchase
price, including accrued interest earned on the underlying securities. The in-
struments held as collateral are valued daily, and if the value of the instru-
ments declines, the Fund will require additional collateral. If the seller de-
faults and the value of the collateral securing the repurchase agreement de-
clines, the Fund may incur a loss. The Fund participates in a joint repurchase
account with other investment companies managed by PMF pursuant to an order of
the Securities and Exchange Commission (SEC).
BORROWING
The Fund may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) for temporary, extraordinary
or emergency purposes, or for the clearance of transactions and to take advan-
tage of investment opportunities. The Fund may pledge up to 20% of its total
assets to secure these borrowings. If the Fund's asset coverage for borrowings
falls below 300%, the Fund will take prompt action to reduce its borrowings.
SECURITIES LENDING
The Fund is permitted to lend its portfolio securities. See "Investment
Objective and Policies--Lending of Securities" in the Statement of Additional
Information.
ILLIQUID SECURITIES
The Fund may invest up to 5% of its net assets in illiquid securities, in-
cluding repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted secu-
rities) and securities that are not readily marketable in securities markets
either within or outside of the United States. Restricted securities eligible
for resale pursuant to Rule 144A under the Securities Act of 1933, as amended
(the Securities Act), and privately placed commercial paper that have a read-
ily available market are not considered illiquid for purposes of this limita-
tion. The investment adviser will monitor the liquidity of such restricted se-
curities under the supervision of the Trustees. Repurchase agreements subject
to demand are deemed to have a maturity equal to the applicable notice period.
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<PAGE>
The staff of the SEC has taken the position that purchased over-the-counter
options and the assets used as "cover" for written over-the-counter options
are illiquid securities unless the Fund and the counterparty have provided for
the Fund, at the Fund's election, to unwind the over-the-counter option. The
exercise of such an option ordinarily would involve the payment by the Fund of
an amount designed to reflect the counterparty's economic loss from an early
termination, but does allow the Fund to treat the assets used as "cover" as
"liquid."
PORTFOLIO TURNOVER
The Fund does not expect to trade in securities for short-term gain. It is
anticipated that the portfolio turnover rate may exceed 100%, although the
rate is not expected to exceed 200%. The portfolio turnover rate is calculated
by dividing the lesser of sales or purchases of portfolio securities by the
average monthly value of the Fund's portfolio securities, excluding securities
having a maturity at the date of purchase of one year or less. High portfolio
turnover may involve correspondingly greater brokerage commissions and other
transaction costs, which will be borne directly by the Fund. See "Portfolio
Transactions and Brokerage" in the Statement of Additional Information. In ad-
dition, high portfolio turnover may result in increased short-term capital
gains which, when distributed to shareholders, are treated as ordinary income.
See "Taxes, Dividends and Distributions."
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities, as defined in the Investment Company
Act. See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE
FUND'S MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON
MATTERS OF GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE
DAILY BUSINESS OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY
INVESTMENT ADVISORY SERVICES.
For the fiscal year ended October 31, 1994, the Fund's total expenses as a
percentage of average net assets for Class A, Class B and Class C shares were
1.09%, 1.85% and 2.05% (annualized), respectively. See "Financial Highlights."
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (PMF OR THE MANAGER), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .60 OF 1% OF THE FUND'S AVERAGE DAILY
NET ASSETS UP TO $500 MILLION AND .50 OF 1% OF THE FUND'S AVERAGE DAILY NET
ASSETS IN EXCESS OF $500 MILLION. PMF was incorporated in May 1987 under the
laws of the State of Delaware. For the fiscal year ended October 31, 1994, the
Fund paid management fees to PMF of .55% of the Fund's average net assets. See
"Manager" in the Statement of Additional Information.
As of November 30, 1994, PMF served as the manager to 38 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 30 closed-end investment companies with aggregate assets of
approximately $46 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS AFFAIRS. See
"Manager" in the Statement of Additional Information.
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<PAGE>
UNDER A SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC OR THE SUBADVISER), PIC FURNISHES INVESTMENT ADVISORY
SERVICES IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY
PMF FOR ITS REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES.
PMF continues to have responsibility for all investment advisory services
under the Management Agreement and supervises PIC's performance of such
services.
The current portfolio manager of the Fund is Warren E. Spitz, a Managing
Director of Prudential Investment Advisors, a unit of PIC. Mr. Spitz has
responsibility for the day-to-day management of the Fund's portfolio. Mr.
Spitz has managed the Fund's portfolio since January 1987 and has been
employed by PIC as a portfolio manager since 1987. Mr. Spitz also serves as
the co-portfolio manager of the Prudential Utility Fund and the portfolio
manager of Prudential Series Fund High Dividend Stock Portfolio.
PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance
Company of America (Prudential), a major diversified insurance and financial
services company.
DISTRIBUTOR
PRUDENTIAL MUTUAL FUND DISTRIBUTORS, INC. (PMFD), ONE SEAPORT PLAZA, NEW
YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE
OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS A SHARES OF THE FUND.
IT IS A WHOLLY-OWNED SUBSIDIARY OF PMF.
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), ONE
SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE
LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS B AND
CLASS C SHARES OF THE FUND. IT IS AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF
PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND SEPARATE DISTRIBUTION
AGREEMENTS (THE DISTRIBUTION AGREEMENTS), PMFD AND PRUDENTIAL SECURITIES
(COLLECTIVELY, THE DISTRIBUTOR) INCUR THE EXPENSES OF DISTRIBUTING THE FUND'S
CLASS A, CLASS B AND CLASS C SHARES. These expenses include commissions and
account servicing fees paid to, or on account of, financial advisers of
Prudential Securities and representatives of Pruco Securities Corporation
(Prusec), an affiliated broker-dealer, commissions and account servicing fees
paid to, or on account of, other broker-dealers or financial institutions
(other than national banks) which have entered into agreements with the
Distributor, advertising expenses, the cost of printing and mailing
prospectuses to potential investors and indirect and overhead costs of
Prudential Securities and Prusec associated with the sale of Fund shares,
including lease, utility, communications and sales promotion expenses. The
State of Texas requires that shares of the Fund may be sold in that state only
by dealers or other financial institutions which are registered there as
broker-dealers.
Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
UNDER THE CLASS A PLAN, THE FUND MAY PAY PMFD FOR ITS DISTRIBUTION-RELATED
ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE OF UP TO .30 OF 1%
OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES. The Class A Plan
provides that (i) up to .25 of 1% of the average daily net assets of the Class
A shares may be used to pay for personal service and/or the maintenance of
shareholder accounts (service fee) and (ii) total distribution fees (including
the service fee of .25 of 1%) may not exceed .30 of 1% of the average daily
net assets of the Class A shares. PMFD has agreed to limit
15
<PAGE>
its distribution-related fees payable under the Class A Plan to .25 of 1% of
the average daily net assets of the Class A shares for the fiscal year ending
October 31, 1995.
For the fiscal year ended October 31, 1994, PMFD received payments of
$319,509 under the Class A Plan. This amount was primarily expended for
payment of account servicing fees to financial advisers and other persons who
sell Class A shares. For the fiscal year ended October 31, 1994, PMFD also
received approximately $1,542,700 in initial sales charges.
UNDER THE CLASS B AND CLASS C PLANS, THE FUND PAYS PRUDENTIAL SECURITIES FOR
ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C SHARES
AT AN ANNUAL RATE OF 1% OF THE AVERAGE DAILY NET ASSETS OF EACH OF THE CLASS B
AND CLASS C SHARES. The Class B and Class C Plans provide for the payment to
Prudential Securities of (i) an asset-based sales charge of .75 of 1% of the
average daily net assets of each of the Class B and Class C shares and (ii) a
service fee of .25 of 1% of the average daily net assets of each of the Class
B and Class C shares. The service fee is used to pay for personal service
and/or the maintenance of shareholder accounts. Prudential Securities also
receives contingent deferred sales charges from certain redeeming
shareholders. See "Shareholder Guide--How to Sell Your Shares--Contingent
Deferred Sales Charges."
For the fiscal year ended October 31, 1994, Prudential Securities incurred
distribution expenses of approximately $13,607,400 under the Class B Plan and
received $7,840,632 from the Fund under the Class B Plan. In addition,
Prudential Securities received approximately $1,587,700 in contingent deferred
sales charges from redemptions of Class B shares during this period.
For the period August 1, 1994 through October 31, 1994, Prudential
Securities incurred distribution expenses of approximately $11,200 under the
Class C Plan and received $1,880 from the Fund under the Class C Plan.
Prudential Securities did not receive any contingent deferred sales charges
from redemptions of Class C shares during this period.
For the fiscal year ended October 31, 1994, the Fund paid distribution
expenses of .24%, 1% and 1% (annualized) of the average daily net assets of
the Class A, Class B and Class C shares of the Fund, respectively. The Fund
records all payments made under the Plans as expenses in the calculation of
net investment income. Prior to August 1, 1994, the Class A and Class B Plans
operated as "reimbursement type" plans and, in the case of Class B, provided
for the reimbursement of distribution expenses incurred in current and prior
years. See "Distributor" in the Statement of Additional Information.
Distribution expenses attributable to the sale of shares of the Fund will be
allocated to each class based upon the ratio of sales of each class to the
sales of all shares of the Fund other than expenses allocable to a particular
class. The distribution fee and sales charge of one class will not be used to
subsidize the sale of another class.
Each Plan provides that it shall continue in effect from year to year
provided that a majority of the Trustees of the Fund, including a majority of
the Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest
in the operation of the Plan or any agreement related to the Plan (the Rule
12b-1 Trustees), vote annually to continue the Plan. Each Plan may be
terminated at any time by vote of a majority of the Rule 12b-1 Trustees or of
a majority of the outstanding shares of the applicable class of the Fund. The
Fund will not be obligated to pay expenses incurred under any Plan if it is
terminated or not continued.
In addition to distribution and service fees paid by the Fund under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers and other persons who
distribute shares of the Fund. Such payments may be calculated by reference to
the net asset value of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (the NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
16
<PAGE>
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the
allegations asserted against it, PSI consented to the entry of an SEC
Administrative Order which stated that PSI's conduct violated the federal
securities laws, directed PSI to cease and desist from violating the federal
securities laws, pay civil penalties, and adopt certain remedial measures to
address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of
a $10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI's settlement with the
state securities regulators included an agreement to pay a penalty of $500,000
per jurisdiction. PSI consented to a censure and to the payment of a
$5,000,000 fine in settling the NASD action.
In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the
signing of the agreement, provided that PSI complies with the terms of the
agreement. If, upon completion of the three year period, PSI has complied with
the terms of the agreement, no prosecution will be instituted by the United
States for the offenses charged in the complaint. If on the other hand, during
the course of the three year period, PSI violates the terms of the agreement,
the U.S. Attorney can then elect to pursue these charges. Under the terms of
the agreement, PSI agreed, among other things, to pay an additional
$330,000,000 into the fund established by the SEC to pay restitution to
investors who purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may
be obtained at no cost by calling 1-800-225-1825.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant for
the Fund, provided that the commissions, fees or other remuneration it
receives are fair and reasonable. See "Portfolio Transactions and Brokerage"
in the Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities
and cash and, in that capacity, maintains certain financial and accounting
books and records pursuant to an agreement with the Fund. Its mailing address
is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
17
<PAGE>
HOW THE FUND VALUES ITS SHARES
THE FUND'S NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE FUND'S
NET ASSET VALUE TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not
readily available, at fair value as determined in good faith under procedures
established by the Fund's Trustees. See "Net Asset Value" in the Statement of
Additional Information.
The Fund will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase,
sell or redeem shares have been received by the Fund or days on which changes
in the value of the Fund's portfolio securities do not materially affect the
NAV. The New York Stock Exchange is closed on the following holidays: New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
NAVs and dividends. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A shares as a result of the larger distribution-
related fee to which Class B and Class C shares are subject. It is expected,
however, that the NAV per share of the three classes will tend to converge
immediately after the recording of dividends, if any, which will differ by
approximately the amount of the distribution-related expense accrual
differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE ITS TOTAL RETURN (INCLUDING
"AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE" TOTAL RETURN) AND YIELD IN
ADVERTISEMENTS OR SALES LITERATURE. TOTAL RETURN AND YIELD ARE CALCULATED
SEPARATELY FOR CLASS A, CLASS B AND CLASS C SHARES. These figures are based on
historical earnings and are not intended to indicate future performance. The
"total return" shows how much an investment in the Fund would have increased
(decreased) over a specified period of time (i.e., one, five or ten years or
since inception of the Fund) assuming that all distributions and dividends by
the Fund were reinvested on the reinvestment dates during the period and less
all recurring fees. The "aggregate" total return reflects actual performance
over a stated period of time. "Average annual" total return is a hypothetical
rate of return that, if achieved annually, would have produced the same
aggregate total return if performance had been constant over the entire
period. "Average annual" total return smoothes out variations in performance
and takes into account any applicable initial or contingent deferred sales
charges. Neither "average annual" total return nor "aggregate" total return
takes into account any federal or state income taxes which may be payable upon
redemption. The "yield" refers to the income generated by an investment in the
Fund over a one-month or 30-day period. This income is then "annualized;" that
is, the amount of income generated by the investment during that 30-day period
is assumed to be generated each 30-day period for twelve periods and is shown
as a percentage of the investment. The income earned on the investment is also
assumed to be reinvested at the end of the sixth 30-day period. The Fund also
may include comparative performance information in advertising or marketing
the Fund's shares. Such performance information may include data from Lipper
Analytical Services, Inc., Morningstar Publications, Inc., other industry
publications, business periodicals and market indices. See "Performance
Information" in the Statement of Additional Information. The Fund will include
performance data for each class of shares of the Fund in any advertisement or
information including performance data of the Fund. Further performance
information is contained in the Fund's annual and semi-annual reports to
shareholders, which may be obtained without charge. See "Shareholder Guide--
Shareholder Services--Reports to Shareholders."
18
<PAGE>
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE FUND HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
FUND WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND CAPITAL AND CURRENCY GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS
SHAREHOLDERS. See "Taxes" in the Statement of Additional Information.
Under the Internal Revenue Code, special rules apply to the treatment of
certain options and futures contracts (Section 1256 contracts). At the end of
each year, such investments held by the Fund will be required to be "marked to
market" for federal income tax purposes; that is, treated as having been sold
at market value. Sixty percent of any gain or loss recognized on these "deemed
sales" and on actual dispositions will be treated as long-term capital gain or
loss, and the remainder will be treated as short-term capital gain or loss.
See "Taxes" in the Statement of Additional Information.
The Fund may, from time to time, invest in Passive Foreign Investment
Companies (PFICs). PFICs are foreign corporations which derive a majority of
their income from passive sources. For tax purposes, the Fund's investments in
PFICs may subject the Fund to federal income taxes on certain income and gains
realized by the Fund. Certain gains or losses from fluctuations in foreign
currency exchange rates (Section 988 gains and losses) will affect the amount
of ordinary income the Fund will be able to pay as dividends. See "Taxes" in
the Statement of Additional Information.
TAXATION OF SHAREHOLDERS
Any dividends out of net investment income, together with distributions of
net short-term gains (i.e., the excess of net short-term gains over long-term
capital losses) and net currency gains, will be taxable as ordinary income to
the shareholder whether or not reinvested. See "Taxes" in the Statement of
Additional Information. Any net capital gains (i.e., the excess of net long-
term capital gains over net short-term capital losses) distributed to
shareholders will be taxable as long-term capital gains to shareholders,
whether or not reinvested and regardless of the length of time a shareholder
has owned his or her shares. The maximum long-term capital gains rate for
individuals is 28%. The maximum long-term capital gains rate for corporate
shareholders is currently the same as the maximum tax rate for ordinary
income.
Both regular and capital gains dividends are taxable to shareholders in the
year in which received, whether they are received in cash or additional
shares. In addition, certain dividends declared by the Fund will be treated as
received by shareholders on December 31 of the year the dividends are
declared. This rule applies to dividends declared by the Fund in October,
November or December of a calendar year, payable to shareholders of record on
a date in any such month, if such dividends are paid during January of the
following calendar year.
Dividends received by corporate shareholders are eligible for a dividends
received deduction of 70% to the extent the Fund's income is derived from
qualified dividends received by the Fund from domestic corporations. Dividends
attributable to foreign dividends, interest income, capital gain net income,
gain or loss from Section 1256 contracts and from some other sources will not
be eligible for the corporate dividends received deduction. Corporate
shareholders should consult their tax advisers regarding other requirements
applicable to the dividends received deduction.
Any gain or loss realized upon a sale or redemption of Fund shares by a
shareholder who is not a dealer in securities will generally be treated as
long-term capital gain or loss if the shares have been held more than one year
and otherwise as short-term capital gain or loss. Any such loss, however,
although otherwise treated as a short-term capital loss, will be treated as
long-term capital loss to the extent of any capital gain distributions
received by the shareholder with respect to those shares.
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<PAGE>
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of
Class B or Class C shares for Class A shares constitutes a taxable event for
federal income tax purposes. However, such opinions are not binding on the
Internal Revenue Service.
Shareholders are advised to consult their own tax advisers regarding
specific questions as to federal, state or local taxes.
WITHHOLDING TAXES
Under the Internal Revenue Code, the Fund is required to withhold and remit
to the U.S. Treasury 31% of dividends, capital gain income and redemption
proceeds on the accounts of those shareholders who fail to furnish their tax
identification numbers on IRS Form W-9 (or IRS Form W-8 in the case of certain
foreign shareholders). Withholding at this rate is also required from
dividends and capital gains distributions (but not redemption proceeds)
payable to shareholders who are otherwise subject to backup withholding.
Dividends of net investment income and short-term capital gains to a foreign
shareholder will generally be subject to U.S. withholding tax at the rate of
30% (or lower treaty rate).
DIVIDENDS AND DISTRIBUTIONS
THE FUND EXPECTS TO PAY DIVIDENDS OUT OF NET INVESTMENT INCOME, IF ANY,
QUARTERLY AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY CAPITAL GAINS IN
EXCESS OF CAPITAL LOSSES. Dividends paid by the Fund with respect to each
class of shares, to the extent any dividends are paid, will be calculated in
the same manner, at the same time, on the same day and will be in the same
amount except that each class will bear its own distribution charges,
generally resulting in lower dividends for Class B and Class C shares.
Distributions of net capital gains, if any, will be paid in the same amount
for each class of shares. See "How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES BASED ON
THE NAV OF EACH CLASS ON THE RECORD DATE, OR SUCH OTHER DATE AS THE TRUSTEES
MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE
BUSINESS DAYS PRIOR TO THE RECORD DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBU-
TIONS IN CASH. Such election should be submitted to Prudential Mutual Fund
Services, Inc., Attention: Account Maintenance, P.O. Box 15015, New Brunswick,
New Jersey 08906-5015. If you hold shares through Prudential Securities, you
should contact your financial adviser to elect to receive dividends and dis-
tributions in cash. The Fund will notify each shareholder after the close of
the Fund's taxable year of both the dollar amount and the taxable status of
that year's dividends and distributions on a per share basis.
WHEN THE FUND GOES "EX-DIVIDEND," THE NAV OF EACH CLASS IS REDUCED BY THE
AMOUNT OF THE DIVIDEND OR DISTRIBUTION ALLOCABLE TO EACH CLASS. IF YOU BUY
SHARES JUST PRIOR TO THE EX-DIVIDEND DATE (WHICH GENERALLY OCCURS FOUR
BUSINESS DAYS PRIOR TO THE RECORD DATE), THE PRICE YOU PAY WILL INCLUDE THE
DIVIDEND OR DISTRIBUTION AND A PORTION OF YOUR INVESTMENT MAY BE RETURNED TO
YOU AS A TAXABLE DIVIDEND OR DISTRIBUTION. YOU SHOULD, THEREFORE, CONSIDER THE
TIMING OF DIVIDENDS AND DISTRIBUTIONS WHEN MAKING YOUR PURCHASES.
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND IS AN OPEN-END INVESTMENT COMPANY WHICH WAS ORGANIZED UNDER THE
LAWS OF MASSACHUSETTS ON SEPTEMBER 18, 1986 AS AN UNINCORPORATED BUSINESS
TRUST, A FORM OF ORGANIZATION THAT IS COMMONLY KNOWN AS A MASSACHUSETTS
BUSINESS TRUST. THE FUND IS AUTHORIZED TO ISSUE AN UNLIMITED NUMBER OF SHARES,
DIVIDED INTO THREE CLASSES, DESIGNATED CLASS A, CLASS B AND CLASS C SHARES.
Each class of shares represents an interest in the same assets of the Fund and
is identical in all respects except that (i) each class bears different
distribution expenses, (ii) each class has exclusive voting rights with
respect to its distribution and service plan (except that the Fund has agreed
with the SEC in
20
<PAGE>
connection with the offering of a conversion feature on Class B shares to
submit any amendment of the Class A Plan to both Class A and Class B
shareholders), (iii) each class has a different exchange privilege and (iv)
only Class B shares have a conversion feature. See "How the Fund is Managed--
Distributor." The Fund has received an order from the SEC permitting the
issuance and sale of multiple classes of shares. Currently, the Fund is
offering three classes, designated Class A, Class B and Class C shares. In
accordance with the Fund's Declaration of Trust, the Trustees may authorize
the creation of additional series of shares and classes of shares within such
series, with such preferences, privileges, limitations and voting and dividend
rights as the Trustees may determine.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of each class
is equal as to earnings, assets and voting privileges, except as noted above,
and each class of shares bears the expenses related to the distribution of its
shares. Except for the conversion feature applicable to the Class B shares,
there are no conversion, preemptive or other subscription rights. In the event
of liquidation, each share of the Fund is entitled to its portion of all of
the Fund's assets after all debt and expenses of the Fund have been paid.
Since Class B and Class C shares generally bear higher distribution expenses
than Class A shares, the liquidation proceeds to shareholders of those classes
are likely to be lower than to Class A shareholders. The Fund's shares do not
have cumulative voting rights for the election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED ON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON THE VOTE OF 10% OF
THE FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE
OR MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make
the Fund similar in certain respects to a Massachusetts business corporation.
The principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of
the Fund beyond the amount of their investment in the Fund. The Declaration of
Trust of the Fund provides that shareholders will not be subject to any
personal liability for acts or obligations of the Fund and that every written
obligation, contract, instrument or undertaking made by the Fund will contain
a provision to the effect that shareholders are not individually bound
thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information
set forth in the Registration Statement filed by the Fund with the SEC under
the Securities Act of 1933. Copies of the Registration Statement may be
obtained at a reasonable charge from the SEC or may be examined, without
charge, at the office of the SEC in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES, INC. (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The minimum initial
investment for Class A and Class B shares is $1,000 per class and $5,000 for
Class C shares. The minimum subsequent investment is $100 for all classes. All
minimum
21
<PAGE>
investment requirements are waived for certain retirement and employee savings
plans or custodial accounts for the benefit of minors. For purchases made
through the Automatic Savings Accumulation Plan, the minimum initial and
subsequent investment is $50. The minimum initial investment requirement is
waived for purchases of Class A shares effected through an exchange of Class B
shares of The BlackRock Government Income Trust. See "Shareholder Services"
below.
THE PURCHASE PRICE IS THE NAV NEXT DETERMINED FOLLOWING RECEIPT OF AN ORDER
BY THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE WHICH, AT
YOUR OPTION, MAY BE IMPOSED EITHER (I) AT THE TIME OF PURCHASE (CLASS A
SHARES) OR (II) ON A DEFERRED BASIS (CLASS B OR CLASS C SHARES). SEE
"ALTERNATIVE PURCHASE PLAN" BELOW. SEE ALSO "HOW THE FUND VALUES ITS SHARES."
Application forms can be obtained from PMFS, Prudential Securities or
Prusec. If a share certificate is desired, it must be requested in writing for
each transaction. Certificates are issued only for full shares. Shareholders
who hold their shares through Prudential Securities will not receive share
certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the fifth business day following the investment.
Transactions in Fund shares may be subject to postage and handling charges
imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, you
must first telephone PMFS at (800) 225-1852 (toll-free) to receive an account
number. The following information will be requested: your name, address, tax
identification number, class election, dividend distribution election, amount
being wired and wiring bank. Instructions should then be given by you to your
bank to transfer funds by wire to State Street Bank and Trust Company (State
Street), Boston, Massachusetts, Custody and Shareholder Services Division,
Attention: Prudential Equity Income Fund, specifying on the wire the account
number assigned by PMFS and your name and identifying the sales charge
alternative (Class A, Class B or Class C shares).
If you arrange for receipt by State Street of Federal Funds prior to 4:15
P.M., New York time, on a business day, you may purchase shares of the Fund as
of that day.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Equity Income
Fund, Class A, Class B or Class C shares and your name and individual account
number. It is not necessary to call PMFS to make subsequent purchase orders
utilizing Federal Funds. The minimum amount which may be invested by wire is
$1,000.
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<PAGE>
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS THREE CLASSES OF SHARES (CLASS A, CLASS B AND CLASS C
SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE
FOR YOUR INDIVIDUAL CIRCUMSTANCES, GIVEN THE AMOUNT OF THE PURCHASE AND THE
LENGTH OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES
(ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
------------------------------ ------------------------ ------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge .30 of 1% Initial sales charge waived or
of 5% of the public offering (Currently being reduced for certain purchases
price charged at a rate
of .25 of 1%)
CLASS B Maximum contingent deferred 1% Shares convert to Class A
sales charge or CDSC of 5% of shares approximately seven
the lesser of the amount years after purchase
invested or the redemption
proceeds; declines to zero
after six years
CLASS C Maximum CDSC of 1% of the 1% Shares do not convert to
lesser of the amount invested another class
or the redemption proceeds on
redemptions made within one
year of purchase
</TABLE>
The three classes of shares represent an interest in the same portfolio of
investments of the Fund and have the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except
as noted under the heading "General Information--Description of Shares"), and
(iii) only Class B shares have a conversion feature. The three classes also
have separate exchange privileges. See "How to Exchange Your Shares" below.
The income attributable to each class and the dividends payable on the shares
of each class will be reduced by the amount of the distribution fee of each
class. Class B and Class C shares bear the expenses of a higher distribution
fee which will generally cause them to have higher expense ratios and to pay
lower dividends than the Class A shares.
Financial advisers and other sales agents who sell shares of the Fund will
receive different compensation for selling Class A, Class B and Class C shares
and will generally receive more compensation initially for selling Class A and
Class B shares than for selling Class C shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER
THINGS, (1) the length of time you expect to hold your investment, (2) the
amount of any applicable sales charge (whether imposed at the time of purchase
or redemption) and distribution-related fees, as noted above, (3) whether you
qualify for any reduction or waiver of any applicable sales charge, (4) the
various exchange privileges among the different classes of shares (see "How to
Exchange Your Shares" below) and (5) the fact that Class B shares
automatically convert to Class A shares approximately seven years after
purchase (see "Conversion Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund:
If you intend to hold your investment in the Fund for less than 7 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 5% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B
shares.
23
<PAGE>
If you intend to hold your investment for 7 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money
invested initially because the sales charge on Class A shares is deducted at
the time of purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B shares and Class C shares for the
higher cumulative annual distribution-related fee on those shares to exceed
the initial sales charge plus cumulative annual distribution-related fees on
Class A shares. This does not take into account the time value of money, which
further reduces the impact of the higher Class B or Class C distribution-
related fee on the investment, fluctuations in net asset value, the effect of
the return on the investment over this period of time or redemptions during
the period in which the CDSC is applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT
OR UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A
SHARES. See "Reduction and Waiver of Initial Sales Charges" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial
sales charge alternative is the next determined NAV plus a sales charge
(expressed as a percentage of the offering price and of the amount invested)
as shown in the following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
------------------ --------------- --------------- -----------------
<S> <C> <C> <C>
Less than $25,000............. 5.00% 5.26% 4.75%
$25,000 to $49,999............ 4.50 4.71 4.25
$50,000 to $99,999............ 4.00 4.17 3.75
$100,000 to $249,999.......... 3.25 3.36 3.00
$250,000 to $499,999.......... 2.50 2.56 2.40
$500,000 to $999,999.......... 2.00 2.04 1.90
$1,000,000 and above.......... None None None
</TABLE>
Selling dealers may be deemed to be underwriters, as that term is defined in
the Securities Act.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be
aggregated to determine the applicable reduction. See "Purchase and Redemption
of Fund Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares"
in the Statement of Additional Information.
Benefit Plans. Class A shares may be purchased at NAV, without payment of an
initial sales charge, by pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the
Internal Revenue Code (Benefit Plans), provided
24
<PAGE>
that the plan has existing assets of at least $1 million invested in shares of
Prudential Mutual Funds (excluding money market funds other than those
acquired pursuant to the exchange privilege) or 1,000 eligible employees or
participants. In the case of Benefit Plans whose accounts are held directly
with the Transfer Agent or Prudential Securities and for which the Transfer
Agent or Prudential Securities does individual account recordkeeping (Direct
Account Benefit Plans) and Benefit Plans sponsored by PSI or its subsidiaries
(PSI or Subsidiary Prototype Benefit Plans), Class A shares may be purchased
at NAV by participants who are repaying loans made from such plans to the
participant.
Prudential Vista Program. Class A shares are offered at net asset value to
certain qualified employee retirement benefit plans under section 401 of the
Internal Revenue Code of 1986, as amended, for which Prudential Defined
Contribution Services serves as the recordkeeper provided that such plan is
also participating in the Prudential Vista Program (PruVista Plan), and
provided further that (i) for existing plans, the plan has existing assets of
at least $1 million and at least 100 eligible employees or participants, and
(ii) for new plans, the plan has at least 500 eligible employees or
participants. The term "existing assets" for this purpose includes
transferable cash and GICs (guaranteed investment contracts) maturing within 4
years.
Special Rules Applicable to Retirement Plans. After a Benefit Plan or the
PruVista Plan qualifies to purchase Class A shares at NAV, all subsequent
purchases will be made at NAV.
Other Waivers. In addition, Class A shares may be purchased at NAV, through
Prudential Securities or the Transfer Agent, by the following persons: (a)
Trustees and officers of the Fund and other Prudential Mutual Funds, (b)
employees of Prudential Securities and PMF and their subsidiaries and members
of the families of such persons who maintain an "employee related" account at
Prudential Securities or the Transfer Agent, (c) employees and special agents
of Prudential and its subsidiaries and all persons who have retired directly
from active service with Prudential or one of its subsidiaries, (d) registered
representatives and employees of dealers who have entered into a selected
dealer agreement with Prudential Securities provided that purchases at NAV are
permitted by such person's employer and (e) investors who have a business
relationship with a financial adviser who joined Prudential Securities from
another investment firm, provided that (i) the purchase is made within 90 days
of the commencement of the financial adviser's employment at Prudential
Securities, (ii) the purchase is made with proceeds of a redemption of shares
of any open-end, non-money market fund sponsored by the financial adviser's
previous employer (other than a fund which imposes a distribution or service
fee of .25 of 1% or less) on which no deferred sales load, fee or other charge
was imposed on redemption and (iii) the financial adviser served as the
client's broker on the previous purchases.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec that you are entitled to the reduction or
waiver of the sales charge. The reduction or waiver will be granted subject to
confirmation of your entitlement. No initial sales charges are imposed upon
Class A shares acquired upon the reinvestment of dividends and distributions.
See "Purchase and Redemption of Fund Shares--Reduction and Waiver of Initial
Sales Charges--Class A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one
of the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class
B and Class C shares may be subject to a CDSC. See "How to Sell Your Shares--
Contingent Deferred Sales Charges."
25
<PAGE>
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES AT ANY TIME FOR CASH AT THE NAV NEXT DETERMINED
AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE TRANSFER AGENT
OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES." In certain
cases, however, redemption proceeds will be reduced by the amount of any
applicable contingent deferred sales charge, as described below. See
"Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM YOUR SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION
SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD
CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE
CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE
REDEMPTION REQUEST TO BE PROCESSED. IF REDEMPTION IS REQUESTED BY A
CORPORATION, PARTNERSHIP, TRUST OR FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY
ACCEPTABLE TO THE TRANSFER AGENT MUST BE SUBMITTED BEFORE SUCH REQUEST WILL BE
ACCEPTED. All correspondence and documents concerning redemptions should be
sent to the Fund in care of its Transfer Agent, Prudential Mutual Fund
Services, Inc., Attention: Redemption Services, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to
a person other than the record owner, (c) are to be sent to an address other
than the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the
redemption request and on the certificates, if any, or stock power must be
guaranteed by an "eligible guarantor institution." An "eligible guarantor
institution" includes any bank, broker, dealer or credit union. The Transfer
Agent reserves the right to request additional information from, and make
reasonable inquiries of, any eligible guarantor institution. For clients of
Prusec, a signature guarantee may be obtained from the agency or office
manager of most Prudential Insurance and Financial Services or Preferred
Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN
SEVEN DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR
WRITTEN REQUEST, EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH
PRUDENTIAL SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE
CREDITED TO YOUR PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE
OTHERWISE. Such payment may be postponed or the right of redemption suspended
at times (a) when the New York Stock Exchange is closed for other than
customary weekends and holidays, (b) when trading on such Exchange is
restricted, (c) when an emergency exists as a result of which disposal by the
Fund of securities owned by it is not reasonably practicable or it is not
reasonably practicable for the Fund fairly to determine the value of its net
assets, or (d) during any other period when the SEC, by order, so permits;
provided that applicable rules and regulations of the SEC shall govern as to
whether the conditions prescribed in (b), (c) or (d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL
THE FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS
BEEN HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE
CHECK BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY
WIRE OR BY CERTIFIED OR OFFICIAL BANK CHECK.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental
to the best interests of the remaining shareholders of the Fund to make
payment wholly or partly in cash, the Fund may pay the redemption price in
whole or in part by a distribution in kind of securities from the investment
portfolio of the Fund, in lieu of cash, in conformity with applicable rules of
the SEC. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How the Fund Values its Shares." If
your shares are redeemed in kind, you would incur transaction costs in
converting the assets into cash. The Fund, however, has elected to be governed
by Rule 18f-1 under the Investment Company Act, under which the Fund is
obligated to redeem shares solely in cash up to the lesser of $250,000 or 1%
of the net asset value of the Fund during any 90-day period for any one
shareholder.
26
<PAGE>
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the
Trustees may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose
account has a net asset value of less than $500 due to a redemption. The Fund
will give such shareholders 60 days' prior written notice in which to purchase
sufficient additional shares to avoid such redemption. No contingent deferred
sales charge will be imposed on any involuntary redemption.
30-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of the Fund at the NAV next
determined after the order is received, which must be within 30 days after the
date of the redemption. No sales charge will apply to such repurchases. You
will receive pro rata credit for any contingent deferred sales charge paid in
connection with the redemption of Class B or Class C shares. You must notify
the Fund's Transfer Agent, either directly or through Prudential Securities or
Prusec, at the time the repurchase privilege is exercised that you are
entitled to credit for the contingent deferred sales charge previously paid.
Exercise of the repurchase privilege will generally not affect federal income
tax treatment of any gain realized upon redemption. If the redemption resulted
in a loss, some or all of the loss, depending on the amount reinvested, will
generally not be allowed for federal income tax purposes.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C
shares redeemed within one year of purchase will be subject to a 1% CDSC. The
CDSC will be deducted from the redemption proceeds and reduce the amount paid
to you. The CDSC will be imposed on any redemption by you which reduces the
current value of your Class B or Class C shares to an amount which is lower
than the amount of all payments by you for shares during the preceding six
years, in the case of Class B shares, and one year, in the case of Class C
shares. A CDSC will be applied on the lesser of the original purchase price or
the current value of the shares being redeemed. Increases in the value of your
shares or shares acquired through reinvestment of dividends or distributions
are not subject to a CDSC. The amount of any contingent deferred sales charge
will be paid to and retained by the Distributor. See "How the Fund is
Managed--Distributor" and "Waiver of the Contingent Deferred Sales Charges--
Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchase of shares, all payments
during a month will be aggregated and deemed to have been made on the last day
of the month. The CDSC will be calculated from the first day of the month
after the initial purchase, excluding the time shares were held in a money
market fund. See "How to Exchange Your Shares."
The following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------------- -------------------------
<S> <C>
First........................................ 5.0%
Second....................................... 4.0%
Third........................................ 3.0%
Fourth....................................... 2.0%
Fifth........................................ 1.0%
Sixth........................................ 1.0%
Seventh...................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired
27
<PAGE>
pursuant to the reinvestment of dividends and distributions; then of amounts
representing the increase in NAV above the total amount of payments for the
purchase of Fund shares made during the preceding six years (five years for
Class B shares purchased prior to January 22, 1990); then of amounts
representing the cost of shares held beyond the applicable CDSC period; and
finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided
to redeem $500 of your investment. Assuming at the time of the redemption the
NAV had appreciated to $12 per share, the value of your Class B shares would
be $1,260 (105 shares at $12 per share). The CDSC would not be applied to the
value of the reinvested dividend shares and the amount which represents
appreciation ($260). Therefore, $240 of the $500 redemption proceeds ($500
minus $260) would be charged at a rate of 4% (the applicable rate in the
second year after purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC
will be waived in the case of a redemption following the death or disability
of a shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint
tenancy (with rights of survivorship), at the time of death or initial
determination of disability, provided that the shares were purchased prior to
death or disability.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include: (i) in the case of a tax-
deferred retirement plan, a lump-sum or other distribution after retirement;
(ii) in the case of an IRA or Section 403(b) custodial account, a lump-sum or
other distribution after attaining age 59 1/2; and (iii) a tax-free return of
an excess contribution or plan distributions following the death or disability
of the shareholder, provided that the shares were purchased prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service (i.e.,
following voluntary or involuntary termination of employment or following
retirement). Under no circumstances will the CDSC be waived on redemptions
resulting from the termination of a tax-deferred retirement plan, unless such
redemptions otherwise qualify for a waiver as described above. In the case of
Direct Account and PSI or Subsidiary Prototype Benefit Plans, the CDSC will be
waived on redemptions which represent borrowings from such plans. Shares
purchased with amounts used to repay a loan from such plans on which a CDSC
was not previously deducted will thereafter be subject to a CDSC without
regard to the time such amounts were previously invested. In the case of a
401(k) plan, the CDSC will also be waived upon the redemption of shares
purchased with amounts used to repay loans made from the account to the
participant and from which a CDSC was previously deducted.
In addition, the CDSC will be waived on redemptions of shares held by
Trustees of the Fund.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to waiver of the CDSC and provide the Transfer Agent with such
supporting documentation as it may deem appropriate. The waiver will be
granted subject to confirmation of your entitlement. See "Purchase and
Redemption of Fund Shares--Waiver of the Contingent Deferred Sales Charge--
Class B Shares" in the Statement of Additional Information.
28
<PAGE>
A quantity discount may apply to redemptions of Class B shares purchased
prior to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement
of Additional Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. It is currently anticipated
that conversions will occur during the months of February, May, August and
November commencing in or about February 1995. Conversions will be effected at
relative net asset value without the imposition of any additional sales
charge.
Since the Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will
be determined on each conversion date in accordance with the following
formula: (i) the ratio of (a) the amounts paid for Class B shares purchased at
least seven years prior to the conversion date to (b) the total amount paid
for all Class B shares purchased and then held in your account (ii) multiplied
by the total number of Class B shares purchased and then held in your account.
Each time any Eligible Shares in your account convert to Class A shares, all
shares or amounts representing Class B shares then in your account that were
acquired through the automatic reinvestment of dividends and other
distributions will convert to Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible
Shares calculated as described above will generally be either more or less
than the number of shares actually purchased approximately seven years before
such conversion date. For example, if 100 shares were initially purchased at
$10 per share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (i.e., $1,000
divided by $2,100 (47.62%), multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to
shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share net asset value of the Class A shares may be
higher than that of the Class B shares at the time of conversion. Thus,
although the aggregate dollar value will be the same, you may receive fewer
Class A shares than Class B shares converted. See "How the Fund Values its
Shares."
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been
made on the last day of the month, or for Class B shares acquired through
exchange, or a series of exchanges, on the last day of the month in which the
original payment for purchases of such Class B shares was made. For Class B
shares previously exchanged for shares of a money market fund, the time period
during which such shares were held in the money market fund will be excluded.
For example, Class B shares held in a money market fund for one year would not
convert to Class A shares until approximately eight years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase
of such shares. The conversion feature described above will not be implemented
and, consequently, the first conversion of Class B shares will not occur
before February 1995, but as soon thereafter as practicable. At that time all
amounts representing Class B shares then outstanding beyond the applicable
conversion period will automatically convert to Class A shares together with
all shares or amounts representing Class B shares acquired through the
automatic reinvestment of dividends and distributions then held in your
account.
29
<PAGE>
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B and Class C shares
will not constitute "preferential dividends" under the Internal Revenue Code
and (ii) that the conversion of shares does not constitute a taxable event.
The conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended,
Class B shares of the Fund will continue to be subject, possibly indefinitely,
to their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE FUND, YOU HAVE AN EXCHANGE PRIVILEGE WITH CERTAIN
OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE PRIVILEGE), INCLUDING ONE OR MORE
SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENTS
OF SUCH FUNDS. CLASS A, CLASS B AND CLASS C SHARES MAY BE EXCHANGED FOR CLASS
A, CLASS B AND CLASS C SHARES, RESPECTIVELY, OF ANOTHER FUND ON THE BASIS OF
THE RELATIVE NAV. No sales charge will be imposed at the time of the exchange.
Any applicable CDSC payable upon the redemption of shares exchanged will be
calculated from the first day of the month after the initial purchase,
excluding the time shares were held in a money market fund. Class B and Class
C shares may not be exchanged into money market funds other than Prudential
Special Money Market Fund. For purposes of calculating the holding period
applicable to the Class B conversion feature, the time period during which
Class B shares were held in a money market fund will be excluded. See
"Conversion Feature--Class B Shares" above. An exchange will be treated as a
redemption and purchase for tax purposes. See "Shareholder Investment
Account--Exchange Privilege" in the Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE
TRANSFER AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may
call the Fund at (800) 225-1852 to execute a telephone exchange of shares, on
weekdays, except holidays, between the hours of 8:00 A.M. and 6:00 P.M., New
York time. For your protection and to prevent fraudulent exchanges, your
telephone call will be recorded and you will be asked to provide your personal
identification number. A written confirmation of the exchange transaction will
be sent to you. NEITHER THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS,
LIABILITY OR COST WHICH RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY
BELIEVED TO BE GENUINE UNDER THE FOREGOING PROCEDURES. All exchanges will be
made on the basis of the relative NAV of the two funds next determined after
the request is received in good order. The Exchange Privilege is available
only in states where the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON
THE FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, INC., AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGE. Commencing in or about February 1995, a special
exchange privilege is available for shareholders who qualify to purchase Class
A shares at NAV. See "Alternative Purchase Plan--Class A Shares--Reduction and
Waiver of Initial Sales Charges" above. Under this exchange privilege, amounts
representing any Class B and Class C shares (which are not subject to a CDSC)
held in such a shareholder's account will be automatically exchanged for Class
A
30
<PAGE>
shares on a quarterly basis, unless the shareholder elects otherwise. It is
currently anticipated that this exchange will occur quarterly in February, May,
August and November. Eligibility for this exchange privilege will be calculated
on the business day prior to the date of the exchange. Amounts representing
Class B or Class C shares which are not subject to a CDSC include the
following: (1) amounts representing Class B or Class C shares acquired pursuant
to the automatic reinvestment of dividends and distributions, (2) amounts
representing the increase in the net asset value above the total amount of
payments for the purchase of Class B or Class C shares and (3) amounts
representing Class B or Class C shares held beyond the applicable CDSC period.
Class B and Class C shareholders must notify the Transfer Agent either directly
or through Prudential Securities or Prusec that they are eligible for this
special exchange privilege.
The Exchange Privilege may be modified or terminated at any time on 60 days'
notice to shareholders.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder of the Fund, you can
take advantage of the following services and privileges:
. AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Fund at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than five full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
Prudential Securities, you should contact your financial adviser.
. AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make regular
purchases of the Fund's shares in amounts as little as $50 via an automatic
debit to a bank account or Prudential Securities account (including a Command
Account). For additional information about this service, you may contact your
Prudential Securities financial adviser, Prusec representative or the Transfer
Agent directly.
. TAX-DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and "tax-
sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code are
available through the Distributor. These plans are for use by both self-
employed individuals and corporate employers. These plans permit either self-
direction of accounts by participants, or a pooled account arrangement.
Information regarding the establishment of these plans, the administration,
custodial fees and other details is available from Prudential Securities or the
Transfer Agent. If you are considering adopting such a plan, you should consult
with your own legal or tax adviser with respect to the establishment and
maintenance of such a plan.
. SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges."
. REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at One Seaport
Plaza, New York, New York 10292. In addition, monthly unaudited financial data
is available upon request from the Fund.
. SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at One
Seaport Plaza, New York, New York 10292, or by telephone at (800) 225-1852
(toll-free) or, from outside the U.S.A., at (908) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
31
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the
investment options available through our family of funds. For more information
on the Prudential Mutual Funds, including charges and expenses, contact your
Prudential Securities financial adviser or Prusec representative or telephone
the Funds at (800) 225-1852 for a free prospectus. Read the prospectus
carefully before you invest or send money.
TAXABLE BOND FUNDS
Prudential Adjustable Rate Securities Fund, Inc.
Prudential GNMA Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Prudential U.S. Government Fund
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Modified Term Series
Prudential Municipal Series Fund
Arizona Series
Florida Series
Georgia Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
Prudential Europe Growth Fund, Inc.
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Conservatively Managed Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential IncomeVertible(R) Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Strategist Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
.Taxable Money Market Funds
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund
Money Market Series
Prudential MoneyMart Assets
.Tax-Free Money Market Funds
Prudential Tax-Free Money Fund
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
.Command Funds
Command Money Fund
Command Government Fund
Command Tax-Free Fund
.Institutional Money Market Funds
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given
or made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell, or a solicita-
tion of any offer to buy any of the securities offered hereby in any jurisdic-
tion to any person to whom it is unlawful to make such offer in such jurisdic-
tion.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND HIGHLIGHTS...................... 2
Risk Factors and Special Character-
istics............................. 2
FUND EXPENSES........................ 4
FINANCIAL HIGHLIGHTS................. 5
HOW THE FUND INVESTS................. 8
Investment Objective and Policies... 8
Hedging and Income Enhancement
Strategies......................... 10
Other Investments and Policies...... 12
Investment Restrictions............. 14
HOW THE FUND IS MANAGED.............. 14
Manager............................. 14
Distributor......................... 15
Portfolio Transactions.............. 17
Custodian and Transfer and Dividend
Disbursing Agent................... 17
HOW THE FUND VALUES ITS SHARES....... 18
HOW THE FUND CALCULATES PERFORMANCE.. 18
TAXES, DIVIDENDS AND DISTRIBUTIONS... 19
GENERAL INFORMATION.................. 20
Description of Shares............... 20
Additional Information.............. 21
SHAREHOLDER GUIDE.................... 21
How to Buy Shares of the Fund....... 21
Alternative Purchase Plan........... 23
How to Sell Your Shares............. 26
Conversion Feature--Class B Shares.. 29
How to Exchange Your Shares......... 30
Shareholder Services................ 31
THE PRUDENTIAL MUTUAL FUND FAMILY.... A-1
</TABLE>
- --------------------------------------------------------------------------------
MF131A 4401367
Class A: 743916207
CUSIP Nos.: Class B: 743916108
Class C: 743916306
[LOGO]
Prudential Equity Income Fund
- --------------------------------------------------------------------------------
December 30, 1994
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
Statement of Additional Information
dated December 30, 1994
Prudential Equity Income Fund (the Fund) is an open-end, diversified
management investment company. Its investment objective is both current income
and capital appreciation. It seeks to achieve this objective by investing
primarily in common stocks and convertible securities that provide investment
income returns above those of the Standard & Poor's 500 Stock Index or the
NYSE Composite Index. In normal circumstances, the Fund intends to invest at
least 65% of its total assets in such securities. In selecting these
investments, the Fund puts emphasis on earnings, balance sheet and cash flow
analysis and the relationships that those factors have to the price and return
of a given security. The balance of the Fund's assets may be invested in other
common stocks, other securities convertible into common stocks, debt
securities and certain derivatives, including options on stocks and stock
indices. Common stocks may include securities of foreign issuers. There can be
no assurance that the Fund's investment objective will be achieved. See
"Investment Objective and Policies."
The Fund's address is One Seaport Plaza, New York, New York 10292, and its
telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Fund's Prospectus dated December 30, 1994, a copy
of which may be obtained from the Fund upon request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CROSS-REFERENCE
TO PAGE IN
PAGE PROSPECTUS
---- ---------------
<S> <C> <C>
General Information....................................... B-2 20
Investment Objective and Policies......................... B-2 8
Investment Restrictions................................... B-8 14
Trustees and Officers..................................... B-9 14
Manager................................................... B-11 14
Distributor............................................... B-12 15
Portfolio Transactions and Brokerage...................... B-15 17
Purchase and Redemption of Fund Shares.................... B-16 21
Shareholder Investment Account............................ B-19 31
Net Asset Value........................................... B-22 18
Taxes..................................................... B-23 19
Performance Information................................... B-25 18
Organization and Capitalization........................... B-26 20
Custodian, Transfer and Dividend Disbursing Agent and In-
dependent Accountants.................................... B-27 17
Financial Statements...................................... B-28 --
Independent Auditors' Report.............................. B-38 --
Description of Security Ratings........................... A-1 --
</TABLE>
- -------------------------------------------------------------------------------
131B 4401375
<PAGE>
GENERAL INFORMATION
On February 28, 1991, the Trustees approved an amendment to the Declaration
of Trust to change the Fund's name from Prudential-Bache Equity Income Fund to
Prudential Equity Income Fund.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is both current income and capital
appreciation. It seeks to achieve this objective by investing primarily in
common stocks and convertible securities that provide investment income
returns above those of the Standard & Poor's 500 Stock Index or the NYSE
Composite Index. There can be no assurance that the Fund's investment
objective will be achieved. See "How the Fund Invests--Investment Objective
and Policies" in the Prospectus.
LIMITATIONS ON PURCHASE AND SALE OF STOCK OPTIONS, OPTIONS ON STOCK INDICES,
STOCK INDEX FUTURES AND OPTIONS THEREON
Except as described below, the Fund will write call options on indices only
if on such date it holds a portfolio of stocks at least equal to the value of
the index times the multiplier times the number of contracts. When the Fund
writes a call option on a broadly-based stock market index, the Fund will
segregate or put into escrow with its Custodian, or pledge to a broker as
collateral for the option, cash, cash equivalents or "qualified securities"
with a market value at the time the option is written of not less than 100% of
the current index value times the multiplier times the number of contracts.
If the Fund has written an option on an industry or market segment index, it
will segregate or put into escrow with its Custodian, or pledge to a broker as
collateral for the option, at least ten "qualified securities," which are
stocks of issuers in such industry or market segment, with a market value at
the time the option is written of not less than 100% of the current index
value times the multiplier times the number of contracts. Such stocks will
include stocks which represent at least 50% of the weighting of the industry
or market segment index and will represent at least 50% of the Fund's holdings
in that industry or market segment. No individual security will represent more
than 15% of the amount so segregated, pledged or escrowed in the case of
broadly-based stock market index options or 25% of such amount in the case of
industry or market segment index options. If at the close of business on any
day the market value of such qualified securities so segregated, escrowed or
pledged falls below 100% of the current index value times the multiplier times
the number of contracts, the Fund will so segregate, escrow or pledge an
amount in cash, Treasury bills or other high-grade short-term debt obligations
equal in value to the difference. In addition, when the Fund writes a call on
an index which is in-the-money at the time the call is written, the Fund will
segregate with its Custodian or pledge to the broker as collateral cash, U.S.
Government or other high-grade short-term debt obligations equal in value to
the amount by which the call is in-the-money times the multiplier times the
number of contracts. Any amount segregated pursuant to the foregoing sentence
may be applied to the Fund's obligation to segregate additional amounts in the
event that the market value of the qualified securities falls below 100% of
the current index value times the multiplier times the number of contracts. A
"qualified security" is an equity security which is listed on a national
securities exchange or listed on the National Association of Securities
Dealers Automated Quotation System against which the Fund has not written a
stock call option and which has not been hedged by the Fund by the sale of
stock index futures. However, if the Fund holds a call on the same index as
the call written where the exercise price of the call held is equal to or less
than the exercise price of the call written or greater than the exercise price
of the call written if the difference is maintained by the Fund in cash,
Treasury bills or other high-grade short-term debt obligations in a segregated
account with its Custodian, it will not be subject to the requirements
described in this paragraph.
The Fund will engage only in transactions in stock index futures contracts
and options thereon as a hedge against changes, resulting from market
conditions, in the values of securities which are held in the Fund's portfolio
or which it intends to purchase or when they are economically appropriate for
the reduction of risks inherent in the ongoing management of the Fund or for
income enhancement. The Fund may not purchase or sell stock index futures or
purchase options thereon if, immediately thereafter, more than one-third of
its net assets would be hedged and, in addition, except as described above in
the case of a call written and held on the same index, will write call options
on indices or sell stock index futures only if the amount resulting from the
multiplication of the then current level of the index (or indices) upon which
the option or futures contract(s) is based, the applicable multiplier(s), and
the number of futures or options contracts which would be outstanding, would
not exceed one-third of the value of the Fund's net assets. The Fund also may
not purchase or sell stock index futures or options thereon for risk
management purposes or income enhancement if, immediately thereafter, the sum
of the amount of margin deposits on the Fund's existing futures positions and
premiums paid for such options would exceed 5% of the liquidation value of the
Fund's total assets after taking into account unrealized profits and
unrealized losses on any such contracts, provided, however, that in the case
of an option that is in-the-money, the in-the-money amount may be excluded in
computing such 5%. The above restriction does not apply to the purchase and
sale of stock index futures or options thereon for bona fide hedging purposes.
In instances involving the purchase of stock index futures
B-2
<PAGE>
contracts by the Fund, an amount of cash and cash equivalents, equal to the
market value of the futures contracts, will be deposited in a segregated
account with the Fund's Custodian and/or in a margin account with a broker to
collateralize the position and thereby ensure that the use of such futures is
unleveraged.
The Fund will use stock index futures and options thereon as described
herein in a manner consistent with these requirements.
The Fund's ability to enter into stock index futures contracts, options
thereon and options on stocks and stock indices may be limited by certain
requirements for qualification as a regulated investment company under the
Internal Revenue Code. See "Taxes."
RISKS OF TRANSACTIONS IN STOCK OPTIONS
An option position may be closed out only on an exchange, board of trade or
other trading facility which provides a secondary market for an option of the
same series. Although the Fund will generally purchase or write only those
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market on an exchange will exist for any
particular option, or at any particular time, and for some options no
secondary market on an exchange or otherwise may exist. In such event it might
not be possible to effect closing transactions in particular options, with the
result that the Fund would have to exercise its options in order to realize
any profit and would incur brokerage commissions upon the exercise of call
options and upon the subsequent disposition of underlying securities acquired
through the exercise of call options or upon the purchase of underlying
securities for the exercise of put options. If the Fund as a covered call
option writer is unable to effect a closing purchase transaction in a
secondary market, it will not be able to sell the underlying security until
the option expires or it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; (iii) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options or underlying securities; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the
facilities of an exchange or a clearing corporation may not at all times be
adequate to handle current trading volume; or (vi) one or more exchanges
could, for economic or other reasons, decide, or be compelled at some future
date, to discontinue the trading of options (or a particular class or series
of options), in which event the secondary market on that exchange (or in the
class or series of options) would cease to exist, although outstanding options
on that exchange that had been issued by a clearing corporation as a result of
trades on that exchange would continue to be exercisable in accordance with
their terms. There is no assurance that higher than anticipated trading
activity or other unforeseen events might not, at times, render certain of the
facilities of any of the clearing corporations inadequate, and thereby result
in the institution by an exchange of special procedures which may interfere
with the timely execution of customers' orders. However, The Options Clearing
Corporation, based on forecasts provided by the U.S. exchanges, believes that
its facilities are adequate to handle the volume of reasonably anticipated
options transactions, and such exchanges have advised such clearing
corporation that they believe their facilities will also be adequate to handle
reasonably anticipated volume.
RISKS OF OPTIONS ON INDICES
The Fund's purchase and sale of options on indices will be subject to risks
described above under "Risks of Transactions in Stock Options." In addition,
the distinctive characteristics of options on indices create certain risks
that are not present with stock options.
Index prices may be distorted if trading of certain stocks included in the
index is interrupted. Trading in the index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number
of stocks included in the index. If this occurred, the Fund would not be able
to close out options which it had purchased or written and, if restrictions on
exercise were imposed, might be unable to exercise an option it holds, which
could result in substantial losses to the Fund. It is the Fund's policy to
purchase or write options only on indices which include a number of stocks
sufficient to minimize the likelihood of a trading halt in the index.
Trading in index options commenced in April 1983 with the S&P 100 option
(formerly called the CBOE 100). Since that time a number of additional index
option contracts have been introduced, including options on industry indices.
Although the markets for certain index option contracts have developed
rapidly, the markets for other index options are still relatively illiquid.
The ability to establish and close out positions on such options will be
subject to the development and maintenance of a liquid secondary market. It is
not certain that this market will develop in all index option contracts. The
Fund will not purchase or sell any index option contract unless and until, in
the opinion of the investment adviser, the market for such options has
developed sufficiently that the risk in connection with such transactions is
no greater than the risk in connection with options on stocks.
B-3
<PAGE>
SPECIAL RISKS OF WRITING CALLS ON INDICES. Because exercises of index
options are settled in cash, a call writer such as the Fund cannot determine
the amount of its settlement obligations in advance and, unlike call writing
on specific stocks, cannot provide in advance for, or cover, its potential
settlement obligations by acquiring and holding the underlying securities.
However, the Fund will write call options on indices only under the
circumstances described above under "Limitations on Purchase and Sale of Stock
Options, Options on Stock Indices, Stock Index Futures and Options Thereon."
Price movements in the Fund's portfolio probably will not correlate
precisely with movements in the level of the index and, therefore, the Fund
bears the risk that the price of the securities held by the Fund may not
increase as much as the index. In such event, the Fund would bear a loss on
the call which is not completely offset by movements in the price of the
Fund's portfolio. It is also possible that the index may rise when the Fund's
portfolio of stocks does not rise. If this occurred, the Fund would experience
a loss on the call which would not be offset by an increase in the value of
its portfolio and might also experience a loss in its portfolio. However,
because the value of a diversified portfolio will, over time, tend to move in
the same direction as the market, movements in the value of the Fund's
portfolio in the opposite direction as the market would be likely to occur for
only a short period or to a small degree.
Unless the Fund has other liquid assets which are sufficient to satisfy the
exercise of a call, the Fund would be required to liquidate portfolio
securities in order to satisfy the exercise. Because an exercise must be
settled within hours after receiving the notice of exercise, if the Fund fails
to anticipate an exercise, it may have to borrow from a bank (in amounts not
exceeding 20% of the Fund's total assets) pending settlement of the sale of
securities in its portfolio and would incur interest charges thereon.
When the Fund has written a call, there is also a risk that the market may
decline between the time the Fund has a call exercised against it, at a price
which is fixed as of the closing level of the index on the date of exercise,
and the time the Fund is able to sell stocks in its portfolio. As with stock
options, the Fund will not learn that an index option has been exercised until
the day following the exercise date but, unlike a call on stock where the Fund
would be able to deliver the underlying securities in settlement, the Fund may
have to sell part of its stock portfolio in order to make settlement in cash,
and the price of such stocks might decline before they can be sold. This
timing risk makes certain strategies involving more than one option
substantially more risky with index options than with stock options. For
example, even if an index call which the Fund has written is "covered" by an
index call held by the Fund with the same strike price, the Fund will bear the
risk that the level of the index may decline between the close of trading on
the date the exercise notice is filed with the clearing corporation and the
close of trading on the date the Fund exercises the call it holds or the time
the Fund sells the call which in either case would occur no earlier than the
day following the day the exercise notice was filed.
SPECIAL RISKS OF PURCHASING PUTS AND CALLS ON INDICES. If the Fund holds an
index option and exercises it before final determination of the closing index
value for that day, it runs the risk that the level of the underlying index
may change before closing. If such a change causes the exercised option to
fall out-of-the-money, the Fund will be required to pay the difference between
the closing index value and the exercise price of the option (times the
applicable multiplier) to the assigned writer. Although the Fund may be able
to minimize this risk by withholding exercise instructions until just before
the daily cutoff time or by selling rather than exercising an option when the
index level is close to the exercise price, it may not be possible to
eliminate this risk entirely because the cutoff times for index options may be
earlier than those fixed for other types of options and may occur before
definitive closing index values are announced.
SPECIAL RISKS RELATED TO FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Fund may enter into forward foreign currency exchange contracts in
several circumstances. When the Fund enters into a contract for the purchase
or sale of a security denominated in a foreign currency, or when the Fund
anticipates the receipt in a foreign currency of dividends or interest
payments on a security which it holds, the Fund may desire to "lock-in" the
U.S. dollar price of the security or the U.S. dollar equivalent of such
dividend or interest payment, as the case may be. By entering into a forward
contract for a fixed amount of dollars, for the purchase or sale of the amount
of foreign currency involved in the underlying transactions, the Fund will be
able to protect itself against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and the subject foreign
currency during the period between the date on which the security is purchased
or sold, or on which the dividend or interest payment is declared, and the
date on which such payment is made or received.
Additionally, when the investment adviser believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, the Fund may enter into a forward contract for a fixed amount of
dollars to sell the amount of foreign currency approximating the value of some
or all of the Fund's portfolio securities denominated in such foreign
currency. The precise matching of the forward contract amounts and the value
of the securities involved will not generally be possible since the future
value of securities in foreign currencies will change as a consequence of
market movements in the value of those securities between the date on which
the forward contract is entered into and the date it matures. The projection
of short-term currency market movement is extremely difficult, and the
successful execution of a short-term hedging strategy is highly uncertain. The
Fund does not intend to enter into such forward contracts to protect the value
of its portfolio securities on a regular or continuous basis. The
B-4
<PAGE>
Fund will also not enter into such forward contracts or maintain a net
exposure to such contracts where the consummation of the contracts would
obligate the Fund to deliver an amount of foreign currency in excess of the
value of the Fund's portfolio securities or other assets denominated in that
currency. Under normal circumstances, consideration of the prospect for
currency parities will be incorporated into the long-term investment decisions
made with regard to overall diversification strategies. However, the Fund
believes that it is important to have the flexibility to enter into such
forward contracts when it determines that the best interest of the Fund will
thereby be served. The Fund's Custodian will place cash or liquid, high-grade
debt securities into a segregated account of the Fund in an amount equal to
the value of the Fund's total assets committed to the consummation of forward
foreign currency exchange contracts. If the value of the securities placed in
the segregated account declines, additional cash or securities will be placed
in the account on a daily basis so that the value of the account will equal
the amount of the Fund's commitments with respect to such contracts.
The Fund generally will not enter into a forward contract with a term of
greater than one year. At the maturity of a forward contract, the Fund may
either sell the portfolio security and make delivery of the foreign currency,
or it may retain the security and terminate its contractual obligation to
deliver the foreign currency by purchasing an "offsetting" contract with the
same currency trader obligating it to purchase, on the same maturity date, the
same amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the contract. Accordingly,
it may be necessary for the Fund to purchase additional foreign currency on
the spot market (and bear the expense of such purchase) if the market value of
the security is less than the amount of foreign currency that the Fund is
obligated to deliver and if a decision is made to sell the security and make
delivery of the foreign currency.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. Should forward
prices decline during the period between the Fund's entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Fund will
realize a gain to the extent that the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should
forward prices increase, the Fund will suffer a loss to the extent that the
price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
The Fund's dealings in forward foreign currency exchange contracts will be
limited to the transactions described above. Of course, the Fund is not
required to enter into such transactions with regard to its foreign currency-
denominated securities. It also should be realized that this method of
protecting the value of the Fund's portfolio securities against a decline in
the value of a currency does not eliminate fluctuations in the underlying
prices of the securities which are unrelated to exchange rates. Additionally,
although such contracts tend to minimize the risk of loss due to a decline in
the value of the hedged currency, at the same time they tend to limit any
potential gain which might result should the value of such currency increase.
The Fund's ability to enter into forward foreign currency exchange contracts
may be limited by certain requirements for qualification as a regulated
investment company under the Internal Revenue Code. See "Taxes."
Although the Fund values its assets daily in terms of U.S. dollars, it does
not intend physically to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. It will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the spread) between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign
currency to the Fund at one rate, while offering a lesser rate of exchange
should the Fund desire to resell that currency to the dealer.
RISKS OF INVESTING IN HIGH YIELD SECURITIES
Fixed-income securities are subject to the risk of an issuer's inability to
meet principal and interest payments on the obligations (credit risk) and may
also be subject to price volatility due to such factors as interest rate
sensitivity, market perception of the creditworthiness of the issuer and
general market liquidity (market risk). Lower rated or unrated (i.e., high
yield) securities are more likely to react to developments affecting market
and credit risk than are more highly rated securities, which react primarily
to movements in the general level of interest rates. The investment adviser
considers both credit risk and market risk in making investment decisions for
the Fund. Investors should carefully consider the relative risks of investing
in high yield securities and understand that such securities are not generally
meant for short-term trading.
The amount of high yield securities outstanding proliferated in the 1980's
in conjunction with the increase in merger and acquisition and leveraged
buyout activity. Under adverse economic conditions, there is a risk that
highly leveraged issuers may be unable to service their debt obligations or to
repay their obligations upon maturity. In addition, the secondary market for
high yield securities, which is concentrated in relatively few market makers,
may not be as liquid as the secondary market for more highly rated
B-5
<PAGE>
securities. Under adverse market or economic conditions, the secondary market
for high yield securities could contract further, independent of any specific
adverse changes in the condition of a particular issuer. As a result, the
investment adviser could find it more difficult to sell these securities or
may be able to sell the securities only at prices lower than if such
securities were widely traded. Prices realized upon the sale of such lower
rated or unrated securities, under these circumstances, may be less than the
prices used in calculating the Fund's net asset value.
Federal laws require the divestiture by federally insured savings and loan
associations of their investments in high yield bonds and limit the
deductibility of interest by certain corporate issuers of high yield bonds.
These laws could adversely affect the Fund's net asset value and investment
practices, the secondary market for high yield securities, the financial
condition of issuers of these securities and the value of outstanding high
yield securities.
Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, the Fund may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Fund experiences unexpected net
redemptions, it may be forced to sell its higher rated securities, resulting
in a decline in the overall credit quality of the Fund's portfolio and
increasing the exposure of the Fund to the risks of high yield securities.
DEFENSIVE STRATEGY AND SHORT-TERM INVESTMENTS
When conditions dictate a defensive strategy or during periods of portfolio
structuring or restructuring, the Fund may invest in money market instruments,
including commercial paper of domestic corporations, certificates of deposit,
bankers' acceptances and other obligations of domestic and foreign banks, and
obligations issued or guaranteed by the U.S. Government, its instrumentalities
or its agencies. The Fund will invest in foreign banks and foreign branches of
U.S. banks only if, after giving effect to such investment, all such
investments would constitute less than 10% of the Fund's total assets (taken
at current value). Such investments may be subject to certain risks, including
future political and economic developments, the possible imposition of
withholding taxes on interest income, the seizure or nationalization of
foreign deposits and foreign exchange controls or other restrictions.
REPURCHASE AGREEMENTS
The Fund's repurchase agreements will be collateralized by U.S. Government
obligations. The Fund will enter into repurchase transactions only with
parties meeting creditworthiness standards approved by the Fund's Trustees.
The Fund's investment adviser will monitor the creditworthiness of such
parties under the general supervision of the Trustees. In the event of a
default or bankruptcy by a seller, the Fund will promptly seek to liquidate
the collateral. To the extent that the proceeds from any sale of such
collateral upon a default in the obligation to repurchase are less than the
repurchase price, the Fund will suffer a loss.
The Fund participates in a joint repurchase account with other investment
companies managed by Prudential Mutual Fund Management, Inc. (PMF) pursuant to
an order of the Securities and Exchange Commission (SEC). On a daily basis,
any uninvested cash balances of the Fund may be aggregated with those of such
investment companies and invested in one or more repurchase agreements. Each
fund participates in the income earned or accrued in the joint account based
on the percentage of its investment.
LENDING OF SECURITIES
Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities to brokers, dealers and financial institutions, provided
that outstanding loans do not exceed in the aggregate 33% of the value of the
Fund's total assets and provided that such loans are callable at any time by
the Fund and are at all times secured by cash or equivalent collateral that is
equal to at least the market value, determined daily, of the loaned
securities. The advantage of such loans is that the Fund continues to receive
payments in lieu of the interest and dividends on the loaned securities, while
at the same time earning interest either directly from the borrower or on the
collateral which will be invested in short-term obligations.
A loan may be terminated by the borrower on one business day's notice or by
the Fund at any time. If the borrower fails to maintain the requisite amount
of collateral, the loan automatically terminates and the Fund can use the
collateral to replace the securities while holding the borrower liable for any
excess of replacement cost over collateral. As with any extensions of credit,
there are risks of delay in recovery and in some cases loss of rights in the
collateral should the borrower of the securities fail financially. However,
these loans of portfolio securities will only be made to firms determined to
be creditworthy pursuant to procedures approved by the Trustees of the Fund.
On termination of the loan, the borrower is required to return the securities
to the Fund, and any gain or loss in the market price during the loan would
inure to the Fund.
Since voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loan, in whole or in
part as may be appropriate, to permit the exercise of such rights if the
matters involved would have a material
B-6
<PAGE>
effect on the Fund's investment in the securities which are the subject of the
loan. The Fund will pay reasonable finders', administrative and custodial fees
in connection with a loan of its securities or may share the interest earned
on collateral with the borrower.
ILLIQUID SECURITIES
The Fund may not invest more than 5% of its net assets in repurchase
agreements which have a maturity of longer than seven days or in other
illiquid securities, including securities that are illiquid by virtue of the
absence of a readily available market (either within or outside of the United
States) or legal or contractual restrictions on resale. Historically, illiquid
securities have included securities subject to contractual or legal
restrictions on resale because they have not been registered under the
Securities Act of 1933, as amended (Securities Act), securities which are
otherwise not readily marketable and repurchase agreements having a maturity
of longer than seven days. Securities which have not been registered under the
Securities Act are referred to as private placements or restricted securities
and are purchased directly from the issuer or in the secondary market. Mutual
funds do not typically hold a significant amount of these restricted or other
illiquid securities because of the potential for delays on resale and
uncertainty in valuation. Limitations on resale may have an adverse effect on
the marketability of portfolio securities and a mutual fund might be unable to
dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemptions within
seven days. A mutual fund might also have to register such restricted
securities in order to dispose of them resulting in additional expense and
delay. Adverse market conditions could impede such a public offering of
securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes.
Institutional investors depend on an efficient institutional market in which
the unregistered security can be readily resold or on an issuer's ability to
honor a demand for repayment. The fact that there are contractual or legal
restrictions on resale to the general public or to certain institutions may
not be indicative of the liquidity of such investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to
the general public. Rule 144A establishes a "safe harbor" from the
registration requirements of the Securities Act for resales of certain
securities to qualified institutional buyers. The investment adviser
anticipates that the market for certain restricted securities such as
institutional commercial paper and foreign securities will expand further as a
result of this regulation and the development of automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National
Association of Securities Dealers, Inc.
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and commercial paper for which there is a readily available
market will not be deemed to be illiquid. The investment adviser will monitor
the liquidity of such restricted securities subject to the supervision of the
Trustees. In reaching liquidity decisions, the investment adviser will
consider, inter alia, the following factors: (1) the frequency of trades and
quotes for the security; (2) the number of dealers wishing to purchase or sell
the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the transfer). In addition, in order for commercial paper that is issued in
reliance on Section 4(2) of the Securities Act to be considered liquid, (i) it
must be rated in one of the two highest rating categories by at least two
nationally recognized statistical rating organizations (NRSRO), or if only one
NRSRO rates the securities, by that NRSRO, or, if unrated, be of comparable
quality in the view of the investment adviser, and (ii) it must not be "traded
flat" (i.e., without accrued interest) or in default as to principal or
interest. Repurchase agreements subject to demand are deemed to have a
maturity equal to the notice period.
PORTFOLIO TURNOVER
As a result of the investment policies described above, the Fund may engage
in a substantial number of portfolio transactions, and the Fund's portfolio
turnover rate may exceed 100%, but is not expected to exceed 200%. The
portfolio turnover rates for the Fund for the fiscal years ended October 31,
1993 and 1994 were 57% and 70%, respectively. The portfolio turnover rate is
generally the percentage computed by dividing the lesser of portfolio
purchases or sales (excluding all securities, including options, whose
maturities or expiration date at acquisition were one year or less) by the
monthly average value of the long-term portfolio. High portfolio turnover
involves correspondingly greater brokerage commissions and other transaction
costs, which are borne directly by the Fund. In addition, high portfolio
turnover may also mean that a proportionately greater amount of distributions
to shareholders
B-7
<PAGE>
will be taxed as ordinary income rather than long-term capital gains compared
to investment companies with lower portfolio turnover. See "Portfolio
Transactions and Brokerage" and "Taxes."
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities. A "majority of the
Fund's outstanding voting securities," when used in this Statement of
Additional Information, means the lesser of (i) 67% of the voting shares
represented at a meeting at which more than 50% of the outstanding voting
shares are present in person or represented by proxy or (ii) more than 50% of
the outstanding voting shares.
The Fund may not:
(1) Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of transactions); provided that
the deposit or payment by the Fund of initial or maintenance margin in
connection with stock index futures or options thereon is not considered the
purchase of a security on margin.
(2) Make short sales of securities or maintain a short position, except
short sales against-the-box.
(3) Issue senior securities, borrow money or pledge its assets, except that
the Fund may borrow up to 20% of the value of its total assets (calculated
when the loan is made) for temporary, extraordinary or emergency purposes or
for the clearance of transactions and to take advantage of investment
opportunities. The Fund may pledge up to 20% of the value of its total assets
to secure such borrowings. For purposes of this restriction, the purchase or
sale of securities on a when-issued or delayed delivery basis, forward foreign
currency exchange contracts and collateral and collateral arrangements
relating thereto, collateral arrangements with respect to stock index futures
and options thereon and with respect to the writing of options on securities
or on stock indices and obligations of the Fund to Trustees pursuant to
deferred compensation arrangements are not deemed to be a pledge of assets or
the issuance of a senior security.
(4) Purchase any security (other than obligations of the U.S. Government,
its agencies or instrumentalities) if as a result: (i) with respect to 75% of
the Fund's total assets, more than 5% of the Fund's total assets (determined
at the time of investment) would then be invested in securities of a single
issuer, or (ii) more than 25% of the Fund's total assets (determined at the
time of investment) would be invested in a single industry. As to utility
companies, gas, electric and telephone companies will be considered as
separate industries.
(5) Purchase any security if as a result the Fund would then hold more than
10% of the outstanding voting securities of an issuer.
(6) Purchase any security if as a result the Fund would then have more than
5% of its total assets (determined at the time of investment) invested in
securities of companies (including predecessors) less than three years old,
except that the Fund may invest in the securities of any U.S. Government
agency or instrumentality, and in any security guaranteed by such an agency or
instrumentality.
(7) Buy or sell real estate or interests in real estate, except that the
Fund may purchase and sell securities which are secured by real estate,
securities of companies which invest or deal in real estate and publicly
traded securities of real estate investment trusts. The Fund may not purchase
interests in real estate limited partnerships which are not readily
marketable.
(8) Buy or sell commodities or commodity contracts, except that the Fund may
purchase and sell stock index futures contracts and options thereon. (For
purposes of this restriction, forward foreign currency exchange contracts are
not deemed to be a commodity or commodity contract.)
(9) Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter
under certain federal securities laws.
(10) Make investments for the purpose of exercising control or management.
(11) Invest in securities of other registered investment companies, except
by purchases in the open market involving only customary brokerage commissions
and as a result of which not more than 5% of its total assets (determined at
the time of investment) would be invested in such securities, or except as
part of a merger, consolidation or other acquisition.
B-8
<PAGE>
(12) Invest in interests in oil, gas or other mineral exploration or
development programs, except that the Fund may invest in the securities of
companies which invest in or sponsor such programs.
(13) Make loans, except through repurchase agreements and loans of portfolio
securities (limited to 33% of the Fund's total assets).
(14) Purchase warrants if as a result the Fund would then have more than 5%
of its total assets (taken at current value) invested in warrants or more than
2% of its total assets (taken at current value) invested in warrants not
listed on the New York or American Stock Exchanges.
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of the Fund's assets, it is intended that if the
percentage limitation is met at the time the investment is made, a later
change in percentage resulting from changing total or net asset values will
not be considered a violation of such policy. However, in the event that the
Fund's asset coverage for borrowings falls below 300%, the Fund will take
prompt action to reduce its borrowings, as required by applicable law.
In order to comply with certain state "blue sky" restrictions, the Fund will
not as a matter of operating policy:
1. purchase the securities of any one issuer if, to the knowledge of the
Fund, any officer or Trustee of the Fund or the Manager or Subadviser
owns more than 1/2 of 1% of the outstanding securities of such issuer,
and such officers, Trustees and directors who own more than 1/2 of 1%
own in the aggregate more than 5% of the outstanding securities of
such issuer;
2. engage in arbitrage transactions;
3. invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, or
securities of issuers which are restricted as to disposition, if more
than 15% of its total assets would be invested in such securities.
This restriction shall not apply to mortgage-backed securities, asset-
backed securities or obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities;
4. invest more than 5% of its total assets in securities of unseasoned
issuers, including their predecessors, which have been in operation
for less than three years, and in equity securities of issuers which
are not readily marketable; and
5. invest in oil, gas and mineral leases.
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS WITH FUND DURING PAST FIVE YEARS
---------------- --------- ----------------------
<C> <C> <S>
Edward D. Beach Trustee President and Director of BMC Fund, Inc., a closed-end
c/o Prudential Mutual Fund investment company; prior thereto, Vice Chairman of
Management, Inc. Broyhill Furniture Industries, Inc.; Certified Public
One Seaport Plaza Accountant; Secretary and Treasurer of Broyhill Family
New York, NY Foundation, Inc.; President,Treasurer and Director of
First Financial Fund, Inc. and The High Yield Plus
Fund, Inc.; Director of The Global Government Plus
Fund, Inc. and The Global Yield Fund, Inc.
Donald D. Lennox Trustee Chairman (since February 1990) and Director (since
c/o Prudential Mutual Fund April 1989) of International Imaging Materials, Inc.;
Management, Inc. Retired Chairman, Chief Executive Officer and Director
One Seaport Plaza of Schlegel Corporation (industrial manufacturing)
New York, NY (March 1987-February 1989); Director of Gleason
Corporation, Navistar International Corporation,
Personal Sound Technologies, Inc., The Global
Government Plus Fund, Inc. and The High Yield Income
Fund, Inc.
Douglas H. McCorkindale Trustee Vice Chairman, Gannett Co. Inc. (publishing and media)
c/o Prudential Mutual Fund (since March 1984); Director of Continental Airlines,
Management, Inc. Inc., Gannett Co., Inc., Rochester Telephone
One Seaport Plaza Corporation and The Global Government Plus Fund, Inc.
New York, NY
</TABLE>
B-9
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS WITH FUND DURING PAST FIVE YEARS
---------------- --------- ----------------------
<C> <C> <S>
*Lawrence C. McQuade President and Vice Chairman of Prudential Mutual Fund Management, Inc.
One Seaport Plaza Trustee (PMF) (since 1988); Managing Director, Investment
New York, NY Banking, of Prudential Securities Incorporated
(Prudential Securities) (1988-1991); Director of Czech
& Slovak American Enterprise Fund (since October 1994),
Quixote Corporation (since February 1992) and BUNZL,
P.L.C. (since June 1991); formerly Director of
Kaiser Tech. Ltd. and Kaiser Aluminum and Chemical Corp.
(March 1987-November 1988) and Crazy Eddie Inc. (1987-1990);
formerly Executive Vice President and Director of
W. R. Grace & Company (1975-1987); President and Director
of The Global Government Plus Fund, Inc., The Global Yield
Fund, Inc. and The High Yield Income Fund, Inc.
Thomas T. Mooney Trustee President of the Greater Rochester Metro Chamber of
c/o Prudential Mutual Commerce; former Rochester City Manager; Trustee of
Fund Center for Governmental Research, Inc.; Director of
Management, Inc. Blue Cross of Rochester, Monroe County Water Authority,
One Seaport Plaza Rochester Jobs, Inc., Executive Service Corps of
New York, NY Rochester, Monroe County Industrial Development
Corporation, Northeast Midwest Institute, First
Financial Fund, Inc., The Global Government Plus Fund,
Inc., The Global Yield Fund, Inc. and The High Yield
Plus Fund, Inc.
*Richard A. Redeker Trustee President, Chief Executive Officer and Director (since
One Seaport Plaza October 1993), PMF; Executive Vice President, Director
New York, NY and Member of Operating Committee (since October
1993), Prudential Securities; Director (since October
1993) of Prudential Securities Group, Inc.; Vice
President, The Prudential Investment Corporation
(since July 1994); formerly Senior Executive Vice
President and Director of Kemper Financial Services,
Inc. (September 1978-September 1993); Director of The
Global Government Plus Fund, Inc., The Global Yield
Fund, Inc. and The High Yield Income Fund, Inc.
Louis A. Weil, III Trustee Publisher and Chief Executive Officer, Phoenix
c/o Prudential Mutual Newspapers, Inc. (since August 1991); Director of
Fund Central Newspapers, Inc. (since September 1991); prior
Management, Inc. thereto, Publisher of Time Magazine (May 1989-March
One Seaport Plaza 1991); formerly President, Publisher and Chief
New York, NY Executive Officer of The Detroit News (February 1986-
August 1989); formerly member of the Advisory Board,
Chase Manhattan Bank-Westchester; Director of The
Global Government Plus Fund, Inc.
Robert F. Gunia Vice President Chief Administrative Officer (since July 1990),
One Seaport Plaza Director (since January 1989) and Executive Vice
New York, NY President, Treasurer and Chief Financial Officer
(since June 1987) of PMF; Senior Vice President (since
March 1987) of Prudential Securities; Vice President
and Director (since May 1989) of The Asia Pacific
Fund, Inc.
Susan C. Cote Treasurer and Senior Vice President (since January 1989) of PMF;
One Seaport Plaza Principal Senior Vice President (since January 1992) and Vice
New York, NY Financial and President (January 1986-December 1991) of Prudential
Accounting Securities.
Officer
S. Jane Rose Secretary Senior Vice President (since January 1991), Senior
One Seaport Plaza Counsel (since June 1987) and First Vice President
New York, NY (June 1987-December 1990) of PMF; Senior Vice
President and Senior Counsel (since July 1992) of
Prudential Securities; formerly Vice President and
Associate General Counsel of Prudential Securities.
Marguerite E.H. Morrison Assistant Vice President and Associate General Counsel (since
One Seaport Plaza Secretary June 1991) of PMF; Vice President and Associate
New York, NY General Counsel of Prudential Securities.
</TABLE>
- ---------
* "Interested" Trustee, as defined in the Investment Company Act, by reason of
his affiliation with Prudential Securities or PMF.
B-10
<PAGE>
Trustees and officers of the Fund are also trustees, directors and officers
of some or all of the other investment companies distributed by Prudential
Securities or Prudential Mutual Fund Distributors, Inc. (PMFD).
The officers conduct and supervise the daily business operations of the
Fund, while the Trustees, in addition to their functions set forth under
"Manager" and "Distributor," review such actions and decide on general policy.
Pursuant to the Management Agreement with the Fund, the Manager pays all
compensation of officers and employees of the Fund as well as the fees and
expenses of all Trustees of the Fund who are affiliated persons of the
Manager.
The Fund pays each of its Trustees who is not an affiliated person of the
Manager annual compensation of $7,500, in addition to certain out-of-pocket
expenses.
Trustees may receive their Trustee's fee pursuant to a deferred fee
agreement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of Trustee's fees which accrue interest at a rate equivalent
to the prevailing rate applicable to 90-day U.S. Treasury bills at the
beginning of each calendar quarter or, pursuant to an SEC exemptive order, at
the daily rate of return of the Fund. Payment of the interest so accrued is
also deferred and accruals become payable at the option of the Trustee. The
Fund's obligation to make payments of deferred Trustees' fees, together with
interest thereon, is a general obligation of the Fund. Mr. Beach elected to
receive his Trustee's fee pursuant to a deferred fee agreement with the Fund
for the fiscal year ended October 31, 1994.
As of December 2, 1994, the Trustees and officers of the Fund, as a group,
owned beneficially less than 1% of the outstanding shares of beneficial
interest of the Fund.
As of December 2, 1994, Prudential Securities was record holder of 5,689,079
Class A shares (or 52% of the outstanding Class A shares), 49,660,588 Class B
shares (or 72% of the outstanding Class B shares) and 84,063 Class C shares
(or 67% of the outstanding Class C shares) of the Fund. In the event of any
meetings of shareholders, Prudential Securities will forward, or cause the
forwarding of, proxy material to the beneficial owners for which it is the
record holder.
MANAGER
The manager of the Fund is Prudential Mutual Fund Management, Inc. (PMF or
the Manager), One Seaport Plaza, New York, New York 10292. PMF serves as
manager to all of the other investment companies that, together with the Fund,
comprise the Prudential Mutual Funds. See "How the Fund is Managed--Manager"
in the Prospectus. As of November 30, 1994, PMF managed and/or administered
open-end and closed-end management investment companies with assets of
approximately $46 billion. According to the Investment Company Institute, as
of August 31, 1994, the Prudential Mutual Funds were the 12th largest family
of mutual funds in the United States.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PMF, subject to the supervision of the Fund's Trustees and in
conformity with the stated policies of the Fund, manages both the investment
operations of the Fund and the composition of the Fund's portfolio, including
the purchase, retention, disposition and loan of securities. In connection
therewith, PMF is obligated to keep certain books and records of the Fund. PMF
also administers the Fund's business affairs and, in connection therewith,
furnishes the Fund with office facilities, together with those ordinary
clerical and bookkeeping services which are not being furnished by State
Street Bank and Trust Company (the Custodian), the Fund's custodian, and
Prudential Mutual Fund Services, Inc. (PMFS or the Transfer Agent), the Fund's
transfer and dividend disbursing agent. The management services of PMF for the
Fund are not exclusive under the terms of the Management Agreement and PMF is
free to, and does, render management services to others.
For its services, PMF receives, pursuant to the Management Agreement, a fee
at an annual rate of .60 of 1% of the Fund's average daily net assets up to
$500 million and .50 of 1% of the Fund's average daily net assets in excess of
$500 million. The fee is computed daily and payable monthly. The Management
Agreement also provides that, in the event the expenses of the Fund (including
the fees of PMF, but excluding interest, taxes, brokerage commissions,
distribution fees and litigation and indemnification expenses and other
extraordinary expenses not incurred in the ordinary course of the Fund's
business) for any fiscal year exceed the lowest applicable annual expense
limitation established and enforced pursuant to the statutes or regulations of
any jurisdiction in which the Fund's shares are qualified for offer and sale,
the compensation due PMF will be reduced by the amount of such excess.
Reductions in excess of the total compensation payable to PMF will be paid by
PMF to the Fund. No such reductions were required during the fiscal year ended
October 31, 1994. Currently, the Fund believes that the most restrictive
expense limitation of state securities commissions is 2 1/2% of the Fund's
average daily net assets up to $30 million, 2% of the next $70 million of such
assets and 1 1/2% of such assets in excess of $100 million.
In connection with its management of the business affairs of the Fund, PMF
bears the following expenses:
(a) the salaries and expenses of all of its and the Fund's personnel except
the fees and expenses of Trustees who are not affiliated persons of PMF or the
Fund's investment adviser;
(b) all expenses incurred by PMF or by the Fund in connection with managing
the ordinary course of the Fund's business, other than those assumed by the
Fund as described below; and
B-11
<PAGE>
(c) the costs and expenses payable to The Prudential Investment Corporation
(PIC) pursuant to the subadvisory agreement between PMF and PIC (the
Subadvisory Agreement).
Under the terms of the Management Agreement, the Fund is responsible for the
payment of the following expenses: (a) the fees payable to the Manager, (b)
the fees and expenses of Trustees who are not affiliated persons of the
Manager or the Fund's investment adviser, (c) the fees and certain expenses of
the Custodian and Transfer and Dividend Disbursing Agent, including the cost
of providing records to the Manager in connection with its obligation of
maintaining required records of the Fund and of pricing the Fund's shares, (d)
the charges and expenses of legal counsel and independent accountants for the
Fund, (e) brokerage commissions and any issue or transfer taxes chargeable to
the Fund in connection with its securities transactions, (f) all taxes and
corporate fees payable by the Fund to governmental agencies, (g) the fees of
any trade associations of which the Fund may be a member, (h) the cost of
share certificates representing shares of the Fund, (i) the cost of fidelity
and liability insurance, (j) certain organization expenses of the Fund and the
fees and expenses involved in registering and maintaining registration of the
Fund and of its shares with the SEC, registering the Fund and qualifying its
shares under state securities laws, including the preparation and printing of
the Fund's registration statements and prospectuses for such purposes, (k)
allocable communications expenses with respect to investor services and all
expenses of shareholders' and Trustees' meetings and of preparing, printing
and mailing reports, proxy statements and prospectuses to shareholders in the
amount necessary for distribution to the shareholders, (l) litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of the Fund's business and (m) distribution fees.
The Management Agreement provides that PMF will not be liable for any error
of judgment or for any loss suffered by the Fund in connection with the
matters to which the Management Agreement relates, except a loss resulting
from willful misfeasance, bad faith, gross negligence or reckless disregard of
duty. The Management Agreement provides that it will terminate automatically
if assigned, and that it may be terminated without penalty by either party
upon not more than 60 days' nor less than 30 days' written notice. The
Management Agreement will continue in effect for a period of more than two
years from the date of execution only so long as such continuance is
specifically approved at least annually in conformity with the Investment
Company Act. The Management Agreement was last approved by the Trustees of the
Fund, including a majority of the Trustees who are not parties to the contract
or interested persons of any such parties as defined in the Investment Company
Act, on May 3, 1994 and by shareholders of the Fund on January 14, 1988.
For the fiscal years ended October 31, 1994, 1993 and 1992, PMF received
management fees of $5,078,246, $2,254,755 and $1,148,728, respectively.
PMF has entered into the Subadvisory Agreement with PIC (the Subadviser), a
wholly-owned subsidiary of The Prudential Insurance Company of America
(Prudential). The Subadvisory Agreement provides that PIC will furnish
investment advisory services in connection with the management of the Fund. In
connection therewith, PIC is obligated to keep certain books and records of
the Fund. PMF continues to have responsibility for all investment advisory
services pursuant to the Management Agreement and supervises PIC's performance
of such services. PIC is reimbursed by PMF for the reasonable costs and
expenses incurred by PIC in furnishing those services.
The Subadvisory Agreement was last approved by the Trustees, including a
majority of the Trustees who are not parties to the contract or interested
persons of any such party as defined in the Investment Company Act, on May 3,
1994, and by shareholders of the Fund on January 14, 1988.
The Subadvisory Agreement provides that it will terminate in the event of
its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. The Subadvisory Agreement may be
terminated by the Fund, PMF or PIC upon not more than 60 days', nor less than
30 days', written notice. The Subadvisory Agreement provides that it will
continue in effect for a period of more than two years from its execution only
so long as such continuance is specifically approved at least annually in
accordance with the requirements of the Investment Company Act.
The Manager and the Subadviser are subsidiaries of Prudential which, as of
December 31, 1993, is one of the largest financial institutions in the world
and the largest insurance company in North America. Prudential has been
engaged in the insurance business since 1875. In July 1993, Institutional
Investor ranked Prudential the third largest institutional money manager of
the 300 largest money management organizations in the United States as of
December 31, 1992.
DISTRIBUTOR
Prudential Mutual Fund Distributors, Inc. (PMFD), One Seaport Plaza, New
York, New York 10292, acts as the distributor of the Class A shares of the
Fund. Prudential Securities Incorporated (Prudential Securities or PSI), One
Seaport Plaza, New York, New York 10292, acts as the distributor of the Class
B and Class C shares of the Fund.
B-12
<PAGE>
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the
Fund under Rule 12b-1 under the Investment Company Act and separate
distribution agreements (the Distribution Agreements), PMFD and Prudential
Securities (collectively, the Distributor) incur the expenses of distributing
the Fund's Class A, Class B and Class C shares. See "How the Fund is Managed--
Distributor" in the Prospectus.
Prior to January 22, 1990, the Fund offered only one class of shares (the
then existing Class B shares). On October 11, 1989, the Trustees, including a
majority of the Trustees who are not interested persons of the Fund and who
have no direct or indirect financial interest in the operation of the Class A
or Class B Plan or in any agreement related to either Plan (the Rule 12b-1
Trustees), at a meeting called for the purpose of voting on each Plan, adopted
a new plan of distribution for the Class A shares of the Fund (the Class A
Plan) and approved an amended and restated plan of distribution with respect
to the Class B shares of the Fund (the Class B Plan). On February 9, 1993, the
Trustees, including a majority of the Rule 12b-1 Trustees, at a meeting called
for the purpose of voting on each Plan, approved the continuance of the Plans
and Distribution Agreements and approved modifications of the Fund's Class A
and Class B Plans and Distribution Agreements to conform them with recent
amendments to the National Association of Securities Dealers, Inc. (NASD)
maximum sales charge rule described below. As so modified, the Class A Plan
provides that (i) up to .25 of 1% of the average daily net assets of the Class
A shares may be used to pay for personal service and/or the maintenance of
shareholder accounts (service fee) and (ii) total distribution fees (including
the service fee of .25 of 1%) may not exceed .30 of 1%. As so modified, the
Class B Plan provides that (i) up to .25 of 1% of the average daily net assets
of the Class B shares may be paid as a service fee and (ii) up to .75 of 1%
(not including the service fee) of the average daily net assets of the Class B
shares (asset-based sales charge) may be used as reimbursement for
distribution-related expenses with respect to the Class B shares. On May 4,
1993, the Trustees, including a majority of the Rule 12b-1 Trustees, at a
meeting called for the purpose of voting on each Plan, adopted a plan of
distribution for the Class C shares of the Fund and approved further
amendments to the plans of distribution for the Fund's Class A and Class B
shares changing them from reimbursement type plans to compensation type plans.
The Plans were last approved by the Trustees, including a majority of the Rule
12-1 Trustees, on May 3, 1994. The Class A Plan, as amended, was approved by
Class A and Class B shareholders, and the Class B Plan, as amended, was
approved by Class B shareholders, on July 19, 1994. The Class C Plan was
approved by the sole shareholder of Class C shares on August 1, 1994.
CLASS A PLAN. For the fiscal year ended October 31, 1994, PMFD received
payments of $319,509 under the Class A Plan. This amount was primarily
expended for payments of account servicing fees to financial advisers and
other persons who sell Class A shares. For the fiscal year ended October 31,
1994, PMFD also received approximately $1,542,700 in initial sales charges.
CLASS B PLAN. For the fiscal year ended October 31, 1994, the Prudential
Securities received $7,840,632 from the Fund under the Class B Plan and spent
approximately $13,607,400 in distributing the Fund's Class B shares. It is
estimated that of the latter amount, approximately 1.1% ($149,500) was spent
on printing and mailing of prospectuses to other than current shareholders;
25.2% ($3,428,800) on compensation to Pruco Securities Corporation (an
affiliated broker-dealer) (Prusec) for commissions to its representatives and
other expenses, including an allocation of overhead and other branch office
distribution-related expenses, incurred by it for distribution of Fund shares;
3.1% ($416,500) in interest and/or carrying charges; and 70.6% ($9,612,600) on
the aggregate of (i) payments of commissions and account servicing fees to
financial advisers (39.2% or $5,340,300) and (ii) an allocation of overhead
and other branch office distribution-related expenses for payments of related
expenses (31.4% or $4,272,300). The term "overhead and other branch office
distribution-related expenses" represents (a) the expenses of operating
Prudential Securities' branch offices in connection with the sale of Fund
shares, including lease costs, the salaries and employee benefits of
operations and sales support personnel, utility costs, communications costs
and the costs of stationery and supplies, (b) the costs of client sales
seminars, (c) expenses of mutual fund sales coordinators to promote the sale
of Fund shares and (d) other incidental expenses relating to branch promotion
of Fund sales.
Prudential Securities also receives the proceeds of contingent deferred
sales charges paid by investors upon certain redemptions of Class B shares.
See "Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales
Charges" in the Prospectus. For the fiscal year ended October 31, 1994,
Prudential Securities received approximately $1,587,700 in contingent deferred
sales charges.
CLASS C PLAN. For the period August 1, 1994 (inception of Class C shares)
through October 31, 1994, Prudential Securities received $1,880 under the
Class C Plan and spent approximately $11,200 in distributing Class C shares.
It is estimated that the latter amount was spent on (i) payments of
commissions and account servicing fees to financial advisers (41.1% or $4,600)
and (ii) an allocation of overhead and other branch office distribution-
related expenses for payments of related expenses (58.9% or $6,600).
Prudential Securities also receives the proceeds of contingent deferred sales
charges paid by investors upon certain redemptions of Class C shares. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales
Charges" in the Prospectus.
The Class A, Class B and Class C Plans continue in effect from year to year,
provided that each such continuance is approved at least annually by a vote of
the Trustees, including a majority vote of the Rule 12b-1 Trustees, cast in
person at a meeting called
B-13
<PAGE>
for the purpose of voting on such continuance. The Plans may each be
terminated at any time, without penalty, by the vote of a majority of the Rule
12b-1 Trustees or by the vote of the holders of a majority of the outstanding
shares of the applicable class on not more than 30 days' written notice to any
other party to the Plans. The Plans may not be amended to increase materially
the amounts to be spent for the services described therein without approval by
the shareholders of the applicable class (by both Class A and Class B
shareholders, voting separately, in the case of material amendments to the
Class A Plan), and all material amendments are required to be approved by the
Trustees in the manner described above. Each Plan will automatically terminate
in the event of its assignment. The Fund will not be contractually obligated
to pay expenses incurred under any Plan if it is terminated or not continued.
Pursuant to each Plan, the Trustees will review at least quarterly a written
report of the distribution expenses incurred on behalf of each class of shares
of the Fund by the Distributor. The report includes an itemization of the
distribution expenses and the purposes of such expenditures. In addition, as
long as the Plans remain in effect, the selection and nomination of the Rule
12b-1 Trustees shall be committed to the Rule 12b-1 Trustees.
Pursuant to each Distribution Agreement, the Fund has agreed to indemnify
PMFD and Prudential Securities to the extent permitted by applicable law
against certain liabilities under the Securities Act of 1933, as amended. Each
Distribution Agreement was last approved by the Trustees, including a majority
of the Rule 12b-1 Trustees, on May 3, 1994.
NASD MAXIMUM SALES CHARGE RULE. Pursuant to rules of the NASD, the
Distributor is required to limit aggregate initial sales charges, deferred
sales charges and asset-based sales charges to 6.25% of total gross sales of
each class of shares. Interest charges on unreimbursed distribution expenses
equal to the prime rate plus one percent per annum may be added to the 6.25%
limitation. Sales from the reinvestment of dividends and distributions are not
included in the calculation of the 6.25% limitation. The annual asset-based
sales charge on shares of the Fund may not exceed .75 of 1% per class. The
6.25% limitation applies to each class of the Fund rather than on a per
shareholder basis. If aggregate sales charges were to exceed 6.25% of total
gross sales of any class, all sales charges on shares of that class would be
suspended.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators in 51 jurisdictions and the NASD to resolve
allegations that PSI sold interests in more than 700 limited partnerships (and
a limited number of other types of securities) from January 1, 1980 through
December 31, 1990, in violation of securities laws to persons for whom such
securities were not suitable in light of the individuals' financial condition
or investment objectives. It was also alleged that the safety, potential
returns and liquidity of the investments had been misrepresented. The limited
partnerships principally involved real estate, oil and gas producing
properties and aircraft leasing ventures. The SEC Order (i) included findings
that PSI's conduct violated the federal securities laws and that an order
issued by the SEC in 1986 requiring PSI to adopt, implement and maintain
certain supervisory procedures had not been complied with; (ii) directed PSI
to cease and desist from violating the federal securities laws and imposed a
$10 million civil penalty; and (iii) required PSI to adopt certain remedial
measures including the establishment of a Compliance Committee of its Board of
Directors. Pursuant to the terms of the SEC settlement, PSI established a
settlement fund in the amount of $330,000,000 and procedures, overseen by a
court approved Claims Administrator, to resolve legitimate claims for
compensatory damages by purchasers of the partnership interests. PSI has
agreed to provide additional funds, if necessary, for that purpose. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action. In settling the
above referenced matters, PSI neither admitted nor denied the allegations
asserted against it.
On January 18, 1994, PSI agreed to the entry of a Final Consent Order and a
Parallel Consent Order by the Texas Securities Commissioner. The firm also
entered into a related agreement with the Texas Securities Commissioner. The
allegations were that the firm had engaged in improper sales practices and
other improper conduct resulting in pecuniary losses and other harm to
investors residing in Texas with respect to purchases and sales of limited
partnership interests during the period of January 1, 1980 through December
31, 1990. Without admitting or denying the allegations, PSI consented to a
reprimand, agreed to cease and desist from future violations, and to provide
voluntary donations to the State of Texas in the aggregate amount of
$1,500,000. The firm agreed to suspend the creation of new customer accounts,
the general solicitation of new accounts, and the offer for sale of securities
in or from PSI's North Dallas office to new customers during a period of
twenty consecutive business days, and agreed that its other Texas offices
would be subject to the same restrictions for a period of five consecutive
business days. PSI also agreed to institute training programs for its
securities salesmen in Texas.
On October 27, 1994, Prudential Securities Group, Inc. (PSG) and PSI entered
into agreements with the United States Attorney deferring prosecution
(provided PSI complies with the terms of the agreement for three years) for
any alleged criminal activity related to the sale of certain limited
partnership programs from 1983 to 1990. In connection with these agreements,
PSI agreed to add the sum of $330,000,000 to the fund established by the SEC
and executed a stipulation providing for a reversion of such funds to the
B-14
<PAGE>
United States Postal Inspection Service. PSI further agreed to obtain a
mutually acceptable outside director to sit on the Board of Directors of PSG
and the Compliance Committee of PSI. The new director will also serve as an
independent "ombudsman" whom PSI employees can call anonymously with
complaints about ethics and compliance. Prudential Securities shall report any
allegations or instances of criminal conduct and material improprieties to the
new director. The new director will submit compliance reports which shall
identify all such allegations or instances of criminal conduct and material
improprieties every three months for a three-year period.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for decisions to buy and sell securities, futures
and options on securities and futures for the Fund, the selection of brokers,
dealers and futures commission merchants to effect the transactions and the
negotiation of brokerage commissions, if any. For purposes of this section,
the term "Manager" includes the Subadviser. Broker-dealers may receive
brokerage commissions on Fund portfolio transactions, including options and
the purchase and sale of underlying securities upon the exercise of options.
Orders may be directed to any broker or futures commission merchant including,
to the extent and in the manner permitted by applicable law, Prudential
Securities and its affiliates. Brokerage commissions on United States
securities, options and futures exchanges or boards of trade are subject to
negotiation between the Manager and the broker or futures commission merchant.
In the over-the-counter market, securities are generally traded on a "net"
basis with dealers acting as principal for their own accounts without a stated
commission, although the price of the security usually includes a profit to
the dealer. In underwritten offerings, securities are purchased at a fixed
price which includes an amount of compensation to the underwriter, generally
referred to as the underwriter's concession or discount. On occasion, certain
money market instruments and U.S. Government agency securities may be
purchased directly from the issuer, in which case no commissions or discounts
are paid. The Fund will not deal with Prudential Securities in any transaction
in which Prudential Securities (or any affiliate) acts as principal. Thus, it
will not deal with Prudential Securities acting as market maker, and it will
not execute a negotiated trade with Prudential Securities if execution
involves Prudential Securities' acting as principal with respect to any part
of the Fund's order.
In placing orders for portfolio securities of the Fund, the Manager is
required to give primary consideration to obtaining the most favorable price
and efficient execution. Within the framework of this policy, the Manager will
consider the research and investment services provided by brokers, dealers or
futures commission merchants who effect or are parties to portfolio
transactions of the Fund, the Manager or the Manager's other clients. Such
research and investment services are those which brokerage houses customarily
provide to institutional investors and include statistical and economic data
and research reports on particular companies and industries. Such services are
used by the Manager in connection with all of its investment activities, and
some of such services obtained in connection with the execution of
transactions for the Fund may be used in managing other investment accounts.
Conversely, brokers, dealers or futures commission merchants furnishing such
services may be selected for the execution of transactions of such other
accounts, whose aggregate assets are far larger than those of the Fund, and
the services furnished by such brokers, dealers or futures commission
merchants may be used by the Manager in providing investment management for
the Fund. Commission rates are established pursuant to negotiations with the
broker, dealer or futures commission merchant based on the quality and
quantity of execution services provided by the broker, dealer or futures
commission merchant in the light of generally prevailing rates. The Manager's
policy is to pay higher commissions to brokers, other than Prudential
Securities, for particular transactions than might be charged if a different
broker had been selected, on occasions when, in the opinion of the Manager,
this policy furthers the objective of obtaining best price and execution. In
addition, the Manager is authorized to pay higher commissions on brokerage
transactions for the Fund to brokers other than Prudential Securities in order
to secure research and investment services described above, subject to review
by the Fund's Trustees from time to time as to the extent and continuation of
this practice. The allocation of orders among brokers and the commission rates
paid are reviewed periodically by the Fund's Trustees. Portfolio securities
may not be purchased from any underwriting or selling syndicate of which
Prudential Securities (or any affiliate), during the existence of the
syndicate, is a principal underwriter (as defined in the Investment Company
Act), except in accordance with rules of the SEC. This limitation, in the
opinion of the Fund, will not significantly affect the Fund's ability to
pursue its present investment objective. However, in the future in other
circumstances, the Fund may be at a disadvantage because of this limitation in
comparison to other funds with similar objectives but not subject to such
limitations.
Subject to the above considerations, Prudential Securities may act as a
securities broker or futures commission merchant for the Fund. In order for
Prudential Securities (or any affiliate) to effect any portfolio transactions
for the Fund, the commissions, fees or other remuneration received by
Prudential Securities (or any affiliate) must be reasonable and fair compared
to the commissions, fees or other remuneration paid to other brokers or
futures commission merchants in connection with comparable transactions
involving similar securities or futures being purchased or sold on an exchange
or board of trade during a comparable period of time.
B-15
<PAGE>
This standard would allow Prudential Securities (or any affiliate) to receive
no more than the remuneration which would be expected to be received by an
unaffiliated broker or futures commission merchant in a commensurate arm's-
length transaction. Furthermore, the Trustees of the Fund, including a
majority of the non-interested Trustees, have adopted procedures which are
reasonably designed to provide that any commissions, fees or other
remuneration paid to Prudential Securities (or any affiliate) are consistent
with the foregoing standard. In accordance with Section 11(a) under the
Securities Exchange Act of 1934, Prudential Securities may not retain
compensation for effecting transactions on a national securities exchange for
the Fund unless the Fund has expressly authorized the retention of such
compensation. Prudential Securities must furnish to the Fund at least annually
a statement setting forth the total amount of all compensation retained by
Prudential Securities from transactions effected for the Fund during the
applicable period. Brokerage and futures transactions with Prudential
Securities (or any affiliate) are also subject to such fiduciary standards as
may be imposed upon Prudential Securities (or such affiliate) by applicable
law.
The table below sets forth information concerning the payment of commissions
by the Fund, including the commissions paid to Prudential Securities, for the
three years ended October 31, 1994.
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, 1994 OCTOBER 31, 1993 OCTOBER 31, 1992
---------------- ---------------- ----------------
<S> <C> <C> <C>
Total brokerage commissions
paid by the Fund........... $2,619,977 $1,046,105 $356,821
Total brokerage commissions
paid to Prudential
Securities................. $ 177,117 $ 193,083 $ 77,071
Percentage of total
brokerage commissions paid
to Prudential Securities... 6.8% 18.5% 21.6%
</TABLE>
The Fund effected approximately 6.8% of the total dollar amount of its
transactions involving the payment of commissions to Prudential Securities
during the year ended October 31, 1994. Of the total brokerage commissions
paid during that period, $1,897,147 (or 72.4%) were paid to firms which
provide research, statistical or other services to PIC.
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share plus a sales charge which, at the election of the
investor, may be imposed either (i) at the time of purchase (Class A shares)
or (ii) on a deferred basis (Class B or Class C shares). See "Shareholder
Guide--How to Buy Shares of the Fund" in the Prospectus.
Each class of shares represents an interest in the same portfolio of
investments of the Fund and has the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except
that the Fund has agreed with the SEC in connection with the offering of a
conversion feature on Class B shares to submit any amendment of the Class A
distribution and service plan to both Class A and Class B shareholders) and
(iii) only Class B shares have a conversion feature. See "Distributor." Each
class also has separate exchange privileges. See "Shareholder Investment
Account--Exchange Privilege."
B-16
<PAGE>
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares of the Fund are sold at a maximum sales charge of
5% and Class B* and Class C* shares of the Fund are sold at net asset value.
Using the Fund's net asset value at October 31, 1994, the maximum offering
price of the Fund's shares is as follows:
<TABLE>
<S> <C>
CLASS A
Net asset value and redemption price per Class A share.................. $14.03
Maximum sales charge (5% of offering price)............................. .74
------
Maximum offering price to public........................................ $14.77
======
CLASS B
Net asset value, redemption price and offering price per Class B share*. $14.00
======
CLASS C
Net asset value, redemption price and offering price per Class C share*. $14.00
======
</TABLE>
- ---------
*Class B and Class C shares are subject to a contingent deferred sales charge
on certain redemptions. See "Shareholder Guide--How to Sell Your Shares--
Contingent Deferred Sales Charges" in the Prospectus.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES--CLASS A SHARES
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other Prudential Mutual Funds, the
purchases may be combined to take advantage of the reduced sales charges
applicable to larger purchases. See the table of breakpoints under
"Shareholder Guide--Alternative Purchase Plan" in the Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's and spouse's Individual Retirement Account (IRA);
(d) any company controlled by the individual (a person, entity or group
that holds 25% or more of the outstanding voting securities of a
company will be deemed to control the company, and a partnership
will be deemed to be controlled by each of its general partners);
(e) a trust created by the individual, the beneficiaries of which are
the individual, his or her spouse, parents or children;
(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act
account created by the individual or the individual's spouse; and
(g) one or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that
employer).
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charges will be
granted subject to confirmation of the investor's holdings. The Combined
Purchase and Cumulative Purchase Privilege does not apply to individual
participants in any retirement or group plans.
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of
related investors, as described above under "Combined Purchase and Cumulative
Purchase Privilege," may aggregate the value of their existing holdings of
shares of the Fund and shares of other Prudential Mutual Funds (excluding
money market funds other than those acquired pursuant to the exchange
privilege) to determine the reduced sales charge. However, the value of shares
held directly with the Transfer Agent and through Prudential Securities will
not be aggregated to determine the reduced sales charge. All shares must be
held either directly with the Transfer Agent or through Prudential Securities.
The value of existing holdings for purposes of determining the reduced sales
charge is calculated using the maximum offering price (net asset value plus
maximum sales charge) as of the previous business day. See "How the Fund
Values its Shares" in the Prospectus. The Distributor must be notified at the
time of purchase that the investor is entitled to a reduced sales charge. The
reduced sales charges will be granted subject to confirmation of the
investor's holdings. Rights of Accumulation are not available to individual
participants in any retirement or group plans.
B-17
<PAGE>
LETTERS OF INTENT. Reduced sales charges are also available to investors (or
an eligible group of related investors) including retirement and group plans,
who enter into a written Letter of Intent providing for the purchase, within a
thirteen-month period, of shares of the Fund and shares of other Prudential
Mutual Funds. All shares of the Fund and shares of other Prudential Mutual
Funds (excluding money market funds other than those acquired pursuant to the
exchange privilege) which were previously purchased and are still owned are
also included in determining the applicable reduction. However, the value of
shares held directly with the Transfer Agent and through Prudential Securities
will not be aggregated to determine the reduced sales charge. All shares must
be held either directly with the Transfer Agent or through Prudential
Securities. The Distributor must be notified at the time of purchase that the
investor is entitled to a reduced sales charge. The reduced sales charge will
be granted subject to confirmation of the investor's holdings. Letters of
Intent are not available to individual participants in any retirement or group
plans.
A Letter of Intent permits a purchaser to establish a total investment goal
to be achieved by any number of investments over a thirteen-month period. Each
investment made during the period will receive the reduced sales charge
applicable to the amount represented by the goal, as if it were a single
investment. Escrowed Class A shares totaling 5% of the dollar amount of the
Letter of Intent will be held by the Transfer Agent in the name of the
purchaser, except in the case of retirement and group plans where the employer
or plan sponsor will be responsible for paying any applicable sales charge.
The effective date of a Letter of Intent may be back-dated up to 90 days, in
order that any investments made during this 90-day period, valued at the
purchaser's cost, can be applied to the fulfillment of the Letter of Intent
goal, except in the case of retirement and group plans.
The Letter of Intent does not obligate the investor to purchase, nor the
Fund to sell, the indicated amount. In the event the Letter of Intent goal is
not achieved within the thirteen-month period, the purchaser (or the employer
or plan sponsor in the case of any retirement or group plan) is required to
pay the difference between the sales charge otherwise applicable to the
purchases made during this period and the sales charge actually paid. Such
payment may be made directly to the Distributor or, if not paid, the
Distributor will liquidate sufficient escrowed shares to obtain such
difference. Investors electing to purchase Class A shares of the Fund pursuant
to a Letter of Intent should carefully read such Letter of Intent.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
The contingent deferred sales charge is waived under circumstances described
in the Prospectus. See "Shareholder Guide--How to Sell Your Shares--Waiver of
the Contingent Deferred Sales Charges--Class B Shares" in the Prospectus. In
connection with these waivers, the Transfer Agent will require you to submit
the supporting documentation set forth below.
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
Death A copy of the shareholder's death
certificate or, in the case of a trust,
a copy of the grantor's death
certificate, plus a copy of the trust
agreement identifying the grantor.
Disability--An individual will be A copy of the Social Security
considered disabled if he or she Administration award letter or a letter
is unable to engage in any from a physician on the physician's
substantial gainful activity by letterhead stating that the shareholder
reason of any medically (or, in the case of a trust, the
determinable physical or mental grantor) is permanently disabled. The
impairment which can be expected letter must also indicate the date of
to result in death or to be of disability.
long-continued and indefinite
duration.
Distribution from an IRA or 403(b) A copy of the distribution form from
Custodial Account the custodial firm indicating (i) the
date of birth of the shareholder and
(ii) that the shareholder is over age
59 1/2 and is taking a normal
distribution--signed by the
shareholder.
Distribution from Retirement Plan A letter signed by the plan
administrator/trustee indicating the
reason for the distribution.
Excess Contributions A letter from the shareholder (for an
IRA) or the plan administrator/trustee
on company letterhead indicating the
amount of the excess and whether or not
taxes have been paid.
The Transfer Agent reserves the right to request such additional documents
as it may deem appropriate.
QUANTITY DISCOUNT--CLASS B SHARES PURCHASED PRIOR TO AUGUST 1, 1994
The CDSC is reduced on redemptions of Class B shares of the Fund purchased
prior to August 1, 1994 if immediately after a purchase of such shares, the
aggregate cost of all Class B shares of the Fund owned by you in a single
account exceeded $500,000.
B-18
<PAGE>
For example, if you purchased $100,000 of Class B shares of the Fund and the
following year purchase an additional $450,000 of Class B shares with the
result that the aggregate cost of your Class B shares of the Fund following
the second purchase was $550,000, the quantity discount would be available for
the second purchase of $450,000 but not for the first purchase of $100,000.
The quantity discount will be imposed at the following rates depending on
whether the aggregate value exceeded $500,000 or $1 million:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF DOLLARS INVESTED
OR REDEMPTION PROCEEDS
--------------------------------------
YEAR SINCE PURCHASE
PAYMENT MADE $500,001 TO $1 MILLION OVER $1 MILLION
------------------- ---------------------- ---------------
<S> <C> <C>
First.......................... 3.0% 2.0%
Second......................... 2.0% 1.0%
Third.......................... 1.0% 0%
Fourth and thereafter.......... 0% 0%
</TABLE>
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to the reduced CDSC. The reduced CDSC will be granted subject to
confirmation of your holdings.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which the shares are held for the
investor by the Transfer Agent. If a share certificate is desired, it must be
requested in writing for each transaction. Certificates are issued only for
full shares and may be redeposited in the Account at any time. There is no
charge to the investor for issuance of a certificate. The Fund makes available
to its shareholders the following privileges and plans.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund. An
investor may direct the Transfer Agent in writing not less than five full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. In the case of recently
purchased shares for which registration instructions have not been received on
the record date, cash payment will be made directly to the dealer. Any
shareholder who receives a cash payment representing a dividend or
distribution may reinvest such dividend or distribution at net asset value by
returning the check or the proceeds to the Transfer Agent within 30 days after
the payment date. Such investment will be made at the net asset value per
share next determined after receipt of the check or proceeds by the Transfer
Agent. Such shareholder will receive credit for any contingent deferred sales
charge paid in connection with the amount of proceeds being reinvested.
EXCHANGE PRIVILEGE
The Fund makes available to its shareholders the privilege of exchanging
their shares of the Fund for shares of certain other Prudential Mutual Funds,
including one or more specified money market funds, subject in each case to
the minimum investment requirements of such funds. Shares of such other
Prudential Mutual Funds may also be exchanged for shares of the Fund. All
exchanges are made on the basis of relative net asset value next determined
after receipt of an order in proper form. An exchange will be treated as a
redemption and purchase for tax purposes. Shares may be exchanged for shares
of another fund only if shares of such fund may legally be sold under
applicable state laws. For retirement and group plans having a limited menu of
Prudential Mutual Funds, the Exchange Privilege is available for those funds
eligible for investment in the particular program.
It is contemplated that the exchange privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
CLASS A. Shareholders of the Fund may exchange their Class A shares for
Class A shares of certain other Prudential Mutual Funds, shares of Prudential
Government Securities Trust (Intermediate Term Series) and shares of the money
market funds specified below. No fee or sales load will be imposed upon the
exchange. Shareholders of money market funds who acquired such shares upon
exchange of Class A shares may use the Exchange Privilege only to acquire
Class A shares of the Prudential Mutual Funds participating in the Exchange
Privilege.
B-19
<PAGE>
The following money market funds participate in the Class A Exchange
Privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets
Prudential Tax-Free Money Fund
CLASS B AND CLASS C. Shareholders of the Fund may exchange their Class B and
Class C shares for Class B and Class C shares, respectively, of certain other
Prudential Mutual Funds and shares of Prudential Special Money Market Fund, a
money market fund. No CDSC will be payable upon such exchange, but a CDSC may
be payable upon the redemption of the Class B and Class C shares acquired as a
result of the exchange. The applicable sales charge will be that imposed by
the fund in which shares were initially purchased and the purchase date will
be deemed to be the first day of the month after the initial purchase, rather
than the date of the exchange.
Class B and Class C shares of the Fund may also be exchanged for shares of
Prudential Special Money Market Fund without imposition of any CDSC at the
time of exchange. Upon subsequent redemption from such money market fund or
after re-exchange into the Fund, such shares will be subject to the CDSC
calculated without regard to the time such shares were held in the money
market fund. In order to minimize the period of time in which shares are
subject to a CDSC, shares exchanged out of the money market fund will be
exchanged on the basis of their remaining holding periods, with the longest
remaining holding periods being transferred first. In measuring the time
period shares are held in a money market fund and "tolled" for purposes of
calculating the CDSC holding period, exchanges are deemed to have been made on
the last day of the month. Thus, if shares are exchanged into the Fund from a
money market fund during the month (and are held in the Fund at the end of
month), the entire month will be included in the CDSC holding period.
Conversely, if shares are exchanged into a money market fund prior to the last
day of the month (and are held in the money market fund on the last day of the
month), the entire month will be excluded from the CDSC holding period. For
purposes of calculating the seven year holding period applicable to the Class
B conversion feature, the time period during which Class B shares were held in
a money market fund will be excluded.
At any time after acquiring shares of other funds participating in the Class
B or Class C Exchange Privilege, a shareholder may again exchange those shares
(and any reinvested dividends and distributions) for Class B or Class C shares
of the Fund, respectively, without subjecting such shares to any CDSC. Shares
of any fund participating in the Class B or Class C Exchange Privilege that
were acquired through reinvestment of dividends or distributions may be
exchanged for Class B or Class C shares of other funds, respectively, without
being subject to any CDSC.
Additional details about the Exchange Privilege and prospectuses for each of
the Prudential Mutual Funds are available from the Fund's Transfer Agent,
Prudential Securities or Prusec. The Exchange Privilege may be modified,
terminated or suspended on 60 days' notice, and any fund, including the Fund,
or the Distributor, has the right to reject any exchange application relating
to such fund's shares.
DOLLAR COST AVERAGING
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more
shares when the price is low and fewer shares when the price is high. The
average cost per share is lower than it would be if a constant number of
shares were bought at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $4,800 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected,
B-20
<PAGE>
for the freshman class of 2007, the cost of four years at a private college
could reach $163,000 and over $97,000 at a public university./1/
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals./2/
<TABLE>
<CAPTION>
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
-------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
25 Years............................. $ 110 $ 165 $ 220 $ 275
20 Years............................. 176 264 352 440
15 Years............................. 296 444 592 740
10 Years............................. 555 833 1,110 1,388
5 Years.............................. 1,371 2,057 2,742 3,428
</TABLE>
See "Automatic Savings Accumulation Plan."
- ---------
/1/Source information concerning the costs of education at public
universities is available from The College Board Annual Survey of Colleges,
1992. Information about the costs of private colleges is from the Digest of
Education Statistics, 1992; The National Center for Educational Statistics;
and the U.S. Department of Education. Average costs for private institutions
include tuition, fees, room and board.
/2/The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not
intended to reflect the performance of an investment in shares of the Fund.
The investment return and principal value of an investment will fluctuate so
that an investor's shares when redeemed may be worth more or less than their
original cost.
AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP)
Under ASAP, an investor may arrange to have a fixed amount automatically
invested in shares of the Fund monthly by authorizing his or her bank account
or Prudential Securities account (including a Command Account) to be debited
to invest specified dollar amounts in shares of the Fund. The investor's bank
must be a member of the Automatic Clearing House System. Share certificates
are not issued to ASAP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, Prudential Securities or Prusec.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders through Prudential
Securities or the Transfer Agent. Such withdrawal plan provides for monthly or
quarterly checks in any amount, except as provided below, up to the value of
the shares in the shareholder's account. Withdrawals of Class B or Class C
shares may be subject to a CDSC. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus.
In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account value applies, (ii) withdrawals may not be for less than $100 and
(iii) the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at net asset
value on shares held under this plan. See "Shareholder Investment Account--
Automatic Reinvestment of Dividends and/or Distributions."
Prudential Securities and the Transfer Agent act as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may
be terminated at any time, and the Distributor reserves the right to initiate
a fee of up to $5 per withdrawal, upon 30 days' written notice to the
shareholder.
Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must generally be recognized for federal income tax
purposes. In addition, withdrawals made concurrently with purchases of
additional shares are inadvisable because of the sales charges applicable to
(i) the purchase of Class A shares and (ii) the withdrawal of Class B and
Class C shares. Each shareholder should consult his or her own tax adviser
with regard to the tax consequences of the systematic withdrawal plan,
particularly if used in connection with a retirement plan.
B-21
<PAGE>
TAX-DEFERRED RETIREMENT PLANS
Various tax-deferred retirement plans, including a 401(k) plan, self-
directed individual retirement accounts and "tax-deferred accounts" under
Section 403(b)(7) of the Internal Revenue Code are available through the
Distributor. These plans are for use by both self-employed individuals and
corporate employers. These plans permit either self-direction of accounts by
participants, or a pooled account arrangement. Information regarding the
establishment of these plans, the administration, custodial fees and other
details are available from Prudential Securities or the Transfer Agent.
Investors who are considering the adoption of such a plan should consult
with their own legal counsel or tax adviser with respect to the establishment
and maintenance of any such plan.
TAX-DEFERRED RETIREMENT ACCOUNTS
INDIVIDUAL RETIREMENT ACCOUNTS. An individual retirement account (IRA)
permits the deferral of federal income tax on income earned in the account
until the earnings are withdrawn. The following chart represents a comparison
of the earnings in a personal savings account with those in an IRA, assuming a
$2,000 annual contribution, an 8% rate of return and a 39.6% federal income
tax bracket and shows how much more retirement income can accumulate within an
IRA as opposed to a taxable individual savings account.
TAX-DEFERRED COMPOUNDING/1/
<TABLE>
<CAPTION>
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
------------- -------- --------
<S> <C> <C>
10 years $ 27,198 $ 31,291
15 years 47,363 58,649
20 years 73,743 98,846
25 years 108,254 157,909
30 years 153,401 244,692
</TABLE>
- ---------
/1/The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated. Earnings
in the IRA account will be subject to tax when withdrawn from the account.
NET ASSET VALUE
The net asset value per share is the net worth of the Fund (assets,
including securities at value, minus liabilities) divided by the number of
shares outstanding. Net asset value is calculated separately for each class.
Under the Investment Company Act, the Trustees are responsible for determining
in good faith the fair value of securities of the Fund. The Trustees have
fixed the specific time of day for the computation of the Fund's net asset
value to be as of 4:15 P.M., New York time.
In accordance with procedures adopted by the Trustees, the value of the
Fund's portfolio will be determined as follows:
Securities for which the primary market is on an exchange or NASDAQ National
Market Securities, other than options on stocks and stock indices, are valued
at the last sale price on such exchange on the day of valuation or, if there
was no sale on such day, at the average of readily available closing bid and
asked prices on such exchange. Corporate obligations (other than convertible
debt securities) and U.S. Government securities that are actively traded in
the over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, are valued at a price provided by
an independent pricing agent using matrix pricing; the independent pricing
agent will use information with respect to transactions in bonds, quotations
from bond dealers, agency ratings, market transactions in comparable
securities and various relationships between securities in determining value.
Convertible debt securities that are actively traded in the over-the-counter
market, including listed securities for which the primary market is believed
to be over-the-counter, are valued at the average of the most recently quoted
bid and asked prices provided by principal market makers. Other securities are
valued at the mean between the most recently quoted bid and asked prices.
Options on stocks and stock indices traded on a national securities exchange
are valued at the last sale price at the close of options trading on such
exchange or, if there was no sale on the applicable options exchange on such
day, at the average of quoted bid and asked prices as of the close of such
exchange. Stock index futures and options thereon traded on a commodities
exchange or board of
B-22
<PAGE>
trade are valued at the last sale price at the close of trading on such
exchange or board of trade or, if there was no sale on the applicable
commodities exchange or board of trade on such day, at the average of quoted
bid and asked prices as of the close of such exchange or board of trade. Money
market instruments having a maturity of one year or less are valued at
amortized cost; the amortized cost method involves valuing a security at cost
and amortizing any discount or premium over the period until maturity; a
dollar-weighted average portfolio maturity of 120 days or less must be
maintained with respect to money market instruments; and securities or other
assets for which reliable market quotations are not readily available are
valued by the Fund's manager in good faith at fair value in accordance with
procedures adopted by the Fund's Trustees.
Because the New York State Exchange or the national securities exchanges on
which stock options are traded have adopted different trading hours on either
a permanent or temporary basis, the Trustees of the Fund may reconsider the
time at which net asset value is computed. In addition, the Fund may compute
its net asset value as of any time permitted pursuant to any exemption, order
or statement of the SEC or its staff.
The net asset value of Class B and Class C shares will generally be lower
than the net asset value of Class A shares as a result of the larger
distribution-related fee to which Class B and Class C shares are subject. It
is expected, however, that the net asset value per share of each class will
tend to converge immediately after the recording of dividends which will
differ by approximately the amount of the distribution-related expense accrual
differential among the classes.
TAXES
The Fund has elected to qualify and intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code.
This relieves the Fund (but not its shareholders) from paying federal tax on
income which is distributed to shareholders, provided that it distributes at
least 90% of its net investment income and short-term capital gains, and
permits net long-term capital gains of the Fund (i.e., the excess of net long-
term capital gains over net short-term capital losses) to be treated as long-
term capital gains of the shareholders, regardless of how long shares in the
Fund are held.
Qualification as a regulated investment company requires, among other
things, that (a) the Fund derive at least 90% of its annual gross income
(without reduction for losses from the sale or other disposition of securities
or foreign currencies) from dividends, interest, proceeds from loans of
securities and gains from the sale or other disposition of securities or
options thereon or foreign currencies, or other income (including but not
limited to, gains from options, futures or forward contracts) derived with
respect to its business of investing in such securities or currencies; (b) the
Fund derive less than 30% of its gross income from gains (without reduction
for losses) from the sale or other disposition of securities, options thereon,
futures contracts and options thereon, forward contracts and foreign
currencies held for less than three months (except for foreign currencies
directly related to the Fund's business of investing in foreign securities);
and (c) the Fund diversify its holdings so that, at the end of each quarter of
the taxable year, (i) at least 50% of the market value of the Fund's assets is
represented by cash, U.S. Government securities and other securities limited
in respect of any one issuer to an amount not greater than 5% of the market
value of the Fund's assets and 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of its assets is invested
in the securities of any one issuer (other than U.S. Government securities).
Gains or losses on sales of securities by the Fund will be treated as long-
term capital gains or losses if the securities have been held by it for more
than one year, except in certain cases where the Fund acquires a put or writes
a call thereon or otherwise holds an offering position with respect to the
securities. Other gains or losses on the sale of securities will be short-term
capital gains or losses. Gains and losses on the sale, lapse or other
termination of options on securities will generally be treated as gains and
losses from the sale of securities (assuming they do not qualify as "Section
1256 contracts"). If an option written by the Fund on securities lapses or is
terminated through a closing transaction, such as a repurchase by the Fund of
the option from its holder, the Fund will generally realize capital gain or
loss. If securities are sold by the Fund pursuant to the exercise of a call
option written by it, the Fund will include the premium received in the sale
proceeds of the securities delivered in determining the amount of gain or loss
on the sale. Certain of the Fund's transactions may be subject to wash sale,
short sale, straddle and anti-conversion provisions of the Internal Revenue
Code. In addition, debt securities acquired by the Fund may be subject to
original issue discount and market discount rules.
"Regulated futures contracts" and certain listed options which are not
"equity options" constitute "Section 1256 contracts" and will be required to
be "marked to market" for federal income tax purposes at the end of the Fund's
taxable year; that is, treated as having been sold at market value. Sixty
percent of any gain or loss recognized on such "deemed sales" and on actual
dispositions will be treated as long-term capital gain or loss, and the
remainder will be treated as short-term capital gain or loss. Gain or loss on
the sale, lapse or other termination of options on narrowly-based stock
indices will be capital gain or loss and will be long-term or short-term
depending on the holding period of the option. In addition, positions which
are part of a "straddle" are to be subject to
B-23
<PAGE>
rules which apply certain wash sale and short sale provisions of the Internal
Revenue Code. The Fund may be required to defer the recognition of losses on
positions it holds to the extent of any unrecognized gain on offsetting
positions held by the Fund. The Fund's ability to enter into forward foreign
currency exchange contracts, stock index futures contracts, options thereon
and options on stocks and stock indices may be affected by the 30% limitation
on gains derived from securities held less than three months, discussed above.
The Fund's ability to hold foreign currencies or engage in hedging activities
may be limited by the 30%-of-income qualification test discussed above.
Gains or losses attributable to fluctuations in exchange rates which occur
between the time the Fund accrues interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time
the Fund actually collects such receivables or pays such liabilities are
treated as ordinary income or ordinary loss. Similarly, gains or losses on
forward foreign currency exchange contracts or dispositions of debt securities
denominated in a foreign currency attributable to fluctuations in the value of
the foreign currency between the date of acquisition of the security and the
date of disposition also are treated as ordinary gain or loss. These gains,
referred to under the Internal Revenue Code as "Section 988" gains or losses,
increase or decrease the amount of the Fund's investment company taxable
income available to be distributed to its shareholders as ordinary income,
rather than increasing or decreasing the amount of the Fund's net capital
gain. If Section 988 losses exceed other investment company taxable income
during a taxable year, the Fund would not be able to make any ordinary
dividend distributions, or distributions made before the losses were realized
would be recharacterized as a return of capital to shareholders, rather than
as an ordinary dividend, reducing each shareholder's basis in his or her Fund
shares.
Shareholders electing to receive dividends and distributions in the form of
additional shares will have a cost basis for federal income tax purposes in
each share so received equal to the net asset value of a share of the Fund on
the reinvestment date.
Any dividends or distributions paid shortly after a purchase by an investor
may have the effect of reducing the per share net asset value of the
investor's shares by the per share amount of the dividends or distributions.
Furthermore, such dividends or distributions, although in effect a return of
capital, are subject to federal income taxes. Therefore, prior to purchasing
shares of the Fund, the investor should carefully consider the impact of
dividends or capital gains distributions which are expected to be or have been
announced.
Dividends and distributions may also be subject to state and local taxes.
Any loss realized on a sale, redemption or exchange of shares of the Fund by
a shareholder will be disallowed to the extent the shares are replaced within
a 61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes
of calculating gain or loss realized upon a sale or exchange of shares of the
Fund.
The per share dividends on Class B and Class C shares will be lower than the
per share dividends on Class A shares as a result of the higher distribution-
related fee applicable to the Class B and Class C shares. The per share
distributions of net capital gains, if any, will be paid in the same amount
for Class A, Class B and Class C shares. See "Net Asset Value."
The Fund is required under the Internal Revenue Code to distribute 98% of
its ordinary income in the same calendar year in which it is earned. The Fund
is also required to distribute during the calendar year 98% of the capital
gain net income it earned during the twelve months ending on October 31 of
such calendar year. In addition, the Fund must distribute during the calendar
year any undistributed ordinary income and undistributed capital gain net
income from the prior year or the twelve-month period ending on October 31 of
such prior calendar year, respectively. To the extent it does not meet these
distribution requirements, the Fund will be subject to a non-deductible 4%
excise tax on the undistributed amount. For purposes of this excise tax,
income on which the Fund pays income tax is treated as distributed.
The Fund may, from time to time, invest in Passive Foreign Investment
Companies (PFICs). PFICs are foreign corporations which derive a majority of
their income from passive sources. For tax purposes, the Fund's investments in
PFICs may subject the Fund to federal income taxes on certain income and gains
realized by the Fund. Under proposed Treasury regulations, the Fund would be
able to avoid such taxes and interest by electing to "mark-to-market" its
investments in PFICs (i.e., treat them as sold for fair market value at the
end of the year).
Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Income tax
treaties between certain countries and the United States may reduce or
eliminate such taxes. It is impossible to determine in advance the effective
rate of foreign tax to which the Fund will be subject, since the amount of the
Fund's assets to be invested in various countries is not known.
B-24
<PAGE>
PERFORMANCE INFORMATION
AVERAGE ANNUAL TOTAL RETURN. The Fund may from time to time advertise its
average annual total return. Average annual total return is determined
separately for Class A, Class B and Class C shares. See "How the Fund
Calculates Performance" in the Prospectus.
Average annual total return is computed according to the following formula:
P(1 + T) to the power of n = ERV
<TABLE>
<S> <C> <C> <C>
Where: P = hypothetical initial payment of $1000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value at the end of the 1, 5 or 10 year periods (or fractional portion thereof) of
a hypothetical
$1000 payment made at the beginning of the 1, 5 or 10 year periods.
</TABLE>
Average annual total return takes into account any applicable initial or
contingent deferred sales charges but does not take into account any federal
or state income taxes that may be payable upon redemption.
The average annual total return for Class A shares for the one year and
since inception (January 22, 1990) periods ended October 31, 1994 was -1.69%
and 11.11%, respectively. The average annual total return for Class B shares
for the one and five year and since inception (January 22, 1987) periods ended
October 31, 1994 was -2.27%, 10.29% and 9.74%, respectively. The average
annual total return for Class C shares for the period since inception (August
1, 1994) through October 31, 1994 was -0.55%.
AGGREGATE TOTAL RETURN. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B
and Class C shares. See "How the Fund Calculates Performance" in the
Prospectus.
Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed according to the following formula:
ERV-P
-----
P
<TABLE>
<S> <C> <C> <C>
Where: P = a hypothetical initial payment of $1000.
ERV = ending redeemable value at the end of the 1, 5 or 10 year periods (or fractional portion thereof) of
a hypothetical
$1000 payment made at the beginning of the 1, 5 or 10 year periods.
</TABLE>
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.
The aggregate total return for Class A shares for the one and since
inception periods ended on October 31, 1994 was 3.48% and 74.03%,
respectively. The aggregate total return for Class B shares for the one and
five year and since inception periods ended on October 31, 1994 was 2.73%,
64.17% and 106.01%, respectively. The aggregate total return for Class C
shares for the period since inception (August 1, 1994) through October 31,
1994 was 0.45%.
YIELD. The Fund may from time to time advertise its yield as calculated over
a 30-day period. Yield is calculated separately for Class A, Class B and Class
C shares. The yield will be computed by dividing the Fund's net investment
income per share earned during this 30-day period by the maximum offering
price per share on the last day of this period. Yield is calculated according
to the following formula:
a - b
YIELD = 2[ ( ( ----- +1 )to the power of 6) -1]
cd
<TABLE>
<S> <C> <C> <C>
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
the average daily number of shares outstanding during the period that were entitled to receive
c = dividends.
d = the maximum offering price per share on the last day of the period.
</TABLE>
Yield fluctuates and an annualized yield quotation is not a representation
by the Fund as to what an investment in the Fund will actually yield for any
given period.
B-25
<PAGE>
The Fund's 30-day yields for the 30 days ended October 31, 1994 were 2.49%,
1.89% and 1.91% for the Class A, Class B and Class C shares, respectively.
From time to time, the performance of the Fund may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long-term and the rate of
inflation./1/
[ART]
/1/ Source: Ibbotson Associates, "Stocks, Bonds, Bills and Inflation--1993
Yearbook" (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). Common stock returns are based on the Standard & Poor's 500
Stock Index, a market-weighted, unmanaged index of 500 common stocks in a
variety of industry sectors. It is a commonly used indicator of broad stock
price movements. This chart is for illustrative purposes only, and is not
intended to represent the performance of any particular investment or fund.
ORGANIZATION AND CAPITALIZATION
The Declaration of Trust and the By-Laws of the Fund are designed to make
the Fund similar in certain respects to a Massachusetts business corporation.
The principal distinction between a Massachusetts business trust and a
Massachusetts business corporation relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, in certain
circumstances, be held personally liable as partners for the obligations of
the Fund, which is not the case with a corporation. The Fund believes that
this risk is not material. The Declaration of Trust of the Fund provides that
shareholders shall not be subject to any personal liability for the acts or
obligations of the Fund and that every written obligation, contract,
instrument or undertaking made by the Fund shall contain a provision to the
effect that the shareholders are not individually bound thereunder.
Massachusetts counsel for the Fund have advised the Fund that no personal
liability with respect to contract obligations will attach to the shareholders
under any undertaking containing such provisions when adequate notice of such
provision is given, except possibly in a few jurisdictions. With respect to
all types of claims in the latter jurisdictions and with respect to tort
claims, contract claims when the provision referred to is omitted from the
undertaking, claims for taxes and certain statutory liabilities, a shareholder
may be held personally liable to the extent that claims are not satisfied by
the Fund. However, upon payment of any such liability, the shareholder will be
entitled to reimbursement from the general assets of the Fund. The Trustees
intend to conduct the operations of the Fund in such a way as to avoid, to the
extent possible, ultimate liability of the shareholders for liabilities of the
Fund.
The Declaration of Trust further provides that no Trustee, officer, employee
or agent of the Fund is liable to the Fund or to a shareholder, nor is any
Trustee, officer, employee or agent liable to any third persons in connection
with the affairs of the Fund, except as such liability may arise from his or
her own bad faith, willful misfeasance, gross negligence or reckless disregard
of his or her duties. It also provides that all third parties shall look
solely to the Fund property for satisfaction of claims arising in connection
with the affairs of the Fund. With the exceptions stated, the Declaration of
Trust permits the Trustees to provide for the indemnification of Trustees,
officers, employees or agents of the Fund against all liability in connection
with the affairs of the Fund.
The Fund does not intend to hold annual meetings of shareholders.
B-26
<PAGE>
The Fund shall continue without limitation of time subject to the provisions
in the Declaration of Trust concerning termination by action of the
shareholders or by the Trustees by written notice to the shareholders.
The authorized capital of the Fund consists of an unlimited number of shares
of beneficial interest, $.01 par value, initially all of one series. All
shares of the Fund issued and outstanding are fully paid and non-assessable by
the Fund. Each share of the Fund represents an equal proportionate interest
with each other share of the Fund. Shares of the Fund entitle their holders to
one vote per share.
Pursuant to the Declaration of Trust, the Trustees may authorize the
creation of additional series of shares (the proceeds of which would be
invested in separate, independently managed portfolios with distinct
investment objectives and policies and share purchase, redemption and net
asset value procedures) with such preferences, privileges, limitations and
voting and dividend rights as the Trustees may determine. All consideration
received by the Fund for shares of any additional series, and all assets in
which such consideration is invested, would belong to that series (subject
only to the rights of creditors of that series) and would be subject to the
liabilities related thereto. Pursuant to the Investment Company Act,
shareholders of any additional series of shares would normally have to approve
the adoption of any advisory contract relating to such series and of any
changes in the investment policies related thereto. The Trustees have no
intention of authorizing additional series at the present time.
The Trustees have the power to alter the number and the terms of office of
the Trustees and they may at any time lengthen their own terms or make their
terms of unlimited duration and appoint their own successors, provided that
always at least a majority of the Trustees have been elected by the
shareholders of the Fund. The voting rights of shareholders are not
cumulative, so that holders of more than 50 percent of the shares voting can,
if they choose, elect all Trustees being selected, while the holders of the
remaining shares would be unable to elect any Trustees.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT AND INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities
and cash and, in that capacity, maintains certain financial and accounting
books and records pursuant to an agreement with the Fund. Subcustodians
provide custodial services for the Fund's foreign assets held outside the
United States. See "How the Fund is Managed--Custodian and Transfer and
Dividend Disbursing Agent" in the Prospectus.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as the transfer and dividend disbursing agent of the
Fund. PMFS is a wholly-owned subsidiary of PMF. PMFS provides customary
transfer agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, the payment of dividends and distributions and
related functions. For these services, PMFS receives an annual fee per
shareholder account, a new account set-up fee for each manually established
account and a monthly inactive zero balance account fee per shareholder
account. PMFS is also reimbursed for its out-of-pocket expenses, including but
not limited to postage, stationery, printing, allocable communication expenses
and other costs. For the fiscal year ended October 31, 1994, the Fund incurred
fees of approximately $1,198,800 for the services of PMFS.
Deloitte & Touche LLP, Two World Financial Center, New York, New York 10281,
serves as the Fund's independent accountants and in that capacity audits the
Fund's annual financial statements.
B-27
<PAGE>
PRUDENTIAL EQUITY INCOME FUND Portfolio of Investments
October 31, 1994
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
LONG-TERM INVESTMENTS--93.6%
Common Stocks--68.9%
Aerospace/Defense--5.9%
91,800 Alliant Techsystems,
Inc.*..................... $ 3,155,625
159,500 E-Systems, Inc.............. 6,619,250
35,500 Moog, Inc.*................. 297,313
583,600 Northrop Grumman Corp....... 25,605,450
134,400 Rockwell International
Corp...................... 4,687,200
1,006,400 Thiokol Corp................ 24,782,600
------------
65,147,438
------------
Automobiles & Trucks--0.5%
150,000 General Motors Corp......... 5,925,000
------------
Banking--0.1%
15,100 First Fidelity Bancorp...... 679,500
------------
Chemicals--0.6%
180,100 Potash Corp. Saskatchewan,
Inc....................... 6,371,037
------------
Computer Hardware--2.9%
93,900 Digital Equipment Corp.*.... 2,875,688
390,900 International Business
Machines Corp............. 29,122,050
------------
31,997,738
------------
Computer Software & Services--0.7%
831,100 Intergraph Corp.*........... 7,168,238
25,200 Shared Medical Systems
Corp...................... 743,400
------------
7,911,638
------------
Conglomerate--0.7%
88,300 ITT Corp.................... 7,792,475
------------
Drugs & Medical Supplies--0.9%
400,000 Baxter International,
Inc....................... 10,400,000
------------
Electrical Equipment--1.6%
1,220,100 Westinghouse Electric
Corp...................... 17,233,913
------------
Electric Utilities--3.1%
81,000 Central & South West
Corp...................... 1,822,500
26,200 Central Hudson Gas &
Electric Co............... 641,900
47,000 Central Louisiana Electric
Co........................ 1,016,375
227,311 CINergy Corp................ 5,256,558
457,800 Entergy Corp................ $ 10,701,075
116,900 NIPSCO Industries, Inc...... 3,258,587
170,700 Pinnacle West Capital
Corp...................... 3,179,288
100,000 Public Service Enterprise,
Inc....................... 2,625,000
280,600 SCE Corp.................... 3,893,325
75,000 Texas Utilities Co.......... 2,446,875
------------
34,841,483
------------
Electronics--1.5%
348,900 Esterline Technologies
Corp.*.................... 4,317,638
462,800 IMO Industries, Inc.*....... 4,396,600
5,400 Kollmorgen Corp............. 35,100
379,400 Newport Corp................ 2,892,925
114,100 Pacific Scientific Co....... 5,419,750
------------
17,062,013
------------
Energy Equipment & Services--2.0%
101,000 Smith International,
Inc.*..................... 1,691,750
375,400 Sonat Offshore Drilling,
Inc....................... 7,461,075
218,300 USX Corp.................... 8,186,250
740,300 Varco International, Inc.... 5,182,100
------------
22,521,175
------------
Energy Systems--8.4%
773,700 Baker Hughes, Inc........... 15,860,850
683,100 Dresser Industries, Inc..... 14,430,488
595,000 Halliburton Co.............. 22,015,000
954,500 McDermott International,
Inc....................... 24,459,063
1,025,000 Morrison Knudsen Corp....... 16,015,624
------------
92,781,025
------------
Financial Services--5.9%
147,900 Alex Brown, Inc............. 4,085,738
800,000 Bear Stearns Cos., Inc...... 13,000,000
330,900 Edwards (A.G.), Inc......... 6,121,650
111,600 Legg Mason, Inc............. 2,343,600
1,169,600 Lehman Brothers Holdings,
Inc....................... 18,128,800
300,000 Merrill Lynch & Co., Inc.... 11,812,500
150,000 Morgan Stanley Group,
Inc....................... 9,806,250
------------
65,298,538
------------
</TABLE>
See Notes to Financial Statements.
B-28
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
Gas Distribution--2.0%
259,800 British Gas plc., ADS
(United Kindom)........... $ 12,308,025
76,400 Equitable Resources, Inc.... 2,330,200
237,450 KN Energy, Inc.............. 5,847,206
58,450 Yankee Energy System,
Inc....................... 1,307,819
------------
21,793,250
------------
Gas Pipelines--2.4%
462,000 Panhandle Eastern Corp...... 10,857,000
208,300 Sonat, Inc.................. 6,769,750
410,000 TransCanada Pipelines,
Ltd....................... 5,330,000
228,900 Transco Energy Co........... 3,290,438
------------
26,247,188
------------
Insurance--5.1%
175,400 Aetna Life & Casualty Co.... 8,090,325
981,100 Alexander & Alexander
Services, Inc............. 19,867,275
138,700 Allstate Corp............... 3,346,138
548,200 Continental Corp............ 8,291,525
113,400 Jefferson-Pilot Corp........ 6,151,950
49,000 Lincoln National Corp....... 1,776,250
85,400 Ohio Casualty Corp.......... 2,497,950
56,300 SAFECO Corp................. 2,822,037
140,100 Selective Insurance Group,
Inc....................... 3,537,525
------------
56,380,975
------------
Integrated Producers--5.5%
19,000 Kerr-McGee Corp............. 933,375
33,300 Mobil Corp.................. 2,863,800
544,300 Occidental Petroleum
Corp...................... 11,906,562
49,800 Petroleum Heat & Power,
Inc....................... 460,650
382,800 Quaker State Corp........... 5,215,650
469,170 Societe Nationale ELF
Aquitaine, ADR
(France).................. 17,183,351
158,700 Sun Co., Inc................ 5,098,238
39,400 Texaco, Inc................. 2,575,775
762,000 USX Marathon Group.......... 14,287,500
------------
60,524,901
------------
Machinery--0.2%
277,300 Terex Corp.*................ $ 2,149,075
------------
Media--0.4%
132,700 Pulitzer Publishing Co...... 4,744,025
------------
Miscellaneous Industrial--1.9%
60,000 Hanson plc., ADR (United
Kingdom).................. 1,117,500
452,000 Tenneco, Inc................ 20,001,000
------------
21,118,500
------------
Realty Investment Trust--10.5%
271,000 AMLI Residential Property
Trust..................... 5,149,000
315,000 Avalon Properties, Inc...... 6,142,500
231,200 Beacon Properties........... 4,363,900
24,600 Carr Reality Corp........... 479,700
68,100 Charles E. Smith Residential
Realty, Inc............... 1,685,474
611,000 Crescent Real Estate
Equities.................. 16,497,000
776,900 Equity Residential Property
Trust..................... 23,209,887
161,900 First Union Real Estate
Equity & Mortgage
Investments............... 1,254,725
457,700 Gables Residential Trust.... 9,840,550
300,000 Glimcher Reality Trust...... 5,812,500
400,000 Irvine Apartment
Communities, Inc.......... 7,100,000
96,000 JP Reality, Inc............. 1,884,000
41,700 Kimco Reality Corp.......... 1,527,262
230,000 Malan Reality
Investors, Inc............ 3,450,000
300,000 Manufactured Home
Communities, Inc.......... 5,587,500
386,742 Property Trust of America... 6,236,215
285,700 Simon Property Group,
Inc....................... 6,821,087
196,200 Vornado Reality Trust....... 6,180,300
69,600 Weingarten Realty Investors,
Inc....................... 2,383,800
------------
115,605,400
------------
Retail
13,100 Bradlees, Inc............... 201,413
------------
Steel
59,600 Tubos De Acero De Mexico,
S.A., ADR*(Mexico)........ 312,900
------------
</TABLE>
See Notes to Financial Statements.
B-29
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
Telecommunication Services--6.1%
13,600 Ameritech Corp.............. $ 549,100
100,000 BellSouth Corp.............. 5,325,000
165,900 GTE Corp.................... 5,101,425
196,700 NYNEX Corp.................. 7,720,475
885,800 Telefonos de Mexico, S.A.,
ADR
(Mexico).................. 48,829,725
11,600 U.S. West, Inc.............. 436,450
------------
67,962,175
------------
Total common stocks
(cost $733,942,598)......... 763,002,775
------------
Preferred Stocks--14.8%
Aluminum--1.3%
422,500 Kaiser Aluminum Corp.,
Conv. $8.25............... 4,753,125
193,500 Reynolds Metals Co., Conv.
$3.31..................... 10,158,750
------------
14,911,875
------------
Automobiles & Trucks--2.7%
118,000 Chrysler Corp., Conv.
$4.63..................... 16,077,500
143,000 Ford Motor Co., Conv.
$4.20..................... 13,835,250
------------
29,912,750
------------
Electrical Equipment--2.3%
1,743,000 Westinghouse Electric Corp.,
Conv. $1.30............... 25,491,375
------------
Electric Utilities--0.1%
2,100 Gulf States Utilities Co.,
$5.08, Class E............ 120,093
11,205 Gulf States Utilities Co.,
$8.08, Class K............ 1,131,705
------------
1,251,798
------------
Energy Systems--0.7%
100,000 McDermott International,
Inc., Conv. $5.75, Ser.
C......................... 4,262,500
149,300 Reading & Bates Corp.,*
Conv. $1.63............... 3,639,187
------------
7,901,687
------------
Insurance--0.5%
102,200 Alexander & Alexander
Services, Inc.,
Conv. $3.63, Ser. A....... $ 4,394,600
12,700 USF & G Corp., Conv. $4.10,
Ser. A.................... 590,550
------------
4,985,150
------------
Integrated Producers--1.0%
110,000 Noble Drilling Corp.,*
Conv. $1.50............... 2,695,000
49,000 Unocal Corp., Conv. $3.50... 2,707,250
118,900 USX Marathon Group, Conv.
6.5%...................... 5,989,587
------------
11,391,837
------------
Mining--0.6%
100,000 Echo Bay Finance Corp.,
Conv. $1.75 Ser. A........ 3,737,500
60,000 Hecla Mining Co.
Conv. 7%, Ser. B.......... 3,015,000
------------
6,752,500
------------
Oil & Gas Exploration & Production--0.4%
85,000 Parker & Parsley Capital,
Conv. 6.25%............... 4,430,625
------------
Paper--1.3%
181,800 Bowater, Inc., Conv. 7%,
Ser. B.................... 4,726,800
451,200 James River Corp., Conv.
$9.00..................... 9,926,400
------------
14,653,200
------------
Realty Investment Trust--0.1%
54,600 Property Trust of America,
Conv. $1.75, Ser. A....... 1,180,725
------------
Steel--1.1%
228,000 Bethleham Steel Corp.,
Conv. $3.50............... 12,255,000
------------
Tobacco--2.7%
4,400,000 RJR Nabisco Holdings, Inc.,
Conv. $0.60, PERCS........ 30,250,000
------------
Total preferred stocks
(cost $162,231,512)....... 165,368,522
------------
</TABLE>
See Notes to Financial Statements.
B-30
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (Note 1)
<C> <C> <S> <C>
Convertible Bonds--4.7%
Computer Hardware--1.8%
B2 $ 2,300 Conner Peripherals, Inc.,
Sub. Deb.,
6.75%, 3/1/01... $ 1,799,750
B2 5,250 Quantum Corp.,
Deb.,
6.375%, 4/1/02.... 5,197,500
Seagate
Technology,
B1 3,407 Deb.,
6.75%, 5/1/12... 2,912,985
B1 9,000 Sub. Deb.,
5.00%,
11/1/03......... 9,767,610
--------------
19,677,845
--------------
Fertilizer--0.4%
Caa 4,500 IMC Fertilizer
Group, Deb.,
6.25%, 12/1/01.... 4,117,500
--------------
Integrated Oil--0.4%
Aa3 339 Amoco Canada
Petroleum Co.,
Sub. Exch. Deb.,
7.375%,
9/1/13.......... 419,513
B2 2,583 Cross Timbers Oil
Co., Deb.,
5.25%, 11/1/03.... 2,208,465
B1 2,121 Oryx Energy Co.,
Sub. Deb.,
7.50%, 5/15/14.... 1,619,914
--------------
4,247,892
--------------
Integrated Producers--1.3%
Baa3 14,299 Noble Affiliates,
Inc.,
Sub. Notes,
4.25%,
11/1/03......... 13,870,030
--------------
Mining--0.4%
CCC+** 3,000 Coeur D'Alene
Mines
Corp., Sub.
Deb.,
7.00%,
11/30/02........ 3,810,000
Ba3 1,000 Freeport McMoran,
Inc.,
Deb.,
6.55%,
1/15/01......... 903,130
--------------
4,713,130
--------------
Real Estate--0.3%
NR $ 3,800 Malan Reality
Investors,
Inc., Sub. Deb.,
9.50%,
7/15/04......... $ 3,458,000
--------------
Steel--0.1%
BB-** 710 USX Corp., Sub
Deb.,
7.00%, 6/15/17.... 628,350
--------------
Total convertible
bonds
(cost
$55,293,712).... 50,712,747
--------------
U. S. Government
Securities--5.2%
71,500 United States
Treasury Bonds,
6.25%, 8/15/23
(cost
$60,751,449).... 57,222,185
--------------
Total long-term
investments
(cost
$1,012,219,269).. 1,036,306,229
--------------
SHORT-TERM INVESTMENTS--4.3%
48,057 Joint Repurchase Agreement
Account, 4.77%, 11/1/94
(cost $48,057,000;
Note 5)......... 48,057,000
--------------
Total Investments--98.0%
(cost
$1,060,276,269;
Note 4)......... 1,084,363,229
Other assets in
excess of
liabilities--2.0%... 22,615,858
--------------
Net Assets--100%.. $1,106,979,087
--------------
--------------
</TABLE>
- ---------------
* Non-income producing security.
** Standard & Poor's rating.
ADR--American Depository Receipt.
ADS--American Depository Shares.
PERCS--Preferred Equity Redemption Cumulative Stock.
The Fund's current Statement of Additional Information contains a description of
Moody's ratings.
NR--Not rated by Moody's or Standard & Poor's.
See Notes to Financial Statements.
B-31
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets October 31, 1994
----------------
<S> <C>
Investments, at value (cost $1,060,276,269).................................................. $1,084,363,229
Cash......................................................................................... 232,809
Receivable for investments sold.............................................................. 33,723,970
Dividends and interest receivable............................................................ 4,896,197
Receivable for Fund shares sold.............................................................. 3,213,254
Deferred expenses and other assets........................................................... 10,495
----------------
Total assets............................................................................... 1,126,439,954
----------------
Liabilities
Payable for investments purchased............................................................ 15,333,395
Payable for Fund shares reacquired........................................................... 2,255,287
Distribution fee payable..................................................................... 828,063
Management fee payable....................................................................... 503,562
Accrued expenses............................................................................. 483,880
Foreign withholding tax payable.............................................................. 56,680
----------------
Total liabilities.......................................................................... 19,460,867
----------------
Net Assets................................................................................... $1,106,979,087
----------------
----------------
Net assets were comprised of:
Shares of beneficial interest, at par...................................................... $ 790,642
Paid-in capital in excess of par........................................................... 1,027,127,251
----------------
1,027,917,893
Undistributed net investment income........................................................ 13,861,666
Accumulated net realized gain on investments............................................... 41,112,568
Net unrealized appreciation of investments................................................. 24,086,960
----------------
Net assets, October 31, 1994................................................................. $1,106,979,087
----------------
----------------
Class A:
Net asset value and redemption price per share
($150,501,747 / 10,729,928 shares of beneficial interest issued and outstanding)......... $14.03
Maximum sales charge (5.00% of offering price)............................................. .74
----------------
Maximum offering price to public........................................................... $14.77
-------
-------
Class B:
Net asset value, offering price and redemption price per share
($954,950,559 / 68,225,183 shares of beneficial interest issued and outstanding)......... $14.00
-------
-------
Class C:
Net asset value, offering price and redemption price per share
($1,526,781 / 109,077 shares of beneficial interest issued and outstanding).............. $14.00
-------
-------
</TABLE>
See Notes to Financial Statements.
B-32
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
Net Investment Income October 31, 1994
----------------
<S> <C>
Income
Dividends (net of foreign
withholding
taxes of $356,524).............. $ 30,417,969
Interest.......................... 6,772,275
----------------
Total income.................... 37,190,244
----------------
Expenses
Distribution fee--Class A......... 319,509
Distribution fee--Class B......... 7,840,632
Distribution fee--Class C......... 1,880
Management fee.................... 5,078,246
Transfer agent's fees and
expenses.......................... 1,448,000
Reports to shareholders........... 500,000
Registration fees................. 330,000
Custodian's fees and expenses..... 296,000
Legal fees........................ 56,000
Trustees' fees.................... 37,500
Audit fee......................... 36,000
Insurance expense................. 15,000
Miscellaneous..................... 14,965
----------------
Total expenses.................. 15,973,732
----------------
Net investment income............... 21,216,512
----------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain on
investment transactions........... 42,485,087
Net change in unrealized
appreciation/depreciation
of investments.................... (35,543,092)
----------------
Net gain on investment
transactions...................... 6,941,995
----------------
Net Increase in Net Assets
Resulting from Operations........... $ 28,158,507
----------------
----------------
</TABLE>
PRUDENTIAL EQUITY INCOME FUND
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended October 31,
Increase (Decrease) --------------------------------
in Net Assets 1994 1993
----------------- ------------
<S> <C> <C>
Operations
Net investment income.... $ 21,216,512 $ 10,304,124
Net realized gain on
investment
transactions........... 42,485,087 25,234,290
Net change in unrealized
appreciation/depreciation
of investments......... (35,543,092) 45,035,883
----------------- ------------
Net increase in net
assets resulting from
operations............. 28,158,507 80,574,297
----------------- ------------
Net equalization credits... 3,591,448 1,785,921
----------------- ------------
Dividends and distributions
(Note 1)
Dividends from net
investment income
Class A................ (2,741,569) (2,383,733)
Class B................ (10,744,017) (8,100,377)
Class C................ (3,204) --
----------------- ------------
(13,488,790) (10,484,110)
----------------- ------------
Distributions from net
realized gains
Class A................ (4,073,407) (1,901,042)
Class B................ (22,284,545) (7,217,743)
----------------- ------------
(26,357,952) (9,118,785)
----------------- ------------
Fund share transactions
(Note 6)
Proceeds from shares
subscribed............. 668,069,397 398,239,834
Net asset value of shares
issued in reinvestment
of dividends and
distributions.......... 36,142,786 17,714,556
Cost of shares
reacquired............... (221,021,185) (88,837,779)
----------------- ------------
Net increase in net
assets from Fund share
transactions........... 483,190,998 327,116,611
----------------- ------------
Total increase............. 475,094,211 389,873,934
Net Assets
Beginning of year.......... 631,884,876 242,010,942
----------------- ------------
End of year................ $ 1,106,979,087 $631,884,876
----------------- ------------
----------------- ------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-33
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
Notes to Financial Statements
Prudential Equity Income Fund (the ``Fund'') is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. The investment objective of the Fund is both current income and capital
appreciation. It seeks to achieve this objective by investing primarily in
common stocks and convertible securities that provide investment income returns
above those of the Standard & Poor's 500 Stock Index or the NYSE Composite
Index. The ability of the issuers of the debt securities held by the Fund to
meet their obligations may be affected by economic developments in a specific
industry or country.
Note 1. Accounting The following is a summary
Policies of significant accounting poli-
cies followed by the Fund in the preparation of
its financial statements.
Securities Valuation: Investments in securities traded on a national securities
exchange (or reported on the NASDAQ national market) are valued at the last sale
price on such exchange on the day of valuation or, if there was no sale on such
day, the mean between the last bid and asked prices quoted on such day.
Convertible debt securities that are actively traded in the over-the-counter
market, including listed securities for which the primary market is believed to
be over-the-counter, are valued at the mean between the most recently quoted bid
and asked prices provided by principal market makers. Other securities are
valued at the mean between the most recently quoted bid and asked prices.
Securities which are otherwise not readily marketable or securities for which
market quotations are not readily available are valued in good faith at fair
value in accordance with procedures adopted by the Fund's Board of Trustees.
Short-term securities which mature in more than 60 days are valued based upon
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, it is the Fund'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. 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.
Securities Transactions and 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; interest income is recorded on the accrual basis.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares of the Fund
based upon the relative proportion of net assets of each class at the beginning
of the day.
Equalization: The Fund follows the accounting practice known as equalization by
which a portion of the proceeds from sales and costs of reacquisitions of Fund
shares, equivalent on a per share basis to the amount of distributable net
investment income on the date of the transaction, is credited or charged to
undistributed net investment income. As a result, undistributed net investment
income per share is unaffected by sales or reacquisitions of the Fund's shares.
Federal Income Taxes: It is the Fund's policy to continue to meet the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable net income to its shareholders.
Therefore, no federal income tax provision is required.
Withholding taxes on foreign dividends have been provided for in accordance
with the Fund's understanding of the applicable country's tax rates.
Dividends and Distributions: The Fund expects to pay dividends out of net
investment income quarterly and make distributions at least annually of any net
capital gains. 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.
Note 2. Agreements The Fund has a management
agreement with Prudential Mutual Fund Management,
Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PMF has entered into a subadvisory agreement with The Prudential
Investment Corporation (``PIC''); PIC furnishes investment advisory services in
connection with the management of the Fund. PMF pays for the cost of the
subadviser's services, the compensation of officers of the Fund, occupancy and
certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
B-34
<PAGE>
The management fee paid PMF is computed daily and payable monthly at an
annual rate of .60 of 1% of the average daily net assets of the Fund up to $500
million and .50 of 1% of the average daily net assets in excess of $500 million.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as the distributor of the Class A
shares of the Fund, and with Prudential Securities Incorporated (``PSI''), which
acts as distributor of the Class B and Class C shares of the Fund (collectively,
the ``Distributors''). The Fund compensates the Distributors 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.
On July 19, 1994, shareholders of the Fund approved amendments to the Class A
and Class B distribution plans under which the distribution plans became
compensation plans, effective August 1, 1994. Prior thereto, the distribution
plans were reimbursement plans, under which PMFD and PSI were reimbursed for
expenses actually incurred by them up to the amount permitted under the Class A
and Class B Plans, respectively. The Fund is not obligated to pay any prior or
future excess distribution costs (costs incurred by the Distributors in excess
of distribution fees paid by the Fund or contingent deferred sales charges
received by the Distributors). The rate of the distribution fees charged to
Class A and Class B shares of the Fund did not change under the amended plans of
distribution. The Fund began offering Class C shares on August 1, 1994.
Pursuant to the Class A, B and C Plans, the Fund compensates the Distributors
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 Class A Plan were charged at an effective
rate of .24 of 1% of the average daily net assets of the Class A shares for the
fiscal year ended October 31, 1994 and are currently charged at a rate of .25 of
1% of the average daily net assets of the Class A shares. Such expenses under
the Class B and C Plans were both 1% of the average daily net assets of the
Class B and C shares for the fiscal year ended October 31, 1994.
PMFD has advised the Fund that it has received approximately $1,542,700 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended October 31, 1994. From these fees, PMFD paid such sales charges to
dealers which in turn paid commissions to salespersons.
PSI has advised the Fund that for the fiscal year ended October 31, 1994, it
received approximately $1,587,700 in contingent deferred sales charges imposed
upon certain redemptions by Class B shareholders.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund Ser-
Transactions vices, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent and
during the fiscal year ended October 31, 1994, the Fund incurred fees of
approximately $1,198,800 for the services of PMFS. As of October 31, 1994,
approximately $116,000 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 non-affiliates.
For the fiscal year ended October 31, 1994, PSI earned approximately $177,100
in brokerage commissions from portfolio transactions executed on behalf of the
Fund.
Note 4. Portfolio Purchases and sales of invest-
Securities ment securities, other than
short-term investments, for the fiscal year ended
October 31, 1994 were $1,101,036,972 and $594,117,341, respectively.
The federal income tax basis of the Fund's investments at October 31, 1994
was $1,060,713,598 and, accordingly, net unrealized appreciation for federal
income tax purposes was $23,649,631 (gross unrealized appreciation--$63,938,373;
gross unrealized depreciation--$40,288,742).
Note 5. Joint The Fund, along with other
Repurchase affiliated registered invest-
Agreement ment companies, transfers
Account 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. At October 31, 1994, the Fund
had a 5.34% undivided interest in the repurchase agreements in the joint
account. The undivided interest for the Fund represented $48,057,000 in
principal amount. As of such date, each repurchase agreement in the joint
account and the value of the collateral therefor was as follows:
Smith Barney, Inc., 4.80%, in the principal amount of $260,000,000,
repurchase price $260,034,667, due 11/1/94. The value of the collateral
including accrued interest is $265,200,122.
Nomura Securities International, Inc., 4.77%, in the principal amount of
$100,000,000, repurchase price $100,013,250, due 11/1/94. The value of the
collateral including accrued interest is $102,000,391.
B-35
<PAGE>
Goldman, Sachs & Co., 4.75%, in the principal amount of $275,000,000,
repurchase price $275,036,285, due 11/1/94. The value of the collateral
including accrued interest is $280,500,611.
CS First Boston Corp., 4.75%, in the principal amount of $265,000,000,
repurchase price $265,034,965, due 11/1/94. The value of the collateral
including accrued interest is $271,053,272.
Note 6. Capital The Fund currently offers
Class A, Class B and Class C shares. Class A
shares are sold with a front-end sales charge of up to 5.00%. Class B shares are
sold with a contingent deferred sales charge which declines from 5% to zero
depending on the period of time the shares are held. Class C shares are sold
with a contingent deferred sales charge of 1% during the first year. Class B
shares will automatically convert to Class A shares on a quarterly basis
approximately seven years after purchase commencing in or about February 1995.
The Fund has authorized an unlimited number of shares of beneficial interest
at $.01 par value divided into three classes, designated Class A, Class B and
Class C.
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------ ----------- ------------
<S> <C> <C>
Year ended October 31, 1994:
Shares sold................... 6,678,218 $ 92,227,070
Shares issued in reinvestment
of
dividends and
distributions............... 461,830 6,268,096
Shares reacquired............. (3,645,394) (50,335,973)
----------- ------------
Net increase in shares
outstanding................. 3,494,654 $ 48,159,193
----------- ------------
----------- ------------
Year ended October 31, 1993:
Shares sold................... 3,950,176 $ 53,801,595
Shares issued in reinvestment
of
dividends and
distributions............... 308,487 3,893,566
Shares reacquired............. (1,232,317) (16,658,314)
----------- ------------
Net increase in shares
outstanding................. 3,026,346 $ 41,036,847
----------- ------------
----------- ------------
<CAPTION>
Class B Shares Amount
- ------------------------------ ----------- ------------
<S> <C> <C>
Year ended October 31, 1994:
Shares sold................... 41,661,976 $574,309,044
Shares issued in reinvestment
of
dividends and
distributions............... 2,213,613 29,871,685
Shares reacquired............. (12,436,151) (170,671,244)
----------- ------------
Net increase in shares
outstanding................. 31,439,438 $433,509,485
----------- ------------
----------- ------------
Year ended October 31, 1993:
Shares sold................... 25,419,549 $344,438,239
Shares issued in reinvestment
of
dividends and
distributions............... 1,098,086 13,820,990
Shares reacquired............. (5,453,744) (72,179,465)
----------- ------------
Net increase in shares
outstanding................. 21,063,891 $286,079,764
----------- ------------
----------- ------------
<CAPTION>
Class C
- ------------------------------
<S> <C> <C>
August 1, 1994* through
October 31, 1994:
Shares sold................... 109,870 $ 1,533,283
Shares issued in reinvestment
of dividends................ 215 3,005
Shares reacquired............. (1,008) (13,968)
----------- ------------
Net increase in shares
outstanding................. 109,077 $ 1,522,320
----------- ------------
----------- ------------
- ---------------
* Commencement of offering of Class C shares.
</TABLE>
Note 7. Dividends On December 7, 1994, the
and Distributions Board of Trustees of the Fund
declared the following dividends and distributions
per share, payable on December 19, 1994 to shareholders of record on December
13, 1994:
<TABLE>
<CAPTION>
Class A Class B and C
------- -------------
<S> <C> <C>
Ordinary Income....................... $ 0.200 $ 0.175
Short-Term Capital Gains.............. $ 0.130 $ 0.130
Long-Term Capital Gains............... $ 0.395 $ 0.395
</TABLE>
B-36
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
Financial Highlights
<TABLE>
<CAPTION>
Class A Class B Class C
------------------------------------------------- ---------------------------------------------------- ------------
January 22, August 1,
1990(D) 1994(D)(D)
Year Ended October 31, through Year Ended October 31, through
-------------------------------------- October 31, ---------------------------------------------------- October 31,
1994 1993 1992 1991 1990 1994 1993 1992 1991 1990 1994
-------- -------- ------- ------ -------- -------- -------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE
OPERATING
PERFORMANCE:
Net asset
value,
beginning
of
period... $ 14.38 $ 12.16 $ 12.04 $ 9.53 $10.59 $ 14.35 $ 12.14 $ 12.03 $ 9.53 $ 10.89 $ 13.99
-------- -------- ------- ------ -------- -------- -------- -------- -------- -------- -----------
Income
from
investment
operations
Net
investment
income... .41 .47 .47 .38 .25 .31 .37 .37 .30 .28 .08
Net
realized
and
unrealized
gain
(loss)
on
investment
trans-
actions... .06 2.65 .60 2.50 (1.01) .06 2.64 .59 2.49 (1.32) (.02)
-------- -------- ------- ------ -------- -------- -------- -------- -------- -------- -----------
Total
from
investment
operations. .47 3.12 1.07 2.88 (.76) .37 3.01 .96 2.79 (1.04) .06
-------- -------- ------- ------ -------- -------- -------- -------- -------- -------- -----------
Less
distributions
Dividends
from
net
investment
income... (.29) (.46) (.47) (.37) (.30) (.19) (.36) (.37) (.29) (.32) (.05)
Distributions
from net
realized
gains... (.53) (.44) (.48) -- -- (.53) (.44) (.48) -- -- --
-------- -------- ------- ------ -------- -------- -------- -------- -------- -------- -----------
Total
distri-
butions (.82) (.90) (.95) (.37) (.30) (.72) (.80) (.85) (.29) (.32) (.05)
-------- -------- ------- ------ -------- -------- -------- -------- -------- -------- -----------
Net asset
value,
end of
period... $ 14.03 $ 14.38 $ 12.16 $12.04 $ 9.53 $ 14.00 $ 14.35 $ 12.14 $ 12.03 $ 9.53 $ 14.00
-------- -------- ------- ------ -------- -------- -------- -------- -------- -------- -----------
-------- -------- ------- ------ -------- -------- -------- -------- -------- -------- -----------
TOTAL
RETURN#:... 3.48% 26.93% 9.50% 30.62% (7.36)% 2.73% 25.93% 8.55% 29.58% (9.77)% 0.45%
RATIOS/SUPPLEMENTAL
DATA:
Net
assets,
end of
period
(000)... $150,502 $104,017 $51,165 $4,013 $1,098 $954,951 $527,868 $190,846 $151,538 $120,032 $ 1,527
Average
net
assets
(000)... $131,398 $ 70,895 $21,931 $2,084 $ 752 $784,063 $304,898 $169,524 $136,602 $142,179 $ 762
Ratios to average
net assets:##
Expenses,
including
distribution
fees... 1.09% 1.07% 1.22% 1.37% 1.59%* 1.85% 1.87% 2.02% 2.17% 2.22% 2.05%*
Expenses,
excluding
distribution
fees... .85% .87% 1.02% 1.17% 1.39%* .85% .87% 1.02% 1.17% 1.22% 1.05%*
Net
investment
income... 2.97% 3.44% 3.22% 3.43% 3.12%* 2.21% 2.58% 3.05% 2.67% 2.70% 2.42%*
Portfolio
turnover... 70% 57% 43% 64% 58% 70% 57% 43% 64% 58% 70%
</TABLE>
- ---------------
* Annualized.
(D) Commencement of offering of Class A shares.
(D)(D) Commencement of offering of Class C shares.
# Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
## Because of the event referred to in (D)(D) and the timing of such, the ratios
for the Class C shares are not necessarily comparable to that of Class A or B
shares and are not necessarily indicative of future ratios.
See Notes to Financial Statements.
B-37
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
Prudential Equity Income Fund
We have audited the accompanying statement of assets and liabilities of
Prudential Equity Income Fund, including the portfolio of investments, as of
October 31, 1994, the related statements of operations for the year then ended
and of changes in net assets for each of the two years in the period then ended,
and the financial highlights for each of the five years in the period then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
October 31, 1994 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Equity
Income Fund as of October 31, 1994, the results of its operations, the changes
in its net assets and its financial highlights for the respective stated periods
in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
New York, New York
December 7, 1994
B-38
<PAGE>
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE
BOND RATINGS
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than Aaa because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment some time in the
future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa to B. The modifier 1 indicates that the company ranks
in the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
SHORT-TERM DEBT RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year.
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obliqations.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations.
STANDARD & POOR'S RATINGS GROUP
DEBT RATINGS
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
A-1
<PAGE>
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB, B, CCC AND CC: Debt rated BB, B, CCC and CC is regarded, on balance, as
having predominantly speculative characteristics with respect to capacity to
pay interest and repay principal. BB indicates the least degree of speculation
and CC the highest degree of speculation. While such debt will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
COMMERCIAL PAPER RATINGS
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-1: The A-1 designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with the designation A-2 is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
DUFF & PHELPS CREDIT RATING CO.
LONG-TERM DEBT AND PREFERRED STOCK RATINGS
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA: High credit quality. Protection factors are strong. Risk is modest but
may vary sightly from time to time because of economic conditions.
A: Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.
BBB: Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.
BB: Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B: Below investment grade and possessing risk that obligations will not be
met when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
Duff & Phelps refines each generic rating classification from AA through B
with a "+" or a "-".
CCC: Well below investment grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
SHORT-TERM DEBT RATINGS
DUFF 1 +: Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free U.S. Treasury short-
term obligations.
DUFF 1: Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk factors
are minor.
DUFF 1-: High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
DUFF 2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
A-2
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS:
(1) Financial statements included in the Prospectus constituting Part A
of this Registration Statement:
Financial Highlights.
(2) Financial statements included in the Statement of Additional
Information constituting Part B of this Registration Statement:
Independent Auditors' Report.
Portfolio of Investments at October 31, 1994.
Statement of Assets and Liabilities at October 31, 1994.
Statement of Operations for the Year Ended October 31, 1994.
Statement of Changes in Net Assets for the Years Ended October 31,
1994 and October 31, 1993.
Notes to Financial Statements.
Financial Highlights.
(B) EXHIBITS:
1.(a) Amended and Restated Declaration of Trust.*
(b) Amended and Restated Certificate of Designation.*
2. By-laws. Incorporated by reference to Exhibit 2(b) to the
Registration Statement on Form N-1A filed via EDGAR on May 6, 1994
(File No. 33-9269).
4.(a) Specimen receipt for shares of beneficial interest, $.01 par
value, of Class A shares. Incorporated by reference to Exhibit 4(a)
to Post-Effective Amendment No. 7 to the Registration Statement on
Form N-1A filed on February 28, 1991 (File No. 33-9269).
(b) Specimen receipt for shares of beneficial interest, $.01 par
value, of Class B shares. Incorporated by reference to Exhibit 4(b)
to Post-Effective Amendment No. 7 to the Registration Statement on
Form N-1A filed on February 28, 1991 (File No. 33-9269).
(c) Instruments Defining Rights of Shareholders. Incorporated by
reference to Exhibit 4(c) to Post-Effective Amendment No. 10 to the
Registration Statement on Form N-1A filed via EDGAR on December 30,
1993 (File No. 33-9269).
5.(a) Management Agreement between the Registrant and Prudential Mutual
Fund Management, Inc. Incorporated by reference to Exhibit 5(a) to
Post-Effective Amendment No. 5 to the Registration Statement on Form
N-1A filed on December 28, 1989 (File No. 33-9269).
(b) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation. Incorporated by
reference to Exhibit 5(b) to Post-Effective Amendment No. 5 to the
Registration Statement on Form N-1A filed on December 28, 1989 (File
No. 33-9269).
C-1
<PAGE>
6.
(a) Distribution Agreement for Class A shares.*
(b) Distribution Agreement for Class B shares.*
(c) Distribution Agreement for Class C shares.*
8.Custodian Contract between the Registrant and State Street Bank and
Trust Company. Incorporated by reference to Exhibit 8 to Pre-
Effective Amendment No. 2 to the Registration Statement on Form N-1A
filed on January 16, 1987 (File No. 33-9269).
9.Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc. Incorporated by reference to
Exhibit 9(a) to Post-Effective Amendment No. 2 to the Registration
Statement on Form N-1A filed on December 31, 1987 (File No. 33-9269).
10.Opinion of Counsel. Incorporated by reference to Exhibit 10 to Pre-
Effective Amendment No. 2 to the Registration Statement on Form N-1A
filed on January 16, 1987 (File No. 33-9269).
11.Consent of Independent Accountants.*
13.Purchase Agreement. Incorporated by reference to Exhibit 13 to Pre-
Effective Amendment No. 2 to the Registration Statement on Form N-1A
filed on January 16, 1987 (File No. 33-9269).
15.
(a) Distribution and Service Plan for Class A shares.*
(b) Distribution and Service Plan for Class B shares.*
(c) Distribution and Service Plan for Class C shares.*
16.(a) Schedule of Computation of Performance Quotations for Class B
Shares. Incorporated by reference to Exhibit 16 to Post-Effective
Amendment No. 6 to the Registration Statement on Form N-1A filed on
January 19, 1990 (File No. 33-9269).
(b) Schedule of Computation of Performance Quotations for Class A
Shares. Incorporated by reference to Exhibit 16(b) to Post-Effective
Amendment No. 8 to the Registration Statement on Form N-1A filed on
December 30, 1991 (File No. 33-9269).
27.Financial Data Schedule.*
Other Exhibits
Copies of Powers of Attorney for:
Edward D. Beach**,
Donald D. Lennox**,
Douglas H. McCorkindale**,
Lawrence C. McQuade**,
Thomas T. Mooney**,
Louis A. Weil, III**.
- ---------
*Filed herewith.
**Incorporated by reference to Post-Effective Amendment No.7 to the
Registration Statement on Form N-1A filed on February 28, 1991 (File No.
33-9269).
C-2
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of December 2, 1994 there were 24,741, 102,819 and 296 record holders of
Class A, Class B and Class C shares of beneficial interest, $.01 par value per
share, of the Registrant.
ITEM 27. INDEMNIFICATION.
As permitted by Sections 17(h) and (i) of the Investment Company Act of 1940
(the "1940 Act") and pursuant to Article V, Sections 5.2 and 5.3 of the
Declaration of Trust (Exhibit 1(a) to the Registration Statement) and to
Article X of the Fund's By-Laws (Exhibit 2 to the Registration Statement),
officers, Trustees, employees and agents of the Registrant will not be liable
to the Registrant, any shareholder, officer, Trustee, employee, agent or other
person for any action or failure to act, except for bad faith, willful
misfeasance, gross negligence or reckless disregard of duties, and those
individuals may be indemnified against liabilities in connection with the
Registrant, subject to the same exceptions. As permitted by Section 17(i) of
the 1940 Act, pursuant to Section 10 of the Distribution Agreements (Exhibit
6(a), (b) and (c) to the Registration Statement), each Distributor of the
Registrant may be indemnified against liabilities which it may incur, except
liabilities arising from bad faith, gross negligence, willful misfeasance or
reckless disregard of duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 ("Securities Act") may be permitted to Trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the 1940 Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a Trustee,
officer, or controlling person of the Registrant in connection with the
successful defense of any action, suit or proceeding) is asserted against the
Registrant by such Trustee, officer or controlling person in connection with
the shares being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the 1940 Act and will be governed
by the final adjudication of such issue.
The Registrant maintains an insurance policy insuring its officers and
Trustees against liabilities, and certain costs of defending claims against
such officers and Trustees, to the extent such officers and Trustees are not
found to have committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of
indemnification payments to officers and Trustees under certain circumstances.
Section 9 of the Management Agreement (Exhibit 5(a) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit 5(b) to the
Registration Statement) limit the liability of Prudential Mutual Fund
Management, Inc. (PMF) and The Prudential Investment Corporation (PIC),
respectively, to liabilities arising from willful misfeasance, bad faith or
gross negligence in the performance of their respective duties or from
reckless disregard by them of their respective obligations and duties under
the agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and each Distribution Agreement in a manner
consistent with Release No. 11330 of the Securities and Exchange Commission
under the 1940 Act so long as the interpretation of Section 17(h) and 17(i) of
such Act remain in effect and are consistently applied.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) Prudential Mutual Fund Management, Inc.
See "How the Fund is Managed--Manager" in the Prospectus constituting Part A
of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
The business and other connections of the officers of PMF are listed in
Schedules A and D of Form ADV of PMF as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference
(File No. 801-31104, filed on March 30, 1994).
C-3
<PAGE>
The business and other connections of PMF's directors and principal executive
officers are set forth below. Except as otherwise indicated, the address of
each person is One Seaport Plaza, New York, NY 10292.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PMF PRINCIPAL OCCUPATIONS
- ---------------- ----------------- ---------------------
<S> <C> <C>
Brendan D. Executive Vice Executive Vice President, PMF; Senior Vice President,
Boyle President and Prudential Securities Incorporated (Prudential
Director of Securities)
Marketing
John D. Director Senior Vice President, The Prudential Insurance
Brookmeyer, Company of America (Prudential)
Jr.
Two Gate-
way Center
Newark, NJ
07102
Susan C. Senior Vice Senior Vice President, PMF; Senior Vice President,
Cote President Prudential Securities
Stephen P. Senior Vice Senior Vice President, PMF; Senior Vice President,
Fisher President Prudential Securities
Frank W. Executive Vice Executive Vice President, General Counsel and
Giordano President, General Secretary, PMF; Senior Vice President, Prudential
Counsel and Securities
Secretary
Robert F. Executive Vice Executive Vice President, Chief Financial and
Gunia President, Chief Administrative Officer, Treasurer and Director, PMF;
Financial and Senior Vice President, Prudential Securities
Administrative
Officer, Treasurer
and Director
Eugene B. Director Senior Vice President, Prudential; President, Director
Heimberg and Chief Investment Officer, PIC
Prudential
Plaza
Newark, NJ
07102
Lawrence C. Vice Chairman Vice Chairman, PMF
McQuade
Leland B. Director Executive Vice President and Director, Prudential
Paton Securities; Director, Prudential Securities Group,
Inc. (PSG)
Richard A. President, Chief President, Chief Executive Officer and Director, PMF;
Redeker Executive Officer Executive Vice President, Director and Member of the
and Director Operating Committee, Prudential Securities; Director,
PSG; Vice President, PIC
S. Jane Senior Vice Senior Vice President, Senior Counsel and Assistant
Rose President, Senior Secretary, PMF; Senior Vice President and Senior
Counsel and Counsel, Prudential Securities
Assistant Secretary
Donald G. Director Senior Vice President, Prudential; Director, PSG
Southwell
213 Wash-
ington
Street
Newark, NJ
07102
</TABLE>
(b) The Prudential Investment Corporation (PIC)
See "How the Fund is Managed--Manager" in the Prospectus constituting Part A
of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
C-4
<PAGE>
The business and other connections of PIC's directors and executive officers
are as set forth below. Except as otherwise indicated, the address of each
person is Prudential Plaza, Newark, NJ 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
---------------- ----------------- ---------------------
<C> <S> <C>
Martin A. Berkowitz Senior Vice Senior Vice President and Chief Financial and
President and Chief Compliance Officer, PIC; Vice President, Prudential
Financial and
Compliance Officer
William M. Bethke Senior Vice President Senior Vice President, Prudential; Senior Vice President, PIC
Two Gateway Center
Newark, NJ 07102
John D. Brookmeyer, Jr. Senior Vice President Senior Vice President, Prudential; Senior Vice
Two Gateway Center President, PIC
Newark, NJ 07102
Theresa A. Hamacher Vice President Second Vice President, Prudential; Vice President PIC
Eugene B. Heimberg President, Director and President, Director and Chief Investment Officer, PIC;
Chief Investment Senior Vice President, Prudential
Officer
Garnett L. Keith, Jr. Director Vice Chairman and Director, Prudential; Director, PIC
William P. Link Senior Vice President Executive Vice President, Prudential; Senior Vice
Four Gateway Center President, PIC
Newark, NJ 07102
James W. Stevens Executive Vice Executive Vice President, Prudential; Executive Vice
Four Gateway Center President President, PIC Director, PSG
Newark, NJ 07102
Robert C. Winters Director Chairman of the Board and Chief Executive Officer,
Prudential; Director, PIC; Chairman of the Board and
Director, PSG
Claude J. Zinngrabe, Jr. Executive Vice Vice President, Prudential; Executive Vice President,
President PIC
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a)(i) Prudential Securities Incorporated
Prudential Securities is distributor for Prudential Government Securities
Trust (Intermediate Term Series) and The Target Portfolio Trust, for Class B
shares of Global Utility Fund, Inc., Nicholas-Applegate Fund, Inc. (Nicholas-
Applegate Growth Equity Fund), and Prudential Adjustable Rate Securities Fund,
Inc., and for Class B and C shares of The BlackRock Government Income Trust,
Prudential Allocation Fund, Prudential California Municipal Fund (California
Income Series and California Series), Prudential Equity Fund, Inc., Prudential
Equity Income Fund, Prudential Europe Growth Fund, Inc., Prudential Global
Fund, Inc., Prudential Global Genesis Fund, Inc., Prudential Global Natural
Resources Fund, Inc., Prudential GNMA Fund, Inc., Prudential Government Income
Fund, Inc., Prudential Growth Opportunity Fund, Inc., Prudential High Yield
Fund, Inc., Prudential IncomeVertible (R) Fund, Inc., Prudential Intermediate
Global Income Fund, Inc., Prudential Multi-Sector Fund, Inc., Prudential
Municipal Bond Fund, Prudential Municipal Series Fund (except Connecticut
Money Market Series, Massachusetts Money Market Series, New York Money Market
Series and New Jersey Money Market Series), Prudential National Municipals
Fund, Inc., Prudential Pacific Growth Fund, Inc., Prudential Short-Term Global
Income Fund, Inc., Prudential Strategist Fund, Inc., Prudential Structured
Maturity Fund, Inc., Prudential U.S. Government Fund and Prudential Utility
Fund, Inc. Prudential Securities is also a depositor for the following unit
investment trusts:
Corporate Investment Trust Fund
Prudential Equity Trust Shares
National Equity Trust
Prudential Unit Trusts
Government Securities Equity Trust
National Municipal Trust
C-5
<PAGE>
(ii) Prudential Mutual Fund Distributors, Inc.
Prudential Mutual Fund Distributors, Inc. is distributor for Command
Government Fund, Command Money Fund, Command Tax-Free Fund, Prudential
California Municipal Fund (California Money Market Series), Prudential
Government Securities Trust (Money Market Series and U.S. Treasury Money
Market Series), Prudential Institutional Liquidity Portfolio, Inc.,
Prudential-Bache MoneyMart Assets Inc. (d/b/a Prudential MoneyMart Assets),
Prudential Municipal Series Fund (Connecticut Money Market Series,
Massachusetts Money Market Series, New York Money Market Series and New Jersey
Money Market Series), Prudential-Bache Special Money Market Fund, Inc. (d/b/a
Prudential Special Money Market Fund), Prudential-Bache Tax-Free Money Fund,
Inc. (d/b/a Prudential Tax-Free Money Fund), and for Class A shares of The
BlackRock Government Income Trust, Global Utility Fund, Inc., Nicholas-
Applegate Fund, Inc. (Nicholas-Applegate Growth Equity Fund), Prudential
Adjustable Rate Securities Fund, Inc., Prudential Allocation Fund, Prudential
California Municipal Fund (California Income Series and California Series),
Prudential Equity Fund, Inc., Prudential Equity Income Fund, Prudential Europe
Growth Fund, Inc., Prudential Global Fund, Inc., Prudential Global Genesis
Fund, Inc., Prudential Global Natural Resources Fund, Inc., Prudential GNMA
Fund, Inc., Prudential Government Income Fund, Inc., Prudential Growth
Opportunity Fund, Inc., Prudential High Yield Fund, Inc., Prudential
IncomeVertible(R) Fund, Inc., Prudential Intermediate Global Income Fund,
Inc., Prudential Multi-Sector Fund, Inc., Prudential Municipal Bond Fund,
Prudential Municipal Series Fund (except Connecticut Money Market Series,
Massachusetts Money Market Series, New York Money Market Series and New Jersey
Money Market Series), Prudential National Municipals Fund, Inc., Prudential
Pacific Growth Fund, Inc., Prudential Short-Term Global Income Fund, Inc.,
Prudential Strategist Fund, Inc., Prudential Structured Maturity Fund, Inc.,
Prudential U.S. Government Fund and Prudential Utility Fund, Inc.
(b)(i) Information concerning the directors and officers of Prudential
Securities Incorporated is set forth below.
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(1) UNDERWRITER REGISTRANT
- ------- ------------- -------------
<S> <C> <C>
Alan D. Hogan........... Executive Vice President, Chief None
Administrative Officer and
Director
George A. Murray........ Executive Vice President and Director None
John P. Murray.......... Executive Vice President and Director of None
Risk Management
Leland B. Paton......... Executive Vice President and None
Director
Vincent T. Pica, II..... Director, Member of Operating Committee None
and Executive Vice President
Richard A. Redeker...... Director Trustee
Hardwick Simmons........ Chief Executive Officer, President None
and Director
Lee B. Spencer, Jr. .... General Counsel, Executive Vice President and Director None
</TABLE>
C-6
<PAGE>
(ii) Information concerning the officers and directors of Prudential Mutual
Fund Distributors, Inc. is set forth below.
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(1) UNDERWRITER REGISTRANT
- ------- ------------- --------------
<S> <C> <C>
Joanne Accurso-Soto..... Vice President None
Dennis Annarumma........ Vice President, Assistant Treasurer None
and Assistant Comptroller
Phyllis J. Berman....... Vice President None
Stephen P. Fisher....... Vice President None
Frank W. Giordano....... Executive Vice President, General Counsel, Secretary and Director None
Robert F. Gunia......... Executive Vice President, Treasurer, Comptroller and Director Vice President
Andrew J. Varley........ Vice President None
Anita L. Whelan......... Vice President and Assistant Secretary None
</TABLE>
- ---------
(/1/)The address of each person named is One Seaport Plaza, New York 10292
unless otherwise indicated.
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder are maintained at the offices
of State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171; The Prudential Investment Corporation, Prudential Plaza,
751 Broad Street, Newark, New Jersey 07102; the Registrant, One Seaport Plaza,
New York, New York 10292; and Prudential Mutual Fund Services, Inc., Raritan
Plaza One, Edison, New Jersey 08837. Documents required by Rules 31a-1(b)(5),
(6), (7), (9), (10) and (11) and 31a-1(f) will be kept at Two Gateway Center,
Newark, New Jersey 07102, documents required by Rules 31a-1(b)(4) and (11) and
31a-1(d) at One Seaport Plaza and the remaining accounts, books and other
documents required by such other pertinent provisions of Section 31(a) and the
Rules promulgated thereunder will be kept by State Street Bank and Trust
Company and Prudential Mutual Fund Services, Inc.
ITEM 31. MANAGEMENT SERVICES
Other than as set forth under the captions "How the Fund is Managed--
Manager" and "How the Fund is Managed--Distributor" in the Prospectus and the
captions "Manager" and "Distributor" in the Statement of Additional
Information, constituting Parts A and B, respectively, of this Registration
Statement, Registrant is not a party to any management-related service
contract.
ITEM 32. UNDERTAKINGS
The Registrant hereby undertakes to furnish each person to whom a Prospectus
is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of
1933 and has duly caused this Post-Effective Amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, and State of New York, on the 21st day of
December, 1994.
PRUDENTIAL EQUITY INCOME FUND
/s/ Lawrence C. McQuade
---------------------------------
(LAWRENCE C. MCQUADE, PRESIDENT)
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Susan C. Cote Treasurer and Principal Financial December 21, 1994
- --------------------------------- and Accounting Officer
SUSAN C. COTE
/s/ Edward D. Beach Trustee December 21, 1994
- ---------------------------------
EDWARD D. BEACH
/s/ Donald D. Lennox Trustee December 21, 1994
- ---------------------------------
DONALD D. LENNOX
/s/ Douglas H. McCorkindale Trustee December 21, 1994
- ---------------------------------
DOUGLAS H. MCCORKINDALE
/s/ Lawrence C. McQuade President and Trustee December 21, 1994
- ---------------------------------
LAWRENCE C. MCQUADE
/s/ Thomas T. Mooney Trustee December 21, 1994
- ---------------------------------
THOMAS T. MOONEY
/s/ Richard A. Redeker Trustee December 21, 1994
- ---------------------------------
RICHARD A. REDEKER
/s/ Louis A. Weil, III Trustee December 21, 1994
- ---------------------------------
LOUIS A. WEIL, III
</TABLE>
C-8
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION PAGE NUMBER
-------------- ----------- -----------
<C> <S> <C>
1(a) Amended and Restated Declaration of Trust.*
1(b) Amended and Restated Certificate of Designation.*
2 By-laws. Incorporated by reference to Exhibit --
2(b) to the Registration Statement on Form N-1A
filed via EDGAR on May 6, 1994 (File No. 33-
9269).
4(a) Specimen receipt for shares of beneficial --
interest, $.01 par value, of Class A shares.
Incorporated by reference to Exhibit 4(a) to
Post-Effective Amendment No. 7 to the
Registration Statement on Form N-1A filed on
February 28, 1991 (File No. 33-9269).
4(b) Specimen receipt for shares of beneficial --
interest, $.01 par value, of Class B shares.
Incorporated by reference to Exhibit 4(b) to
Post-Effective Amendment No. 7 to the
Registration Statement on Form N-1A filed on
February 28, 1991 (File No. 33-9269).
4(c) Instruments Defining Rights of Shareholders. --
Incorporated by reference to Exhibit 4(c) to
Post-Effective Amendment No. 10 to the
Registration Statement on Form N-1A filed via
EDGAR on December 30, 1993 (File No. 33-9269).
5(a) Management Agreement between the Registrant and --
Prudential Mutual Fund Management, Inc.
Incorporated by reference to Exhibit 5(a) to
Post-Effective Amendment No. 5 to the
Registration Statement on Form N-1A filed on
December 28, 1989 (File No. 33-9269).
5(b) Subadvisory Agreement between Prudential Mutual --
Fund Management, Inc. and The Prudential
Investment Corporation. Incorporated by reference
to Exhibit 5(b) to Post-Effective Amendment No. 5
to the Registration Statement on Form N-1A filed
on December 28, 1989 (File No. 33-9269).
6(a) Distribution Agreement for Class A shares.*
6(b) Distribution Agreement for Class B shares.*
6(c) Distribution Agreement for Class C shares.*
8 Custodian Contract between the Registrant and --
State Street Bank and Trust Company. Incorporated
by reference to Exhibit 8 to Pre-Effective
Amendment No. 2 to the Registration Statement on
Form N-1A filed on January 16, 1987 (File No. 33-
9269).
9 Transfer Agency and Service Agreement between the --
Registrant and Prudential Mutual Fund Services,
Inc. Incorporated by reference to Exhibit 9(a) to
Post-Effective Amendment No. 2 to the
Registration Statement on Form N-1A filed on
December 31, 1987 (File No. 33-9269).
10 Opinion of Counsel. Incorporated by reference to --
Exhibit 10 to Pre-Effective Amendment No. 2 to
the Registration Statement on Form N-1A filed on
January 16, 1987 (File No. 33-9269).
11 Consent of Independent Accountants.*
13 Purchase Agreement. Incorporated by reference to --
Exhibit 13 to Pre-Effective Amendment No. 2 to
the Registration Statement on Form N-1A filed on
January 16, 1987 (File No. 33-9269).
15(a) Distribution and Service Plan for Class A
shares.*
15(b) Distribution and Service Plan for Class B
shares.*
15(c) Distribution and Service Plan for Class C
shares.*
16(a) Schedule of Computation of Performance Quotations --
for Class B Shares. Incorporated by reference to
Exhibit 16 to Post-Effective Amendment No. 6 to
the Registration Statement on Form N-1A filed on
January 19, 1990 (File No. 33-9269).
16(b) Schedule of Computation of Performance Quotations --
for Class A Shares. Incorporated by reference to
Exhibit 16(b) to Post-Effective Amendment No. 8
to the Registration Statement on Form N-1A filed
on December 30, 1991 (File No. 33-9269).
27 Financial Data Schedule.*
</TABLE>
Other Exhibits
Copies of Powers of Attorney for:
Edward D. Beach**,
Donald D. Lennox**,
Douglas H. McCorkindale**,
Lawrence C. McQuade**,
Thomas T. Mooney**,
Louis A. Weil, III**.
- ---------
*Filed herewith.
**Incorporated by reference to Post-Effective Amendment No.7 to the
Registration Statement on Form N-1A filed on February 28, 1991 (File No.
33-9269).
<PAGE>
EXHIBIT 99.1(a)
AMENDED AND RESTATED
DECLARATION OF TRUST
OF
PRUDENTIAL EQUITY INCOME FUND
Dated August 16, 1994
WHEREAS, Section 9.3 of the Declaration of Trust of Prudential Equity
Income Fund, dated September 18, 1986, as amended to date, provides that the
said Declaration of Trust may be amended for certain purposes by an instrument
in writing signed by a majority of the Trustees, and Section 11.1 thereof
provides that the said Declaration of Trust and all amendments thereto may be
restated as a single instrument if executed by a majority of the Trustees;
NOW, THEREFORE, the said Declaration of Trust, as amended to date, is
hereby restated in its entirety to read as follows:
WITNESSETH
WHEREAS, this Trust has been formed for the investment and reinvestment of
funds contributed thereto; and
WHEREAS, the beneficial interest in the Trust Property is and shall be
divided into transferable shares of beneficial interest;
NOW, THEREFORE, the Trustees hereby declare that they will hold in trust
all money and property contributed to the Trust to manage and dispose of the
same for the beneficial interest issued hereunder and subject to the provisions
hereof, to wit:
ARTICLE I.
NAME AND DEFINITIONS
--------------------
Section 1.1. Name. The name of the trust created hereby is the
----
Prudential Equity Income Fund.
Section 1.2. Definitions. Wherever they are used herein, the following
-----------
terms have the following respective meanings:
(a) "Administrator" means the party, other than the Trust, to the
contract described in Section 4.2 hereof.
(b) "By-Laws" means the By-Laws referred to in Section 3.9 hereof, as
from time to time amended.
<PAGE>
(c) The terms "Commission," "Affiliated Person" and "Interested
Person" have the meanings given them in the 1940 Act, as defined herein,
except as otherwise defined by the Trustees in conjunction with the
establishment of any series of Shares.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Custodian" means any Person other than the Trust who has custody
of any Trust Property as required by (S) 17(f) of the 1940 Act, but does
not include a system for the central handling of securities described in
said (S) 17(f).
(f) "Declaration" means this Declaration of Trust as amended from time
to time. Reference in this Declaration of Trust to "Declaration,"
"hereof," "herein" and "hereunder" shall be deemed to refer to this
Declaration rather than to the article or section in which such words
appear.
(g) "Distributor" means the party, other than the Trust, to the
contract described in Section 4.3 hereof.
(h) "Fundamental Policies" means the investment objective and
investment restrictions set forth in the Prospectus and designated as
fundamental policies therein.
(i) "Investment Adviser" means the party, other than the Trust, to the
contract described in Section 4.1 hereof.
(j) "Majority Shareholder Vote" means the vote of the holders of a
majority of Shares which shall consist of: (i) a majority of Shares
represented in person or by proxy and entitled to vote at a meeting of
Shareholders at which a quorum, as determined in accordance with the By-
Laws, is present; (ii) a majority of Shares issued and outstanding and
entitled to vote when action is taken by written consent of Shareholders;
or (iii) a "majority of the outstanding voting securities," as that phrase
is defined in the 1940 Act, when action is taken by Shareholders with
respect to approval of an investment advisory or management contract or an
underwriting or distribution agreement or continuance thereof.
(k) "1940 Act" means the Investment Company Act of 1940 and the rules
and regulations thereunder, as amended from time to time.
(l) "Person" means and includes individuals, corporations,
partnerships, trusts, associations, joint ventures and other entities,
whether or not legal entities, and governments and agencies and political
subdivisions thereof.
(m) "Prospectus" means the prospectus (including the statement of
additional information to the extent incorporated by reference therein)
constituting part of the Registration Statement of the Trust under the
Securities Act of 1933, as amended, as such
-2-
<PAGE>
prospectus may be amended or supplemented and filed with the Commission
from time to time.
(n) "Shareholder" means a record owner of outstanding Shares.
(o) "Shares" shall mean the equal proportionate transferable units of
interest into which the beneficial interest in any series of the Trust
shall be divided from time to time and includes fractions of Shares as well
as whole Shares. As provided in Article VI hereof, a series of the Trust
may be divided into separate classes of Shares; all references to Shares
shall be deemed to be Shares of any or all series or of a single class of a
series or all classes of a series as the context may require.
(p) "Transfer Agent" means the party, other than the Trust, to the
contract described in Section 4.5 hereof.
(q) "Trust" means the Prudential Equity Income Fund.
(r) "Trust Property" means any and all property, real or personal,
tangible or intangible, which is owned or held by or for the account of the
Trust or the Trustees.
(s) "Trustees" means the person or persons who have signed the
Declaration, so long as he or they shall continue in office in accordance
with the terms hereof, and all other persons who may from time to time be
duly elected, qualified and serving as Trustees in accordance with the
provisions hereof, and reference herein to a Trustee or the Trustees shall
refer to such person or persons in their capacity as trustees hereunder.
ARTICLE II.
TRUSTEES
--------
Section 2.1. Number of Trustees. The number of Trustees shall initially
------------------
be one and thereafter shall be such number as shall be fixed from time to time
by a written instrument signed by a majority of the Trustees; provided, however,
that at all times after the Prospectus of the Trust first becomes effective, the
number of Trustees shall in no event be less than three (3) nor more than
fifteen (15).
Section 2.2. Election and Term. The Trustees shall be elected by a
-----------------
Majority Shareholder Vote at the first meeting of Shareholders following the
public offering of Shares of the Trust. The Trustees shall have the power to
set and alter the terms of office of the Trustees, and they may at any time
lengthen or lessen their own terms or make their terms of unlimited duration,
subject to the resignation and removal provisions of Section 2.3 hereof. Except
in the event of resignation or removals pursuant to Section 2.3 hereof, each
Trustee shall hold office until such time as less than a majority of the
Trustees holding office have been elected by Shareholders. In such event the
Trustees then in office will call a Shareholders' meeting for the
-3-
<PAGE>
election of Trustees. Subject to Section 16(c) of the 1940 Act, no Trustee shall
continue to hold office after the holders of record of not less than two-thirds
of the outstanding Shares of the Trust have declared that such Trustee be
removed from office either by declaration in writing filed with the Custodian or
by votes cast in person or by proxy at a meeting called for the purpose. The
Trustees shall promptly call a meeting of the Shareholders for the purpose of
voting upon the question of removal of any Trustee or Trustees when requested in
writing to do so by the record holders of not less than 10 percent of the
outstanding Shares. Except for the foregoing circumstances, the Trustee shall
continue to hold office and may appoint successor Trustees.
Section 2.3. Resignation and Removal. Any Trustee may resign his trust
-----------------------
(without need for prior or subsequent accounting) by an instrument in writing
signed by him and delivered to the other Trustees and such resignation shall be
effective upon such delivery, or at a later date according to the terms of the
instrument. Any of the Trustees may be removed (provided that the aggregate
number of Trustees after such removal shall not be less than the number required
by Section 2.1 hereof) with cause, by the action of two-thirds of the remaining
Trustees. Upon the resignation or removal of a Trustee, or his otherwise
ceasing to be a Trustee, he shall execute and deliver such documents as the
remaining Trustees shall require for the purpose of conveying to the Trust or
the remaining Trustees any Trust Property or property of any series of the Trust
held in the name of the resigning or removed Trustee. Upon the incapacity or
death of any Trustee, his legal representative shall execute and deliver on his
behalf such documents as the remaining Trustees shall require as provided in the
preceding sentence.
Section 2.4. Vacancies. The term of office of a Trustee shall terminate
---------
and a vacancy shall occur in the event of the death, resignation, removal,
bankruptcy, adjudicated incompetence or other incapacity to perform the duties
of the office of a Trustee. No such vacancy shall operate to annul the
Declaration or to revoke any existing agency created pursuant to the terms of
the Declaration. In the case of an existing vacancy, including a vacancy
existing by reason of an increase in the number of Trustees, subject to the
provisions of Section 16(a) of the 1940 Act, the remaining Trustees or, prior to
the public offering of Shares of the Trust, if only one Trustee shall then
remain in office, the remaining Trustee, shall fill such vacancy by the
appointment of such other person as they or he, in their or his discretion,
shall see fit, made by a written instrument signed by a majority of the
remaining Trustees or by the remaining Trustee, as the case may be. Any such
appointment shall not become effective, however, until the person named in the
written instrument of appointment shall have accepted in writing such
appointment and agreed in writing to be bound by the terms of the Declaration.
An appointment of a Trustee may be made in anticipation of a vacancy to occur at
a later date by reason of retirement, resignation or increase in the number of
Trustees, provided that such appointment shall not become effective prior to
such retirement, resignation or increase in the number of Trustees. Whenever a
vacancy in the number of Trustees shall occur, until such vacancy is filled as
provided in this Section 2.4, the Trustees in office, regardless of their
number, shall have all the powers granted to the Trustees and shall discharge
all the duties imposed upon the Trustees by the Declaration. A written
instrument certifying the existence of such vacancy signed by a majority of the
Trustees shall be conclusive evidence of the existence of such vacancy.
-4-
<PAGE>
Section 2.5. Delegation of Power to Other Trustees. Any Trustee may, by
-------------------------------------
power of attorney, delegate his power for a period not exceeding six (6) months
at any one time to any other Trustee or Trustees; provided that in no case shall
less than two (2) Trustees personally exercise the powers granted to the
Trustees under the Declaration except as herein otherwise expressly provided.
ARTICLE III.
POWERS OF TRUSTEES
------------------
Section 3.1. General. The Trustees shall have exclusive and absolute
-------
control over the property and business of the Trust and of any series of the
Trust to the same extent as if the Trustees were the sole owners of such
property and business in their own right, but with such powers of delegation as
may be permitted by the Declaration. The Trustees shall have power to conduct
the business of the Trust and carry on its operations in any and all of its
branches and maintain offices both within and without The Commonwealth of
Massachusetts, in any and all states of the United States of America, in the
District of Columbia, and in any and all commonwealths, territories,
dependencies, colonies, possessions, agencies or instrumentalities of the United
States of America and of foreign governments, and to do all such other things
and execute all such instruments as they deem necessary, proper or desirable in
order to promote the interests of the Trust although such things are not herein
specifically mentioned. Any determination as to what is in the interests of the
Trust made by the Trustees in good faith shall be conclusive. In construing the
provisions of the Declaration, the presumption shall be in favor of a grant of
power to the Trustees.
The enumeration of any specific power herein shall not be construed as
limiting the aforesaid powers. Such powers of the Trustees may be exercised
without order of or resort to any court.
Section 3.2. Investments. The Trustees shall have the power to:
-----------
(a) conduct, operate and carry on the business of an investment
company;
(b) subscribe for, invest in, reinvest in, purchase or otherwise
acquire, hold, pledge, sell, assign, transfer, exchange, distribute, lend
or otherwise deal in or dispose of negotiable or non-negotiable
instruments, obligations, evidences of indebtedness, certificates of
deposit or indebtedness, commercial paper, repurchase agreements, reverse
repurchase agreements, options, futures and other securities of any kind,
including, without limitation, those issued, guaranteed or sponsored by any
and all Persons including, without limitation, states, territories and
possessions of the United States, the District of Columbia and any of the
political subdivisions, agencies or instrumentalities thereof, and by the
United States Government or its agencies or instrumentalities, or
international instrumentalities, or by any bank or savings institution, or
by any corporation or organization organized under the laws of the United
States or of any state, territory or possession thereof, and of
corporations or organizations organized under
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<PAGE>
foreign laws, or in "when issued" contracts for any such securities, or
retain assets of the Trust or any series thereof in cash and from time to
time change the investments of the assets of the Trust or any series
thereof; and to exercise any and all rights, powers and privileges of
ownership or interest in respect of any and all such investments of every
kind and description, including, without limitation, the right to consent
and otherwise act with respect thereto, with power to designate one or more
persons, firms, associations or corporations to exercise any of said
rights, powers and privileges in respect of any of said instruments; and
the Trustees shall be deemed to have the foregoing powers with respect to
any additional securities in which the Trust or any series of the Trust may
invest should the Fundamental Policies be amended.
The Trustees shall not be limited to investing in obligations maturing before
the possible termination of the Trust, nor shall the Trustees be limited by any
law limiting the investments which may be made by fiduciaries.
Section 3.3. Legal Title. Legal title to all of the Trust Property shall
-----------
be vested in the Trustees as joint tenants except that the Trustees shall have
power to cause legal title to any Trust Property to be held by or in the name of
one or more of the Trustees, or in the name of the Trust or any series of the
Trust, or in the name of any other Person as nominee, on such terms as the
Trustees may determine, provided that the interest of the Trust therein is
appropriately protected. The right, title and interest of the Trustees in the
Trust Property shall vest automatically in each Person who may hereafter become
a Trustee. Upon the resignation, removal or death of a Trustee he shall
automatically cease to have any right, title or interest in any of the Trust
Property, and the right, title and interest of such Trustee in all such property
shall vest automatically in the remaining Trustees. Such vesting and cessation
of title shall be effective without the requirement that conveyancing documents
be executed and delivered.
Section 3.4. Issuance and Repurchase of Securities. The Trustees shall
-------------------------------------
have the power to issue, sell, repurchase, redeem, retire, cancel, acquire,
hold, resell, reissue, dispose of, transfer and otherwise deal in Shares and,
subject to the provisions set forth in Articles VII, VIII and IX and Section 6.9
hereof, to apply to any such repurchase, redemption, retirement, cancellation or
acquisition of Shares any funds or property of the particular series of the
Trust with respect to which such Shares are issued, whether capital or surplus
or otherwise, to the full extent now or hereafter permitted by laws of The
Commonwealth of Massachusetts governing business corporations.
Section 3.5. Borrowing Money; Lending Trust Assets. The Trustees shall
-------------------------------------
have power to borrow money or otherwise obtain credit and to secure the same by
mortgaging, pledging or otherwise subjecting as security the assets of the
Trust, to endorse, guarantee or undertake the performance of any obligation,
contract or engagement of any other Person and to lend Trust assets.
Section 3.6. Delegation; Committees. The Trustees shall have power,
----------------------
consistent with their continuing exclusive authority over the management of the
Trust and the Trust Property, to delegate from time to time to such of their
number or to officers, employees or agents of the
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<PAGE>
Trust the doing of such things and the execution of such instruments either in
the name of the Trust or any series of the Trust or the names of the Trustees or
otherwise as the Trustees may deem expedient.
Section 3.7. Collection and Payment. The Trustees shall have power to
----------------------
collect all property due to the Trust; to pay all claims, including taxes,
against the Trust Property; to prosecute, defend, compromise or abandon any
claims relating to the Trust Property; to foreclose any security interest
securing any obligations, by virtue of which any property is owed to the Trust;
and to enter into releases, agreements and other instruments.
Section 3.8. Expenses. The Trustees shall have the power to incur and pay
--------
any expenses which in the opinion of the Trustees are necessary or incidental to
carry out any of the purposes of the Declaration and to pay reasonable
compensation from the funds of the Trust to themselves as Trustees. The
Trustees shall fix the compensation of all officers, employees and Trustees.
Section 3.9. Manner of Acting; By-Laws. Except as otherwise provided
-------------------------
herein or in the By-Laws or by any provision of law, any action to be taken by
the Trustees may be taken by a majority of the Trustees present at a meeting of
Trustees (a quorum being present), including any meeting held by means of a
conference telephone circuit or similar communications equipment by means of
which all persons participating in the meeting can hear each other, or by
written consent of all the Trustees. The Trustees may adopt By-Laws not
inconsistent with this Declaration to provide for the conduct of the business of
the Trust and may amend or repeal such By-Laws to the extent such power is not
reserved to the Shareholders.
Section 3.10. Miscellaneous Powers. Subject to Section 6.9 hereof, the
--------------------
Trustees shall have the power to: (a) employ or contract with such Persons as
the Trustees may deem desirable for the transaction of the business of the Trust
or any series thereof; (b) enter into joint ventures, partnerships and any other
combinations or associations; (c) remove Trustees or fill vacancies in or add to
their number, elect and remove such officers and appoint and terminate such
agents or employees as they consider appropriate, and appoint from their own
number or otherwise, and terminate, any one or more committees which may
exercise some or all of the power and authority of the Trustees as the Trustees
may determine; (d) purchase, and pay for out of Trust Property or the property
of the appropriate series of the Trust, insurance policies insuring the
Shareholders, Trustees, officers, employees, agents, investment advisers,
distributors, selected dealers or independent contractors of the Trust against
all claims arising by reason of holding any such position or by reason of any
action taken or omitted to be taken by any such Person in such capacity, whether
or not constituting negligence, or whether or not the Trust would have the power
to indemnify such Person against such liability; (e) establish pension, profit-
sharing, Share purchase and other retirement, incentive and benefit plans for
any Trustees, officers, employees and agents of the Trust; (f) to the extent
permitted by law, indemnify any person with whom the Trust or any series thereof
has dealings, including the Investment Adviser, Administrator, Distributor,
Custodian, Transfer Agent and selected dealers, to such extent as the Trustees
shall determine; (g) guarantee indebtedness or contractual obligations of
others; (h) determine and change the fiscal year of the Trust or any series
thereof and the method by which its accounts
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<PAGE>
shall be kept; (i) adopt a seal for the Trust, but the absence of such seal
shall not impair the validity of any instrument executed on behalf of the Trust;
(j) aid by further investment any corporation, company, trust, association or
firm, any obligation of or interest in which is included in the Trust Property
or in the affairs of which the Trustees have any direct or indirect interest; to
do all acts and things designed to protect, preserve, improve or enhance the
value of such obligation or interest; to guarantee or become surety on any or
all of the contracts, stocks, bonds, notes, debentures and other obligations of
any such corporation, company, trust, association or firm; (k) enter into a plan
of distribution and any related agreements whereby the Trust may finance
directly or indirectly any activity which is primarily intended to result in
sale of Shares; and (l) in general, carry on any other business in connection
with or incidental to any of the foregoing powers, to do everything necessary,
suitable or proper for the accomplishment of any purpose or the attainment of
any object or the furtherance of any power hereinbefore set forth, either alone
or in association with others, and to do every other act or thing incidental or
appurtenant to or growing out of or connected with the aforesaid business or
purposes, objects or powers.
The foregoing clauses shall be construed both as objects and powers, and
the foregoing enumeration of specific powers shall not be held to limit or
restrict in any manner the general powers of the Trustees.
The Trustees shall not be limited to investing in obligations maturing
before the possible termination of the Trust, nor shall the Trustees be limited
by any law limiting the investments which may be made by fiduciaries.
Section 3.11. Principal Transactions. Except in transactions permitted by
----------------------
the 1940 Act or any order of exemption issued by the Commission, or effected to
implement the provisions of any agreement to which the Trust is a party, the
Trustees shall not, on behalf of the Trust, buy any securities (other than
Shares) from or sell any securities (other than Shares) to, or lend any assets
of the Trust or any series thereof to, any Trustee or officer of the Trust or
any firm of which any such Trustee or officer is a member acting as principal,
or have any such dealings with the Investment Adviser, Administrator, Custodian,
Distributor or Transfer Agent or with any Affiliated Person of such Person; but
the Trust or a series thereof may employ any such Person, or firm or company in
which such Person is an Interested Person, as broker, legal counsel, registrar,
transfer agent, dividend disbursing agent or custodian upon customary terms.
ARTICLE IV.
INVESTMENT ADVISER, ADMINISTRATOR, DISTRIBUTOR,
-----------------------------------------------
CUSTODIAN AND TRANSFER AGENT
----------------------------
Section 4.1. Investment Adviser. Subject to approval by a Majority
------------------
Shareholder Vote, the Trustees may in their discretion from time to time enter
into an investment advisory or management contract or contracts whereby the
other party to such contract shall undertake to furnish the Trust or any series
thereof such management, investment advisory, administration,
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<PAGE>
accounting, legal, statistical and research facilities and services, promotional
activities and such other facilities and services, if any, as the Trustees shall
from time to time consider desirable, all upon such terms and conditions as the
Trustees may in their discretion determine. Notwithstanding any provisions of
the Declaration, the Trustees may authorize the Investment Adviser (subject to
such general or specific instructions as the Trustees may from time to time
adopt) to effect purchases, sales, loans or exchanges of portfolio securities of
the Trust or any series thereof on behalf of the Trustees or may authorize any
officer, employee or Trustee to effect such purchases, sales, loans or exchanges
pursuant to recommendations of the Investment Adviser, all without further
action by the Trustees. Any such purchases, sales, loans and exchanges shall be
deemed to have been authorized by all of the Trustees. The Trustees may, in
their sole discretion, call a meeting of Shareholders in order to submit to a
vote of Shareholders at such meeting the approval of continuance of any such
investment advisory or management contract.
Section 4.2. Administrator. The Trustees may in their discretion from
-------------
time to time enter into an administrative services contract or contracts whereby
the other party or parties to such contract or contracts shall undertake to
furnish administrative services. The contract or contracts shall have such
terms and conditions as the Trustees may in their discretion determine are not
inconsistent with the Declaration. Such services may be provided by one or more
Persons.
Section 4.3. Distributor. The Trustees may in their discretion from time
-----------
to time enter into a contract providing for the sale of Shares of the Trust or
applicable series thereof at not less than the net asset value per Share (as
described in Article VIII hereof) and pursuant to which the Trust or series
thereof may either agree to sell the Shares to the other party to the contract
or appoint such other party its sales agent for such Shares. In either case,
the contract shall be on such terms and conditions as the Trustees may in their
discretion determine is not inconsistent with the provisions of this Article IV,
including, without limitation, the provision for the repurchase or sale of
Shares of the Trust by such other party as principal or as agent of the Trust.
Section 4.4. Custodian. The Trustees shall employ at all times a
---------
custodian or custodians, meeting the qualifications for custodians of portfolio
securities under the 1940 Act, as custodian with respect to the Trust and may
from time to time enter into a custodian contract or contracts whereby the other
party or parties to such contract or contracts shall undertake to furnish
custodial services. The contract or contracts shall have such terms and
conditions as the Trustees may in their discretion determine are not
inconsistent with the Declaration. Such services may be provided by one or more
Persons.
Section 4.5. Transfer Agent. The Trustees may in their discretion from
--------------
time to time enter into a transfer agency and shareholder service contract
whereby the other party to such contract shall undertake to furnish transfer
agency and shareholder services to the Trust. The contract shall have such
terms and conditions as the Trustees may in their discretion determine that are
not inconsistent with the Declaration. Such services may be provided by one or
more Persons.
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<PAGE>
Section 4.6. Parties to Contract. Any contract of the character described
-------------------
in Section 4.1, 4.2, 4.3, 4.4 or 4.5 of this Article IV and any other contract
may be entered into with any Person, although one or more of the Trustees or
officers of the Trust may be an officer, director, trustee, shareholder or
member of such other party to the contract, and no such contract shall be
invalidated or rendered voidable by reason of the existence of any such
relationship; nor shall any Person holding such relationship be liable merely by
reason of such relationship for any loss or expense to the Trust under or by
reason of said contract or accountable for any profit realized directly or
indirectly therefrom, provided that the contract when entered into was not
inconsistent with the provisions of this Article IV. The same Person may be the
other party to any contracts entered into pursuant to Sections 4.1, 4.2, 4.3,
4.4 and 4.5 above or otherwise, and any individual may be financially interested
or otherwise affiliated with Persons who are parties to any or all of the
contracts referred to in this Section 4.6.
ARTICLE V.
LIMITATION OF LIABILITY OF SHAREHOLDERS,
----------------------------------------
TRUSTEES AND OTHERS
-------------------
Section 5.1. No Personal Liability of Shareholders, Trustees, etc. No
----------------------------------------------------
Shareholder shall be subject to any personal liability whatsoever to any Person
in connection with Trust Property, or the acts, obligations or affairs of the
Trust. No Trustee, officer, employee or agent of the Trust shall be subject to
any personal liability whatsoever to any Person, other than the Trust or its
Shareholders, in connection with Trust Property or the affairs of the Trust,
save only that arising from bad faith, willful misfeasance, gross negligence or
reckless disregard of his duty to such Person; and all such Persons shall look
solely to the Trust Property or the property of one or more specific series of
the Trust, for satisfaction of claims of any nature arising in connection with
the affairs of the Trust. If any Shareholder, Trustee, officer, employee or
agent, as such, of the Trust is made a party to any suit or proceeding to
enforce any such liability, he shall not, on account thereof, be held to any
personal liability. The Trust shall indemnify and hold each Shareholder
harmless from and against all claims by reason of his being or having been a
Shareholder, and shall reimburse the Shareholder for all legal and other
expenses reasonably incurred by him in connection with any such claim or
liability, provided that any such expenses shall be paid solely out of the Trust
Property or the property of one or more series thereof. Indemnification and
reimbursement required by the preceding sentence shall be made only out of
assets of the one or more series whose shares were held by said Shareholder at
the time the act or event occurred which gave rise to the claim against or
liability of said Shareholder. The rights accruing to a Shareholder under this
Section 5.1 shall not exclude any other right to which the Shareholder may be
lawfully entitled, nor shall anything herein contained restrict the right of the
Trust to indemnify or reimburse a Shareholder in any appropriate situation even
though not specifically provided herein.
Section 5.2. Non-Liability of Trustees, etc. No Trustee, officer,
------------------------------
employee or agent of the Trust shall be liable to the Trust, its Shareholders or
to any Shareholder, Trustee, officer, employee or agent thereof for any action
or failure to act (including without limitation the failure
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<PAGE>
to compel in any way any former or acting Trustee to redress any breach of
trust) except for his own bad faith, willful misfeasance, gross negligence or
reckless disregard of his duties.
Section 5.3. Indemnification.
---------------
(a) The Trustees shall provide for indemnification by the Trust or by one
or more series thereof if the claim arises from conduct with respect to only
such series of every person who is, or has been, a Trustee or officer of the
Trust against all liability and against all expenses reasonably incurred or paid
by him in connection with any claim, action, suit or proceeding in which he
becomes involved as a party or otherwise by virtue of his being or having been a
Trustee or officer and against amounts paid or incurred by him in the settlement
thereof, in such manner as the Trustees may provide from time to time in the By-
Laws.
(b) The words "claim," "action," "suit" or "proceeding" shall apply to all
claims, actions, suits or proceedings (civil, criminal or other, including
appeals), actual or threatened; and the words "liability" and "expenses" shall
include, without limitation, attorneys' fees, costs, judgments, amounts paid in
settlement, fines, penalties and other liabilities.
Section 5.4. No Bond Required of Trustees. No Trustee shall be obligated
----------------------------
to give any bond or other security for performance of any of his duties
hereunder.
Section 5.5. No Duty of Investigation; Notice in Trust Instruments;
------------------------------------------------------
Insurance. No purchaser, lender, transfer agent or other Person dealing with
- ---------
the Trustees or any officer, employee or agent of the Trust or any series
thereof shall be bound to make any inquiry concerning the validity of any
transaction purporting to be made by the Trustees or by said officer, employee
or agent or be liable for the application of money or property paid, loaned or
delivered to or on the order of the Trustees or of said officer, employee or
agent. Every obligation, contract, instrument, certificate, Share, other
security of the Trust or any series thereof or undertaking, and every other act
or thing whatsoever executed in connection with the Trust or any series thereof,
shall be conclusively presumed to have been executed or done by the executors
thereof only in their capacity as Trustees under the Declaration or in their
capacity as officers, employees or agents of the Trust or any series thereof.
Every written obligation, contract, instrument, certificate, Share, other
security of the Trust or a series thereof or undertaking made or issued by the
Trustees shall recite that the same is executed or made by them not
individually, but as Trustees under the Declaration, and that the obligations of
any such instrument are not binding upon any of the Trustees or Shareholders,
individually, but bind only the Trust Property or a series thereof, and may
contain any further recital which they or he may deem appropriate, but the
omission of such recital shall not operate to bind the Trustees or Shareholders
individually. The Trustees shall at all times maintain insurance for the
protection of the Trust Property and any property of a series thereof, its
Shareholders, Trustees, officers, employees and agents in such amount as the
Trustees shall deem adequate to cover possible tort liability, and such other
insurance as the Trustees in their sole judgment shall deem advisable.
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<PAGE>
Section 5.6. Reliance on Experts, etc. Each Trustee and officer or
------------------------
employee of the Trust or any series thereof shall, in the performance of his
duties, be fully and completely justified and protected with regard to any act
or any failure to act resulting from reliance in good faith upon the books of
account or other records of the Trust or any series thereof, upon an opinion of
counsel or upon reports made to the Trust or any series thereof by any of its
officers or employees or by the Investment Adviser, Administrator, Distributor,
Custodian, Transfer Agent, selected dealers, accountants, appraisers or other
experts or consultants selected with reasonable care by the Trustees, officers
or employees of the Trust or any series thereof, regardless of whether such
counsel or expert may also be a Trustee.
ARTICLE VI.
SHARES OF BENEFICIAL INTEREST
-----------------------------
Section 6.1. Beneficial Interest. The interest of the beneficiaries
-------------------
hereunder shall be divided into transferable shares of beneficial interest with
$.01 par value. The number of such shares of beneficial interest authorized
hereunder is unlimited. All Shares issued hereunder including, without
limitation, Shares issued in connection with a dividend in Shares or a split in
Shares, shall be fully paid and nonassessable.
Section 6.2. Rights of Shareholders. The ownership of the Trust Property
----------------------
and the right to conduct any business hereinbefore described are vested
exclusively in the Trustees, and the Shareholders shall have no interest therein
other than the beneficial interest conferred by their Shares, and they shall
have no right to call for any partition or division of any property, profits,
rights or interests of the Trust nor can they be called upon to assume any
losses of the Trust or suffer an assessment of any kind by virtue of their
ownership of Shares. The Shares shall be personal property giving only the
rights specifically set forth in the Declaration. The Shares shall not entitle
the holder to preference, preemptive, appraisal, conversion or exchange rights,
except as the Trustees may determine.
Section 6.3. Trust Only. It is the intention of the Trustees to create
----------
only the relationship of Trustee and beneficiary between the Trustees and each
Shareholder from time to time. It is not the intention of the Trustees to
create a general partnership, limited partnership, joint stock association,
corporation, bailment or any form of legal relationship other than a trust.
Nothing in the Declaration shall be construed to make the Shareholders, either
by themselves or with the Trustees, partners or members of a joint stock
association.
Section 6.4. Issuance of Shares. The Trustees, in their discretion may,
------------------
from time to time without vote of the Shareholders, issue Shares, in addition to
the then issued and outstanding Shares and Shares held in the treasury, to such
party or parties and for such amounts and type of consideration, including cash
or property, at such time or times (including, without limitation, each business
day) and on such terms as the Trustees may deem best, and may in such manner
acquire other assets (including the acquisition of assets subject to, and in
connection with, the assumption of liabilities) and businesses. In connection
with any issuance of Shares,
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<PAGE>
the Trustees may issue fractional Shares. Reductions in the number of
outstanding Shares may be made pursuant to the provisions of Section 8.3.
Contributions to the Trust may be accepted for, and Shares shall be redeemed as,
whole Shares and/or fractions of a Share as described in the Prospectus.
Section 6.5. Register of Shares. A register shall be kept at the
------------------
principal office of the Trust or at an office of the Transfer Agent which shall
contain the names and addresses of the Shareholders and the number of Shares
held by each of them and a record of all transfers thereof. Such register may
be in written form or any other form capable of being converted into written
form within a reasonable time for visual inspection. Such register shall be
conclusive as to who are the holders of the Shares and who shall be entitled to
receive dividends or distributions or otherwise to exercise or enjoy the rights
of Shareholders. No Shareholder shall be entitled to receive payment of any
dividend or distribution, nor to have notice given to him as herein or in the
By-Laws provided, until he has given his address to the Transfer Agent or such
other officer or agent of the Trustees as shall keep the said register for entry
thereon. It is not contemplated that certificates will be issued for the
Shares; however, the Trustees, in their discretion, may authorize the issuance
of Share certificates and promulgate appropriate rules and regulations as to
their use.
Section 6.6. Transfer of Shares. Shares shall be transferable on the
------------------
records of the Trust only by the record holder thereof or by his agent thereunto
duly authorized in writing, upon delivery to the Trustees or the Transfer Agent
of a duly executed instrument of transfer, together with such evidence of the
genuineness of each such execution and authorization and of other matters as may
reasonably be required. Upon this delivery the transfer shall be recorded on
the register of the Trust. Until this record is made, the Shareholder of record
shall be deemed to be the holder of the Shares for all purposes hereunder and
neither the Trustees nor any Transfer Agent or registrar nor any officer,
employee or agent of the Trust shall be affected by any notice of the proposed
transfer.
Any person becoming entitled to any Shares in consequence of the death,
bankruptcy or incompetence of any Shareholder, or otherwise by operation of law,
shall be recorded on the register of Shares as the holder of such Shares upon
production of the proper evidence thereof to the Trustees or the Transfer Agent,
but until such record is made, the Shareholder of record shall be deemed to be
the holder of such Shares for all purposes hereunder and neither the Trustees
nor any Transfer Agent or registrar nor any officer or agent of the Trust shall
be affected by any notice of such death, bankruptcy or incompetence, or other
operation of law, except as may otherwise be provided by the laws of The
Commonwealth of Massachusetts.
Section 6.7. Notices. Any and all notices to which any Shareholder may be
-------
entitled and any and all communications shall be deemed duly served or given if
mailed, postage prepaid, addressed to any Shareholder of record at his last
known address as recorded on the register of the Trust.
Section 6.8. Voting Powers. The Shareholders shall have power to vote (i)
-------------
for the election of Trustees as provided in Section 2.2; (ii) with respect to
any advisory or management
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<PAGE>
contract of a series as provided in Section 4.1; (iii) with respect to the
amendment of this Declaration as provided in Section 9.3; (iv) with respect to
such additional matters relating to the Trust as may be required or authorized
by the 1940 Act, the laws of The Commonwealth of Massachusetts or other
applicable law or by this Declaration or the By-Laws of the Trust; and (v) with
respect to such additional matters relating to the Trust as may be properly
submitted for Shareholder approval. If the Shares of a series shall be divided
into classes as provided in Section 6.9 hereof, the Shares of each class shall
have identical voting rights except that the Trustees, in their discretion, may
provide a class of a series with exclusive voting rights with respect to matters
related to expenses being borne solely by such class.
Section 6.9. Series Designation. The Trustees, in their discretion from
------------------
time to time, may authorize the division of Shares into two or more series, each
series relating to a separate portfolio of investments. The different series
shall be established and designated, and the variations in the relative rights
and preferences as between the different series shall be fixed and determined,
by the Trustees; provided that all Shares shall be identical except that there
may be variations between different series as to purchase price, determination
of net asset value, the price, terms and manner of redemption, special and
relative rights as to dividends and on liquidation, conversion rights, and
conditions under which the several series shall have separate voting rights.
The Trustees, in their discretion without a vote of the Shareholders, may
divide the Shares of any series into classes. In such event, each class of a
series shall represent interests in the Trust Property of a series and have
identical voting, dividend, liquidation and other rights and the same terms and
conditions except that expenses related directly or indirectly to the
distribution of the Shares of a class of a series may be borne solely by such
class (as shall be determined by the Trustees) and, as provided in Section 6.8,
a class of a series may have exclusive voting rights with respect to matters
relating to the expenses being borne solely by such class. The bearing of such
expenses solely by a class of Shares shall be appropriately reflected (in the
manner determined by the Trustees) in the net asset value, dividend and
liquidation rights of the Shares of such class. The division of the Shares of a
series into classes and the terms and conditions pursuant to which the shares of
the classes of a series will be issued must be made in compliance with the 1940
Act. No division of Shares of a series into classes shall result in the
creation of a class of Shares having a preference as to dividends or
distributions or a preference in the event of any liquidation, termination or
winding up of the Trust.
If the Trustees shall divide the Shares into two or more series, the
following provisions shall be applicable:
(a) The number of Shares of each series and of each class of a series that
may be issued shall be unlimited. The Trustees may classify or reclassify any
unissued Shares or any Shares previously issued and reacquired of any series
into one or more series that may be established and designated from time to
time. The Trustees may hold as treasury Shares (of the same or some other
series), reissue Shares for such consideration and on such terms as they may
determine, or cancel any Shares of any series reacquired by the Trust at their
discretion from time to time.
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<PAGE>
(b) The power of the Trustees to invest and reinvest the Trust Property of
each series that may be established shall be governed by Section 3.2 of this
Declaration.
(c) All consideration received by the Trust for the issue or sale of Shares
of a particular series, together with all assets in which such consideration is
invested or reinvested, all income, earnings, profits, and proceeds thereof,
including any proceeds derived from the sale, exchange or liquidation of such
assets, and any funds or payments derived from any reinvestment of such proceeds
in whatever form the same may be, shall irrevocably belong to that series for
all purposes, subject only to the rights of creditors, and shall be so recorded
upon the books of account of the Trust. In the event that there are any assets,
income, earnings, profits, and proceeds thereof, funds, or payments which are
not readily identifiable as belonging to any particular series, the Trustees
shall allocate them among any one or more of the series established and
designated from time to time in such manner and on such basis as they, in their
sole discretion, deem fair and equitable. Each such allocation by the Trustees
shall be conclusive and binding upon the Shareholders of all series for all
purposes.
(d) The assets belonging to each particular series shall be charged with
the liabilities of the Trust in respect of that series only and all expenses,
costs, charges and reserves attributable to that series and shall not be charged
with the liabilities, expenses, costs, charges and reserves attributable to
other series, and any general liabilities, expenses, costs, charges or reserves
of the Trust which are not readily identifiable as belonging to any particular
series shall be allocated and charged by the Trustees to and among any one or
more of the series established and designated from time to time in such manner
and on such basis as the Trustees in their sole discretion deem fair and
equitable. Each allocation of liabilities, expenses, costs, charges and
reserves by the Trustees shall be conclusive and binding upon the Shareholders
of all series for all purposes. The Trustees shall have full discretion, to the
extent not inconsistent with the 1940 Act, to determine which items shall be
treated as income and which items as capital; and each such determination and
allocation shall be conclusive and binding upon the Shareholders.
(e) The power of the Trustees to pay dividends and make distributions with
respect to any one or more series shall be governed by Section 8.2 of this
Declaration. Dividends and distributions on Shares of a particular series may
be paid with such frequency as the Trustees may determine, to the holders of
Shares of that series, from such of the income and capital gains, accrued or
realized, from the assets belonging to that series, as the Trustees may
determine, after providing for actual and accrued liabilities belonging to that
series. All dividends and distributions on Shares of a particular series shall
be distributed pro rata to the Shareholders of that series in proportion to the
number of Shares of that series held by such holders at the date and time of
record established for the payment of such dividends or distributions, except
that such dividends and distributions shall appropriately reflect expenses
related directly or indirectly to the distribution of Shares of a class of such
series.
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<PAGE>
The establishment and designation of any series or class within such series
of Shares shall be effective upon the execution by a majority of the then
Trustees (or by an officer of the Trust pursuant to a vote of a majority of the
Trustees) of an instrument setting forth the establishment and designation of
such series or class within such series. Such instrument shall also set forth
any rights and preferences of such series or class within such series which are
in addition to the rights and preferences of Shares set forth in this
Declaration. At any time that there are no Shares outstanding of any particular
series or class within such series previously established and designated, the
Trustees may by an instrument executed by a majority of their number (or by an
officer of the Trust pursuant to a vote of a majority of the Trustees) abolish
that series or class within such series and the establishment and designation
thereof. Each instrument referred to in this paragraph shall have the status of
an amendment to this Declaration.
ARTICLE VII.
REDEMPTIONS
-----------
Section 7.1. Redemptions. All outstanding Shares may be redeemed at the
-----------
option of the holders thereof, upon and subject to the terms and conditions
provided in this Article VII. The Trust shall, upon application of any
Shareholder or pursuant to authorization from any Shareholder, redeem or
repurchase from the Shareholder outstanding Shares for an amount per share
determined by the Trustees in accordance with any applicable laws and
regulations; provided that (a) the amount per share shall not exceed the cash
equivalent of the proportionate interest of each share in the assets of the
Trust or any series thereof at the time of the redemption or repurchase and (b)
if so authorized by the Trustees, the Trust may, at any time and from time to
time, charge fees for effecting such redemption or repurchase, at rates the
Trustees may establish, as and to the extent permitted under the 1940 Act, and
may, at any time and from time to time, pursuant to the Act, suspend the right
of redemption. The procedures for effecting and suspending redemption shall be
as set forth in the Prospectus from time to time. Payment will be made in the
manner described in the Prospectus.
Section 7.2. Redemption of Shares; Disclosure of Holding. If the Trustees
-------------------------------------------
shall, at any time and in good faith, be of the opinion that direct or indirect
ownership of Shares or other securities of the Trust or any series thereof has
or may become concentrated in any Person to an extent which would disqualify the
Trust as a regulated investment company under the Internal Revenue Code, then
the Trustees shall have the power by lot or other means deemed equitable by them
(i) to call for redemption by any such Person a number, or principal amount, of
Shares or other securities of the Trust or series thereof sufficient, in the
opinion of the Trustees, to maintain or bring the direct or indirect ownership
of Shares or other securities of the Trust or series thereof into conformity
with the requirements for such qualification and (ii) to refuse to transfer or
issue Shares or other securities of the Trust or any series thereof to any
Person whose acquisition of the Shares or other securities of the Trust in
question would in the opinion of the Trustees result in such disqualification.
The redemption shall be effected at a redemption price determined in accordance
with Section 7.1 hereof.
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<PAGE>
The holders of Shares or other securities of the Trust or any series
thereof shall upon demand disclose to the Trustees in writing such information
with respect to direct and indirect ownership of Shares or other securities of
the Trust or series thereof as the Trustees deem necessary to comply with the
provisions of the Internal Revenue Code, or to comply with the requirements of
any other authority.
Section 7.3. Redemptions of Accounts of Less than $500. The Trustees
-----------------------------------------
shall have the power at any time to redeem Shares of any Shareholder at a
redemption price determined in accordance with Section 7.1 if at such time the
aggregate net asset value of the Shares in the Shareholder's account is less
than $500. A Shareholder will be notified that the value of his account is less
than $500 and allowed at least sixty (60) days to make an additional investment
before redemption is processed.
Section 7.4. Payment for Redeemed Shares in Kind. Subject to any
-----------------------------------
applicable provisions of the 1940 Act, payment for any Shares redeemed pursuant
to Section 7.1 or 7.2 hereof may, at the option of the Trustees or such officer
or officers of the Trust as they may authorize for the purpose, be made in cash
or in kind, or partially in cash and partially in kind, and, in case of full or
partial payment in kind, the Trustees or such authorized officer or officers
shall have absolute discretion to determine the securities or other assets of
the Trust and the amount thereof to be distributed in kind. For such purpose,
the value of any securities or other non-cash assets delivered in payment for
Shares redeemed shall be determined in the same manner as the value of such
securities or other non-cash assets are determined in accordance with Section
8.1 hereof for purposes of determining the net asset value per Share applicable
to such Shares, as of the same time that the net asset value per Share
applicable to such Shares is determined.
Section 7.5. Other Redemptions. The Trust or series thereof may also
-----------------
reduce the number of outstanding Shares pursuant to the provisions of Section
8.3 hereof.
ARTICLE VIII.
DETERMINATION OF NET ASSET VALUE,
---------------------------------
NET INCOME AND DISTRIBUTIONS
----------------------------
Section 8.1. Net Asset Value. The net asset value of each outstanding
---------------
Share of each series of the Trust shall be determined at such time or times on
such days as the Trustees may determine, in accordance with the 1940 Act, with
respect to each series. The method of determination of net asset value of
Shares of each class of a series shall be determined by the Trustees and shall
be as set forth in the Prospectus with respect to the applicable series with any
expenses being borne solely by a class of Shares being reflected in the net
asset value of Shares of each class. The power and duty to make the daily
calculations for any series may be delegated by the Trustees to the adviser,
administrator, manager, custodian, transfer agent or such other person as the
Trustees may determine. The Trustees may suspend the daily determination of net
asset value to the extent permitted by the 1940 Act.
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<PAGE>
Section 8.2. Distributions to Shareholders. The Trustees shall from time
-----------------------------
to time distribute ratably among the Shareholders of any series such proportion
of the net profits, surplus (including paid-in-surplus), capital, or assets with
respect to such series held by the Trustees as they deem proper with any
expenses being borne solely by a class of Shares of any series being reflected
in the net profits or other assets being distributed to such class. Such
distribution may be made in cash or property (including without limitation any
type of obligations of the Trust or any assets thereof), and the Trustees may
distribute ratably among the Shareholders of any series additional Shares of
such series issuable hereunder in such manner, at such times, and on such terms
as the Trustees may deem proper. Such distributions may be among the
Shareholders of record at the time of declaring a distribution or among the
Shareholders of record at such later date as the Trustees shall determine. The
Trustees may always retain from the net profits such amount as they may deem
necessary to pay the debts or expenses of the Trust or to meet obligations of
the Trust, or as they deem desirable to use in the conduct of its affairs or to
retain for future requirements or extensions of the business. The Trustees may
adopt and offer to Shareholders of any series such dividend reinvestment plans,
cash dividend payout plans, or related plans as the Trustees shall deem
appropriate for such series.
Inasmuch as the computation of net income and gains for federal income tax
purposes may vary from the computation thereof on the books, the above
provisions shall be interpreted to give the Trustees the power in their
discretion to distribute for any fiscal year as ordinary dividends and as
capital gains distributions, respectively, additional amounts sufficient to
enable the Trust to avoid or reduce liability for taxes.
Section 8.3. Determination of Net Income. The Trustees shall have the
---------------------------
power to determine the net income of the Trust or any series thereof one or more
times on each business day and at each determination to declare the net income
as dividends in additional Shares. The determination of net income and the
resultant declaration of dividends shall be as set forth in the Prospectus. It
is expected that the Trust or any series thereof will have a positive net income
at the time of each determination. If for any reason the net income is a
negative amount, the Trustees shall have authority to reduce the number of
outstanding Shares. The reduction will be effected by having each Shareholder
proportionately contribute to the capital the necessary Shares that represent
the amount of the excess upon such determination. Each Shareholder will be
deemed to have agreed to such contribution in these circumstances by his
investment in the Trust or any series thereof. The Trustees shall have full
discretion to determine whether any cash or property received shall be treated
as income or as principal and whether any item of expenses shall be charged to
the income or the principal account, and their determination made in good faith
shall be conclusive upon the Shareholders. In the case of stock dividends
received, the Trustees shall have full discretion to determine, in the light of
the particular circumstances, how much, if any, of the value thereof shall be
treated as income, with the balance, if any, to be treated as principal.
Section 8.4. Power to Modify Foregoing Procedures. Notwithstanding any of
------------------------------------
the foregoing provisions of this Article VIII, the Trustees may prescribe, in
their absolute discretion, such other bases and times for determining the per
share net asset value of the Trust's Shares or
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<PAGE>
net income, or the declaration and payment of dividends and distributions as
they deem necessary or desirable or to enable the Trust to comply with any
provision of the 1940 Act, including any rule or regulation adopted pursuant to
Section 22 of the 1940 Act by the Securities and Exchange Commission or any
securities association registered under the Securities Exchange Act of 1934, all
as in effect now or hereafter amended or modified.
ARTICLE IX.
DURATION; TERMINATION OF
------------------------
TRUST; AMENDMENT; MERGERS, ETC.
-------------------------------
Section 9.1. Duration. The Trust or any series thereof shall continue
--------
without limitation of time but subject to the provisions of this Article IX.
Section 9.2. Termination.
-----------
(a) The Trust may be terminated by (1) the affirmative vote of the
holders of not less than two-thirds of the Shares of each series of the
Trust at any meeting of Shareholders, (2) by an instrument in writing,
without a meeting, signed by a majority of the Trustees and consented to by
the holders of not less than two-thirds of such Shares, or (3) by the
Trustees by written notice to the Shareholders. In addition, any series may
be so terminated by vote or written consent of not less than two-thirds of
the Shares of such series. Upon the termination of the Trust or any series:
(i) The Trust or such series shall carry on no business except
for the purpose of winding up its affairs.
(ii) The Trustees shall proceed to wind up the affairs of the
Trust or such series and all of the powers of the Trustees under this
Declaration shall continue until the affairs of the Trust or such
series shall have been wound up, including the power to fulfill or
discharge the contracts of the Trust or such series, collect its
assets, sell, convey, assign, exchange, transfer or otherwise dispose
of all or any part of the remaining Trust Property to one or more
persons at public or private sale for consideration which may consist
in whole or in part of cash, securities or other property of any kind,
discharge or pay its liabilities, and do all other acts appropriate to
liquidate its business; provided that any sale, conveyance,
assignment, exchange, transfer or other disposition of all or
substantially all the Trust Property shall require approval of the
principal terms of the transaction and the nature and amount of the
consideration by vote or consent of the holders of a majority of the
Shares entitled to vote.
(iii) After paying or adequately providing for the payment of all
liabilities, and upon receipt of such releases, indemnities and
refunding agreements, as they deem necessary for their protection, the
Trustees may
-19-
<PAGE>
distribute the remaining Trust Property of any series, in cash or in kind
or partly each, among the Shareholders of such series and each class of
such series, according to their respective rights taking into account their
respective net asset values and the proper allocation of expenses being
borne solely by any series or any class of Shares of a series.
(b) After termination of the Trust or a series and distribution to the
Shareholders as herein provided, a majority of the Trustees (or an officer of
the Trust pursuant to a vote of a majority of the Trustees) shall execute and
lodge among the records of the Trust an instrument in writing setting forth the
fact of such termination, and such instrument shall be filed with the Secretary
of The Commonwealth of Massachusetts, as well as with any other governmental
office where such filing may from time to time be required by the laws of
Massachusetts. Upon termination of the Trust, the Trustees shall thereupon be
discharged from all further liabilities and duties hereunder, and the rights and
interests of all Shareholders shall thereupon cease. Upon termination of any
series, the Trustee shall thereupon be discharged from all further liabilities
and duties with respect to such series, and the rights and interests of all
Shareholders of such series shall thereupon cease.
Section 9.3. Amendment Procedure.
-------------------
(a) This Declaration may be amended by a Majority Shareholder Vote, at a
meeting of Shareholders, or by written consent without a meeting. The Trustees
may also amend this Declaration without the vote or consent of Shareholders to
change the name of the Trust or a series, to supply any omission, to cure,
correct or supplement any ambiguous, defective or inconsistent provision hereof,
or if they deem it necessary to conform this Declaration to the requirements of
applicable federal laws or regulations or the requirements of the regulated
investment company provisions of the Code, but the Trustees shall not be liable
for failing so to do.
(b) No amendment may be made under this Section 9.3 which would change any
rights with respect to any Shares of the Trust or a series by reducing the
amount payable thereon upon liquidation of the Trust or a series or by
diminishing or eliminating any voting rights pertaining thereto, except with the
vote or consent of the holders of two-thirds of the Shares outstanding and
entitled to vote. Nothing contained in this Declaration shall permit the
amendment of this Declaration to impair the exemption from personal liability of
the Shareholders, Trustees, officers, employees and agents of the Trust or a
series or to permit assessments upon Shareholders.
(c) A certificate signed by a majority of the Trustees or by the Secretary
or any Assistant Secretary of the Trust, setting forth an amendment and reciting
that it was duly adopted by the Shareholders or by the Trustees as aforesaid or
a copy of the Declaration, as amended, and executed by a majority of the
Trustees or certified by the Secretary or any Assistant Secretary of the Trust,
shall be conclusive evidence of such amendment when lodged among the records of
the Trust. Such amendment shall be
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<PAGE>
effective when lodged among the records of the Trust unless some later
effective date is specified.
Notwithstanding any other provision hereof, until such time as a
Registration Statement under the Securities Act of 1933, as amended, covering
the first public offering of securities of the Trust or a series thereof shall
have become effective, this Declaration may be terminated or amended in any
respect by the affirmative vote of a majority of the Trustees or by an
instrument signed by a majority of the Trustees.
Section 9.4. Merger, Consolidation and Sale of Assets. The Trust or any
----------------------------------------
series thereof may merge or consolidate with any other corporation, association,
trust or other organization or may sell, lease or exchange all or substantially
all of the Trust Property or property of a series, including its good will, upon
such terms and conditions and for such consideration when and as authorized, at
any meeting of Shareholders called for the purpose, by the affirmative vote of
the holders of not less than two-thirds of the Shares; provided however, that,
if the merger, consolidation, sale, lease or exchange is recommended by the
Trustees, a Majority Shareholder Vote shall be sufficient authorization.
Section 9.5. Incorporation. With approval of a Majority Shareholder Vote,
-------------
the Trustees may cause to be organized or assist in organizing a corporation or
corporations under the laws of any jurisdiction or any other trust, partnership,
association or other organization to take over all of the Trust Property or
property of a series or to carry on any business in which the Trust or any
series shall directly or indirectly have any interest, and to sell, convey and
transfer the Trust Property or the property of a series to any corporation,
trust, association or organization in exchange for the shares or securities
thereof or otherwise, and to lend money to, subscribe for the shares or
securities of, and enter into any contracts with any corporation, trust,
partnership, association or organization in which the Trust or any series holds
or is about to acquire shares or any other interest. The Trustees may also
cause a merger or consolidation between the Trust or any series or any successor
thereto and any corporation, trust, partnership, association or other
organization if and to the extent permitted by law, as provided under the law
then in effect. Nothing contained herein shall be construed as requiring
approval of Shareholders for the Trustees to organize or assist in organizing
one or more corporations, trusts, partnerships, associations or other
organizations and selling, conveying or transferring a portion of the Trust
Property to such organization or entities.
ARTICLE X.
REPORTS TO SHAREHOLDERS
-----------------------
The Trustees shall at least semi-annually submit to the Shareholders a
written financial report of the transactions of the Trust or a series thereof,
including financial statements which shall at least annually be certified by
independent public accountants.
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<PAGE>
ARTICLE XI.
MISCELLANEOUS
-------------
Section 11.1. Filing. This Declaration and any amendment hereto shall be
------
filed in the office of the Secretary of The Commonwealth of Massachusetts and in
such other places as may be required under the laws of Massachusetts and may
also be filed or recorded in such other places as the Trustees deem appropriate.
Each amendment so filed shall be accompanied by a certificate signed and
acknowledged by a Trustee or by the Secretary or any Assistant Secretary of the
Trust stating that such action was duly taken in a manner provided herein. A
restated Declaration, integrating into a single instrument all of the provisions
of the Declaration which are then in effect and operative, may be executed from
time to time by a majority of the Trustees and shall, upon filing with the
Secretary of The Commonwealth of Massachusetts, be conclusive evidence of all
amendments contained therein and may thereafter be referred to in lieu of the
original Declaration and the various amendments thereto.
Section 11.2. Resident Agent. The Trust may appoint and maintain a
--------------
resident agent in The Commonwealth of Massachusetts.
Section 11.3. Governing Law. This Declaration is executed by the Trustees
-------------
with reference to the laws of The Commonwealth of Massachusetts, and the rights
of all parties and the validity and construction of every provision hereof shall
be subject to and construed according to the laws of the Commonwealth,
notwithstanding any Massachusetts law governing choice of law which may require
the construction of this Declaration in accordance with the laws of another
state or jurisdiction.
Section 11.4. Counterparts. The Declaration may be simultaneously
------------
executed in several counterparts, each of which shall be deemed to be an
original, and such counterparts, together, shall constitute one and the same
instrument, which shall be sufficiently evidenced by any such original
counterpart.
Section 11.5. Reliance by Third Parties. Any certificate executed by an
-------------------------
individual who, according to the records of the Trust, appears to be a Trustee
hereunder, or Secretary or Assistant Secretary of the Trust, certifying to: (a)
the number or identity of Trustees or Shareholders, (b) the due authorization of
the execution of any instrument or writing, (c) the form of any vote passed at a
meeting of Trustees or Shareholders, (d) the fact that the number of Trustees or
Shareholders present at any meeting or executing any written instrument
satisfies the requirements of this Declaration, (e) the form of any By-Laws
adopted by or the identity of any officers elected by the Trustees, or (f) the
existence of any fact or facts which in any manner relate to the affairs of the
Trust, shall be conclusive evidence as to the matters so certified in favor of
any Person dealing with the Trustees and their successors.
-22-
<PAGE>
Section 11.6. Provisions in Conflict with Law or Regulations.
----------------------------------------------
(a) The provisions of the Declaration are severable, and if the Trustees
shall determine, with the advice of counsel, that any of such provisions is in
conflict with the 1940 Act, the regulated investment company provisions of the
Code or with other applicable laws and regulations, the conflicting provisions
shall be deemed never to have constituted a part of the Declaration; provided,
however, that such determination shall not affect any of the remaining
provisions of the Declaration or render invalid or improper any action taken or
omitted prior to such determination.
(b) If any provision of the Declaration shall be held invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall
affect only the provision in the jurisdiction and shall not in any manner affect
the provision in any other jurisdiction or any other provision of the
Declaration in any jurisdiction.
IN WITNESS WHEREOF, the undersigned have set their hands and seals this
16th day of August, 1994.
/s/ Edward D. Beach
------------------------------------------
Edward D. Beach
/s/ Donald D. Lennox
------------------------------------------
Donald D. Lennox
/s/ Douglas H. McCorkindale
------------------------------------------
Douglas H. McCorkindale
/s/ Lawrence C. McQuade
------------------------------------------
Lawrence C. McQuade
/s/ Thomas T. Mooney
------------------------------------------
Thomas T. Mooney
/s/ Richard A. Redeker
------------------------------------------
Richard A. Redeker
/s/ Louis A. Weil, III
------------------------------------------
Louis A. Weil, III
<PAGE>
CERTIFICATE
-----------
The undersigned, as Secretary of Prudential Equity Income Fund (the
"Fund"), does hereby certify that the amended and restated Declaration of Trust
attached hereto was duly adopted by the Fund's Trustees on August 16, 1994,
pursuant to Sections 9.3 and 11.1 of the Declaration of Trust.
/s/ S. Jane Rose
------------------------------------------
S. Jane Rose, Secretary
Acknowledged:
/s/ Marguerite E. H. Morrison
- --------------------------------------
Marguerite E. H. Morrison, Assistant
Secretary
-2-
<PAGE>
EXHIBIT 99.1(b)
Amended and Restated Certificate of Designation
-----------------------------------------------
PRUDENTIAL EQUITY INCOME FUND
The undersigned, being the Assistant Secretary of Prudential Equity
Income Fund (hereinafter referred to as the "Trust"), a trust with transferable
shares of the type commonly called a Massachusetts business trust, DOES HEREBY
CERTIFY that, pursuant to the authority conferred upon the Trustees of the Trust
by Section 6.9 and Section 9.3 of the Declaration of Trust, dated September 18,
1986, as amended to date (hereinafter referred to as the "Declaration of
Trust"), and pursuant to the rights granted to the Shareholders of the Trust by
Section 9.3 of the Declaration of Trust, and by the affirmative vote of a
majority of the Trustees and of the Shareholders at meetings duly called and
held on March 17, 1993, and July 19, 1994, respectively, the Certificate of
Designation dated January 11, 1990 and filed with the Secretary of The
Commonwealth of Massachusetts on January 18, 1990 amending the Declaration of
Trust is amended and restated effective as of August 1, 1994, as follows:
(1) The shares of beneficial interest of the Trust are classified into
three classes, designated "Class A Shares," "Class B Shares," and "Class C
Shares," an unlimited number of each of which may be issued. All Class A Shares
and Class B Shares outstanding on the date on which the amendments provided for
herein become effective shall be and continue to be Class A Shares and Class B
Shares, respectively.
(2) The holders of Class A Shares, Class B Shares and Class C Shares
shall be considered Shareholders of the Trust, and shall have the relative
rights and preferences set forth herein and in the Declaration of Trust with
respect to Shares of the Trust, and shall also be considered Shareholders of the
Trust for all other purposes (including, without limitation, for purposes of
receiving reports and notices and the right to vote) and, for matters reserved
to the Shareholders of one or more other classes by the Declaration of Trust or
by any instrument establishing and designating a particular class, or as
required by the Investment Company Act of
<PAGE>
1940 and/or the rules and regulations of the Securities and Exchange Commission
thereunder (collectively, as from time to time in effect, the "1940 Act") or
other applicable laws.
(3) The Class A Shares, Class B Shares and Class C Shares shall
represent an equal proportionate interest in the share of such class in the
Trust Property, adjusted for any liabilities specifically allocable to the
Shares of that class, and each Share of any such class shall have identical
voting, dividend, liquidation and other rights and the same terms and
conditions, except that the expenses related directly or indirectly to the
distribution of the Shares of a class, and any service fees to which such class
is subject (as determined by the Trustees), shall be borne solely by such class,
and such expenses shall be appropriately reflected in the determination of net
asset value and the dividend, distribution and liquidation rights of such class.
(4) (a) Class A Shares shall be subject to (i) a front-end sales
charge and (ii) (A) an asset-based sales charge pursuant to a plan under Rule
12b-1 of the 1940 Act (a "Plan"), and/or (B) a service fee for the maintenance
of shareholder accounts and personal services, in such amounts as shall be
determined from time to time.
(b) Class B Shares shall be subject to (i) a contingent deferred sales
charge and (ii) (A) an asset-based sales charge pursuant to a Plan, and/or (B) a
service fee for the maintenance of shareholder accounts and personal services,
in such amounts as shall be determined from time to time.
(c) Class C Shares shall be subject to (i) a contingent deferred sales
charge and (ii) (A) an asset-based sales charge pursuant to a Plan, and/or (B) a
service fee for the maintenance of shareholder accounts and personal services,
in such amounts as shall be determined from time to time.
(5) Subject to compliance with the requirements of the 1940 Act, the
Trustees shall have the authority to provide that holders of Shares of the Trust
shall have the right to convert said Shares into Shares of one or more other
registered investment companies specified for the purpose in this Trust's
Prospectus for the Shares accorded such right, that holders of any class of
Shares of the Trust shall have the right to convert such Shares into Shares of
one or more other
-2-
<PAGE>
classes of the Trust, and that Shares of any class of the Trust shall be
automatically converted into Shares of another class of the Trust, in each case
in accordance with such requirements and procedures as the Trustees may from
time to time establish. The requirements and procedures applicable to such
mandatory or optional conversion of Shares of any such class shall be set forth
in the Prospectus in effect with respect to such Shares.
(6) Shareholders of each class shall vote as a separate class, as the
case may be, on any matter to the extent required by, and any matter shall be
deemed to have been effectively acted upon with respect to any class as provided
in, Rule 18f-2, as from time to time in effect, under the 1940 Act, or any
successor rule and by the Declaration of Trust. Except as otherwise required by
the 1940 Act, the Shareholders of each class, voting as a separate class, shall
have sole and exclusive voting rights with respect to the provisions of any Plan
applicable to Shares of such class, and shall have no voting rights with respect
to provisions of any Plan applicable solely to any other class of Shares of such
Trust.
IN WITNESS WHEREOF, the undersigned has set her hand and seal this
27th day of July, 1994.
/s/ Marguerite E. H. Morrison
------------------------------------------
Marguerite E. H. Morrison, Assistant
Secretary
-3-
<PAGE>
ACKNOWLEDGMENT
--------------
STATE OF NEW YORK )
) SS July 27, 1994
COUNTY OF NEW YORK )
Then personally appeared before me the above named Marguerite E. H.
Morrison, Assistant Secretary, and acknowledged the foregoing instrument to be
her free act and deed.
/s/ Kathleen M. Dietz
---------------------
Notary Public
-4-
<PAGE>
EXHIBIT 99.6(a)
PRUDENTIAL EQUITY INCOME FUND
Distribution Agreement
(Class A Shares)
----------------
Agreement made as of August 1, 1994, between Prudential Equity Income Fund,
a Massachusetts Business Trust (the Fund) and Prudential Mutual Fund
Distributors, Inc., a Delaware corporation (the Distributor).
WITNESSETH
WHEREAS, the Fund is registered under the Investment Company Act of 1940,
as amended (the Investment Company Act), as a diversified, open-end, management
investment company and it is in the interest of the Fund to offer its Class A
shares for sale continuously;
WHEREAS, the Distributor is a broker-dealer registered under the Securities
Exchange Act of 1934, as amended, and is engaged in the business of selling
shares of registered investment companies either directly or through other
broker-dealers;
WHEREAS, the Fund and the Distributor wish to enter into an agreement with
each other, with respect to the continuous offering of the Fund's Class A shares
from and after the date hereof in order to promote the growth of the Fund and
facilitate the distribution of its Class A shares; and
WHEREAS, upon approval by the Class A shareholders of the Fund it is
contemplated that the Fund will adopt a plan of distribution pursuant to Rule
12b-1 under the Investment Company Act (the Plan) authorizing payments by the
Fund to the Distributor with respect to the distribution of Class A shares of
the Fund and the maintenance of Class A shareholder accounts.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor
------------------------------
The Fund hereby appoints the Distributor as the principal underwriter and
distributor of the Class A shares of the Fund to sell Class A shares to the
public and the Distributor hereby accepts such appointment and agrees to act
hereunder. The Fund hereby agrees during the term of this Agreement to sell
Class A shares of the Fund to the Distributor on the terms and conditions set
forth below.
<PAGE>
Section 2. Exclusive Nature of Duties
--------------------------
The Distributor shall be the exclusive representative of the Fund to act as
principal underwriter and distributor of the Fund's Class A shares, except that:
2.1 The exclusive rights granted to the Distributor to purchase Class A
shares from the Fund shall not apply to Class A shares of the Fund issued in
connection with the merger or consolidation of any other investment company or
personal holding company with the Fund or the acquisition by purchase or
otherwise of all (or substantially all) the assets or the outstanding shares of
any such company by the Fund.
2.2 Such exclusive rights shall not apply to Class A shares issued by the
Fund pursuant to reinvestment of dividends or capital gains distributions.
2.3 Such exclusive rights shall not apply to Class A shares issued by the
Fund pursuant to the reinstatement privilege afforded redeeming shareholders.
2.4 Such exclusive rights shall not apply to purchases made through the
Fund's transfer and dividend disbursing agent in the manner set forth in the
currently effective Prospectus of the Fund. The term "Prospectus" shall mean
the Prospectus and Statement of Additional Information included as part of the
Fund's Registration Statement, as such Prospectus and Statement of Additional
Information may be amended or supplemented from time to time, and the term
"Registration Statement" shall mean the Registration Statement filed by the Fund
with the Securities and Exchange Commission and effective under the Securities
Act of 1933, as amended (Securities Act), and the Investment Company Act, as
such Registration Statement is amended from time to time.
Section 3. Purchase of Class A Shares from the Fund
----------------------------------------
3.1 The Distributor shall have the right to buy from the Fund the Class A
shares needed, but not more than the Class A shares needed (except for clerical
errors in transmission) to fill unconditional orders for Class A shares placed
with the Distributor by investors or registered and qualified securities dealers
and other financial institutions (selected dealers). The price which the
Distributor shall pay for the Class A shares so purchased from the Fund shall be
the net asset value, determined as set forth in the Prospectus.
3.2 The Class A shares are to be resold by the Distributor or selected
dealers, as described in Section 6.4 hereof, to investors at the offering price
as set forth in the Prospectus.
2
<PAGE>
3.3 The Fund shall have the right to suspend the sale of its Class A
shares at times when redemption is suspended pursuant to the conditions in
Section 4.3 hereof or at such other times as may be determined by the Trustees.
The Fund shall also have the right to suspend the sale of its Class A shares if
a banking moratorium shall have been declared by federal or New York
authorities.
3.4 The Fund, or any agent of the Fund designated in writing by the Fund,
shall be promptly advised of all purchase orders for Class A shares received by
the Distributor. Any order may be rejected by the Fund; provided, however, that
the Fund will not arbitrarily or without reasonable cause refuse to accept or
confirm orders for the purchase of Class A shares. The Fund (or its agent) will
confirm orders upon their receipt, will make appropriate book entries and upon
receipt by the Fund (or its agent) of payment therefore, will deliver deposit
receipts for such Class A shares pursuant to the instructions of the
Distributor. Payment shall be made to the Fund in New York Clearing House funds
or federal funds. The Distributor agrees to cause such payment and such
instructions to be delivered promptly to the Fund (or its agent).
Section 4. Repurchase or Redemption of Class A Shares by the Fund
------------------------------------------------------
4.1 Any of the outstanding Class A shares may be tendered for redemption
at any time, and the Fund agrees to repurchase or redeem the Class A shares so
tendered in accordance with its Declaration of Trust as amended from time to
time, and in accordance with the applicable provisions of the Prospectus. The
price to be paid to redeem or repurchase the Class A shares shall be equal to
the net asset value determined as set forth in the Prospectus. All payments by
the Fund hereunder shall be made in the manner set forth in Section 4.2 below.
4.2 The Fund shall pay the total amount of the redemption price as defined
in the above paragraph pursuant to the instructions of the Distributor on or
before the seventh calendar day subsequent to its having received the notice of
redemption in proper form. The proceeds of any redemption of Class A shares
shall be paid by the Fund to or for the account of the redeeming shareholder, in
each case in accordance with applicable provisions of the Prospectus.
4.3 Redemption of Class A shares or payment may be suspended at times when
the New York Stock Exchange is closed for other than customary weekends and
holidays, when trading on said Exchange is restricted, when an emergency exists
as a result of which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or during any other period when the
Securities and Exchange Commission, by order,
3
<PAGE>
so permits.
Section 5. Duties of the Fund
------------------
5.1 Subject to the possible suspension of the sale of Class A shares as
provided herein, the Fund agrees to sell its Class A shares so long as it has
Class A shares available.
5.2 The Fund shall furnish the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Class A shares, and this
shall include one certified copy, upon request by the Distributor, of all
financial statements prepared for the Fund by independent public accountants.
The Fund shall make available to the Distributor such number of copies of its
Prospectus and annual and interim reports as the Distributor shall reasonably
request.
5.3 The Fund shall take, from time to time, but subject to the necessary
approval of the Trustees and the shareholders, all necessary action to fix the
number of authorized Class A shares and such steps as may be necessary to
register the same under the Securities Act, to the end that there will be
available for sale such number of Class A shares as the Distributor reasonably
may expect to sell. The Fund agrees to file from time to time such amendments,
reports and other documents as may be necessary in order that there will be no
untrue statement of a material fact in the Registration Statement, or necessary
in order that there will be no omission to state a material fact in the
Registration Statement which omission would make the statements therein
misleading.
5.4 The Fund shall use its best efforts to qualify and maintain the
qualification of any appropriate number of its Class A shares for sales under
the securities laws of such states as the Distributor and the Fund may approve;
provided that the Fund shall not be required to amend its Declaration of Trust
or By-Laws to comply with the laws of any state, to maintain an office in any
state, to change the terms of the offering of its Class A shares in any state
from the terms set forth in its Registration Statement, to qualify as a foreign
corporation in any state or to consent to service of process in any state other
than with respect to claims arising out of the offering of its Class A shares.
Any such qualification may be withheld, terminated or withdrawn by the Fund at
any time in its discretion. As provided in Section 9.1 hereof, the expense of
qualification and maintenance of qualification shall be borne by the Fund. The
Distributor shall furnish such information and other material relating to its
affairs and activities as may be required by the Fund in connection with such
qualifications.
4
<PAGE>
Section 6. Duties of the Distributor
-------------------------
6.1 The Distributor shall devote reasonable time and effort to effect
sales of Class A shares of the Fund, but shall not be obligated to sell any
specific number of Class A shares. Sales of the Class A shares shall be on the
terms described in the Prospectus. The Distributor may enter into like
arrangements with other investment companies. The Distributor shall compensate
the selected dealers as set forth in the Prospectus.
6.2 In selling the Class A shares, the Distributor shall use its best
efforts in all respects duly to conform with the requirements of all federal and
state laws relating to the sale of such securities. Neither the Distributor nor
any selected dealer nor any other person is authorized by the Fund to give any
information or to make any representations, other than those contained in the
Registration Statement or Prospectus and any sales literature approved by
appropriate officers of the Fund.
6.3 The Distributor shall adopt and follow procedures for the confirmation
of sales to investors and selected dealers, the collection of amounts payable by
investors and selected dealers on such sales and the cancellation of unsettled
transactions, as may be necessary to comply with the requirements of the
National Association of Securities Dealers, Inc. (NASD).
6.4 The Distributor shall have the right to enter into selected dealer
agreements with registered and qualified securities dealers and other financial
institutions of its choice for the sale of Class A shares, provided that the
Fund shall approve the forms of such agreements. Within the United States, the
Distributor shall offer and sell Class A shares only to such selected dealers as
are members in good standing of the NASD. Class A shares sold to selected
dealers shall be for resale by such dealers only at the offering price
determined as set forth in the Prospectus.
Section 7. Payments to the Distributor
---------------------------
The Distributor shall receive and may retain any portion of any front-end
sales charge which is imposed on sales of Class A shares and not reallocated to
selected dealers as set forth in the Prospectus, subject to the limitations of
Article III, Section 26 of the NASD Rules of Fair Practice. Payment of these
amounts to the Distributor is not contingent upon the adoption or continuation
of the Plan.
Section 8. Payment of the Distributor under the Plan
-----------------------------------------
8.1 The Fund shall pay to the Distributor as compensation for services
under the Distribution and Service Plan and this Agreement a fee of .30 of 1%
(including an asset-based sales charge of .05 of 1% and a service fee of .25 of
1%) per annum
5
<PAGE>
of the average daily net assets of the Class A shares of the Fund. Amounts
payable under the Plan shall be accrued daily and paid monthly or at such other
intervals as the Trustees may determine. Amounts payable under the Plan shall
be subject to the limitations of Article III, Section 26 of the NASD Rules of
Fair Practice.
8.2 So long as the Plan or any amendment thereto is in effect, the
Distributor shall inform the Trustees of the commissions and account servicing
fees to be paid by the Distributor to account executives of the Distributor and
to broker-dealers and financial institutions which have dealer agreements with
the Distributor. So long as the Plan (or any amendment thereto) is in effect,
at the request of the Trustees or any agent or representative of the Fund, the
Distributor shall provide such additional information as may reasonably be
requested concerning the activities of the Distributor hereunder and the costs
incurred in performing such activities.
8.3 Expenses of distribution with respect to the Class A shares of the
Fund include, among others:
(a) amounts paid to Prudential Securities for performing services
under a selected dealer agreement between Prudential
Securities and the Distributor for sale of Class A shares of
the Fund, including sales commissions and trailer commissions
paid to, or on account of, account executives and indirect
and overhead costs associated with distribution activities,
including central office and branch expenses;
(b) amounts paid to Prusec for performing services under a
selected dealer agreement between Prusec and the Distributor
for sale of Class A shares of the Fund, including sales
commissions and trailer commissions paid to, or on account
of, agents and indirect and overhead costs associated with
distribution activities;
(c) sales commissions and trailer commissions paid to, or on
account of, broker-dealers and financial institutions (other
than Prudential Securities and Prusec) which have entered
into selected dealer agreements with the Distributor with
respect to Class A shares of the Fund;
(d) amounts paid to, or an account of, account executives of
Prudential Securities, Prusec, or of other broker-dealers or
financial institutions for personal service and/or the
6
<PAGE>
maintenance of shareholder accounts; and
(e) advertising for the Fund in various forms through any
available medium, including the cost of printing and mailing
Fund Prospectuses, and periodic financial reports and sales
literature to persons other than current shareholders of the
Fund.
Indirect and overhead costs referred to in clauses (a) and (b) of the
foregoing sentence include (i) lease expenses, (ii) salaries and benefits of
personnel including operations and sales support personnel, (iii) utility
expenses, (iv) communications expenses, (v) sales promotion expenses, (vi)
expenses of postage, stationery and supplies and (vii) general overhead.
Section 9. Allocation of Expenses
----------------------
9.1 The Fund shall bear all costs and expenses of the continuous
offering of its Class A shares, including fees and disbursements of its counsel
and auditors, in connection with the preparation and filing of any required
Registration Statements and/or Prospectuses under the Investment Company Act or
the Securities Act, and preparing and mailing annual and periodic reports and
proxy materials to shareholders (including but not limited to the expense of
setting in type any such Registration Statements, Prospectuses, annual or
periodic reports or proxy materials). The Fund shall also bear the cost of
expenses of qualification of the Class A shares for sale, and, if necessary or
advisable in connection therewith, of qualifying the Fund as a broker or dealer,
in such states of the United States or other jurisdictions as shall be selected
by the Fund and the Distributor pursuant to Section 5.4 hereof and the cost and
expense payable to each such state for continuing qualification therein until
the Fund decides to discontinue such qualification pursuant to Section 5.4
hereof. As set forth in Section 8 above, the Fund shall also bear the expenses
it assumes pursuant to the Plan with respect to Class A shares, so long as the
Plan is in effect.
Section 10. Indemnification
---------------
10.1 The Fund agrees to indemnify, defend and hold the Distributor,
its officers and directors and any person who controls the Distributor within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Distributor, its
officers, directors or any such controlling person may incur under the
Securities Act, or under common law or otherwise, arising out of or based upon
any untrue statement of a material fact contained in the Registration Statement
or Prospectus
7
<PAGE>
or arising out of or based upon any alleged omission to state a material fact
required to be stated in either thereof or necessary to make the statements in
either thereof not misleading, except insofar as such claims, demands,
liabilities or expenses arise out of or are based upon any such untrue statement
or omission or alleged untrue statement or omission made in reliance upon and in
conformity with information furnished in writing by the Distributor to the Fund
for use in the Registration Statement or Prospectus; provided, however, that
this indemnity agreement shall not inure to the benefit of any such officer,
director or controlling person unless a court of competent jurisdiction shall
determine in a final decision on the merits, that the person to be indemnified
was not liable by reason of willful misfeasance, bad faith or gross negligence
in the performance of its duties, or by reason of its reckless disregard of its
obligations under this Agreement (disabling conduct), or, in the absence of such
a decision, a reasonable determination, based upon a review of the facts, that
the indemnified person was not liable by reason of disabling conduct, by (a) a
vote of a majority of a quorum of Trustees who are neither "interested persons"
of the Fund as defined in Section 2(a)(19) of the Investment Company Act nor
parties to the proceeding, or (b) an independent legal counsel in a written
opinion. The Fund's agreement to indemnify the Distributor, its officers or
directors and any such controlling person as aforesaid is expressly conditioned
upon the Fund's being promptly notified of any action brought against the
Distributor, its officers or directors, or any such controlling person, such
notification to be given by letter or telegram addressed to the Fund at its
principal business office. The Fund agrees promptly to notify the Distributor
of the commencement of any litigation or proceedings against the Fund or any of
its officers or Trustees in connection with the issue and sale of any Class A
shares.
10.2 The Distributor agrees to indemnify, defend and hold the Fund,
its officers and Trustees and any person who controls the Fund, if any, within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending against such claims, demands or liabilities
and any counsel fees incurred in connection therewith) which the Fund, its
officers and Trustees or any such controlling person may incur under the
Securities Act or under common law or otherwise, but only to the extent that
such liability or expense incurred by the Fund, its Trustees or officers or such
controlling person resulting from such claims or demands shall arise out of or
be based upon any alleged untrue statement of a material fact contained in
information furnished in writing by the Distributor to the Fund for use in the
Registration Statement or Prospectus or shall arise out of or be based upon any
alleged omission to state a material fact in connection with such information
required to be stated in the Registration Statement or Prospectus or necessary
to make such information not misleading. The Distributor's agreement
8
<PAGE>
to indemnify the Fund, its officers and Trustees and any such controlling person
as aforesaid, is expressly conditioned upon the Distributor's being promptly
notified of any action brought against the Fund, its officers and Trustees or
any such controlling person, such notification being given to the Distributor at
its principal business office.
Section 11. Duration and Termination of this Agreement
------------------------------------------
11.1 This Agreement shall become effective as of the date first above
written and shall remain in force for two years from the date hereof and
thereafter, but only so long as such continuance is specifically approved at
least annually by (a) the Trustees of the Fund, or by the vote of a majority of
the outstanding voting securities of the Class A shares of the Fund, and (b) by
the vote of a majority of those Trustees who are not parties to this Agreement
or interested persons of any such parties and who have no direct or indirect
financial interest in this Agreement or in the operation of the Fund's Plan or
in any agreement related thereto (Rule 12b-1 Trustees), cast in person at a
meeting called for the purpose of voting upon such approval.
11.2 This Agreement may be terminated at any time, without the
payment of any penalty, by a majority of the Rule 12b-1 Trustees or by vote of a
majority of the outstanding voting securities of the Class A shares of the Fund,
or by the Distributor, on sixty (60) days' written notice to the other party.
This Agreement shall automatically terminate in the event of its assignment.
11.3 The terms "affiliated person," "assignment," "interested person"
and "vote of a majority of the outstanding voting securities", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.
Section 12. Amendments to this Agreement
----------------------------
This Agreement may be amended by the parties only if such amendment is
specifically approved by (a) the Trustees of the Fund, or by the vote of a
majority of the outstanding voting securities of the Class A shares of the Fund,
and (b) by the vote of a majority of the Rule 12b-1 Trustees cast in person at a
meeting called for the purpose of voting on such amendment.
Section 13. Governing Law
-------------
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of New York as at the time in effect and
the applicable provisions of the Investment Company Act. To the extent that the
applicable law of the State of New York, or any of the provisions herein,
conflict with the applicable provisions of the Investment Company Act, the
9
<PAGE>
latter shall control.
Section 14 Liabilities of the Fund
-----------------------
The name "Prudential Equity Income Fund" is the designation of the
Trustees under a Declaration of Trust dated September 18, 1986, as amended, and
all persons dealing with the Fund must look solely to the property of the Fund
for the enforcement of any claims against the Fund, and neither the Trustees,
officers, agents or shareholders assume any personal liability for obligations
entered into on behalf of the Fund.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year above written.
Prudential Mutual Fund
Distributors, Inc.
By: /s/ Robert F. Gunia
________________________
Robert F. Gunia
Executive Vice President
Prudential Equity Income Fund
By: /s/ Lawrence C. McQuade
_______________________
Lawrence C. McQuade
President
10
<PAGE>
EXHIBIT 99.6(b)
PRUDENTIAL EQUITY INCOME FUND
Distribution Agreement
(Class B Shares)
----------------
Agreement made as of August 1, 1994, between Prudential Equity Income Fund,
a Massachusetts Business Trust and Prudential Securities Incorporated, a
Delaware corporation (the Distributor).
WITNESSETH
WHEREAS, the Fund is registered under the Investment Company Act of 1940,
as amended (the Investment Company Act), as a diversified, open-end, management
investment company and it is in the interest of the Fund to offer its Class B
shares for sale continuously;
WHEREAS, the Distributor is a broker-dealer registered under the Securities
Exchange Act of 1934, as amended, and is engaged in the business of selling
shares of registered investment companies either directly or through other
broker-dealers;
WHEREAS, the Fund and the Distributor wish to enter into an agreement with
each other, with respect to the continuous offering of the Fund's Class B shares
from and after the date hereof in order to promote the growth of the Fund and
facilitate the distribution of its Class B shares; and
WHEREAS, the Fund has adopted a distribution and service plan pursuant to
Rule 12b-1 under the Investment Company Act (the Plan) authorizing payments by
the Fund to the Distributor with respect to the distribution of Class B shares
of the Fund and the maintenance of Class B shareholder accounts.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor
------------------------------
The Fund hereby appoints the Distributor as the principal underwriter and
distributor of the Class B shares of the Fund to sell Class B shares to the
public and the Distributor hereby accepts such appointment and agrees to act
hereunder. The Fund hereby agrees during the term of this Agreement to sell
Class B shares of the Fund to the Distributor on the terms and conditions set
forth below.
Section 2. Exclusive Nature of Duties
--------------------------
The Distributor shall be the exclusive representative of the Fund to act as
principal underwriter and distributor of the Fund's Class B shares, except that:
<PAGE>
2.1 The exclusive rights granted to the Distributor to purchase Class B
shares from the Fund shall not apply to Class B shares of the Fund issued in
connection with the merger or consolidation of any other investment company or
personal holding company with the Fund or the acquisition by purchase or
otherwise of all (or substantially all) the assets or the outstanding shares of
any such company by the Fund.
2.2 Such exclusive rights shall not apply to Class B shares issued by the
Fund pursuant to reinvestment of dividends or capital gains distributions.
2.3 Such exclusive rights shall not apply to Class B shares issued by the
Fund pursuant to the reinstatement privilege afforded redeeming shareholders.
2.4 Such exclusive rights shall not apply to purchases made through the
Fund's transfer and dividend disbursing agent in the manner set forth in the
currently effective Prospectus of the Fund. The term "Prospectus" shall mean
the Prospectus and Statement of Additional Information included as part of the
Fund's Registration Statement, as such Prospectus and Statement of Additional
Information may be amended or supplemented from time to time, and the term
"Registration Statement" shall mean the Registration Statement filed by the Fund
with the Securities and Exchange Commission and effective under the Securities
Act of 1933, as amended (the Securities Act), and the Investment Company Act, as
such Registration Statement is amended from time to time.
Section 3. Purchase of Class B Shares from the Fund
----------------------------------------
3.1 The Distributor shall have the right to buy from the Fund the Class B
shares needed, but not more than the Class B shares needed (except for clerical
errors in transmission) to fill unconditional orders for Class B shares placed
with the Distributor by investors or registered and qualified securities dealers
and other financial institutions (selected dealers). The price which the
Distributor shall pay for the Class B shares so purchased from the Fund shall be
the net asset value, determined as set forth in the Prospectus.
3.2 The Class B shares are to be resold by the Distributor or selected
dealers, as described in Section 6.4 hereof, to investors at the offering price
as set forth in the Prospectus.
3.3 The Fund shall have the right to suspend the sale of its Class B
shares at times when redemption is suspended pursuant to the conditions in
Section 4.3 hereof or at such other times as may be determined by the Trustees.
The Fund shall also have the right to suspend the sale of its Class B shares if
a banking moratorium shall have been declared by federal or New York
2
<PAGE>
authorities.
3.4 The Fund, or any agent of the Fund designated in writing by the Fund,
shall be promptly advised of all purchase orders for Class B shares received by
the Distributor. Any order may be rejected by the Fund; provided, however, that
the Fund will not arbitrarily or without reasonable cause refuse to accept or
confirm orders for the purchase of Class B shares. The Fund (or its agent) will
confirm orders upon their receipt, will make appropriate book entries and upon
receipt by the Fund (or its agent) of payment therefore, will deliver deposit
receipts for such Class B shares pursuant to the instructions of the
Distributor. Payment shall be made to the Fund in New York Clearing House funds
or federal funds. The Distributor agrees to cause such payment and such
instructions to be delivered promptly to the Fund (or its agent).
Section 4. Repurchase or Redemption of Class B Shares by the Fund
------------------------------------------------------
4.1 Any of the outstanding Class B shares may be tendered for redemption
at any time, and the Fund agrees to repurchase or redeem the Class B shares so
tendered in accordance with its Declaration of Trust as amended from time to
time, and in accordance with the applicable provisions of the Prospectus. The
price to be paid to redeem or repurchase the Class B shares shall be equal to
the net asset value determined as set forth in the Prospectus. All payments by
the Fund hereunder shall be made in the manner set forth in Section 4.2 below.
4.2 The Fund shall pay the total amount of the redemption price as defined
in the above paragraph pursuant to the instructions of the Distributor on or
before the seventh day subsequent to its having received the notice of
redemption in proper form. The proceeds of any redemption of Class B shares
shall be paid by the Fund as follows: (a) any applicable contingent deferred
sales charge shall be paid to the Distributor and (b) the balance shall be paid
to or for the account of the redeeming shareholder, in each case in accordance
with applicable provisions of the Prospectus.
4.3 Redemption of Class B shares or payment may be suspended at times when
the New York Stock Exchange is closed for other than customary weekends and
holidays, when trading on said Exchange is restricted, when an emergency exists
as a result of which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or during any other period when the
Securities and Exchange Commission, by order, so permits.
3
<PAGE>
Section 5. Duties of the Fund
------------------
5.1 Subject to the possible suspension of the sale of Class B shares as
provided herein, the Fund agrees to sell its Class B shares so long as it has
Class B shares available.
5.2 The Fund shall furnish the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Class B shares, and this
shall include one certified copy, upon request by the Distributor, of all
financial statements prepared for the Fund by independent public accountants.
The Fund shall make available to the Distributor such number of copies of its
Prospectus and annual and interim reports as the Distributor shall reasonably
request.
5.3 The Fund shall take, from time to time, but subject to the necessary
approval of the Trustees and the shareholders, all necessary action to fix the
number of authorized Class B shares and such steps as may be necessary to
register the same under the Securities Act, to the end that there will be
available for sale such number of Class B shares as the Distributor reasonably
may expect to sell. The Fund agrees to file from time to time such amendments,
reports and other documents as may be necessary in order that there will be no
untrue statement of a material fact in the Registration Statement, or necessary
in order that there will be no omission to state a material fact in the
Registration Statement which omission would make the statements therein
misleading.
5.4 The Fund shall use its best efforts to qualify and maintain the
qualification of any appropriate number of its Class B shares for sales under
the securities laws of such states as the Distributor and the Fund may approve;
provided that the Fund shall not be required to amend its Declaration of Trust
or By-Laws to comply with the laws of any state, to maintain an office in any
state, to change the terms of the offering of its Class B shares in any state
from the terms set forth in its Registration Statement, to qualify as a foreign
corporation in any state or to consent to service of process in any state other
than with respect to claims arising out of the offering of its Class B shares.
Any such qualification may be withheld, terminated or withdrawn by the Fund at
any time in its discretion. As provided in Section 9.1 hereof, the expense of
qualification and maintenance of qualification shall be borne by the Fund. The
Distributor shall furnish such information and other material relating to its
affairs and activities as may be required by the Fund in connection with such
qualifications.
4
<PAGE>
Section 6. Duties of the Distributor
-------------------------
6.1 The Distributor shall devote reasonable time and effort to effect
sales of Class B shares of the Fund, but shall not be obligated to sell any
specific number of Class B shares. Sales of the Class B shares shall be on the
terms described in the Prospectus. The Distributor may enter into like
arrangements with other investment companies. The Distributor shall compensate
the selected dealers as set forth in the Prospectus.
6.2 In selling the Class B shares, the Distributor shall use its best
efforts in all respects duly to conform with the requirements of all federal and
state laws relating to the sale of such securities. Neither the Distributor nor
any selected dealer nor any other person is authorized by the Fund to give any
information or to make any representations, other than those contained in the
Registration Statement or Prospectus and any sales literature approved by
appropriate officers of the Fund.
6.3 The Distributor shall adopt and follow procedures for the confirmation
of sales to investors and selected dealers, the collection of amounts payable by
investors and selected dealers on such sales and the cancellation of unsettled
transactions, as may be necessary to comply with the requirements of the
National Association of Securities Dealers, Inc. (NASD).
6.4 The Distributor shall have the right to enter into selected dealer
agreements with registered and qualified securities dealers and other financial
institutions of its choice for the sale of Class B shares, provided that the
Fund shall approve the forms of such agreements. Within the United States, the
Distributor shall offer and sell Class B shares only to such selected dealers as
are members in good standing of the NASD. Class B shares sold to selected
dealers shall be for resale by such dealers only at the offering price
determined as set forth in the Prospectus.
Section 7. Payments to the Distributor
---------------------------
The Distributor shall receive and may retain any contingent deferred sales
charge which is imposed with respect to repurchases and redemptions of Class B
shares as set forth in the Prospectus, subject to the limitations of Article
III, Section 26 of the NASD Rules of Fair Practice. Payment of these amounts to
the Distributor is not contingent upon the adoption or continuation of the Plan.
Section 8. Payment of the Distributor under the Plan
-----------------------------------------
8.1 The Fund shall pay to the Distributor as compensation for services
under the Distribution and Service Plan and this Agreement a fee of 1%
(including an asset-based sales charge of .75 of 1% and a service fee of .25 of
1%) per annum of
5
<PAGE>
the average daily net assets of the Class B shares of the Fund. Amounts payable
under the Plan shall be accrued daily and paid monthly or at such other
intervals as the Trustees may determine. Amounts payable under the Plan shall
be subject to the limitations of Article III, Section 26 of the NASD Rules of
Fair Practice.
8.2 So long as the Plan or any amendment thereto is in effect, the
Distributor shall inform the Trustees of the commissions (including trailer
commissions) and account servicing fees to be paid by the Distributor to account
executives of the Distributor and to broker-dealers and financial institutions
which have selected dealer agreements with the Distributor. So long as the Plan
(or any amendment thereto) is in effect, at the request of the Trustees or any
agent or representative of the Fund, the Distributor shall provide such
additional information as may reasonably be requested concerning the activities
of the Distributor hereunder and the costs incurred in performing such
activities.
8.3 Expenses of distribution with respect to the Class B shares of the
Fund include, among others:
(a) sales commissions (including trailer commissions) paid to, or
on account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated
with performance of distribution activities, including
central office and branch expenses;
(c) amounts paid to Prusec for performing services under a
selected dealer agreement between Prusec and the Distributor
for sale of Class B shares of the Fund, including sales
commissions and trailer commissions paid to, or on account
of, agents and indirect and overhead costs associated with
distribution activities;
(d) sales commissions (including trailer commissions) paid to, or
on account of, broker-dealers and financial institutions
(other than Prusec) which have entered into selected dealer
agreements with the Distributor with respect to Class B
shares of the Fund;
(e) amounts paid to, or an account of, account executives of the
Distributor or of other broker-dealers or financial
institutions for personal service and/or the maintenance of
shareholder accounts; and
6
<PAGE>
(f) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund
Prospectuses, and periodic financial reports and sales literature
to persons other than current shareholders of the Fund.
Indirect and overhead costs referred to in clauses (b) and (c) of the
foregoing sentence include (i) lease expenses, (ii) salaries and benefits of
personnel including operations and sales support personnel, (iii) utility
expenses, (iv) communications expenses, (v) sales promotion expenses, (vi)
expenses of postage, stationery and supplies and (vii) general overhead.
Section 9. Allocation of Expenses
----------------------
9.1 The Fund shall bear all costs and expenses of the continuous
offering of its Class B shares, including fees and disbursements of its counsel
and auditors, in connection with the preparation and filing of any required
Registration Statements and/or Prospectuses under the Investment Company Act or
the Securities Act, and preparing and mailing annual and periodic reports and
proxy materials to shareholders (including but not limited to the expense of
setting in type any such Registration Statements, Prospectuses, annual or
periodic reports or proxy materials). The Fund shall also bear the cost of
expenses of qualification of the Class B shares for sale, and, if necessary or
advisable in connection therewith, of qualifying the Fund as a broker or dealer,
in such states of the United States or other jurisdictions as shall be selected
by the Fund and the Distributor pursuant to Section 5.4 hereof and the cost and
expense payable to each such state for continuing qualification therein until
the Fund decides to discontinue such qualification pursuant to Section 5.4
hereof. As set forth in Section 8 above, the Fund shall also bear the expenses
it assumes pursuant to the Plan with respect to Class B shares, so long as the
Plan is in effect.
Section 10. Indemnification
---------------
10.1 The Fund agrees to indemnify, defend and hold the Distributor,
its officers and directors and any person who controls the Distributor within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Distributor, its
officers, directors or any such controlling person may incur under the
Securities Act, or under common law or otherwise, arising out of or based upon
any untrue statement of a material fact contained in the Registration Statement
or Prospectus or arising out of or based upon any alleged omission to state a
material fact required to be stated in either thereof or necessary to make the
statements in either thereof not misleading, except
7
<PAGE>
insofar as such claims, demands, liabilities or expenses arise out of or are
based upon any such untrue statement or omission or alleged untrue statement or
omission made in reliance upon and in conformity with information furnished in
writing by the Distributor to the Fund for use in the Registration Statement or
Prospectus; provided, however, that this indemnity agreement shall not inure to
the benefit of any such officer, director or controlling person unless a court
of competent jurisdiction shall determine in a final decision on the merits,
that the person to be indemnified was not liable by reason of willful
misfeasance, bad faith or gross negligence in the performance of its duties, or
by reason of its reckless disregard of its obligations under this Agreement
(disabling conduct), or, in the absence of such a decision, a reasonable
determination, based upon a review of the facts, that the indemnified person was
not liable by reason of disabling conduct, by (a) a vote of a majority of a
quorum of Trustees who are neither "interested persons" of the Fund as defined
in Section 2(a)(19) of the Investment Company Act nor parties to the proceeding,
or (b) an independent legal counsel in a written opinion. The Fund's agreement
to indemnify the Distributor, its officers and directors and any such
controlling person as aforesaid is expressly conditioned upon the Fund's being
promptly notified of any action brought against the Distributor, its officers or
directors, or any such controlling person, such notification to be given in
writing addressed to the Fund at its principal business office. The Fund agrees
promptly to notify the Distributor of the commencement of any litigation or
proceedings against the Fund or any of its officers or Trustees in connection
with the issue and sale of any Class B shares.
10.2 The Distributor agrees to indemnify, defend and hold the Fund,
its officers and Trustees and any person who controls the Fund, if any, within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending against such claims, demands or liabilities
and any counsel fees incurred in connection therewith) which the Fund, its
officers and Trustees or any such controlling person may incur under the
Securities Act or under common law or otherwise, but only to the extent that
such liability or expense incurred by the Fund, its Trustees or officers or such
controlling person resulting from such claims or demands shall arise out of or
be based upon any alleged untrue statement of a material fact contained in
information furnished in writing by the Distributor to the Fund for use in the
Registration Statement or Prospectus or shall arise out of or be based upon any
alleged omission to state a material fact in connection with such information
required to be stated in the Registration Statement or Prospectus or necessary
to make such information not misleading. The Distributor's agreement to
indemnify the Fund, its officers and Trustees and any such controlling person as
aforesaid, is expressly conditioned upon the Distributor's being promptly
notified of any action brought against the Fund, its officers and Trustees or
any such controlling person,
8
<PAGE>
such notification to be given to the Distributor in writing at its principal
business office.
Section 11. Duration and Termination of this Agreement
------------------------------------------
11.1 This Agreement shall become effective as of the date first above
written and shall remain in force for two years from the date hereof and
thereafter, but only so long as such continuance is specifically approved at
least annually by (a) the Trustees of the Fund, or by the vote of a majority of
the outstanding voting securities of the Class B shares of the Fund, and (b) by
the vote of a majority of those Trustees who are not parties to this Agreement
or interested persons of any such parties and who have no direct or indirect
financial interest in this Agreement or in the operation of the Fund's Plan or
in any agreement related thereto (Rule 12b-1 Trustees), cast in person at a
meeting called for the purpose of voting upon such approval.
11.2 This Agreement may be terminated at any time, without the
payment of any penalty, by a majority of the Rule 12b-1 Trustees or by vote of a
majority of the outstanding voting securities of the Class B shares of the Fund,
or by the Distributor, on sixty (60) days' written notice to the other party.
This Agreement shall automatically terminate in the event of its assignment.
11.3 The terms "affiliated person," "assignment," "interested person"
and "vote of a majority of the outstanding voting securities," when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.
Section 12. Amendments to this Agreement
----------------------------
This Agreement may be amended by the parties only if such amendment is
specifically approved by (a) the Trustees of the Fund, or by the vote of a
majority of the outstanding voting securities of the Class B shares of the Fund,
and (b) by the vote of a majority of the Rule 12b-1 Trustees cast in person at a
meeting called for the purpose of voting on such amendment.
Section 13. Governing Law
-------------
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of New York as at the time in effect and
the applicable provisions of the Investment Company Act. To the extent that the
applicable law of the State of New York, or any of the provisions herein,
conflict with the applicable provisions of the Investment Company Act, the
latter shall control.
9
<PAGE>
Section 14. Liabilities of the Fund
-----------------------
The name "Prudential Equity Income Fund" is the designation of the
Trustees under a Declaration of Trust dated September 18, 1986, as amended, and
all persons dealing with the Fund must look solely to the property of the Fund
for the enforcement of any claims against the Fund, and neither the Trustees,
officers, agents or shareholders assume any personal liability for obligations
entered into on behalf of the Fund.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year above written.
Prudential Securities
Incorporated
By: /s/ Robert F. Gunia
________________________
Robert F. Gunia
Senior Vice President
Prudential Equity Income Fund
By: /s/ Lawrence C. McQuade
_______________________
Lawrence C. McQuade
President
10
<PAGE>
EXHIBIT 99.6(c)
PRUDENTIAL EQUITY INCOME FUND
Distribution Agreement
(Class C Shares)
----------------
Agreement made as of August 1, 1994, between Prudential Equity Income Fund,
a Massachusetts Business Trust (the Fund) and Prudential Securities
Incorporated, a Delaware corporation (the Distributor).
WITNESSETH
WHEREAS, the Fund is registered under the Investment Company Act of 1940,
as amended (the Investment Company Act), as a diversified, open-end, management
investment company and it is in the interest of the Fund to offer its Class C
shares for sale continuously;
WHEREAS, the Distributor is a broker-dealer registered under the Securities
Exchange Act of 1934, as amended, and is engaged in the business of selling
shares of registered investment companies either directly or through other
broker-dealers;
WHEREAS, the Fund and the Distributor wish to enter into an agreement with
each other, with respect to the continuous offering of the Fund's Class C shares
from and after the date hereof in order to promote the growth of the Fund and
facilitate the distribution of its Class C shares; and
WHEREAS, the Fund has adopted a distribution and service plan pursuant to
Rule 12b-1 under the Investment Company Act (the Plan) authorizing payments by
the Fund to the Distributor with respect to the distribution of Class C shares
of the Fund and the maintenance of Class C shareholder accounts.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor
------------------------------
The Fund hereby appoints the Distributor as the principal underwriter and
distributor of the Class C shares of the Fund to sell Class C shares to the
public and the Distributor hereby accepts such appointment and agrees to act
hereunder. The Fund hereby agrees during the term of this Agreement to sell
Class C shares of the Fund to the Distributor on the terms and conditions set
forth below.
Section 2. Exclusive Nature of Duties
--------------------------
The Distributor shall be the exclusive representative of the Fund to act as
principal underwriter and distributor of the Fund's Class C shares, except that:
<PAGE>
2.1 The exclusive rights granted to the Distributor to purchase Class
C shares from the Fund shall not apply to Class C shares of the Fund issued in
connection with the merger or consolidation of any other investment company or
personal holding company with the Fund or the acquisition by purchase or
otherwise of all (or substantially all) the assets or the outstanding shares of
any such company by the Fund.
2.2 Such exclusive rights shall not apply to Class C shares issued by the
Fund pursuant to reinvestment of dividends or capital gains distributions.
2.3 Such exclusive rights shall not apply to Class C shares issued by the
Fund pursuant to the reinstatement privilege afforded redeeming shareholders.
2.4 Such exclusive rights shall not apply to purchases made through the
Fund's transfer and dividend disbursing agent in the manner set forth in the
currently effective Prospectus of the Fund. The term "Prospectus" shall mean
the Prospectus and Statement of Additional Information included as part of the
Fund's Registration Statement, as such Prospectus and Statement of Additional
Information may be amended or supplemented from time to time, and the term
"Registration Statement" shall mean the Registration Statement filed by the Fund
with the Securities and Exchange Commission and effective under the Securities
Act of 1933, as amended (the Securities Act), and the Investment Company Act, as
such Registration Statement is amended from time to time.
Section 3. Purchase of Class C Shares from the Fund
----------------------------------------
3.1 The Distributor shall have the right to buy from the Fund the Class C
shares needed, but not more than the Class C shares needed (except for clerical
errors in transmission) to fill unconditional orders for Class C shares placed
with the Distributor by investors or registered and qualified securities dealers
and other financial institutions (selected dealers). The price which the
Distributor shall pay for the Class C shares so purchased from the Fund shall be
the net asset value, determined as set forth in the Prospectus.
3.2 The Class C shares are to be resold by the Distributor or selected
dealers, as described in Section 6.4 hereof, to investors at the offering price
as set forth in the Prospectus.
3.3 The Fund shall have the right to suspend the sale of its Class C
shares at times when redemption is suspended pursuant to the conditions in
Section 4.3 hereof or at such other times as may be determined by the Trustees.
The Fund shall also have the right to suspend the sale of its Class C shares if
a banking
2
<PAGE>
moratorium shall have been declared by federal or New York authorities.
3.4 The Fund, or any agent of the Fund designated in writing by the Fund,
shall be promptly advised of all purchase orders for Class C shares received by
the Distributor. Any order may be rejected by the Fund; provided, however, that
the Fund will not arbitrarily or without reasonable cause refuse to accept or
confirm orders for the purchase of Class C shares. The Fund (or its agent) will
confirm orders upon their receipt, will make appropriate book entries and upon
receipt by the Fund (or its agent) of payment therefore, will deliver deposit
receipts for such Class C shares pursuant to the instructions of the
Distributor. Payment shall be made to the Fund in New York Clearing House funds
or federal funds. The Distributor agrees to cause such payment and such
instructions to be delivered promptly to the Fund (or its agent).
Section 4. Repurchase or Redemption of Class C Shares by the Fund
------------------------------------------------------
4.1 Any of the outstanding Class C shares may be tendered for redemption
at any time, and the Fund agrees to repurchase or redeem the Class C shares so
tendered in accordance with its Declaration of Trust as amended from time to
time, and in accordance with the applicable provisions of the Prospectus. The
price to be paid to redeem or repurchase the Class C shares shall be equal to
the net asset value determined as set forth in the Prospectus. All payments by
the Fund hereunder shall be made in the manner set forth in Section 4.2 below.
4.2 The Fund shall pay the total amount of the redemption price as defined
in the above paragraph pursuant to the instructions of the Distributor on or
before the seventh day subsequent to its having received the notice of
redemption in proper form. The proceeds of any redemption of Class C shares
shall be paid by the Fund as follows: (a) any applicable contingent deferred
sales charge shall be paid to the Distributor and (b) the balance shall be paid
to or for the account of the redeeming shareholder, in each case in accordance
with applicable provisions of the Prospectus.
4.3 Redemption of Class C shares or payment may be suspended at times when
the New York Stock Exchange is closed for other than customary weekends and
holidays, when trading on said Exchange is restricted, when an emergency exists
as a result of which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or during any other period when the
Securities and Exchange Commission, by order, so permits.
3
<PAGE>
Section 5. Duties of the Fund
------------------
5.1 Subject to the possible suspension of the sale of Class C shares as
provided herein, the Fund agrees to sell its Class C shares so long as it has
Class C shares available.
5.2 The Fund shall furnish the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Class C shares, and this
shall include one certified copy, upon request by the Distributor, of all
financial statements prepared for the Fund by independent public accountants.
The Fund shall make available to the Distributor such number of copies of its
Prospectus and annual and interim reports as the Distributor shall reasonably
request.
5.3 The Fund shall take, from time to time, but subject to the necessary
approval of the Trustees and the shareholders, all necessary action to fix the
number of authorized Class C shares and such steps as may be necessary to
register the same under the Securities Act, to the end that there will be
available for sale such number of Class C shares as the Distributor reasonably
may expect to sell. The Fund agrees to file from time to time such amendments,
reports and other documents as may be necessary in order that there will be no
untrue statement of a material fact in the Registration Statement, or necessary
in order that there will be no omission to state a material fact in the
Registration Statement which omission would make the statements therein
misleading.
5.4 The Fund shall use its best efforts to qualify and maintain the
qualification of any appropriate number of its Class C shares for sales under
the securities laws of such states as the Distributor and the Fund may approve;
provided that the Fund shall not be required to amend its Declaration of Trust
or By-Laws to comply with the laws of any state, to maintain an office in any
state, to change the terms of the offering of its Class C shares in any state
from the terms set forth in its Registration Statement, to qualify as a foreign
corporation in any state or to consent to service of process in any state other
than with respect to claims arising out of the offering of its Class C shares.
Any such qualification may be withheld, terminated or withdrawn by the Fund at
any time in its discretion. As provided in Section 9.1 hereof, the expense of
qualification and maintenance of qualification shall be borne by the Fund. The
Distributor shall furnish such information and other material relating to its
affairs and activities as may be required by the Fund in connection with such
qualifications.
4
<PAGE>
Section 6. Duties of the Distributor
-------------------------
6.1 The Distributor shall devote reasonable time and effort to effect
sales of Class C shares of the Fund, but shall not be obligated to sell any
specific number of Class C shares. Sales of the Class C shares shall be on the
terms described in the Prospectus. The Distributor may enter into like
arrangements with other investment companies. The Distributor shall compensate
the selected dealers as set forth in the Prospectus.
6.2 In selling the Class C shares, the Distributor shall use its best
efforts in all respects duly to conform with the requirements of all federal and
state laws relating to the sale of such securities. Neither the Distributor nor
any selected dealer nor any other person is authorized by the Fund to give any
information or to make any representations, other than those contained in the
Registration Statement or Prospectus and any sales literature approved by
appropriate officers of the Fund.
6.3 The Distributor shall adopt and follow procedures for the confirmation
of sales to investors and selected dealers, the collection of amounts payable by
investors and selected dealers on such sales and the cancellation of unsettled
transactions, as may be necessary to comply with the requirements of the
National Association of Securities Dealers, Inc. (NASD).
6.4 The Distributor shall have the right to enter into selected dealer
agreements with registered and qualified securities dealers and other financial
institutions of its choice for the sale of Class C shares, provided that the
Fund shall approve the forms of such agreements. Within the United States, the
Distributor shall offer and sell Class C shares only to such selected dealers as
are members in good standing of the NASD. Class C shares sold to selected
dealers shall be for resale by such dealers only at the offering price
determined as set forth in the Prospectus.
Section 7. Payments to the Distributor
---------------------------
The Distributor shall receive and may retain any contingent deferred sales
charge which is imposed with respect to repurchases and redemptions of Class C
shares as set forth in the Prospectus, subject to the limitations of Article
III, Section 26 of the NASD Rules of Fair Practice. Payment of these amounts to
the Distributor is not contingent upon the adoption or continuation of the Plan.
Section 8. Payment of the Distributor under the Plan
-----------------------------------------
8.1 The Fund shall pay to the Distributor as compensation for services
under the Distribution and Service Plan and this Agreement a fee of 1%
(including an asset-based sales charge of .75 of 1% and a service fee of .25 of
1%) per annum of
5
<PAGE>
the average daily net assets of the Class C shares of the Fund. Amounts payable
under the Plan shall be accrued daily and paid monthly or at such other
intervals as the Trustees may determine. Amounts payable under the Plan shall
be subject to the limitations of Article III, Section 26 of the NASD Rules of
Fair Practice.
8.2 So long as the Plan or any amendment thereto is in effect, the
Distributor shall inform the Trustees of the commissions (including trailer
commissions) and account servicing fees to be paid by the Distributor to account
executives of the Distributor and to broker-dealers and financial institutions
which have selected dealer agreements with the Distributor. So long as the Plan
(or any amendment thereto) is in effect, at the request of the Trustees or any
agent or representative of the Fund, the Distributor shall provide such
additional information as may reasonably be requested concerning the activities
of the Distributor hereunder and the costs incurred in performing such
activities.
8.3 Expenses of distribution with respect to the Class C shares of the
Fund include, among others:
(a) sales commissions (including trailer commissions) paid to, or
on account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated
with performance of distribution activities, including
central office and branch expenses;
(c) amounts paid to Prusec for performing services under a
selected dealer agreement between Prusec and the Distributor
for sale of Class C shares of the Fund, including sales
commissions and trailer commissions paid to, or on account
of, agents and indirect and overhead costs associated with
distribution activities;
(d) sales commissions (including trailer commissions) paid to, or
on account of, broker-dealers and financial institutions
(other than Prusec) which have entered into selected dealer
agreements with the Distributor with respect to Class C
shares of the Fund;
(e) amounts paid to, or an account of, account executives of the
Distributor or of other broker-dealers or financial
institutions for personal service and/or the maintenance of
6
<PAGE>
shareholder accounts; and
(f) advertising for the Fund in various forms through any
available medium, including the cost of printing and mailing
Fund Prospectuses, and periodic financial reports and sales
literature to persons other than current shareholders of the
Fund.
Indirect and overhead costs referred to in clauses (b) and (c) of the
foregoing sentence include (i) lease expenses, (ii) salaries and benefits of
personnel including operations and sales support personnel, (iii) utility
expenses, (iv) communications expenses, (v) sales promotion expenses, (vi)
expenses of postage, stationery and supplies and (vii) general overhead.
Section 9. Allocation of Expenses
----------------------
9.1 The Fund shall bear all costs and expenses of the continuous
offering of its Class C shares, including fees and disbursements of its counsel
and auditors, in connection with the preparation and filing of any required
Registration Statements and/or Prospectuses under the Investment Company Act or
the Securities Act, and preparing and mailing annual and periodic reports and
proxy materials to shareholders (including but not limited to the expense of
setting in type any such Registration Statements, Prospectuses, annual or
periodic reports or proxy materials). The Fund shall also bear the cost of
expenses of qualification of the Class C shares for sale, and, if necessary or
advisable in connection therewith, of qualifying the Fund as a broker or dealer,
in such states of the United States or other jurisdictions as shall be selected
by the Fund and the Distributor pursuant to Section 5.4 hereof and the cost and
expense payable to each such state for continuing qualification therein until
the Fund decides to discontinue such qualification pursuant to Section 5.4
hereof. As set forth in Section 8 above, the Fund shall also bear the expenses
it assumes pursuant to the Plan with respect to Class C shares, so long as the
Plan is in effect.
Section 10. Indemnification
---------------
10.1 The Fund agrees to indemnify, defend and hold the Distributor,
its officers and directors and any person who controls the Distributor within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Distributor, its
officers, directors or any such controlling person may incur under the
Securities Act, or under common law or otherwise, arising out of or based upon
any untrue statement of a material fact contained in the Registration Statement
or Prospectus
7
<PAGE>
or arising out of or based upon any alleged omission to state a material fact
required to be stated in either thereof or necessary to make the statements in
either thereof not misleading, except insofar as such claims, demands,
liabilities or expenses arise out of or are based upon any such untrue statement
or omission or alleged untrue statement or omission made in reliance upon and in
conformity with information furnished in writing by the Distributor to the Fund
for use in the Registration Statement or Prospectus; provided, however, that
this indemnity agreement shall not inure to the benefit of any such officer,
director or controlling person unless a court of competent jurisdiction shall
determine in a final decision on the merits, that the person to be indemnified
was not liable by reason of willful misfeasance, bad faith or gross negligence
in the performance of its duties, or by reason of its reckless disregard of its
obligations under this Agreement (disabling conduct), or, in the absence of such
a decision, a reasonable determination, based upon a review of the facts, that
the indemnified person was not liable by reason of disabling conduct, by (a) a
vote of a majority of a quorum of Trustees who are neither "interested persons"
of the Fund as defined in Section 2(a)(19) of the Investment Company Act nor
parties to the proceeding, or (b) an independent legal counsel in a written
opinion. The Fund's agreement to indemnify the Distributor, its officers and
directors and any such controlling person as aforesaid is expressly conditioned
upon the Fund's being promptly notified of any action brought against the
Distributor, its officers or directors, or any such controlling person, such
notification to be given in writing addressed to the Fund at its principal
business office. The Fund agrees promptly to notify the Distributor of the
commencement of any litigation or proceedings against the Fund or any of its
officers or Trustees in connection with the issue and sale of any Class C
shares.
10.2 The Distributor agrees to indemnify, defend and hold the Fund,
its officers and Trustees and any person who controls the Fund, if any, within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending against such claims, demands or liabilities
and any counsel fees incurred in connection therewith) which the Fund, its
officers and Trustees or any such controlling person may incur under the
Securities Act or under common law or otherwise, but only to the extent that
such liability or expense incurred by the Fund, its Trustees or officers or such
controlling person resulting from such claims or demands shall arise out of or
be based upon any alleged untrue statement of a material fact contained in
information furnished in writing by the Distributor to the Fund for use in the
Registration Statement or Prospectus or shall arise out of or be based upon any
alleged omission to state a material fact in connection with such information
required to be stated in the Registration Statement or Prospectus or necessary
to make such information not misleading. The Distributor's agreement
8
<PAGE>
to indemnify the Fund, its officers and Trustees and any such controlling person
as aforesaid, is expressly conditioned upon the Distributor's being promptly
notified of any action brought against the Fund, its officers and Trustees or
any such controlling person, such notification to be given to the Distributor in
writing at its principal business office.
Section 11. Duration and Termination of this Agreement
------------------------------------------
11.1 This Agreement shall become effective as of the date first above
written and shall remain in force for two years from the date hereof and
thereafter, but only so long as such continuance is specifically approved at
least annually by (a) the Trustees of the Fund, or by the vote of a majority of
the outstanding voting securities of the Class C shares of the Fund, and (b) by
the vote of a majority of those Trustees who are not parties to this Agreement
or interested persons of any such parties and who have no direct or indirect
financial interest in this Agreement or in the operation of the Fund's Plan or
in any agreement related thereto (Rule 12b-1 Trustees), cast in person at a
meeting called for the purpose of voting upon such approval.
11.2 This Agreement may be terminated at any time, without the
payment of any penalty, by a majority of the Rule 12b-1 Trustees or by vote of a
majority of the outstanding voting securities of the Class C shares of the Fund,
or by the Distributor, on sixty (60) days' written notice to the other party.
This Agreement shall automatically terminate in the event of its assignment.
11.3 The terms "affiliated person," "assignment," "interested person"
and "vote of a majority of the outstanding voting securities," when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.
Section 12. Amendments to this Agreement
----------------------------
This Agreement may be amended by the parties only if such amendment is
specifically approved by (a) the Trustees of the Fund, or by the vote of a
majority of the outstanding voting securities of the Class C shares of the Fund,
and (b) by the vote of a majority of the Rule 12b-1 Trustees cast in person at a
meeting called for the purpose of voting on such amendment.
Section 13. Governing Law
-------------
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of New York as at the time in effect and
the applicable provisions of the Investment Company Act. To the extent that the
applicable law of the State of New York, or any of the provisions herein,
conflict with the applicable provisions of the Investment Company Act, the
9
<PAGE>
latter shall control.
Section 14. Liabilities of the Fund
-----------------------
The name "Prudential Equity Income Fund" is the designation of the
Trustees under a Declaration of Trust dated September 18, 1986, as amended, and
all persons dealing with the Fund must look solely to the property of the Fund
for the enforcement of any claims against the Fund, and neither the Trustees,
officers, agents or shareholders assume any personal liability for obligations
entered into on behalf of the Fund.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year above written.
Prudential Securities
Incorporated
By: /s/ Robert F. Gunia
________________________
Robert F. Gunia
Senior Vice President
Prudential Equity Income Fund
By: /s/ Lawrence C. McQuade
_______________________
Lawrence C. McQuade
President
10
<PAGE>
EXHIBIT 99.11
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in Post-Effective Amendment No. 13 to Registration
Statement No. 33-9269 of Prudential Equity Income Fund of our report dated
December 7, 1994, appearing in the Statement of Additional Information, which is
a part of such Registration Statement, and to the references to us under the
headings "Financial Highlights" in the Prospectus, which is a part of such
Registration Statement, and "Custodian, Transfer and Dividend Disbursing Agent
and Independent Accountants" in the Statement of Additional Information.
Deloitte & Touche LLP
New York, New York
December 20, 1994
<PAGE>
EXHIBIT 99.15(a)
PRUDENTIAL EQUITY INCOME FUND
Distribution and Service Plan
(Class A Shares)
---------------
Introduction
------------
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Article III, Section 26 of
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc. (NASD) has been adopted by Prudential Equity Income Fund (the Fund) and by
Prudential Mutual Fund Distributors, Inc., the Fund's distributor (the
Distributor).
The Fund has entered into a distribution agreement pursuant to which the
Fund will employ the Distributor to distribute Class A shares issued by the Fund
(Class A shares). Under the Plan, the Fund intends to pay to the Distributor, as
compensation for its services, a distribution and service fee with respect to
Class A shares.
A majority of the Trustees of the Fund, including a majority of those
Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of this Plan or any agreements related to it (the Rule 12b-1
Trustees), have determined by votes cast in person at a meeting called for the
purpose of voting on this Plan that there is a reasonable likelihood that
adoption of this Plan will benefit the Fund and its shareholders. Expenditures
under this Plan by the Fund for Distribution
<PAGE>
Activities (defined below) are primarily intended to result in the sale of Class
A shares of the Fund within the meaning of paragraph (a)(2) of Rule 12b-1
promulgated under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
The Plan
--------
The material aspects of the Plan are as follows:
1. Distribution Activities
-----------------------
The Fund shall engage the Distributor to distribute Class A shares of the
Fund and to service shareholder accounts using all of the facilities of the
distribution networks of Prudential Securities Incorporated (Prudential
Securities) and Pruco Securities Corporation (Prusec), including sales personnel
and branch office and central support systems, and also using such other
qualified broker-dealers and financial institutions as the Distributor may
select. Services provided and activities undertaken to distribute Class A
shares of the Fund are referred to herein as "Distribution Activities."
2. Payment of Service Fee
-----------------------
The Fund shall pay to the Distributor as compensation for
2
<PAGE>
providing personal service and/or maintaining shareholder accounts a service fee
of .25 of 1% per annum of the average daily net assets of the Class A shares
(service fee). The Fund shall calculate and accrue daily amounts payable by the
Class A shares of the Fund hereunder and shall pay such amounts monthly or at
such other intervals as the Trustees may determine.
3. Payment for Distribution Activities
-----------------------------------
The Fund shall pay to the Distributor as compensation for its services a
distribution fee, together with the service fee (described in Section 2 hereof),
of .30 of 1% per annum of the average daily net assets of the Class A shares of
the Fund for the performance of Distribution Activities. The Fund shall
calculate and accrue daily amounts payable by the Class A shares of the Fund
hereunder and shall pay such amounts monthly or at such other intervals as the
Trustees may determine. Amounts payable under the Plan shall be subject to the
limitations of Article III, Section 26 of the NASD Rules of Fair Practice.
Amounts paid to the Distributor by the Class A shares of the Fund will not
be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class A shares according to the
ratio of the sales of Class A shares to the total sales of the Fund's shares
over the Fund's fiscal year or such other allocation method approved by the
Trustees. The allocation of distribution expenses among classes will be subject
to the review of the Trustees.
3
<PAGE>
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
(a)amounts paid to Prudential Securities for performing services
under a selected dealer agreement between Prudential Securities and
the Distributor for sale of Class A shares of the Fund, including
sales commissions and trailer commissions paid to, or on account of,
account executives and indirect and overhead costs associated with
Distribution Activities, including central office and branch expenses;
(b)amounts paid to Prusec for performing services under a
selected dealer agreement between Prusec and the Distributor for sale
of Class A shares of the Fund, including sales commissions and trailer
commissions paid to, or on account of, agents and indirect and
overhead costs associated with Distribution Activities;
(c)advertising for the Fund in various forms through any
available medium, including the cost of printing and mailing Fund
prospectuses, statements of additional information and periodic
financial reports and sales literature to persons other than current
shareholders of the Fund; and
(d)sales commissions (including trailer commissions) paid to, or
on account of, broker-dealers and financial institutions (other than
Prudential Securities and Prusec) which have entered into selected
dealer agreements with the Distributor with respect to Class A shares
of the Fund.
4. Quarterly Reports; Additional Information
-----------------------------------------
An appropriate officer of the Fund will provide to the Trustees of the Fund
for review, at least quarterly, a written report specifying in reasonable detail
the amounts expended for Distribution Activities (including payment of the
service fee) and the purposes for which such expenditures were made in
compliance
4
<PAGE>
with the requirements of Rule 12b-1. The Distributor will provide to the
Trustees of the Fund such additional information as the Trustees shall from time
to time reasonably request, including information about Distribution Activities
undertaken or to be undertaken by the Distributor.
The Distributor will inform the Trustees of the Fund of the commissions and
account servicing fees to be paid by the Distributor to account executives of
the Distributor and to broker-dealers and financial institutions which have
selected dealer agreements with the Distributor.
5. Effectiveness; Continuation
---------------------------
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class A shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities of
the Class A shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the Trustees of the Fund and a majority of the Rule 12b-1 Trustees
by votes cast in person at a meeting called for the purpose of voting on the
continuation of the Plan.
6. Termination
-----------
This Plan may be terminated at any time by vote of a majority of the Rule
12b-1 Trustees, or by vote of a majority of the
5
<PAGE>
outstanding voting securities (as defined in the Investment Company Act) of the
Class A shares of the Fund.
7. Amendments
----------
The Plan may not be amended to change the combined service and distribution
fees to be paid as provided for in Sections 2 and 3 hereof so as to increase
materially the amounts payable under this Plan unless such amendment shall be
approved by the vote of a majority of the outstanding voting securities (as
defined in the Investment Company Act) of the Class A shares of the Fund. All
material amendments of the Plan shall be approved by a majority of the Trustees
of the Fund and a majority of the Rule 12b-1 Trustees by votes cast in person at
a meeting called for the purpose of voting on the Plan.
8. Rule 12b-1 Trustees
-------------------
While the Plan is in effect, the selection and nomination of the Rule 12b-1
Trustees shall be committed to the discretion of the Rule 12b-1 Trustees.
9. Records
-------
The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.
10. Enforcement of Claims
---------------------
The name "Prudential Equity Income Fund" is the designation of the
Trustees under a Declaration of Trust dated September 18,
6
<PAGE>
1986, as amended, and all persons dealing with the Fund must look solely to the
property of the Fund for the enforcement of any claims against the Fund, and
neither the Trustees, officers, agents or shareholders assume any personal
liability for obligations entered into on behalf of the Fund.
Dated: August 1, 1994
7
<PAGE>
EXHIBIT 99.15(b)
PRUDENTIAL EQUITY INCOME FUND
Distribution and Service Plan
(Class B Shares)
---------------
Introduction
------------
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Article III, Section 26 of
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc. (NASD) has been adopted by Prudential Equity Income Fund (the Fund) and by
Prudential Securities Incorporated (Prudential Securities), the Fund's
distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which the
Fund will continue to employ the Distributor to distribute Class B shares issued
by the Fund (Class B shares). Under the Plan, the Fund wishes to pay to the
Distributor, as compensation for its services, a distribution and service fee
with respect to Class B shares.
A majority of the Trustees of the Fund including a majority who are not
"interested persons" of the Fund (as defined in the Investment Company Act) and
who have no direct or indirect financial interest in the operation of this Plan
or any agreements related to it (the Rule 12b-1 Trustees), have determined by
votes cast in person at a meeting called for the purpose of voting on this Plan
that there is a reasonable likelihood that adoption of this Plan will benefit
the Fund and its shareholders. Expenditures
<PAGE>
under this Plan by the Fund for Distribution Activities (defined below) are
primarily intended to result in the sale of Class B shares of the Fund within
the meaning of paragraph (a)(2) of Rule 12b-1 promulgated under the Investment
Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
The Plan
--------
The material aspects of the Plan are as follows:
1. Distribution Activities
-----------------------
The Fund shall engage the Distributor to distribute Class B shares of the
Fund and to service shareholder accounts using all of the facilities of the
Prudential Securities distribution network including sales personnel and branch
office and central support systems, and also using such other qualified broker-
dealers and financial institutions as the Distributor may select, including
Pruco Securities Corporation (Prusec). Services provided and activities
undertaken to distribute Class B shares of the Fund are referred to herein as
"Distribution Activities."
2
<PAGE>
2. Payment of Service Fee
-----------------------
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class B shares (service
fee). The Fund shall calculate and accrue daily amounts payable by the Class B
shares of the Fund hereunder and shall pay such amounts monthly or at such other
intervals as the Trustees may determine.
3. Payment for Distribution Activities
-----------------------------------
The Fund shall pay to the Distributor as compensation for its services a
distribution fee of .75 of 1% per annum of the average daily net assets of the
Class B shares of the Fund for the performance of Distribution Activities. The
Fund shall calculate and accrue daily amounts payable by the Class B shares of
the Fund hereunder and shall pay such amounts monthly or at such other intervals
as the Trustees may determine. Amounts payable under the Plan shall be subject
to the limitations of Article III, Section 26 of the NASD Rules of Fair
Practice.
Amounts paid to the Distributor by the Class B shares of the Fund will not
be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class B shares according to the
ratio of the sale of Class B shares to the total sales of the Fund's shares over
the Fund's fiscal year or such other allocation method approved by the Trustees.
The allocation of distribution expenses among classes
3
<PAGE>
will be subject to the review of the Trustees.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
(a) sales commissions (including trailer commissions) paid to, or on
account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
performance of Distribution Activities including central office and
branch expenses;
(c) amounts paid to Prusec for performing services under a selected
dealer agreement between Prusec and the Distributor for sale of Class
B shares of the Fund, including sales commissions and trailer
commissions paid to, or on account of, agents and indirect and
overhead costs associated with Distribution Activities;
(d) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund prospectuses,
statements of additional information and periodic financial reports
and sales literature to persons other than current shareholders of the
Fund; and
(e) sales commissions (including trailer commissions) paid to, or on
account of, broker-dealers and other financial institutions (other
than Prusec) which have entered into selected dealer agreements with
the Distributor with respect to Class B shares of the Fund.
4. Quarterly Reports; Additional Information
-----------------------------------------
An appropriate officer of the Fund will provide to the Trustees of the Fund
for review, at least quarterly, a written report specifying in reasonable detail
the amounts expended for Distribution Activities (including payment of the
service fee) and the purposes for which such expenditures were made in
compliance with the requirements of Rule 12b-1. The Distributor will provide to
the Trustees of the Fund such additional information as they shall from time to
time reasonably request, including information
4
<PAGE>
about Distribution Activities undertaken or to be undertaken by the Distributor.
The Distributor will inform the Trustees of the Fund of the commissions and
account servicing fees to be paid by the Distributor to account executives of
the Distributor and to broker-dealers and other financial institutions which
have selected dealer agreements with the Distributor.
5. Effectiveness; Continuation
---------------------------
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class B shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities of
the Class B shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the Trustees of the Fund and a majority of the Rule 12b-1 Trustees
by votes cast in person at a meeting called for the purpose of voting on the
continuation of the Plan.
6. Termination
-----------
This Plan may be terminated at any time by vote of a majority of the Rule
12b-1 Trustees, or by vote of a majority of the outstanding voting securities
(as defined in the Investment Company Act) of the Class B shares of the Fund.
5
<PAGE>
7. Amendments
----------
The Plan may not be amended to change the combined service and distribution
fees to be paid as provided for in Sections 2 and 3 hereof so as to increase
materially the amounts payable under this Plan unless such amendment shall be
approved by the vote of a majority of the outstanding voting securities (as
defined in the Investment Company Act) of the Class B shares of the Fund. All
material amendments of the Plan shall be approved by a majority of the Trustees
of the Fund and a majority of the Rule 12b-1 Trustees by votes cast in person at
a meeting called for the purpose of voting on the Plan.
8. Rule 12b-1 Trustees
-------------------
While the Plan is in effect, the selection and nomination of the Rule 12b-1
Trustees shall be committed to the discretion of the Rule 12b-1 Trustees.
9. Records
-------
The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.
10. Enforcement of Claims
---------------------
The name "Prudential Equity Income Fund" is the designation of the
Trustees under a Declaration of Trust dated September 18, 1986, as amended, and
all persons dealing with the Fund must look solely to the property of the Fund
for the enforcement of any
6
<PAGE>
claims against the Fund, and neither the Trustees, officers, agents or
shareholders assume any personal liability for obligations entered into on
behalf of the Fund.
Dated: August 1, 1994
7
<PAGE>
EXHIBIT 99.15(c)
PRUDENTIAL EQUITY INCOME FUND
Distribution and Service Plan
(Class C Shares)
---------------
Introduction
------------
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Article III, Section 26 of
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc. (NASD) has been adopted by Prudential Equity Income Fund (the Fund) and by
Prudential Securities Incorporated (Prudential Securities), the Fund's
distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which
the Fund will continue to employ the Distributor to distribute Class C shares
issued by the Fund (Class C shares). Under the Plan, the Fund wishes to pay to
the Distributor, as compensation for its services, a distribution and service
fee with respect to Class C shares.
A majority of the Trustees of the Fund including a majority who are
not "interested persons" of the Fund (as defined in the Investment Company Act)
and who have no direct or indirect financial interest in the operation of this
Plan or any agreements related to it (the Rule 12b-1 Trustees), have determined
by votes cast in person at a meeting called for the purpose of voting on this
Plan that there is a reasonable likelihood that adoption of this Plan will
benefit the Fund and its shareholders. Expenditures under this Plan by the Fund
for Distribution Activities (defined
<PAGE>
below) are primarily intended to result in the sale of Class C shares of the
Fund within the meaning of paragraph (a)(2) of Rule 12b-1 promulgated under the
Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor
and/or other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
The Plan
--------
The material aspects of the Plan are as follows:
1. Distribution Activities
-----------------------
The Fund shall engage the Distributor to distribute Class C shares of
the Fund and to service shareholder accounts using all of the facilities of the
Prudential Securities distribution network including sales personnel and branch
office and central support systems, and also using such other qualified broker-
dealers and financial institutions as the Distributor may select, including
Pruco Securities Corporation (Prusec). Services provided and activities
undertaken to distribute Class C shares of the Fund are referred to herein as
"Distribution Activities."
2. Payment of Service Fee
-----------------------
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts
2
<PAGE>
a service fee of .25 of 1% per annum of the average daily net assets of the
Class C shares (service fee). The Fund shall calculate and accrue daily amounts
payable by the Class C shares of the Fund hereunder and shall pay such amounts
monthly or at such other intervals as the Trustees may determine.
3. Payment for Distribution Activities
-----------------------------------
The Fund shall pay to the Distributor as compensation for its services a
distribution fee of .75 of 1% per annum of the average daily net assets of the
Class C shares of the Fund for the performance of Distribution Activities. The
Fund shall calculate and accrue daily amounts payable by the Class C shares of
the Fund hereunder and shall pay such amounts monthly or at such other intervals
as the Trustees may determine. Amounts payable under the Plan shall be subject
to the limitations of Article III, Section 26 of the NASD Rules of Fair
Practice.
Amounts paid to the Distributor by the Class C shares of the Fund will not
be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class C shares according to the
ratio of the sale of Class C shares to the total sales of the Fund's shares over
the Fund's fiscal year or such other allocation method approved by the Trustees.
The allocation of distribution expenses among classes will be subject to the
review of the Trustees.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
3
<PAGE>
(a) sales commissions (including trailer commissions) paid to, or on
account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
performance of Distribution Activities including central office and
branch expenses;
(c) amounts paid to Prusec for performing services under a selected
dealer agreement between Prusec and the Distributor for sale of Class
C shares of the Fund, including sales commissions and trailer
commissions paid to, or on account of, agents and indirect and
overhead costs associated with Distribution Activities;
(d) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund prospectuses,
statements of additional information and periodic financial reports
and sales literature to persons other than current shareholders of the
Fund; and
(e) sales commissions (including trailer commissions) paid to, or on
account of, broker-dealers and other financial institutions (other
than Prusec) which have entered into selected dealer agreements with
the Distributor with respect to Class C shares of the Fund.
4. Quarterly Reports; Additional Information
-----------------------------------------
An appropriate officer of the Fund will provide to the Trustees of the Fund
for review, at least quarterly, a written report specifying in reasonable detail
the amounts expended for Distribution Activities (including payment of the
service fee) and the purposes for which such expenditures were made in
compliance with the requirements of Rule 12b-1. The Distributor will provide to
the Trustees of the Fund such additional information as they shall from time to
time reasonably request, including information about Distribution Activities
undertaken or to be undertaken by the Distributor.
The Distributor will inform the Trustees of the Fund of the
4
<PAGE>
commissions and account servicing fees to be paid by the Distributor to account
executives of the Distributor and to broker-dealers and other financial
institutions which have selected dealer agreements with the Distributor.
5. Effectiveness; Continuation
---------------------------
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class C shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities of
the Class C shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the Trustees of the Fund and a majority of the Rule 12b-1 Trustees
by votes cast in person at a meeting called for the purpose of voting on the
continuation of the Plan.
6. Termination
-----------
This Plan may be terminated at any time by vote of a majority of the Rule
12b-1 Trustees, or by vote of a majority of the outstanding voting securities
(as defined in the Investment Company Act) of the Class C shares of the Fund.
7. Amendments
----------
The Plan may not be amended to change the combined service and distribution
fees to be paid as provided for in Sections 2 and 3 hereof so as to increase
materially the amounts payable under this
5
<PAGE>
Plan unless such amendment shall be approved by the vote of a majority of the
outstanding voting securities (as defined in the Investment Company Act) of the
Class C shares of the Fund. All material amendments of the Plan shall be
approved by a majority of the Trustees of the Fund and a majority of the Rule
12b-1 Trustees by votes cast in person at a meeting called for the purpose of
voting on the Plan.
8. Rule 12b-1 Trustees
-------------------
While the Plan is in effect, the selection and nomination of the Rule 12b-1
Trustees shall be committed to the discretion of the Rule 12b-1 Trustees.
9. Records
-------
The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.
10. Enforcement of Claims
---------------------
The name "Prudential Equity Income Fund" is the designation of the
Trustees under a Declaration of Trust dated September 18, 1986, as amended, and
all persons dealing with the Fund must look solely to the property of the Fund
for the enforcement of any claims against the Fund, and neither the Trustees,
officers, agents or shareholders assume any personal liability for obligations
entered into on behalf of the Fund.
Dated: August 1, 1994
6
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> PRUDENTIAL EQUITY INCOME FUND (CLASS A)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1994
<PERIOD-END> OCT-31-1994
<INVESTMENTS-AT-COST> 1,060,276,269
<INVESTMENTS-AT-VALUE> 1,084,363,229
<RECEIVABLES> 41,833,421
<ASSETS-OTHER> 243,304
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,126,439,954
<PAYABLE-FOR-SECURITIES> 15,333,395
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,127,472
<TOTAL-LIABILITIES> 19,460,867
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,027,917,893
<SHARES-COMMON-STOCK> 79,064,188
<SHARES-COMMON-PRIOR> 44,021,019
<ACCUMULATED-NII-CURRENT> 13,861,666
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 41,112,568
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 24,086,960
<NET-ASSETS> 1,106,979,087
<DIVIDEND-INCOME> 30,417,969
<INTEREST-INCOME> 6,772,275
<OTHER-INCOME> 0
<EXPENSES-NET> 15,973,732
<NET-INVESTMENT-INCOME> 21,216,512
<REALIZED-GAINS-CURRENT> 42,485,087
<APPREC-INCREASE-CURRENT> (35,543,092)
<NET-CHANGE-FROM-OPS> 28,158,507
<EQUALIZATION> 3,591,448
<DISTRIBUTIONS-OF-INCOME> (13,488,790)
<DISTRIBUTIONS-OF-GAINS> (26,357,952)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 668,069,397
<NUMBER-OF-SHARES-REDEEMED> (221,021,185)
<SHARES-REINVESTED> 36,142,786
<NET-CHANGE-IN-ASSETS> 475,094,211
<ACCUMULATED-NII-PRIOR> 2,542,710
<ACCUMULATED-GAINS-PRIOR> 24,985,219
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,078,246
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 15,973,732
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 14.38
<PER-SHARE-NII> 0.41
<PER-SHARE-GAIN-APPREC> 0.06
<PER-SHARE-DIVIDEND> (0.29)
<PER-SHARE-DISTRIBUTIONS> (0.53)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 14.03
<EXPENSE-RATIO> 0.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> PRUDENTIAL EQUITY INCOME FUND (CLASS B)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1994
<PERIOD-END> OCT-31-1994
<INVESTMENTS-AT-COST> 1,060,276,269
<INVESTMENTS-AT-VALUE> 1,084,363,229
<RECEIVABLES> 41,833,421
<ASSETS-OTHER> 243,304
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,126,439,954
<PAYABLE-FOR-SECURITIES> 15,333,395
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,127,472
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<PAID-IN-CAPITAL-COMMON> 1,027,917,893
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<SHARES-COMMON-PRIOR> 44,021,019
<ACCUMULATED-NII-CURRENT> 13,861,666
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<ACCUMULATED-NET-GAINS> 41,112,568
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 24,086,960
<NET-ASSETS> 1,106,979,087
<DIVIDEND-INCOME> 30,417,969
<INTEREST-INCOME> 6,772,275
<OTHER-INCOME> 0
<EXPENSES-NET> 15,973,732
<NET-INVESTMENT-INCOME> 21,216,512
<REALIZED-GAINS-CURRENT> 42,485,087
<APPREC-INCREASE-CURRENT> (35,543,092)
<NET-CHANGE-FROM-OPS> 28,158,507
<EQUALIZATION> 3,591,448
<DISTRIBUTIONS-OF-INCOME> (13,488,790)
<DISTRIBUTIONS-OF-GAINS> (26,357,952)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 668,069,397
<NUMBER-OF-SHARES-REDEEMED> (221,021,185)
<SHARES-REINVESTED> 36,142,786
<NET-CHANGE-IN-ASSETS> 475,094,211
<ACCUMULATED-NII-PRIOR> 2,542,710
<ACCUMULATED-GAINS-PRIOR> 24,985,219
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
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<GROSS-EXPENSE> 15,973,732
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 14.35
<PER-SHARE-NII> 0.31
<PER-SHARE-GAIN-APPREC> 0.06
<PER-SHARE-DIVIDEND> (0.19)
<PER-SHARE-DISTRIBUTIONS> (0.53)
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<PER-SHARE-NAV-END> 14.00
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> PRUDENTIAL EQUITY INCOME FUND (CLASS C)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1994
<PERIOD-END> OCT-31-1994
<INVESTMENTS-AT-COST> 1,060,276,269
<INVESTMENTS-AT-VALUE> 1,084,363,229
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<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,127,472
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<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,027,917,893
<SHARES-COMMON-STOCK> 79,064,188
<SHARES-COMMON-PRIOR> 44,021,019
<ACCUMULATED-NII-CURRENT> 13,861,666
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 41,112,568
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 24,086,960
<NET-ASSETS> 1,106,979,087
<DIVIDEND-INCOME> 30,417,969
<INTEREST-INCOME> 6,772,275
<OTHER-INCOME> 0
<EXPENSES-NET> 15,973,732
<NET-INVESTMENT-INCOME> 21,216,512
<REALIZED-GAINS-CURRENT> 42,485,087
<APPREC-INCREASE-CURRENT> (35,543,092)
<NET-CHANGE-FROM-OPS> 28,158,507
<EQUALIZATION> 3,591,448
<DISTRIBUTIONS-OF-INCOME> (13,488,790)
<DISTRIBUTIONS-OF-GAINS> (26,357,952)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 668,069,397
<NUMBER-OF-SHARES-REDEEMED> (221,021,185)
<SHARES-REINVESTED> 36,142,786
<NET-CHANGE-IN-ASSETS> 475,094,211
<ACCUMULATED-NII-PRIOR> 2,542,710
<ACCUMULATED-GAINS-PRIOR> 24,985,219
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<INTEREST-EXPENSE> 0
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<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 13.99
<PER-SHARE-NII> 0.08
<PER-SHARE-GAIN-APPREC> (0.02)
<PER-SHARE-DIVIDEND> (0.05)
<PER-SHARE-DISTRIBUTIONS> 0.00
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<PER-SHARE-NAV-END> 14.00
<EXPENSE-RATIO> 0.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
