<PAGE>
- --------------------------------------------------------------------------------
Prudential Equity Income Fund
- -------------------------------------------------------
PROSPECTUS DATED AUGUST 1, 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 convert-
ible 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 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 "How the Fund In-
vests--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.
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 August 1, 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 7.
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 7. The Fund may also
engage in various hedging and income enhancement strategies, including
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 11.
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 June 30, 1994, PMF served as manager or administrator to 66
investment companies, including 37 mutual funds, with aggregate assets of
approximately $47 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 13.
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 14.
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 20 and
"Shareholder Guide--Shareholder Services" at page 29.
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 16 and "Shareholder Guide--How to Buy Shares of the
Fund" at page 20.
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 21.
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 24.
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 17.
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........ .60% .60% .60%
12b-1 Fees............. .25++ 1.00 1.00
Other Expenses......... .27 .27 .27
--- ---- ----
Total Fund Operating
Expenses.............. 1.12% 1.87% 1.87%
==== ==== ====
</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 $84 $109 $180
Class B................................. $69 $89 $111 $190
Class C**............................... $29 $59 $101 $219
You would pay the following expenses on the
same investment, assuming no redemption:
Class A................................. $61 $84 $109 $180
Class B................................. $19 $59 $101 $190
Class C**............................... $19 $59 $101 $219
</TABLE>
The above example with respect to Class A and Class B shares is based on
restated data for the Fund's fiscal year ended October 31, 1993. The above
example with respect to Class C shares is based on expenses expected to
have been incurred if Class C shares had been in existence during the
fiscal year ended October 31, 1993. The example should not be considered a
representation of past or future expenses. Actual expenses may be greater
or less than those shown.
The purpose of this table is to assist investors in understanding the
various costs and expenses that an investor in the Fund will bear, whether
directly or indirectly. For more complete descriptions of the various
costs and expenses, see "How the Fund is Managed." "Other Expenses"
include operating expenses of the Fund, such as 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 fiscal year ended October 31,
1993.
+ 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, 1994. Total
operating expenses without such limitation would be 1.17%. 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 (with the exception of the six months
ended April 30, 1994) have been audited by Deloitte & Touche, 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. No Class C shares were outstanding during the
periods indicated.
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------
JANUARY 22,
SIX MONTHS YEAR ENDED 1990*
ENDED OCTOBER 31, THROUGH
APRIL 30, 1994 ------------------------- OCTOBER 31,
(UNAUDITED) 1993 1992 1991 1990
-------------- -------- ------- ------ ------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PER-
FORMANCE:
Net asset value, begin-
ning of period......... $ 14.38 $ 12.16 $ 12.04 $ 9.53 $10.59
-------- -------- ------- ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income... .18 .47 .47 .38 .25
Net realized and
unrealized gain (loss)
on investment transac-
tions.................. (.44) 2.65 .60 2.50 (1.01)
-------- -------- ------- ------ ------
Total from investment
operations............ (.26) 3.12 1.07 2.88 (.76)
-------- -------- ------- ------ ------
LESS DISTRIBUTIONS
Dividends from net in-
vestment income........ (.14) (.46) (.47) (.37) (.30)
Distributions from net
realized gains......... (.53) (.44) (.48) -- --
-------- -------- ------- ------ ------
Total distributions.... (.67) (.90) (.95) (.37) (.30)
-------- -------- ------- ------ ------
Net asset value, end of
period................. $ 13.45 $ 14.38 $ 12.16 $12.04 $ 9.53
======== ======== ======= ====== ======
TOTAL RETURN++:......... (1.86)% 26.93% 9.50% 30.62% (7.36)%
RATIOS/SUPPLEMENTAL DA-
TA:
Net assets, end of pe-
riod (000)............. $133,107 $104,017 $51,165 $4,013 $1,098
Average net assets
(000).................. $120,449 $ 70,895 $21,931 $2,084 $ 752
Ratios to average net
assets:
Expenses, including
distribution fees..... .98%+ 1.07% 1.22% 1.37% 1.59%+
Expenses, excluding
distribution fees..... .75%+ .87% 1.02% 1.17% 1.39%+
Net investment income.. 2.57%+ 3.44% 3.22% 3.43% 3.12%+
Portfolio turnover...... 25% 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, 1993, have been audited by Deloitte & Touche, 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. No Class C shares were
outstanding during the periods indicated.
<TABLE>
<CAPTION>
CLASS B
--------------------------------------------------------------------------------------
JANUARY 22,
SIX MONTHS 1987*
ENDED YEAR ENDED OCTOBER 31, THROUGH
APRIL 30, 1994 ---------------------------------------------------------- OCTOBER 31,
(UNAUDITED) 1993 1992 1991 1990 1989 1988** 1987
-------------- -------- -------- -------- -------- -------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, begin-
ning of period......... $ 14.35 $ 12.14 $ 12.03 $ 9.53 $ 10.89 $ 9.63 $ 8.48 $ 9.70
-------- -------- -------- -------- -------- -------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income... .13 .37 .37 .30 .28 .32 .28 .18++
Net realized and
unrealized gain (loss)
on investment transac-
tions.................. (.43) 2.64 .59 2.49 (1.32) 1.26 1.47 (1.30)
-------- -------- -------- -------- -------- -------- ------- -------
Total from investment
operations............ (.30) 3.01 .96 2.79 (1.04) 1.58 1.75 (1.12)
-------- -------- -------- -------- -------- -------- ------- -------
LESS DISTRIBUTIONS
Dividends from net in-
vestment income........ (.09) (.36) (.37) (.29) (.32) (.32) (.27) (.10)
Distributions from net
realized gains......... (.53) (.44) (.48) -- -- -- (.33) --
-------- -------- -------- -------- -------- -------- ------- -------
Total distributions.... (.62) (.80) (.85) (.29) (.32) (.32) (.60) (.10)
-------- -------- -------- -------- -------- -------- ------- -------
Net asset value, end of
period................. $ 13.43 $ 14.35 $ 12.14 $ 12.03 $ 9.53 $ 10.89 $ 9.63 $ 8.48
======== ======== ======== ======== ======== ======== ======= =======
TOTAL RETURN+++:........ (2.14)% 25.93% 8.55% 29.58% (9.77)% 16.68% 21.85% (11.74)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of pe-
riod (000)............. $795,366 $527,868 $190,846 $151,538 $120,032 $143,169 $60,733 $67,226
Average net assets
(000).................. $683,380 $304,898 $169,524 $136,602 $142,179 $ 84,157 $63,013 $73,823
Ratios to average net
assets:
Expenses, including
distribution fees..... 1.75%+ 1.87% 2.02% 2.17% 2.22% 2.08% 2.30% 2.22%+/++
Expenses, excluding
distribution fees..... .75%+ .87% 1.02% 1.17% 1.22% 1.12% 1.29% 1.21%+/++
Net investment income.. 1.77%+ 2.58% 3.05% 2.67% 2.70% 2.89% 3.19% 2.12%+/++
Portfolio turnover...... 25% 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>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
THE INVESTMENT OBJECTIVE OF THE FUND IS BOTH CURRENT INCOME AND CAPITAL
APPRECIATION. THE FUND WILL SEEK 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.
7
<PAGE>
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.
During the year ended October 31, 1993, the monthly dollar weighted average
ratings of the fixed-income obligations held by the Fund, expressed as a
percentage of the Fund's total investments, were as follows:
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
RATINGS INVESTMENTS
------- -----------
<S> <C>
AAA/Aaa.................................... 0.00%
AA/Aa...................................... 0.07%
A/A........................................ 1.19%
BBB/Baa.................................... 0.00%
BB/Ba...................................... 0.11%
B/B........................................ 4.63%
CCC/Caa.................................... 0.00%
CC/Ca...................................... 0.00%
Unrated.................................... 0.71%
</TABLE>
8
<PAGE>
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
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 INCOME. 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-
COUNTER MARKET TO ENHANCE INCOME OR TO HEDGE THE FUND'S PORTFOLIO. These op-
tions 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
purchase 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
options 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.
9
<PAGE>
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 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.
10
<PAGE>
FUTURES CONTRACTS AND OPTIONS THEREON
THE FUND MAY PURCHASE AND SELL FINANCIAL FUTURES CONTRACTS AND OPTIONS
THEREON WHICH ARE TRADEDON 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.
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.
11
<PAGE>
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 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 securities the value may be more or less than the purchase
price and an increase in the percentage of the Fund's assets committed to the
purchase of securities on a when-issued or delayed delivery basis may increase
the volatility of the Fund's net asset value.
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
12
<PAGE>
securities eligible for resale pursuant to Rule 144A under the Securities Act
of 1933, as amended (the Securities Act), and privately placed commercial pa-
per that have a readily available market are not considered illiquid for pur-
poses of this limitation. The investment adviser will monitor the liquidity of
such restricted securities under the supervision of the Trustees. Repurchase
agreements subject to demand are deemed to have a maturity equal to the appli-
cable notice period.
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, 1993, the Fund's total expenses as a
percentage of average net assets for Class A and Class B shares were 1.07% and
1.87%, respectively. See "Financial Highlights." No Class C shares were
outstanding during the fiscal year ended October 31, 1993.
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, 1993, the
Fund paid management fees to PMF of .60% of the Fund's average net assets. See
"Manager" in the Statement of Additional Information.
13
<PAGE>
As of June 30, 1994, PMF served as the manager to 37 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 29 closed-end investment companies with aggregate assets of
approximately $47 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.
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.
14
<PAGE>
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 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, 1994.
For the fiscal year ended October 31, 1993, PMFD received payments of
approximately $141,790 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, 1993,
PMFD also received approximately $1,497,600 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, 1993, Prudential Securities incurred
distribution expenses of approximately $11,240,500 under the Class B Plan and
received $3,048,976 from the Fund under the Class B Plan. In addition,
Prudential Securities received approximately $538,500 in contingent deferred
sales charges from redemptions of Class B shares during this period. No Class
C shares were outstanding during the fiscal year ended October 31, 1993.
For the fiscal year ended October 31, 1993, the Fund paid distribution
expenses of .20% and 1.00% of the average daily net assets of the Class A and
Class B shares of the Fund, respectively. The Fund records all payments made
under the Plans as expenses in the calculation of net investment income. No
Class C shares were outstanding during the fiscal year ended October 31, 1993.
Prior to the date of this Prospectus, 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. governing maximum sales charges. See "Distributor" in
the Statement of Additional Information.
15
<PAGE>
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.
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
16
<PAGE>
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."
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
All dividends out of net investment income, together with distributions of
net short-term capital gains 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 the
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
17
<PAGE>
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 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 on shares that are held for six months or less.
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 U.S. Treasury Regulations, 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) with the required certifications regarding the
shareholder's status under the federal income tax law.
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
18
<PAGE>
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 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
19
<PAGE>
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 investment requirements are waived for certain retirement and employee
savings plans or custodial accounts for the benefit of minors. For purchases
made through the Automatic Savings Accumulation Plan, the minimum initial and
subsequent investment is $50. See "Shareholder Services" below.
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.
20
<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
investment 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.
21
<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
22
<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
members. 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 Retirement Accumulation Program 401(k) Plan. Class A shares may
be purchased at net asset value, with a waiver of the initial sales charge, by
or on behalf of participants in the Prudential Retirement Accumulation Program
401(k) Plan for which the Transfer Agent or Prudential Securities provides
recordkeeping services (PruRap Plan) provided that (i) for existing plans, the
plan has existing assets of $1 million or more, as measured on the last
business day of the month, invested in shares of Prudential Mutual Funds
(excluding money market funds other than those acquired pursuant to the
exchange privilege) held at the Transfer Agent or Prudential Securities and
(ii) for new plans, the plan initially invests $1 million or more in shares of
non-money market Prudential Mutual Funds or has at least 1,000 eligible
employees or members.
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 members, and (ii)
for new plans, the plan has at least 500 eligible employees or members. 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
PruRap or PruVista Plan qualifies to purchase Class A shares at NAV, all
subsequent purchases will be made at NAV.
Miscellaneous 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 purchased 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.
23
<PAGE>
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."
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
24
<PAGE>
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.
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 purchased 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>
25
<PAGE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in NAV above the total amount of payments
for the purchase of 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.
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.
26
<PAGE>
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.
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.
27
<PAGE>
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
that imposed by the fund in which shares were initially purchased and 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 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.
28
<PAGE>
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.
29
<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
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................. 7
Investment Objective and Policies... 7
Hedging and Income Enhancement
Strategies......................... 9
Other Investments and Policies...... 12
Investment Restrictions............. 13
HOW THE FUND IS MANAGED.............. 13
Manager............................. 13
Distributor......................... 14
Portfolio Transactions.............. 16
Custodian and Transfer and Dividend
Disbursing Agent................... 16
HOW THE FUND VALUES ITS SHARES....... 16
HOW THE FUND CALCULATES PERFORMANCE.. 16
TAXES, DIVIDENDS AND DISTRIBUTIONS... 17
GENERAL INFORMATION.................. 19
Description of Shares............... 19
Additional Information.............. 19
SHAREHOLDER GUIDE.................... 20
How to Buy Shares of the Fund....... 20
Alternative Purchase Plan........... 21
How to Sell Your Shares............. 24
Conversion Feature--Class B Shares.. 27
How to Exchange Your Shares......... 28
Shareholder Services................ 29
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
- --------------------------------------------------------------------------------
August 1, 1994
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
Statement of Additional Information
dated August 1, 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 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 August 1, 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 19
Investment Objective and Policies......................... B-2 7
Investment Restrictions................................... B-8 13
Trustees and Officers..................................... B-9 13
Manager................................................... B-11 13
Distributor............................................... B-12 14
Portfolio Transactions and Brokerage...................... B-14 16
Purchase and Redemption of Fund Shares.................... B-15 20
Shareholder Investment Account............................ B-18 29
Net Asset Value........................................... B-21 16
Taxes..................................................... B-22 17
Performance Information................................... B-24 16
Organization and Capitalization........................... B-25 19
Custodian, Transfer and Dividend Disbursing Agent and In-
dependent Accountants.................................... B-26 16
Financial Statements...................................... B-27 --
Independent Auditors' Report.............................. B-49 --
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,
1992 and 1993 were 43% and 57%, 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 investment company; prior
c/o Prudential Mutual Fund thereto, Vice Chairman of Broyhill Furniture Industries, Inc.; Certified Public
Management, Inc. Accountant; Secretary and Treasurer of Broyhill Family Foundation, Inc.;
One Seaport Plaza President,Treasurer and Director of First Financial Fund, Inc. and The High Yield
New York, NY 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 April 1989) of International
c/o Prudential Mutual Fund Imaging Materials, Inc.; Retired Chairman, Chief Executive Officer and Director of
Management, Inc. Schlegel Corporation (industrial manufacturing) (March 1987-February 1989); Director
One Seaport Plaza of Gleason Corporation, Navistar International Corporation, Personal Sound
New York, NY 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) (since March 1984); Director of
c/o Prudential Mutual Fund Continental Airlines, Inc., Gannett Co., Inc., Rochester Telephone Corporation and
Management, Inc. The Global Government Plus Fund, Inc.
One Seaport Plaza
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. (PMF) (since 1988); Managing
One Seaport Plaza Trustee Director, Investment Banking, of Prudential Securities Incorporated (Prudential
New York, NY Securities) (1988-1991); Director of 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 Commerce; former Rochester City
c/o Prudential Mutual Fund Manager; Trustee of Center for Governmental Research, Inc.; Director of Blue Cross of
Management, Inc. Rochester, Monroe County Water Authority, Rochester Jobs, Inc., Executive Service
One Seaport Plaza Corps of Rochester, Monroe County Industrial Development Corporation, Northeast
New York, NY 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 October 1993), PMF; Executive
One Seaport Plaza Vice President, Director and Member of Operating Committee (since October 1993),
New York, NY Prudential Securities; Director (since October 1993) of Prudential Securities Group,
Inc.; formerly Senior Executive Vice President and Director of Kemper Financial
Services, Inc. (September 1978-September 1993); Director of The Global Government
Plus Fund, Inc. and The High Yield Income Fund, Inc.
Louis A. Weil, III Trustee Publisher and Chief Executive Officer, Phoenix Newspapers, Inc. (since August 1991);
c/o Prudential Mutual Fund Director of Central Newspapers, Inc. (since September 1991); prior thereto, Publisher
Management, Inc. of Time Magazine (May 1989-March 1991); formerly President, Publisher and Chief
One Seaport Plaza Executive Officer of The Detroit News (February 1986-August 1989); formerly member of
New York, NY 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), Director (since January 1989) and
One Seaport Plaza Executive Vice President, Treasurer and Chief Financial Officer (since June 1987) of
New York, NY 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) and First Vice President (June 1987-
One Seaport Plaza Principal December 1988) of PMF; Senior Vice President (since January 1992) and Vice President
New York, NY Financial and (January 1986-December 1991) of Prudential Securities.
Accounting
Officer
S. Jane Rose Secretary Senior Vice President (since January 1991), Senior Counsel (since June 1987) and First
One Seaport Plaza Vice President (June 1987-December 1990) of PMF; Senior Vice President and Senior
New York, NY 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 June 1991) of PMF; Vice President
One Seaport Plaza Secretary and Associate General Counsel of Prudential Securities.
New York, NY
</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.
Mr. Beach receives his 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 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.
As of June 17 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 June 17, 1994, Prudential Securities was record holder of 5,706,576
Class A shares (or 56.4% of the outstanding Class A shares) and 46,052,174
Class B shares (or 74.6% of the outstanding Class B 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 June 30, 1994, PMF managed and/or administered open-
end and closed-end management investment companies with assets of
approximately $47 billion. According to the Investment Company Institute, as
of April 30, 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, 1993. 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, 1993, 1992 and 1991, PMF received
management fees of $2,254,755, $1,148,728 and $832,114, 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), 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, 1993, PMFD received
payments of $141,790 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,
1993, PMFD also received approximately $1,497,600 in initial sales charges.
CLASS B PLAN. For the fiscal year ended October 31, 1993, the Prudential
Securities received $3,048,976 from the Fund under the Class B Plan and spent
approximately $11,240,500 in distributing the Fund's Class B shares. It is
estimated that of the latter amount, approximately 0.8% ($87,700) was spent on
printing and mailing of prospectuses to other than current shareholders; 12.4%
($1,390,400) 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;
1.5% ($175,600) in interest and/or carrying charges; and 85.3% ($9,586,800) on
the aggregate of (i) payments of commissions and account servicing fees to
financial advisers (36.6% or $4,109,300) and (ii) an allocation of overhead
and other branch office distribution-related expenses for payments of related
expenses (48.7% or $5,477,500). 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, 1993,
Prudential Securities received approximately $538,500 in contingent deferred
sales charges.
CLASS C PLAN. Prudential Securities 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. Prior to the date of this Statement of
Additional Information, no distribution expenses were incurred under the Class
C Plan.
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.
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
B-14
<PAGE>
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. 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, 1993.
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, 1993 OCTOBER 31, 1992 OCTOBER 31, 1991
---------------- ---------------- ----------------
<S> <C> <C> <C>
Total brokerage commissions
paid by the Fund........... $1,046,105 $356,821 $307,123
Total brokerage commissions
paid to Prudential
Securities................. $ 193,083 $ 77,071 $ 96,799
Percentage of total
brokerage commissions paid
to Prudential Securities... 18.5% 21.6% 31.5%
</TABLE>
The Fund effected approximately 21.0% of the total dollar amount of its
transactions involving the payment of commissions to Prudential Securities
during the year ended October 31, 1993. Of the total brokerage commissions
paid during that period, $841,486 (or 80.4%) 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-15
<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 April 30, 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.................. $13.45
Maximum sales charge (5% of offering price)............................. .71
------
Maximum offering price to public........................................ $14.16
======
CLASS B
Net asset value, redemption price and offering price per Class B share*. $13.43
======
CLASS C
Net asset value, redemption price and offering price per Class C share*. $13.43
======
</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. Class C shares did not
exist on April 30, 1994.
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-16
<PAGE>
LETTERS OF INTENT. Reduced sales charges are also available to investors or
an eligible group of related investors who enter into a written Letter of
Intent providing for the purchase, within a thirteen-month period, of shares
of 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. 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.
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 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. If the goal is exceeded in an amount which qualifies for a lower
sales charge, a price adjustment is made by refunding to the purchaser the
amount of excess sales charge, if any, paid during the thirteen-month period.
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-17
<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-18
<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
an eligible 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-19
<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-20
<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-21
<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 makes a short sale against-the-box. 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-22
<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.
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-23
<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 nth power = 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 periods ended April 30, 1994 was 1.24% and 11.03%,
respectively. The average annual total return for Class B shares for the one
and five year and since inception periods ended April 30, 1994 was 1.10%,
10.59% and 10.45%, respectively. During these periods, no Class C shares were
outstanding.
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 Fund's aggregate total return for Class A shares for the one and since
inception periods ended on April 30, 1994 was 6.85% and 65.04%, respectively.
The aggregate total return for Class B shares for the one and five year and
since inception periods ended on April 30, 1994 was 6.10%, 66.49% and 96.23%,
respectively. During these periods, no Class C shares were outstanding.
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:
YIELD = 2[(a-b)/cd + 1) to the 6th power -1
<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-24
<PAGE>
The Fund's 30-day yields for the 30 days ended October 31, 1993 were 2.49%
and 1.84% for the Class A and Class B shares, respectively. The Fund's 30-day
yields for the 30 days ended April 30, 1994 were 2.17% and 1.56% for the Class
A and Class B shares, respectively. During these periods, no Class C shares
were outstanding.
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-25
<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, 1993, the Fund incurred
fees of approximately $549,900 for the services of PMFS.
Deloitte & Touche, 1633 Broadway, New York, New York 10019, serves as the
Fund's independent accountants and in that capacity audits the Fund's annual
financial statements.
B-26
<PAGE>
PRUDENTIAL EQUITY INCOME FUND Portfolio of Investments
April 30, 1994 (Unaudited)
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
LONG-TERM INVESTMENTS--93.4%
Common Stocks--75.2%
Aerospace/Defense--6.4%
270,400 Alliant Techsystems,
Inc.*..................... $ 6,117,800
119,500 E-Systems, Inc.............. 4,794,938
107,900 Lockheed Corp............... 6,622,362
90,300 McDonnell Douglas Corp...... 10,610,250
35,500 Moog, Inc.*................. 310,625
433,600 Northrop Corp............... 16,585,200
134,400 Rockwell International
Corp...................... 5,241,600
337,100 Thiokol Corp................ 8,132,537
39,800 Whittaker Corp.*............ 547,250
------------
58,962,562
------------
Automobiles & Trucks--2.4%
150,000 Chrysler Corp............... 7,181,250
116,100 Ford Motor Co............... 6,777,338
150,000 General Motors Corp......... 8,512,500
------------
22,471,088
------------
Banking--0.1%
15,100 First Fidelity Bancorp...... 700,263
------------
Chemicals--4.7%
14,000 American Cyanamid Co........ 658,000
2,000 Cytec Industries, Inc.*..... 28,750
298,800 Dow Chemical Co............. 18,749,700
115,175 Eastman Chemical Co......... 5,125,287
55,600 Imperial Chemical
Industries, ADR (United
Kingdom).................. 2,766,100
63,500 Monsanto Co................. 5,222,875
180,100 Potash Corp. Saskatchewan,
Inc....................... 4,592,550
261,000 Union Carbide Corp.......... 6,883,875
------------
44,027,137
------------
Computer Hardware--4.1%
406,500 Digital Equipment Corp.*.... $ 8,536,500
507,600 International Business
Machines Corp............. 29,060,100
------------
37,596,600
------------
Computer Software & Services--0.2%
147,200 Intergraph Corp.*........... 1,398,400
25,200 Shared Medical Systems
Corp...................... 645,750
------------
2,044,150
------------
Conglomerate--0.6%
60,000 ITT Corp.................... 5,385,000
------------
Drugs & Medical Supplies--0.6%
34,200 Allergan, Inc............... 735,300
194,200 Upjohn Co................... 5,194,850
------------
5,930,150
------------
Electrical Equipment--1.8%
1,437,200 Westinghouse Electric
Corp...................... 16,707,450
------------
Electric Utilities--0.8%
26,200 Central Hudson Gas &
Electric Co............... 763,075
47,000 Central Louisiana Electric
Co........................ 1,186,750
222,200 PSI Resources, Inc.......... 4,971,725
38,000 SCE Corp.................... 608,000
------------
7,529,550
------------
Electronics--1.7%
306,900 Esterline Technologies
Corp.*.................... 2,301,750
87,600 Harris Corp................. 3,843,450
462,800 IMO Industries, Inc.*....... 4,859,400
321,400 Newport Corp................ 1,968,575
106,700 Pacific Scientific Co....... 2,667,500
------------
15,640,675
------------
</TABLE>
See Notes to Financial Statements.
B-27
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
Energy Equipment & Services--2.0%
351,000 Smith International,
Inc.*..................... $ 4,387,500
363,000 Sonat Offshore Drilling,
Inc....................... 6,443,250
146,400 USX Corp.................... 4,977,600
537,300 Varco International, Inc.... 2,887,988
------------
18,696,338
------------
Energy Systems--6.5%
723,700 Baker Hughes, Inc........... 13,297,987
200,000 Crestar Energy, Inc.*....... 2,351,920
633,100 Dresser Industries, Inc..... 14,403,025
595,000 Halliburton Co.............. 17,626,875
590,300 McDermott International,
Inc....................... 12,543,875
------------
60,223,682
------------
Exploration & Production--1.0%
200,000 Burlington Resources,
Inc....................... 8,975,000
------------
Forest Products--0.2%
103,300 Boise Cascade Corp.......... 2,220,950
------------
Gas Distribution--2.0%
206,200 British Gas plc., ADS
(United Kingdom).......... 9,021,250
76,400 Equitable Resources, Inc.... 2,769,500
237,450 KN Energy, Inc.............. 5,550,394
58,450 Yankee Energy System,
Inc....................... 1,271,287
------------
18,612,431
------------
Gas Pipelines--2.7%
25,700 Enserch Corp................ 363,013
462,000 Panhandle Eastern Corp...... 9,297,750
119,700 Sonat, Inc.................. 3,635,887
410,000 TransCanada Pipelines,
Ltd....................... 5,535,000
228,900 Transco Energy Co........... 3,462,112
108,200 Williams Cos., Inc.......... 2,786,150
------------
25,079,912
------------
Gold Mines--0.6%
250,000 Ashant Goldfield Ltd., GDR*
(Denmark)................. $ 5,593,750
------------
Insurance--6.9%
309,200 Aetna Life & Casualty Co.... 16,078,400
1,081,100 Alexander & Alexander
Services, Inc............. 15,811,087
138,700 Allstate Corp............... 3,311,462
16,300 American Reinsurance
Corp.*.................... 456,400
176,300 CIGNA Corp.................. 10,313,550
309,200 Continental Corp............ 6,957,000
49,000 Lincoln National Corp....... 1,868,125
85,400 Ohio Casualty Corp.......... 2,626,050
56,300 SAFECO Corp................. 3,033,163
140,100 Selective Insurance Group,
Inc....................... 3,467,475
------------
63,922,712
------------
Integrated Producers--7.7%
164,500 British Petroleum Ltd.,
plc., ADS (United
Kingdom).................. 11,515,000
3,600 Exxon Corp.................. 226,350
19,000 Kerr-McGee Corp............. 850,250
33,300 Mobil Corp.................. 2,605,725
544,300 Occidental Petroleum
Corp...................... 9,661,325
51,300 Petroleum Heat & Power,
Inc....................... 410,400
469,900 Quaker State Corp........... 6,343,650
49,100 Royal Dutch Petroleum Co.... 5,351,900
452,300 Societe Nationale ELF
Aquitaine, ADR (France)... 16,452,412
158,700 Sun Co., Inc................ 5,375,963
39,400 Texaco, Inc................. 2,536,375
33,200 Unocal Corp................. 917,150
562,000 USX Marathon Group.......... 9,483,750
------------
71,730,250
------------
Machinery--0.3%
21,400 Gerber Scientific, Inc...... 323,675
277,300 Terex Corp.*................ 2,149,075
------------
2,472,750
------------
</TABLE>
See Notes to Financial Statements.
B-28
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
Media--1.9%
121,300 Foote Cone & Belding
Communications, Inc....... $ 5,185,575
132,700 Pulitzer Publishing Co...... 4,860,138
2,147,200 WPP Group, plc., ADS
(United Kingdom).......... 7,917,800
------------
17,963,513
------------
Miscellaneous Industrial--3.5%
60,000 Hanson plc., ADR (United
Kingdom).................. 1,237,500
582,500 Tenneco, Inc................ 29,853,125
27,200 Textron, Inc................ 1,434,800
------------
32,525,425
------------
Realty Investment Trust--9.8%
242,200 AMLI Residential Property
Trust*.................... 5,146,750
315,000 Avalon Properties, Inc...... 7,402,500
24,600 Carr Realty Corp............ 584,250
176,700 Crescent Real Estate
Equities*................. 4,660,339
479,800 Equity Residential Property
Trust..................... 15,713,450
457,700 Gables Residential Trust.... 11,099,225
300,000 Glimcher Realty Trust....... 6,262,500
400,000 Irvine Apartment
Communities, Inc.......... 8,150,000
96,000 JP Realty, Inc.............. 2,016,000
41,700 Kimco Realty Corp........... 1,495,987
300,000 Manufactured Home
Communities, Inc.......... 6,712,500
386,742 Property Trust of America... 7,203,070
285,700 Simon Property Group,
Inc....................... 7,642,475
133,800 Vornado Realty Trust........ 4,398,675
69,600 Weingarten Realty Investors,
Inc....................... 2,627,400
------------
91,115,121
------------
Retail--0.1%
23,700 Petrie Stores Corp.......... 604,350
------------
Steel--0.1%
49,988 Allegheny Ludlum Corp....... $ 956,021
59,600 Tubos De Acero De Mexico
S.A., ADR* (Mexico)....... 294,275
------------
1,250,296
------------
Telecommunication Services--5.6%
13,600 Ameritech Corp.............. 535,500
67,700 BellSouth Corp.............. 4,121,238
165,900 GTE Corp.................... 5,246,587
187,300 NYNEX Corp.................. 6,813,037
342,100 Sprint Corp................. 12,572,175
89,400 Telecomunicoes Brasilera,
ADR*
(Brazil).................. 3,151,350
326,800 Telefonos de Mexico S.A.*,
ADR
(Mexico).................. 19,240,350
11,600 U.S. West, Inc.............. 472,700
------------
52,152,937
------------
Tobacco--0.8%
226,500 American Brands, Inc........ 7,672,688
------------
Wood Processing--0.1%
15,000 Rayonier, Inc.*............. 423,750
------------
Total common stocks
(cost $675,297,216)......... 698,230,480
------------
Preferred Stocks--13.4%
Aluminum--1.3%
332,500 Kaiser Aluminum Corp.,*
Conv. $8.25............... 3,117,188
193,500 Reynolds Metals Co., Conv.
$3.31..................... 8,925,187
------------
12,042,375
------------
Electric Utilities--0.1%
2,100 Gulf States Utilities Co.*,
$5.08, Class E............ 136,500
11,205 Gulf States Utilities Co.*,
$8.08, Class K............ 1,134,506
------------
1,271,006
------------
</TABLE>
See Notes to Financial Statements.
B-29
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
Electrical Equipment--2.6%
1,943,000 Westinghouse Electric
Corp.,* Conv.............. $ 24,530,375
------------
Energy Equipment & Services--0.3%
102,500 Chiles Offshore Corp.*,
Conv. $1.50............... 2,357,500
------------
Energy Systems--0.8%
100,000 McDermott International,
Inc.,
Conv., Ser. C............. 4,087,500
149,300 Reading & Bates Corp.,*
Conv. $1.63............... 3,732,500
------------
7,820,000
------------
Insurance--0.5%
102,200 Alexander & Alexander
Services, Inc.,*
Conv. $3.63, Ser. A......... 3,934,700
12,700 USF & G Corp., Conv. $4.10,
Ser A..................... 627,063
------------
4,561,763
------------
Integrated Producers--0.9%
49,000 Unocal Corp.,* Conv.
$3.50..................... 2,639,875
118,900 USX Marathon Group, Conv.... 5,945,000
------------
8,584,875
------------
Mining--0.7%
100,000 Echo Bay Finance Corp.,*
Conv. $1.75, Ser A........ $ 3,775,000
60,000 Hecla Mining Co., Conv., Ser
B......................... 2,985,000
------------
6,760,000
------------
Oil & Gas Exploration & Production--1.0%
175,000 Parker & Parsley Capital,
Conv...................... 9,471,875
------------
Paper--0.1%
7,500 Bowater, Inc., Conv., Ser.
B......................... 168,750
------------
Realty Investment Trust--0.2%
54,600 Property Trust of America,
Conv., Ser. A............. 1,487,850
------------
Steel--2.2%
360,000 Bethlehem Steel Corp.,*
Conv. $3.50............... 20,295,000
------------
Surgical Devices--0.8%
324,200 U.S. Surgical, Inc.,* Conv.
$2.20..................... 7,051,350
------------
Tobacco--1.9%
2,765,900 RJR Nabisco Holdings, Inc.,*
Conv., PERCS.............. 17,978,350
------------
Total preferred stocks
(cost $131,369,264)......... 124,381,069
------------
</TABLE>
See Notes to Financial Statements.
B-30
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (Note 1)
<S> <C> <C> <C>
Convertible Bonds--4.8%
Computer Hardware--2.4%
Conner Peripherals,
Inc.,
Sub. Deb.,
B2 $ 2,300 6.75%, 3/1/01........ $ 1,986,625
Quantum Corp., Deb.,
B2 5,250 6.375%, 4/1/02....... 5,761,875
Seagate Technology,
Deb.,
B1 3,407 6.75%, 5/1/12........ 3,023,712
Sub. Deb.,
NR 10,500 5.00%, 11/1/03....... 11,602,500
------------
22,374,712
------------
Fertilizer--0.4%
IMC Fertilizer Group,
Deb.,
Caa 4,500 6.25%, 12/1/01....... 3,892,500
------------
Integrated Oil--0.5%
Amoco Canada
Petroleum
Co., Sub. Exch.
Deb.,
Aa3 339 7.375%, 9/1/13....... 390,274
Cross Timbers Oil
Co., Deb.,
B2 2,583 5.25%, 11/1/03....... 2,243,981
Oryx Energy Co., Sub.
Deb.,
B1 2,121 7.50%, 5/15/14....... 1,919,505
------------
4,553,760
------------
Mining--0.8%
Coeur D'Alene Mines
Corp.,
Sub. Deb.,
CCC+** 3,000 7.00%, 11/30/02...... 3,967,500
Freeport McMoran,
Inc.,
Deb.,
Ba3 1,000 6.55%, 1/15/01....... 891,250
Hecla Mining Co.,
Sub. Deb.,
B3 7,000 Zero Coupon,
6/14/04............ 3,123,750
------------
7,982,500
------------
Miscellaneous Industrial--0.6%
Terex Corp., Deb.,
NR $ 5,650 13.00%, 8/1/96....... $ 5,424,000
------------
Steel--0.1%
USX Corp., Sub. Deb.,
Ba2 710 7.00%, 6/15/17....... 621,250
------------
Total convertible
bonds
(cost
$42,541,860)....... 44,848,722
------------
Total long-term
investments
(cost
$849,208,340)...... 867,460,271
------------
SHORT-TERM INVESTMENTS--6.5%
60,247 Joint Repurchase
Agreement
Account, 3.54%,
5/2/94
(cost $60,247,000;
Note 5)............ 60,247,000
------------
Total Investments--99.9%
(cost $909,455,340;
Note 4)............ 927,707,271
Other assets in
excess of
liabilities--0.1%... 766,408
------------
Net Assets--100%..... $928,473,679
------------
------------
</TABLE>
- ---------------
* Non-income producing security.
** Standard & Poor's rating.
ADR--American Depository Receipt.
ADS--American Depository Shares.
GDR--Global Depository Receipts.
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
(Unaudited)
<TABLE>
<CAPTION>
Assets April 30, 1994
--------------
<S> <C>
Investments, at value (cost $909,455,340)...................................................... $927,707,271
Cash........................................................................................... 244,448
Receivable for investments sold................................................................ 55,834,322
Receivable for Fund shares sold................................................................ 5,462,939
Dividends and interest receivable.............................................................. 2,402,536
Prepaid expenses and other assets.............................................................. 223,203
--------------
Total assets................................................................................. 991,874,719
--------------
Liabilities
Payable for investments purchased.............................................................. 60,515,920
Payable for Fund shares reacquired............................................................. 1,614,505
Distribution fee payable....................................................................... 665,394
Management fee payable......................................................................... 413,738
Accrued expenses............................................................................... 155,850
Foreign withholding tax payable................................................................ 35,633
--------------
Total liabilities............................................................................ 63,401,040
--------------
Net Assets..................................................................................... $928,473,679
--------------
--------------
Net assets were comprised of:
Shares of beneficial interest, at par........................................................ $ 691,345
Paid-in capital in excess of par............................................................. 891,547,710
--------------
892,239,055
Undistributed net investment income.......................................................... 6,430,293
Accumulated net realized gains............................................................... 11,552,599
Net unrealized appreciation.................................................................. 18,251,732
--------------
Net assets, April 30, 1994..................................................................... $928,473,679
--------------
--------------
Class A:
Net asset value and redemption price per share
($133,107,276 / 9,893,488 shares of beneficial interest issued and outstanding)............ $13.45
Maximum sales charge (5.25% of offering price)............................................... .75
--------------
Maximum offering price to public............................................................. $14.20
--------------
--------------
Class B:
Net asset value, offering price and redemption price per share
($795,366,403 / 59,240,973 beneficial interest issued and outstanding)..................... $13.43
--------------
--------------
</TABLE>
See Notes to Financial Statements.
B-32
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended
Net Investment Income April 30, 1994
--------------
<S> <C>
Income
Dividends (net of foreign withholding
taxes of $70,201).................. $ 10,500,775
Interest and discount earned......... 3,546,995
--------------
Total income....................... 14,047,770
--------------
Expenses
Distribution fee--Class A............ 140,337
Distribution fee--Class B............ 3,388,814
Management fee....................... 2,240,999
Transfer agent's fees and expenses... 478,000
Custodian's fees and expenses........ 88,000
Registration fees.................... 87,000
Reports to shareholders.............. 30,000
Trustees' fees....................... 22,500
Audit fee............................ 18,000
Legal fees........................... 15,000
Miscellaneous........................ 8,393
--------------
Total expenses..................... 6,517,043
--------------
Net investment income.................. 7,530,727
--------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain on
investment transactions.............. 12,766,300
Net change in unrealized
appreciation/depreciation
of investments....................... (41,378,320)
--------------
Net loss on investments................ (28,612,020)
--------------
Net Decrease in Net Assets
Resulting from Operations.............. $(21,081,293)
--------------
--------------
</TABLE>
PRUDENTIAL EQUITY INCOME FUND
Statement of Changes in Net Assets
(Unaudited)
<TABLE>
<CAPTION>
Six Months Year Ended
Increase (Decrease) Ended October 31,
in Net Assets April 30, 1994 1993
--------------- ------------
<S> <C> <C>
Operations
Net investment income...... $ 7,530,727 $ 10,304,124
Net realized gain on
investment
transactions............. 12,766,300 25,234,290
Net change in unrealized
appreciation/depreciation
of investments........... (41,378,320) 45,035,883
--------------- ------------
Net increase (decrease) in
net assets resulting from
operations............... (21,081,293) 80,574,297
--------------- ------------
Net equalization credits..... 2,183,505 1,785,921
--------------- ------------
Dividends and distributions
(Note 1)
Dividends to shareholders
from net investment
income
Class A.................. (1,220,894) (2,383,733)
Class B.................. (4,605,755) (8,100,377)
--------------- ------------
(5,826,649) (10,484,110)
--------------- ------------
Distributions to
shareholders from net
realized gains
Class A.................. (4,060,372) (1,901,042)
Class B.................. (22,138,548) (7,217,743)
--------------- ------------
(26,198,920) (9,118,785)
--------------- ------------
Fund share transactions (Note
6)
Net proceeds from shares
subscribed............... 415,411,140 398,239,834
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions........ 29,118,655 17,714,556
Cost of shares
reacquired................. (97,017,635) (88,837,779)
--------------- ------------
Net increase in net assets
from Fund share
transactions............. 347,512,160 327,116,611
--------------- ------------
Total increase............... 296,588,803 389,873,934
Net Assets
Beginning of period.......... 631,884,876 242,010,942
--------------- ------------
End of period................ $ 928,473,679 $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, as the case may be under
triparty repurchase agreements, 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.
B-34
<PAGE>
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.
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 Prudential Securities Incorporated (``PSI''), which acts
as distributor of the Class B shares of the Fund (collectively, the
``Distributors''). To reimburse the Distributors for their expenses incurred in
distributing and servicing the Fund's Class A and B shares, the Fund, pursuant
to plans of distribution, pays the Distributors a reimbursement, accrued daily
and payable monthly.
Pursuant to the Class A Plan, the Fund reimburses PMFD for its expenses 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. Such expenses under the Class A Plan
were .20 of 1% of the average daily net assets of the Class A shares for the two
months ended December 31, 1993 and .25 of 1% of the average daily net assets of
the Class A shares thereafter. PMFD pays various broker-dealers, including PSI
and Pruco Securities Corporation (``Prusec''), affiliated broker-dealers, for
account servicing fees and other expenses incurred by such broker-dealers.
Pursuant to the Class B Plan, the Fund reimburses PSI for its
distribution-related expenses with respect to Class B shares at an annual rate
of up to 1% of the average daily net assets of the Class B shares.
The Class B distribution expenses include commission credits for payment of
commissions and account servicing fees to financial advisers and an allocation
for overhead and other distribution-related expenses, interest and/or carrying
charges, the cost of printing and mailing prospectuses to potential investors
and of advertising incurred in connection with the distribution of shares.
The Distributors recover the distribution expenses and account servicing fees
incurred through the receipt of reimbursement payments from the Fund under the
plans and the receipt of initial sales charges (Class A only) and contingent
deferred sales charges (Class B only) from shareholders.
PMFD has advised the Fund that it has received approximately $1,411,401 in
front-end sales charges resulting from sales of Class A shares during the six
months ended April 30, 1994. From these fees, PMFD paid such sales charges to
dealers (PSI and Prusec) which in turn paid commissions to salespersons.
With respect to the Class B Plan, at any given time, the amount of expenses
incurred by PSI in distributing the Fund's shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total payments made by the Fund pursuant to
the Class B Plan. PSI has advised the Fund that for the six months ended April
30, 1994, it received approximately $581,600 in contingent deferred sales
charges imposed upon certain redemptions by investors. PSI, as distributor, has
also advised the Fund that at April 30, 1994, the amount of distribution
expenses incurred by PSI and not yet reimbursed by the Fund or recovered through
contingent deferred sales charges approximated $15,470,700. This amount may be
recovered through future payments under the Class B Plan or contingent deferred
sales charges.
In the event of termination or noncontinuation of the Class B Plan, the Fund
would not be contractually obligated to pay PSI, as distributor, for any
expenses not previously reimbursed or recovered through contingent deferred
sales charges.
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 six months ended April 30, 1994, the Fund incurred fees of
approximately $521,100 for the services of PMFS. As of April 30, 1994,
approximately $107,800 of such fees were due to PMFS.
For the six months ended April 30, 1994, PSI earned approximately $93,900 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 six months ended
April 30, 1994 were $551,181,637 and $177,429,445, respectively.
B-35
<PAGE>
The federal income tax basis of the Fund's investments, at April 30, 1994 was
$909,910,782 and, accordingly, net unrealized appreciation for federal income
tax purposes was $17,796,489 (gross unrealized appreciation--$58,959,397; gross
unrealized depreciation--$41,162,908).
Note 5. Joint The Fund, along with other affili-
Repurchase ated registered investment com-
Agreement panies, transfers uninvested
Account 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 April 30, 1994, the Fund had a 6.16% undivided
interest in the repurchase agreements in the joint account. The undivided
interest for the Fund represented $60,247,000 in principal amount. As of such
date, each repurchase agreement in the joint account and the value of the
collateral therefor was as follows:
Barclays de Zoete Wedd, Inc., 3.55%, in the principal amount of $53,000,000,
repurchase price $53,015,679, due 5/2/94. The value of the collateral including
accrued interest is $54,060,428.
Goldman Sachs & Co., 3.50%, in the principal amount of $315,000,000,
repurchase price $315,091,875, due 5/2/94. The value of the collateral including
accrued interest is $321,300,231.
Merrill Lynch, Pierce, Fenner & Smith, Inc., 3.55%, in the principal amount
of $315,000,000, repurchase price $315,093,188, due 5/2/94. The value of the
collateral including accrued interest is $321,300,584.
Morgan (J.P.) Securities, Inc., 3.58%, in the principal amount of
$295,000,000, repurchase price $295,088,008, due 5/2/94. The value of the
collateral including accrued interest is $300,901,625.
Note 6. Capital The Fund offers both Class A
and Class B shares. Class A shares are sold with a
front-end sales charge of up to 5.25%. 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. Both classes of shares have equal rights as to
earnings, assets and voting privileges except that each class bears different
distribution expenses and has exclusive voting rights with respect to its
distribution plan.
The Fund has authorized an unlimited number of shares of beneficial interest
at $.01 par value divided into two classes, designated Class A and Class B.
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------ ---------- ------------
<S> <C> <C>
Six months ended April 30,
1994:
Shares sold................... 3,579,762 $ 49,652,308
Shares issued in reinvestment
of
dividends and
distributions............... 359,133 4,858,534
Shares reacquired............. (1,280,681) (17,771,832)
---------- ------------
Net increase in shares
outstanding................. 2,658,214 $ 36,739,010
---------- ------------
---------- ------------
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
- ------------------------------
<S> <C> <C>
Six months ended April 30,
1994:
Shares sold................... 26,412,413 $365,758,832
Shares issued in reinvestment
of
dividends and
distributions............... 1,803,399 24,260,121
Shares reacquired............. (5,760,584) (79,245,803)
---------- ------------
Net increase in shares
outstanding................. 22,455,228 $310,773,150
---------- ------------
---------- ------------
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
---------- ------------
---------- ------------
</TABLE>
- ---------------
These financial statements are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
period presented.
B-36
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
Financial Highlights
(Unaudited)
<TABLE>
<CAPTION>
Class A
-------------------------------------------------
January 22,
Six Months 1990(+)
Ended Year Ended October 31, through
April 30, --------------------------- October 31,
1994 1993 1992 1991 1990
--------- -------- ------- ------ -----------
<S> <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
-------- -------- ------- ------ ------
Income from investment
- ----------------------
operations
----------
Net investment income........ .18 .47 .47 .38 .25
Net realized and unrealized
gain (loss) on investment
transactions............... (.44) 2.65 .60 2.50 (1.01)
-------- -------- ------- ------ ------
Total from investment
operations.............. (.26) 3.12 1.07 2.88 (.76)
-------- -------- ------- ------ ------
Less distributions
- ------------------
Dividends from net
investment income.......... (.14) (.46) (.47) (.37) (.30)
Distributions from net
realized gains............... (.53) (.44) (.48) -- --
-------- -------- ------- ------ ------
Total distributions........ (.67) (.90) (.95) (.37) (.30)
-------- -------- ------- ------ ------
Net asset value, end of
period..................... $ 13.45 $ 14.38 $ 12.16 $12.04 $ 9.53
-------- -------- ------- ------ ------
-------- -------- ------- ------ ------
TOTAL RETURN#:............... (1.86)% 26.93% 9.50% 30.62% (7.36)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)...................... $133,107 $104,017 $51,165 $4,013 $1,098
Average net assets (000)..... $120,449 $ 70,895 $21,931 $2,084 $ 752
Ratios to average net assets:
Expenses, including
distribution fees........ .98%* 1.07% 1.22% 1.37% 1.59%*
Expenses, excluding
distribution fees........ .75%* .87% 1.02% 1.17% 1.39%*
Net investment income...... 2.57%* 3.44% 3.22% 3.43% 3.12%*
Portfolio turnover........... 25% 57% 43% 64% 58%
<CAPTION>
Class B
------------------------------------------------------------------
Six Months
Ended Year Ended October 31,
April 30, ----------------------------------------------------
1994 1993 1992 1991 1990 1989
---------- --------- -------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period..................... $ 14.35 $ 12.14 $ 12.03 $ 9.53 $ 10.89 $ 9.63
-------- -------- -------- -------- -------- --------
Income from investment
- ----------------------
operations
----------
Net investment income........ .13 .37 .37 .30 .28 .32
Net realized and unrealized
gain (loss) on investment
transactions............... (.43) 2.64 .59 2.49 (1.32) 1.26
-------- -------- -------- -------- -------- --------
Total from investment
operations............... (.30) 3.01 .96 2.79 (1.04) 1.58
-------- -------- -------- -------- -------- --------
Less distributions
- ------------------
Dividends from net
investment income.......... (.09) (.36) (.37) (.29) (.32) (.32)
Distributions from net
realized gains............... (.53) (.44) (.48) -- -- --
-------- -------- -------- -------- -------- --------
Total distributions........ (.62) (.80) (.85) (.29) (.32) (.32)
-------- -------- -------- -------- -------- --------
Net asset value, end of
period.................... $ 13.43 $ 14.35 $ 12.14 $ 12.03 $ 9.53 $ 10.89
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
TOTAL RETURN#:............... (2.14)% 25.93% 8.55% 29.58% (9.77)% 16.68%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)...................... $795,366 $527,868 $190,846 $151,538 $120,032 $143,169
Average net assets (000)..... $683,380 $304,898 $169,524 $136,602 $142,179 $ 84,157
Ratios to average net assets:
Expenses, including
distribution fees........ 1.75%* 1.87% 2.02% 2.17% 2.22% 2.08%
Expenses, excluding
distribution fees........ .75%* .87% 1.02% 1.17% 1.22% 1.12%
Net investment income...... 1.77%* 2.58% 3.05% 2.67% 2.70% 2.89%
Portfolio turnover........... 25% 57% 43% 64% 58% 60%
</TABLE>
- ---------------
* Annualized.
(+) Commencement of offering of Class A 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.
See Notes to Financial Statements.
B-37
<PAGE>
PRUDENTIAL EQUITY INCOME FUND Portfolio of Investments
October 31, 1993
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
LONG-TERM INVESTMENTS--82.5%
Common Stocks--67.9%
Aerospace/Defense--11.3%
270,400 Alliant Techsystems, Inc.*... $ 7,875,400
119,500 E-Systems, Inc............... 5,422,312
184,400 Grumman Corp................. 6,845,850
107,900 Lockheed Corp................ 7,431,613
211,000 Loral Corp................... 6,699,250
169,400 Martin Marietta Corp......... 7,495,950
21,800 McDonnell Douglas Corp....... 2,043,750
35,500 Moog, Inc.................... 275,125
391,900 Northrop Corp................ 13,618,525
134,400 Rockwell International
Corp....................... 4,821,600
337,100 Thiokol Corp................. 8,891,013
------------
71,420,388
------------
Chemicals--3.9%
14,000 American Cyanamid Co......... 763,000
185,200 Dow Chemical Co.............. 10,278,600
55,600 Imperial Chemical Industries,
ADR........................ 2,390,800
83,500 Monsanto Co.................. 5,771,937
166,900 Potash Corp. Saskatchewan,
Inc........................ 3,233,687
111,000 Union Carbide Corp........... 2,192,250
------------
24,630,274
------------
Computer Hardware--3.9%
425,700 Digital Equipment Corp.*..... 15,165,562
207,600 International Business
Machines Corp.............. 9,549,600
------------
24,715,162
------------
Computer Software & Services--0.1%
25,200 Shared Medical Systems
Corp....................... 630,000
------------
Drugs & Medical Supplies--1.1%
34,200 Allergan, Inc................ 782,325
194,200 Upjohn Co.................... 6,335,775
------------
7,118,100
------------
Electrical Equipment--3.2%
1,402,400 Westinghouse Electric
Corp....................... $ 20,334,800
------------
Electric Utilities--1.7%
26,200 Central Hudson Gas & Electric
Co......................... 835,125
47,000 Central Louisiana Electric
Co......................... 1,239,625
28,500 Northeast Utilities Co....... 748,125
33,300 Philadelphia Electric Co..... 1,040,625
222,200 PSI Resources, Inc........... 5,916,075
38,000 SCE Corp..................... 798,000
------------
10,577,575
------------
Electronics--1.6%
236,300 Esterline Technologies
Corp....................... 1,772,250
87,600 Harris Corp.................. 4,051,500
40,000 IMO Inds., Inc............... 305,000
272,400 Newport Corp................. 1,736,550
116,800 Pacific Scientific Co........ 2,190,000
------------
10,055,300
------------
Energy Equipment & Services--3.1%
697,800 Baroid Corp.................. 5,756,850
180,600 Smith International*......... 2,009,175
152,700 Sonat Offshore Drilling,
Inc........................ 3,149,438
146,400 USX Corp..................... 5,490,000
403,600 Varco International, Inc..... 3,178,350
------------
19,583,813
------------
Financial Services--1.3%
167,500 American Express Co.......... 5,401,875
92,500 GFC Financial Corp........... 2,879,062
------------
8,280,937
------------
Forest Products--0.3%
27,300 Georgia-Pacific Corp......... 1,754,025
------------
</TABLE>
B-38 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
Gas Distribution--2.5%
82,100 British Gas plc., ADS........ $ 4,392,350
76,400 Equitable Resources, Inc..... 2,989,150
237,450 KN Energy, Inc............... 6,529,875
58,450 Yankee Energy System, Inc.... 1,680,437
------------
15,591,812
------------
Gas Pipelines--4.8%
158,500 Enserch Corp................. 3,150,187
450,000 Panhandle Eastern Corp....... 10,687,500
103,600 Sonat, Inc................... 3,224,550
410,000 TransCanada Pipelines,
Ltd........................ 6,252,500
228,900 Transco Energy Co............ 3,691,013
54,100 Williams Cos., Inc........... 3,212,188
------------
30,217,938
------------
Insurance--8.7%
179,100 Aetna Life & Casualty Co..... 11,775,825
265,900 Alexander & Alexander
Services, Inc.............. 5,484,187
45,600 American Reinsurance
Corp.*..................... 1,316,700
173,400 CIGNA Corp................... 11,639,475
309,200 Continental Corp............. 10,087,650
59,600 Lincoln National Corp........ 2,711,800
42,700 Ohio Casualty Corp........... 2,764,825
56,300 SAFECO Corp.................. 3,265,400
75,600 Selective Insurance Group,
Inc........................ 2,324,700
109,000 Travelers Corp............... 3,842,250
------------
55,212,812
------------
Integrated Producers--6.9%
164,500 British Petroleum Ltd., plc,
ADS........................ 10,240,125
3,600 Exxon Corp................... 235,350
19,000 Kerr-McGee Corp.............. 957,125
33,300 Mobil Corp................... 2,713,950
236,000 Occidental Petroleum Corp.... 4,366,000
53,800 Petroleum Heat & Power,
Inc........................ 511,100
531,700 Quaker State Corp............ 7,377,337
49,100 Royal Dutch Petroleum Co..... 5,192,325
158,700 Sun Co., Inc................. 4,959,375
39,400 Texaco, Inc.................. $ 2,684,125
33,200 Unocal Corp.................. 971,100
184,200 USX Marathon Group........... 3,407,700
------------
43,615,612
------------
Machinery--0.4%
21,400 Gerber Scientific, Inc....... 299,600
277,300 Terex Corp................... 2,114,413
------------
2,414,013
------------
Media--1.9%
121,300 Foote Cone & Belding
Communications, Inc........ 4,624,562
132,700 Pulitzer Publishing Co....... 4,462,038
1,056,200 WPP Group, plc, ADS.......... 3,036,575
------------
12,123,175
------------
Miscellaneous Industrial--3.2%
107,900 Ametek, Inc.................. 1,483,625
60,900 Fischer And Porter Co........ 966,787
60,000 Hanson plc, ADR.............. 1,207,500
90,300 Kollmorgen Corp.............. 699,825
282,500 Tenneco, Inc................. 14,407,500
27,200 Textron, Inc................. 1,519,800
------------
20,285,037
------------
Railroads--0.5%
188,000 Southern Pacific Rail
Corp....................... 3,360,500
------------
Realty Investment Trust--2.9%
24,600 Carr Realty Corp............. 571,950
73,500 Equity Residential Property
Trust...................... 2,544,937
41,700 Kimco Realty Corp............ 1,527,263
386,742 Property Trust of America.... 7,783,183
83,500 Vornado Realty Trust......... 3,256,500
69,600 Weingarten Realty Investors,
Inc........................ 2,784,000
------------
18,467,833
------------
Recreation--0.6%
60,700 Eastman Kodak Co............. 3,824,100
------------
</TABLE>
B-39 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
Retail--0.1%
23,700 Petrie Stores Corp........... $ 690,263
------------
Steel--0.3%
59,000 Athlone Industries, Inc...... 1,017,750
50,000 Bethlehem Steel Corp.*....... 837,500
------------
1,855,250
------------
Telecommunication Services--2.9%
6,800 Ameritech Corp............... 576,300
24,300 BellSouth Corp............... 1,524,825
65,900 GTE Corp..................... 2,619,525
105,200 NYNEX Corp................... 4,444,700
232,100 Sprint Corp.................. 8,355,600
11,600 U.S. West, Inc............... 581,450
------------
18,102,400
------------
Tobacco--0.7%
136,300 American Brands, Inc......... 4,702,350
------------
Total common stocks
(cost $373,214,402).......... 429,563,469
------------
Preferred Stocks--7.9%
Electric Utilities--0.3%
2,100 Gulf States Utilities Co.
Class E.................... 165,900
12,304 Gulf States Utilities Co.
Class K.................... 1,267,312
------------
1,433,212
------------
Energy Systems--1.2%
100,000 McDermott International,
Inc., Conv., Ser C......... 5,225,000
77,800 Reading & Bates Corp., Conv.
$1.63...................... 2,489,600
------------
7,714,600
------------
Insurance--0.9%
102,200 Alexander & Alexander
Services, Inc.,
Conv. $3.63, Ser. A.......... $ 5,020,575
12,700 USF & G Corp., Conv. $4.10,
Ser A...................... 650,875
------------
5,671,450
------------
Integrated Producers--1.5%
49,000 Unocal Corp., Conv. $3.50.... 2,976,750
118,900 USX Marathon Group, Conv..... 6,569,225
------------
9,545,975
------------
Mining--1.1%
100,000 Echo Bay Finance Corp., Conv.
$1.75, Ser A............... 4,225,000
60,000 Hecla Mining Co., Conv., Ser
B.......................... 3,015,000
------------
7,240,000
------------
Retail--0.6%
72,700 K-Mart Corp., Conv., PERCS... 3,598,650
------------
Steel--1.9%
230,000 Bethlehem Steel Corp., Conv.
$3.50...................... 12,132,500
------------
Trucking--0.4%
122,100 Consolidated Freightways,
Inc., Conv., PERCS......... 2,716,725
------------
Total preferred stocks
(cost $47,765,607)....... 50,053,112
------------
</TABLE>
B-40 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (Note 1)
<S> <C> <C> <C>
Convertible Bonds--6.7%
Computer Hardware--2.0%
Conner Peripherals,
Inc., Sub. Deb.,
B1 $ 2,300 6.75%, 3/1/01........ $ 1,966,500
Quantum Corp., Deb.,
B2 5,250 6.375%, 4/1/02....... 5,171,250
Seagate Technology,
Sub. Deb.,
B2 3,407 6.75%, 5/1/12........ 3,083,335
Storage Technology
Corp., Sub. Deb.,
B2 2,200 8.00%, 5/31/15....... 2,301,750
------------
12,522,835
------------
Energy System--1.2%
Baker Hughes, Inc.,
A3 12,375 Zero Coupon,
5/5/08............. 7,486,875
------------
Fertilizer--0.7%
IMC Fertilizer Group,
Deb.,
B3 4,500 6.25%, 12/1/01....... 4,218,750
------------
Integrated Oil--0.7%
Amoco Canada
Petroleum Co.,
Sub. Exch. Deb.,
Aa3 339 7.375%, 9/1/13....... 419,513
Cross Timbers Oil
Co., Deb.,
B2 2,034 5.25%, 11/1/03....... 2,074,680
Oryx Energy Co., Sub.
Deb.,
B1 2,121 7.50%, 5/15/14....... 2,179,328
------------
4,673,521
------------
Mining--1.3%
Coeur D'Alene Mines
Corp., Deb.,
B2 3,000 7.00%, 11/30/02...... 4,275,000
Freeport McMoran,
Inc., Deb.,
Ba3 1,000 6.55%, 1/15/01....... 897,500
Hecla Mining Co.,
Sub. Deb.,
B3 7,000 Zero Coupon,
6/14/04............ 3,045,000
------------
8,217,500
------------
Miscellaneous Industrial--0.7%
Terex Corp., Deb.,
NR $ 5,650 13.00%, 8/1/96....... $ 4,491,750
------------
Steel--0.1%
USX Corp., Sub. Deb.,
BB+** 710 7.00%, 6/15/17....... 686,925
------------
Total convertible
bonds
(cost $41,304,676)... 42,298,156
------------
Total long-term
investments
(cost
$462,284,685)...... 521,914,737
------------
SHORT-TERM INVESTMENTS--17.2%
Joint Repurchase
Agreement
Account,
108,387 2.93%, 11/1/93
(cost $108,387,000;
Note 5)............ 108,387,000
------------
Total Investments--99.7%
(cost $570,671,685;
Note 4)............ 630,301,737
Other assets in
excess of
liabilities--0.3%... 1,583,139
------------
Net Assets--100%..... $631,884,876
------------
------------
</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.
B-41 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets October 31, 1993
----------------
<S> <C>
Investments, at value (cost $570,671,685)................................................... $630,301,737
Receivable for Fund shares sold............................................................. 8,182,867
Receivable for investments sold............................................................. 3,570,287
Dividends and interest receivable........................................................... 1,789,722
Deferred expenses and other assets.......................................................... 5,567
--------------
Total assets.............................................................................. 643,850,180
--------------
Liabilities
Bank overdraft.............................................................................. 1,022,722
Payable for investments purchased........................................................... 9,786,128
Due to Distributors......................................................................... 444,629
Due to Manager.............................................................................. 307,579
Accrued expenses............................................................................ 218,480
Payable for Fund shares reacquired.......................................................... 158,837
Foreign withholding tax payable............................................................. 26,929
--------------
Total liabilities......................................................................... 11,965,304
--------------
Net Assets.................................................................................. $631,884,876
--------------
--------------
Net assets were comprised of:
Shares of beneficial interest, at par..................................................... $ 440,210
Paid-in capital in excess of par.......................................................... 544,286,685
--------------
544,726,895
Undistributed net investment income....................................................... 2,542,710
Accumulated net realized gains............................................................ 24,985,219
Net unrealized appreciation............................................................... 59,630,052
--------------
Net assets, October 31, 1993................................................................ $631,884,876
--------------
--------------
Class A:
Net asset value and redemption price per share ($104,016,660 / 7,235,274 shares of
beneficial interest issued and outstanding)............................................. $14.38
Maximum sales charge (5.25% of offering price)............................................ .80
Maximum offering price to public.......................................................... $15.18
Class B:
Net asset value, offering price and redemption price per share ($527,868,216 / 36,785,745
shares of beneficial interest issued and outstanding)................................... $14.35
</TABLE>
See Notes to Financial Statements.
B-42
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
October 31,
Net Investment Income 1993
-----------
<S> <C>
Income
Dividends (net of foreign withholding
taxes of $167,410)................... $14,326,125
Interest and discount earned........... 2,446,136
-----------
Total income......................... 16,772,261
-----------
Expenses
Distribution fee--Class A.............. 141,790
Distribution fee--Class B.............. 3,048,976
Management fee......................... 2,254,755
Transfer agent's fees and expenses..... 583,000
Custodian's fees and expenses.......... 143,000
Registration fees...................... 97,000
Reports to shareholders................ 54,000
Trustees' fees......................... 45,000
Audit fee.............................. 36,000
Legal fees............................. 26,000
Franchise taxes........................ 22,000
Miscellaneous.......................... 16,616
-----------
Total expenses....................... 6,468,137
-----------
Net investment income.................... 10,304,124
-----------
Realized and Unrealized
Gain on Investments
Net realized gain on:
Investment transactions................ 24,810,840
Financial futures contracts............ 423,450
-----------
25,234,290
-----------
Net change in unrealized appreciation of
investments............................ 45,035,883
-----------
Net gain on investments.................. 70,270,173
-----------
Net Increase in Net Assets
Resulting from Operations................ $80,574,297
-----------
-----------
</TABLE>
PRUDENTIAL EQUITY INCOME FUND
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended October 31,
Increase (Decrease) ----------------------------
in Net Assets 1993 1992
------------ -------------
<S> <C> <C>
Operations
Net investment income...... $ 10,304,124 $ 5,878,222
Net realized gain on
investment
transactions............. 25,234,290 9,228,512
Net change in unrealized
appreciation of
investments.............. 45,035,883 447,132
------------ -------------
Net increase in net assets
resulting from
operations............... 80,574,297 15,553,866
------------ -------------
Net equalization credits..... 1,785,921 217,876
------------ -------------
Dividends and distributions
(Note 1)
Dividends to shareholders
from net investment
income
Class A.................. (2,383,733) (659,875)
Class B.................. (8,100,377) (5,206,396)
------------ -------------
(10,484,110) (5,866,271)
------------ -------------
Distributions to
shareholders from net
realized gains on
investment transactions
Class A.................. (1,901,042) (177,489)
Class B.................. (7,217,743) (6,139,444)
------------ -------------
(9,118,785) (6,316,933)
------------ -------------
Fund share transactions (Note
6)
Proceeds from shares
subscribed............... 398,239,834 131,072,403
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions........ 17,714,556 10,978,645
Cost of shares
reacquired................. (88,837,779) (59,179,985)
------------ -------------
Net increase in net assets
from Fund share
transactions............. 327,116,611 82,871,063
------------ -------------
Total increase............... 389,873,934 86,459,601
Net Assets
Beginning of year............ 242,010,942 155,551,341
------------ -------------
End of year.................. $631,884,876 $ 242,010,942
------------ -------------
------------ -------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-43
<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 Fund was organized as an unincorporated business trust in
Massachusetts on September 18, 1986 and had no operations until December 22,
1986 when 10,309 shares of beneficial interest were sold at $9.70 per share to
Prudential Securities Incorporated (``PSI''). Investment operations commenced
on January 22, 1987. 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 region.
Note 1. Accounting The following is a summary
Policies of significant accounting
policies 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.
Corporate bonds (other than convertible debt securities) and U.S. Government
securities that are actively traded in the over-the-counter market, including
listed securities for which the primary market is believed to be
over-the-counter, are valued on the basis of valuations provided by a pricing
service which uses information with respect to transactions in bonds,
quotations from bond dealers, agency ratings, market transactions in
comparable securities and various relationships between securities in
determining value. Convertible debt securities that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, are valued at the mean between the
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 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.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Fund is required to pledge to the broker an amount of cash and/or other
amounts equal to a certain percentage of the contract amount. This is known as
the ``initial margin''. Subsequent payments, known as ``variation margin'', are
made or received by the Fund each day, depending on the daily fluctuations in
the value of the underlying security. Such variation margin is recorded for
financial statement purposes on a daily basis as unrealized gain or loss until
the contracts expire or are closed, at which time the gain or loss is
reclassified to realized gain or loss. The Fund invests in financial futures
contracts solely for the purpose of hedging its existing portfolio securities or
securities the Fund intends to purchase against fluctuations in value caused by
changes in prevailing market conditions. Should market conditions move
unexpectedly, the Fund may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss. The use of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets.
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
B-44
<PAGE>
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. These differences are primarily due to differing
treatments for wash sales.
Reclassification of Capital Accounts: Effective November 1, 1992, the Fund
began accounting and reporting for distributions to shareholders in accordance
with Statement of Position 93-2; Determination, Disclosure, and Financial
Statement Presentation of Income, Capital Gain, and Return of Capital
Distributions by Investment Companies. The effect caused by adopting this
statement was to decrease paid-in capital by $2,048, increase undistributed net
investment income by $577 and increase accumulated net realized gains on
investments by $1,471 with respect to amounts reported through October 31,
1993. Net investment income, net realized gains and net assets were not
affected by this change.
Note 2. Agreements The Fund has a management
agreement with Prudential 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.
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 PSI, which acts as distributor of the Class B shares of
the Fund (collectively, the ``Distributors''). To reimburse the Distributors
for their expenses incurred in distributing and servicing the Fund's Class A
and B shares, the Fund, pursuant to plans of distribution, pays the
Distributors a reimbursement, accrued daily and payable monthly.
Pursuant to the Class A Plan, the Fund reimburses PMFD for its expenses 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. Such expenses under the Class A Plan
were .20 of 1% of the average daily net assets of the Class A shares for the
fiscal year ended October 31, 1993. PMFD pays various broker-dealers, including
PSI and Pruco Securities Corporation (``Prusec''), affiliated broker-dealers,
for account servicing fees and other expenses incurred by such broker-dealers.
Pursuant to the Class B Plan, the Fund reimburses PSI for its
distribution-related expenses with respect to Class B shares at an annual rate
of up to 1% of the average daily net assets of the Class B shares.
The Class B distribution expenses include commission credits for payment of
commissions and account servicing fees to financial advisers and an allocation
for overhead and other distribution-related expenses, interest and/or carrying
charges, the cost of printing and mailing prospectuses to potential investors
and of advertising incurred in connection with the distribution of shares.
B-45
<PAGE>
The Distributors recover the distribution expenses and account servicing
fees incurred through the receipt of reimbursement payments from the Fund under
the plans and the receipt of initial sales charges (Class A only) and
contingent deferred sales charges (Class B only) from shareholders.
PMFD has advised the Fund that it has received approximately $1,497,600 in
front-end sales charges resulting from sales of Class A shares during the
fiscal year ended October 31, 1993. From these fees, PMFD paid such sales
charges to dealers (PSI and Prusec) which in turn paid commissions to
salespersons.
With respect to the Class B Plan, at any given time, the amount of expenses
incurred by PSI in distributing the Fund's shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total payments made by the Fund pursuant
to the Class B Plan. PSI has advised the Fund that for the fiscal year ended
October 31, 1993, it received approximately $538,500 in contingent deferred
sales charges imposed upon certain redemptions by investors. PSI, as
distributor, has also advised the Fund that at October 31, 1993, the amount of
distribution expenses incurred by PSI and not yet reimbursed by the Fund or
recovered through contingent deferred sales charges approximated $10,271,700.
This amount may be recovered through future payments under the Class B Plan or
contingent deferred sales charges.
In the event of termination or noncontinuation of the Class B Plan, the Fund
would not be contractually obligated to pay PSI, as distributor, for any
expenses not previously reimbursed or recovered through contingent deferred
sales charges.
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
Transactions Services, 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, 1993, the Fund incurred fees of
approximately $549,900 for the services of PMFS. As of October 31, 1993,
approximately $63,800 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, 1993, PSI earned approximately
$193,100 in brokerage commissions from portfolio transactions executed on
behalf of the Fund.
Note 4. Portfolio Purchases and sales of
Securities investment securities, other
than short-term investments, for the fiscal year
ended October 31, 1993 were $413,063,973 and $193,859,516, respectively.
The federal income tax basis of the Fund's investments, at October 31, 1993
was $571,009,768 and, accordingly, net unrealized appreciation for federal
income tax purposes was $59,291,969 (gross unrealized
appreciation--$68,087,576; gross unrealized depreciation--$8,795,607).
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. As of October
31, 1993, the Fund has an 8.0% undivided interest in the repurchase agreements
in the joint account. The undivided interest for the Fund represents
$108,387,000 in principal amount. As of such date, each repurchase agreement
in the joint account and the collateral therefor were as follows:
CS First Boston Corp., 2.93%, in the principal amount of $360,000,000,
repurchase price $360,087,900, due 11/1/93, collateralized by $47,400,000 U.S.
Treasury Notes, 6.75%, due 2/28/97; $40,000,000 U.S. Treasury Notes, 11.25%,
due 2/15/95; $100,000,000 U.S. Treasury Bonds, 7.50%, due 11/15/16; $50,00,000
U.S. Treasury Bonds, 10.375%, due 11/15/12 and $50,000,000 U.S. Treasury Bonds,
12.00%, due 5/15/05; aggregate value including accrued interest--$368,368,052.
Goldman Sachs & Co., 2.93%, in the principal amount of $450,154,000,
repurchase price $450,263,913, due 11/1/93, collateralized by $104,915,000 U.S.
Treasury Bonds, 12.00%, due 8/15/13 and $200,000,000 U.S. Treasury Bonds,
10.75%, due 8/15/05; aggregate value including accrued interest--$462,739,932.
Kidder, Peabody & Co. Inc., 2.95%, in the principal amount of $305,000,000,
repurchase price $305,074,979, due 11/1/93, collateralized by $210,030,000 U.S.
Treasury Bonds, 9.875%, due 11/15/15; value including accrued
interest--$311,527,136.
Nomura Securities International, Inc., 2.90%, in the principal amount of
$60,889,000, repurchase price $60,903,715, due 11/1/93, collateralized by
$8,280,000 U.S. Treasury Notes, 7.75%, due 2/15/95; $25,000,000 U.S. Treasury
B-46
<PAGE>
Notes, 7.375%, due 5/15/96 and $22,775,000 U.S. Treasury Notes, 8.875%, due
2/15/96; aggregate value including accrued interest--$62,140,276.
Smith Barney Shearson, Inc., 2.94%, in the principal amount of $175,000,000,
repurchase price $175,042,875, due 11/1/93, collateralized by $4,465,000 U.S.
Treasury Bonds, 12.00%, due 5/15/05; $11,435,000 U.S. Treasury Notes, 9.125%,
due 5/15/99; $75,000,000 U.S. Treasury Bonds, 8.125%, due 8/15/19 and
$50,000,000 U.S. Treasury Bonds, 8.00%, due 11/15/21; aggregate value including
accrued interest--$178,771,706.
Note 6. Capital The Fund offers both Class
A and Class B shares. Class A shares are sold
with a front-end sales charge of up to 5.25%. 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. Both classes of shares have equal
rights as to earnings, assets and voting privileges except that each class
bears different distribution expenses and has exclusive voting rights with
respect to its distribution plan.
The Fund has authorized an unlimited number of shares of beneficial interest
at $.01 par value divided into two classes, designated Class A and Class B.
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- --------------------------- ---------- ------------
<S> <C> <C>
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)
---------- ------------
Increase in shares
outstanding.............. 3,026,346 $ 41,036,847
---------- ------------
---------- ------------
<CAPTION>
Shares Amount
---------- ------------
<S> <C> <C>
Year ended October 31,
1992:
Shares sold................ 534,597 $ 6,385,385
Shares issued--merger...... 3,584,907 42,652,014
Shares issued in
reinvestment of
dividends and
distributions............ 63,805 755,032
Shares reacquired.......... (307,736) (3,704,537)
---------- ------------
Increase in shares
outstanding.............. 3,875,573 $ 46,087,894
---------- ------------
---------- ------------
<CAPTION>
Class B
- ---------------------------
<S> <C> <C>
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)
---------- ------------
Increase in shares
outstanding.............. 21,063,891 $286,079,764
---------- ------------
---------- ------------
Year ended October 31,
1992:
Shares sold................ 6,854,296 $ 82,035,004
Shares issued in
reinvestment of
dividends and
distributions............ 891,406 10,223,613
Shares reacquired.......... (4,623,152) (55,475,448)
---------- ------------
Increase in shares
outstanding.............. 3,122,550 $ 36,783,169
---------- ------------
---------- ------------
</TABLE>
Note 7. Dividends On December 9, 1993, the
Board of Trustees of the Fund declared ordinary
income dividends of $0.07 per Class A share and $0.045 per Class B share and a
$0.345 long-term capital gain distribution and a $0.18 short-term capital gain
distribution for both Class A and Class B shares payable on December 22, 1993
to shareholders of record on December 15, 1993.
B-47
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
Financial Highlights
<TABLE>
<CAPTION>
Class A Class B
-------------------------------------- ----------------------------------------------------
January
22,
1990+
through
Year Ended October 31, October Year Ended October 31,
--------------------------- 31, ----------------------------------------------------
1993 1992 1991 1990 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-------- ------- ------ -------- -------- -------- -------- -------- --------
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $ 12.16 $ 12.04 $ 9.53 $10.59 $ 12.14 $ 12.03 $ 9.53 $ 10.89 $ 9.63
-------- ------- ------ -------- -------- -------- -------- -------- --------
Income from investment
operations
Net investment income.......... .47 .47 .38 .25 .37 .37 .30 .28 .32
Net realized and unrealized
gain (loss) on investment
transactions................. 2.65 .60 2.50 (1.01) 2.64 .59 2.49 (1.32) 1.26
-------- ------- ------ -------- -------- -------- -------- -------- --------
Total from investment
operations................. 3.12 1.07 2.88 (.76) 3.01 .96 2.79 (1.04) 1.58
-------- ------- ------ -------- -------- -------- -------- -------- --------
Less distributions
Dividends from net investment
income....................... (.46) (.47) (.37) (.30) (.36) (.37) (.29) (.32) (.32)
Distributions from net realized
gains........................ (.44) (.48) -- -- (.44) (.48) -- -- --
-------- ------- ------ -------- -------- -------- -------- -------- --------
Total distributions.......... (.90) (.95) (.37) (.30) (.80) (.85) (.29) (.32) (.32)
-------- ------- ------ -------- -------- -------- -------- -------- --------
Net asset value, end of
period....................... $ 14.38 $ 12.16 $12.04 $ 9.53 $ 14.35 $ 12.14 $ 12.03 $ 9.53 $ 10.89
-------- ------- ------ -------- -------- -------- -------- -------- --------
-------- ------- ------ -------- -------- -------- -------- -------- --------
TOTAL RETURN#:................. 26.93% 9.50% 30.62% (7.36)% 25.93% 8.55% 29.58% (9.77)% 16.68%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $104,017 $51,165 $4,013 $1,098 $527,868 $190,846 $151,538 $120,032 $143,169
Average net assets (000)....... $ 70,895 $21,931 $2,084 $ 752 $304,898 $169,524 $136,602 $142,179 $ 84,157
Ratios to average net assets:
Expenses, including
distribution fees.......... 1.07% 1.22% 1.37% 1.59%* 1.87% 2.02% 2.17% 2.22% 2.08%
Expenses, excluding
distribution fees.......... .87% 1.02% 1.17% 1.39%* .87% 1.02% 1.17% 1.22% 1.12%
Net investment income........ 3.44% 3.22% 3.43% 3.12%* 2.58% 3.05% 2.67% 2.70% 2.89%
Portfolio turnover............. 57% 43% 64% 58% 57% 43% 64% 58% 60%
</TABLE>
- ---------------
* Annualized.
+ Commencement of offering of Class A 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.
See Notes to Financial Statements.
B-48
<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, 1993, 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, 1993 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, 1993, the results of its operations, the changes
in its net assets and the financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.
Deloitte & Touche
New York, New York
December 9, 1993
B-49
<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 obligations.
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 Standard & Poor's.
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
A Standard & Poor's 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 slightly 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
