<PAGE>
As filed with the Securities and Exchange Commission on October 22, 1998
Securities Act Registration No. 33-9269
Investment Company Act Registration No. 811-4864
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [_]
PRE-EFFECTIVE AMENDMENT NO. [_]
[X]
POST-EFFECTIVE AMENDMENT NO. 19
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [_]
[X]
AMENDMENT NO. 20
(Check appropriate box or boxes)
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PRUDENTIAL EQUITY INCOME FUND
(Exact name of registrant as specified in charter)
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973) 367-7525
MARGUERITE E. H. MORRISON, ESQ.
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(NAME AND ADDRESS OF AGENT FOR SERVICE)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE
DATE OF THE REGISTRATION STATEMENT.
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX):
[_] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[X] on December 30, 1998 pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[_] this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment
TITLE OF SECURITIES BEING REGISTERED . . . . SHARES OF BENEFICIAL INTEREST,
PAR VALUE $.01 PER SHARE.
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<PAGE>
FUND TYPE:
-------------------------------
Stock
INVESTMENT OBJECTIVE:
-------------------------------
Capital appreciation and
current income
Prudential Equity
Income Fund
-------------------------------
PROSPECTUS: DECEMBER 30, 1998
As with all mutual funds, filing this prospectus
with the Securities and Exchange Commission
does not mean that the SEC has judged this Fund
a good investment, nor has the SEC determined that
this prospectus is complete or accurate. It is a criminal
offense to state otherwise.
LOGO Prudential
Investments
<PAGE>
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TABLE OF CONTENTS
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<TABLE>
<S> <C>
2 Risk/Return Summary
2 Investment Objective and Principal Strategies
2 Principal Risks
2 Evaluating Performance
4 Shareholder Fees and Expenses
6 How the Fund Invests
6 Investment Objective and Policies
7 Other Investments
8 Derivative Strategies
8 Additional Strategies
9 Investment Risks
12 How the Fund is Managed
12 Manager
12 Investment Adviser
12 Portfolio Manager
12 Distributor
13 Year 2000
14 Fund Distributions and Tax Issues
14 Distributions
14 Tax Issues
16 If You Sell or Exchange Your Shares
17 How to Buy, Sell and Exchange Shares of the Fund
17 How to Buy Shares
24 How to Sell Your Shares
26 How to Exchange Your Shares
28 Financial Highlights
28 Class A Shares
29 Class B Shares
30 Class C Shares
31 Class Z Shares
32 The Prudential Mutual Fund Family
For More Information (Back Cover)
</TABLE>
1
<PAGE>
RISK / RETURN SUMMARY
This section highlights key information about the Prudential Equity Income Fund,
which we refer to as "the Fund." Additional information follows this summary.
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is both capital appreciation and current income, which
means we seek investments that will increase in value as well as pay the Fund
dividends and other income. We normally invest at least 65% of the Fund's total
assets in the common stock of U.S. companies, as well as securities that can be
converted into common stock (known as convertibles).
<TABLE>
<S> <C>
WE'RE VALUE INVESTORS To achieve our income objective, we look for
In deciding which stocks to securities that will provide investment income
buy, we use what is known as returns above those of the Standard & Poor's 500
a value investment style. Stock Index or the NYSE Composite Index. While we
That is, we invest in stocks make every effort to achieve our objective, we can't
that we believe are under- guarantee success.
valued, given the company's
sales, earnings, book value PRINCIPAL RISKS
and cash flow. Using this Although we try to invest wisely, all investments
approach, we seek reasonable involve risk. Since the Fund invests primarily in
growth with an eye toward stock, there is the risk that the price of a
minimizing risk. particular stock we
- -------------------------------
own could go down, or pay lower-than-expected dividends. Generally, the stock price
of large companies is more stable than the stock price of medium-sized and small
companies, but this is not always the case.
</TABLE>
In addition to an individual stock losing value, the value of the equity markets
as a whole could go down. Some of our investment strategies - as well as foreign
investments that we make-also involve risk. Like any mutual fund, an investment
in the Fund could lose value, and you could lose money. For more information
about the risks associated with the Fund, see "Investment Risks."
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
EVALUATING PERFORMANCE
A number of factors-including risk-can affect how the Fund performs.
The following bar chart and table show the Fund's performance over the past 10
years and demonstrate how returns can change from year to year. Past performance
does not mean that the Fund will achieve similar results in the future.
2
<PAGE>
<TABLE>
<CAPTION>
ANNUAL RETURNS Class B shares/1/
<S> <C> <C>
(as percentage)
1988: 20.89
1989: 20.35
1990: -5.73
1991: 25.62
1992: 8.42 [ Bar Chart Here]
1993: 20.43
1994: -0.80
1995: 20.72
1996: 20.98
1997: 35.35
Best Quarter: 16.25% (2nd quarter of 1997) Worst Quarter: -11.04% (3rd quarter of 1990)
- -----
</TABLE>
/1/ These annual returns do not include sales charges. If the sales charges
were included, the annual returns would be lower than those shown. The total
return of the Class B shares from 1-1-98 to 9-30-98 was -10.85%.
AVERAGE ANNUAL RETURNS AS OF 12-31-97/1/
<TABLE>
<CAPTION>
1 YR 5 YRS 10 YRS SINCE INCEPTION
<S> <C> <C> <C> <C>
Class A shares 29.59% 18.44% n/a 15.89% (since 1-22-90)
Class B shares 30.35% 18.65% 16.00% 13.31% (since 1-20-87)
Class C shares 34.35% n/a n/a 20.92% (since 8-1-94)
Class Z shares 36.81% n/a n/a 28.68% (since 3-1-96)
S&P 500/2/ % % % n/a
Lipper Average/3/ % % % n/a
</TABLE>
/1/ The Fund's returns are after deduction of sales charges and expenses.
/2/ The Standard & Poor's 500 Stock Index (S&P 500) - an unmanaged index of
500 stocks of large U.S. companies - gives a broad look at how stock
prices have performed. These returns do not include the effect of any
sales charges. These returns would be lower if they included the effect of
sales charges. S&P 500 since inception returns are % for Class A, %
_ --
for Class B, % for Class C and % for Class Z shares.
-- --
/3/ The Lipper Average is based on the average return of all mutual funds in
the Lipper Equity Income category and does not include the effect of any
sales charges. Again, these returns would be lower if they included the
effect of sales charges. Lipper since inception returns are % for Class
--
A, % for Class B, % for Class C and % for Class Z shares.
-- -- --
3
<PAGE>
Shareholder Fees and Expenses
This table shows the sales charges, fees and expenses for each share class of
the Fund-Class A, B, C and Z. Each share class has different sales charges-known
as loads-and expenses, but represents an investment in the same fund. Class Z
shares are available only to a limited group of investors. For more information
about which share class may be right for you, see "How to Buy, Sell and Exchange
Shares of the Fund".
SHAREHOLDER FEES/1/ Paid Directly from Your Investment
<TABLE>
<CAPTION>
Class A Class B Class C Class Z
<S> <C> <C> <C> <C>
Maximum sales charge
(load) imposed on
purchases (as a 5% None 1% None
percentage of offering
price)
Maximum deferred sales
charge (load) (as a
percentage of the lower
of original purchase None 5%/2/ 1%/3/ None
price or sale proceeds)
Maximum sales charge
(load) imposed on
reinvested dividends and None None None None
other distributions
Redemption fees None None None None
Exchange fee None None None None
Maximum account fee None None None None
</TABLE>
ANNUAL FUND OPERATING EXPENSES Deducted from Fund Assets
<TABLE>
<CAPTION>
Class A Class B Class C Class Z
<S> <C> <C> <C> <C>
Management fees % % % %
+ Distribution (12b-1) and
service fees .30%/4/ 1.00% 1.00% None
+ Other expenses ___% ___% ___% ___%
= Total annual Fund ___% ___% ___% ___%
operating expenses
</TABLE>
/1/ The maximum sales charges permitted by the National Association of
Securities Dealers, Inc. may not exceed 6.25% of total gross sales per
class. Because of 12b-1 fees, long-term shareholders may pay more than
6.25% of their investment in shares of the Fund. Your broker may charge you
a separate or additional fee for purchases and sales of shares.
/2/ The Contingent Deferred Sales Charge (CDSC) for Class B shares decreases by
1% annually to 1% in the fifth and sixth years and 0% in the seventh year.
4
<PAGE>
/3/ The CDSC for Class C shares is 1% for shares redeemed within 18 months of
purchase.
/4/ The Distributor of the Fund has voluntarily reduced its distribution and
service fees for Class A shares to .25 of 1% of the average daily net
assets of the Class A shares. This voluntary reduction may be terminated at
any time without notice. With this reduction, Total annual Fund operating
expenses are __%.
Fees and Expenses Example
This example will help you compare the fees and expenses of the Fund's
different share classes.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
1 yr 3 yrs 5 yrs 10 yrs
Class A shares
Class B shares
Class C shares
Class Z shares
You would pay the following expenses on the same investment if you did not sell
your shares:
1 yr 3 yrs 5 yrs 10 yrs
Class A shares
Class B shares
Class C shares
Class Z shares
5
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is both CAPITAL APPRECIATION and CURRENT INCOME.
This means we seek investments that will increase in value, as well as pay the
Fund dividends and other income. While we make every effort to achieve our
objective, we can't guarantee success.
In pursuing our objective, we normally invest at least 65% of the Fund's total
assets in the COMMON STOCK and CONVERTIBLE SECURITIES of companies that we
believe will provide investment income returns above those of the S&P 500 or the
NYSE Composite Index. This means that we focus on companies whose dividend yield
(the annual dividend a company pays to its shareholders, shown as a percentage
of the current stock price) is higher than the average dividend yield of the
companies that make up the S&P 500 or the NYSE Composite Index.
<TABLE>
<S> <C>
WE USE A CONTRARIAN APPROACH We buy common stock and convertible
securities of companies of every
To achieve our value investment strategy, size - small, medium and large
we generally take a strong contrarian capitalization.
approach to investing. In other words,
we usually buy securities that are out In addition to buying stock, we may
of favor and that many other investors buy CONVERTIBLE SECURITIES. These
are selling, and we attempt to invest in are securities - like bonds,
companies and industries before other corporate notes and preferred stock
investors recognize their true value. - that can be converted into the
Using these guidelines, we focus on
long-term performance, not short-term
gain.
- ------------------------------------------
company's common stock or some other equity security. The Fund also invests in
other EQUITY-RELATED SECURITIES, including preferred stock, warrants and rights
that can be exercised to obtain stock, investments in various types of business
ventures, including partnerships and joint ventures, and securities - like
American Depositary Receipts (ADRs) - that represent an equity investment in a
foreign company. Generally, we consider selling a security when, in the opinion
of the investment adviser, it has increased in value to the point where it is
no longer undervalued.
</TABLE>
For more information, see "Investment Risks" and the Statement of Additional
Information, "Description of the Fund, Its Investments and Risks." The Statement
of Additional Information - which we refer to as the SAI -contains additional
information about the Fund. To obtain a copy, see the back cover page of this
prospectus.
The Fund's investment objective is a fundamental policy that cannot be changed
without shareholder approval. The Board of the Fund can change investment
policies that are not fundamental.
6
<PAGE>
OTHER INVESTMENTS
We may also use the following investment strategies to increase the Fund's
returns or protect its assets if market conditions warrant.
Money Market Instruments, Bonds and Other Fixed-Income Obligations
Under normal circumstances, the Fund may invest up to 35% of its total assets in
MONEY MARKET INSTRUMENTS, which include the commercial paper of U.S.
corporations, the obligations of U.S. banks, certificates of deposit and
obligations issued or guaranteed by the U.S. government or its agencies. We also
may invest up to 35% of the Fund's total assets in other fixed-income
obligations like BONDS. Generally, fixed-income obligations provide a fixed rate
of return, but provide less opportunity for capital appreciation than investing
in stocks.
If we believe it is necessary, we may temporarily invest up to 100% of the
Fund's assets in money market instruments. Investing heavily in these securities
limits our ability to achieve capital appreciation but may help to preserve the
Fund's assets when the equity markets are unstable.
The Fund will only purchase money market instruments in one of the two highest
short-term quality ratings of a nationally recognized statistical rating
organization (NRSRO). For bonds and other long-term fixed-income obligations, we
invest primarily in obligations in one of the top three long-term quality
ratings (A or better). We may invest in lower rated obligations which are more
speculative, including high-yield or "junk" bonds (obligations rated below
BBB/Baa), although we will not invest in obligations rated lower than Ca/CC. We
may also invest in obligations that are not rated, but which we believe are of
comparable quality to the obligations described above.
FOREIGN SECURITIES
We may invest up to 30% of the Fund's total assets in FOREIGN SECURITIES,
including money market instruments and other fixed-income securities, stock and
other equity-related securities. For purposes of this limitation, we do not
consider ADRs and other similar receipts or shares to be foreign securities.
REAL ESTATE INVESTMENT TRUSTS
We may invest in the securities of real estate investment trusts known as REITS.
REITs are like corporations, except that they do not pay income taxes if they
meet certain IRS requirements. However, while REITs themselves do not pay income
taxes, the distributions they make to investors are taxable. REITs invest
primarily in real estate and distribute almost all of their income - most of
which comes from rents, mortgages and gains on sales of property - to
shareholders.
7
<PAGE>
DERIVATIVE STRATEGIES
We may use a number of alternative investment strategies - including
DERIVATIVES - to try to improve the Fund's returns or protect its assets,
although we cannot guarantee they will work. Derivatives - such as futures,
options, forward foreign currency exchange contracts and options on futures -
involve costs and can be volatile. With derivatives, the investment adviser
tries to predict whether the underlying investment, i.e. a security, market
index, currency, interest rate or some other investment, will go up or down at
some future date. We may use derivatives to try to reduce risk or to increase
return consistent with the Fund's overall investment objective. Any derivatives
we may use may not match the Fund's underlying holdings. For more information
about these strategies, see the SAI, "Description of the Fund, Its Investments
and Risks - Hedging and Return Enhancement Strategies."
ADDITIONAL STRATEGIES
The Fund may also use REPURCHASE AGREEMENTS, where a party agrees to sell a
security to the Fund and then repurchase it at an agreed-upon price at a stated
time. This creates a fixed return for the Fund.
The Fund also follows certain policies when it: BORROWS MONEY (the Fund can
borrow up to 20% of the value of its total assets); LENDS ITS SECURITIES to
others (the Fund can lend up to 33% of the value of its total assets, including
collateral received in the transaction); and holds ILLIQUID SECURITIES (the Fund
may hold up to 15% of its net assets in illiquid securities, including
restricted securities, those without a readily available market and repurchase
agreements with maturities longer than seven days). The Fund is subject to
certain investment restrictions that are fundamental policies, which means they
cannot be changed without shareholder approval. For more information about these
restrictions, see the SAI.
8
<PAGE>
INVESTMENT RISKS
As noted, all investments involve risk, and investing in the Fund is no
exception. This chart outlines the key risks and potential rewards of the Fund's
principal investments.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
INVESTMENT TYPE RISKS POTENTIAL REWARDS
% OF FUND'S TOTAL ASSETS
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
STOCK AND CONVERTIBLE . Individual stocks could . Historically, stocks have
SECURITIES OF U.S. lose value out-performed other
COMPANIES investments over the long
. The equity markets could . term
At least 65% go down
Generally, economic
. Companies that pay . growth means higher
dividends may not do corporate profits, which
so if they don't have leads to an increase in stock
profits or adequate cash flow prices, known as capital
appreciation
. Changes in economic or .
political conditions, May be one source
both domestic and of dividend income
international
- -------------------------------------------------------------------------------------------------------------
BONDS . Credit risk--the risk . Regular interest
that the borrower can't income
Up to 35% under pay back the money
normal conditions borrowed or make
interest payments . Generally more secure than
(particularly high for stock since companies
junk bonds) must pay their debts
before they pay
. Market risk--the risk dividends
that bonds or other debt
instruments may lose
value in the market
because interest rates
change or there is a
lack of confidence in
the borrower
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
INVESTMENT TYPE RISKS POTENTIAL REWARDS
% OF FUND'S TOTAL ASSETS
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FOREIGN SECURITIES . Foreign markets, economies . Investors can participate in
and political systems may not the growth of foreign markets
Up to 30% be as stable as in the U.S. and companies operating in
those markets
. Currency risk
. May be less liquid than U.S.
stocks
. Differences in foreign laws,
accounting standards and public
information
- -------------------------------------------------------------------------------------------------------------
REAL ESTATE . Performance depends . Real estate holdings
INVESTMENT on the strength of real can generate good
TRUSTS (REITS) estate markets, REIT returns from rents,
management and rising market values,
Up to 25% property management etc.
which can be affected by
many factors, including . Greater diversification
national and regional than direct ownership
economic conditions
- -------------------------------------------------------------------------------------------------------------
DERIVATIVES . Generally involves trying . One way to manage
to predict whether the Fund's risk/return
Percentage varies the underlying security, balance by locking in
market index, currency the value of an
or interest rate will investment ahead of
increase or decrease at time
some future date
. If the investment adviser
predicts wrong, the Fund
can lose money
. Using derivatives costs
money
- -------------------------------------------------------------------------------------------------------------
ILLIQUID SECURITIES . May be difficult to . May offer a more
value and sell attractive yield or
potential for growth
Up to 15% of net assets . Could result in losses than more liquid
securities
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
INVESTMENT TYPE RISKS POTENTIAL REWARDS
% OF FUND'S TOTAL ASSETS
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MONEY MARKET INSTRUMENTS . Limits potential for . May preserve the
(up to 100% on a temporary capital appreciation Fund's assets
basis) . See Credit risk and
Market risk
</TABLE>
11
<PAGE>
HOW THE FUND IS MANAGED
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM)
GATEWAY CENTER THREE, 100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
Under a management agreement with the Fund, PIFM manages the Fund's investment
operations and administers its business affairs. For the fiscal year ended
October 31, 1998, the Fund paid PIFM management fees of __% of the Fund's
average net assets.
As of November 30, 1998, PIFM served as the Manager to all __ of the Prudential
Mutual Funds, and as Manager or administrator to __ closed-end investment
companies, with aggregate assets of approximately $__ billion.
INVESTMENT ADVISER
The Prudential Investment Corporation, known as Prudential Investments, is the
Fund's investment adviser. Its address is Prudential Plaza, 751 Broad Street,
Newark, New Jersey 07102. PIFM has responsibility for all investment advisory
services, supervises Prudential Investments and reimburses Prudential
Investments for its reasonable costs and expenses.
PORTFOLIO MANAGER
Warren E. Spitz, a Managing Director of Prudential Investments, has managed the
Fund since 1988. He earned a B.S. from Allegheny College and an M.B.A. from the
University of Pennsylvania's Wharton School of Business.
As a value investor, Warren seeks companies that will produce both above-average
earnings and dividend growth over the long term. He also uses sales, book value
and cash flow as guides for stock selection.
DISTRIBUTOR
Prudential Investment Management Services LLC (PIMS) distributes the Fund's
shares under a Distribution Agreement with the Fund. The Fund has Distribution
and Service Plans under Rule 12b-1 of the Investment Company Act. Under the
Plans and the Distribution Agreement, PIMS pays the expenses of distributing the
Fund's Class A, B, C and Z shares and provides certain shareholder support
services. The Fund pays distribution and other fees to PIMS as compensation for
its services for each class of shares other than Class Z. These fees-known as
12b-1 fees-are shown in the "Shareholder Fees and Expenses" table.
12
<PAGE>
YEAR 2000
Many computer systems used today cannot distinguish the year 2000 from the year
1900 because of the way dates are encoded. This could be a problem when the year
2000 arrives and could affect securities trades, interest and dividend payments,
pricing and account services. Although we cannot guarantee that this will not be
a problem, the Fund's service providers have been working on adapting their
computer systems. They expect that their systems, and the systems of their
service providers, will be ready for the year 2000.
In addition, issuers of securities may also encounter year 2000 compliance
problems. If these problems are significant and are not corrected, securities
markets could go down or issuers could have poor performance. If the Fund owns
these securities, then it is possible that the Fund could lose money.
13
<PAGE>
FUND DISTRIBUTIONS AND TAX ISSUES
Investors who buy shares of the Fund should be aware of some important tax
issues. For example, the Fund distributes DIVIDENDS and CAPITAL GAINS, if any,
to shareholders. These distributions are subject to taxes, unless you hold your
shares in a 401(k) plan, an Individual Retirement Account (IRA) or some other
qualified tax-deferred plan or account.
Also, if you sell shares of the Fund for a profit, you may have to pay capital
gains taxes on the amount of your profit, again unless your shares are held in a
qualified tax-deferred plan or account.
The following briefly discusses some of the important federal tax issues you
should be aware of, but is not meant to be tax advice. For tax advice, please
speak with your tax adviser.
DISTRIBUTIONS
The Fund distributes DIVIDENDS of any net investment income to shareholders,
typically every quarter. For example, if the Fund owns ACME Corp. stock and the
stock pays a dividend, the Fund will pay out a portion of this dividend to its
shareholders, assuming the Fund's income is more than its costs and expenses.
The dividends you receive from the Fund will be taxed as ordinary income,
whether or not they are reinvested in the Fund.
The Fund also distributes CAPITAL GAINS to shareholders - typically once a year
- - which are generated when the Fund sells its assets for a profit. For example,
if the Fund bought 100 shares of ACME Corp. stock for a total of $1,000 and
later sold the shares for a total of $1,500, the Fund has capital gains of $500,
which it will pass on to shareholders (assuming the Fund's total gains are
greater than any losses it may have). Capital gains are taxed differently
depending on how long the Fund holds the security - the longer a security is
held before it is sold, the lower the capital gains tax rate, up to a point.
For your convenience, Fund distributions of dividends and capital gains are
AUTOMATICALLY REINVESTED in the Fund without any sales charge. If you ask us to
pay the distributions in cash, we will send you a check if your account is with
the Transfer Agent. Otherwise, if your account is with a broker you will
receive a credit to your account. Either way, the distributions may be subject
to taxes, unless your shares are held in a qualified tax-deferred plan or
account. For more information about automatic reinvestment and other shareholder
services, see "Step 4: Additional Shareholder Services" in the next section.
TAX ISSUES
Form 1099
During the tax season every year, you will receive a Form 1099, which reports
the amount of dividends and capital gains we distributed to you during the prior
year. If you own shares of the Fund as part of a qualified tax-deferred plan or
account, your taxes are deferred, so you will not
14
<PAGE>
receive a Form 1099. However, you will receive a Form 1099 when you take any
distributions from your qualified tax-deferred plan or account.
Fund distributions are generally taxable to you in the year they are received,
except when we declare certain dividends in the fourth quarter and actually pay
them in January of the following year. In such cases, the dividends are treated
as if they were paid on December 31 of the prior year. Corporate shareholders
are eligible for the 70% dividends-received deduction for certain dividends.
WITHHOLDING TAXES
If federal tax law requires you to provide the Fund with your tax identification
number and certifications as to your tax status, and you fail to do this, we
will withhold and pay to the U.S. Treasury 31% of your distributions and sale
proceeds. If you are subject to backup withholding, we will withhold and pay to
the U.S. Treasury 31% of your distributions. Dividends of net investment income
and short-term capital gains paid to a nonresident foreign shareholder generally
will be subject to a U.S. withholding tax of 30%. This rate may be lower,
depending on any tax treaty the U.S. may have with the shareholder's country.
IF YOU PURCHASE JUST BEFORE RECORD DATE
If you buy shares of the Fund just before the record date (the date that
determines who receives the distribution), that distribution will be paid to you
as a shareholder of record. As explained above, the distribution may be subject
to income or capital gains taxes. You may think you've done well, since you
bought shares one day, and soon thereafter received a distribution. That is not
so because when dividends are paid out, the value of each share of the Fund
decreases by the amount of the dividend and the market changes (if any) to
reflect the payout. The distribution you receive makes up for the decrease in
share value. However, the timing of your purchase does mean that part of your
investment came back to you as taxable income.
RETIREMENT PLANS
Retirement plans and accounts allow you to defer paying taxes on investment
income and capital gains. Contributions to these plans may also be tax
deductible, although distributions from these plans generally are taxable. In
the case of Roth IRA accounts - available to certain taxpayers beginning in 1998
- - contributions are not tax deductible, but distributions from the plan may be
tax-free. Please contact your broker or a Prudential professional for
information on a variety of retirement plans offered by Prudential.
15
<PAGE>
IF YOU SELL OR EXCHANGE YOUR SHARES
If you sell any shares of the Fund for a profit, you have REALIZED A CAPITAL
GAIN, which is subject to tax, unless you hold shares in a qualified tax-
deferred plan or account. The amount of tax you pay depends on how long you
owned your shares. If you sell shares of the Fund for a loss, you may have a
capital loss, which you may use to offset certain capital gains you have.
<TABLE>
<S> <C>
$
RECEIPTS CAPITAL GAIN
FROM SALE (taxes owed)
OR
CAPITAL LOSS
(offset against
gain)
</TABLE>
Exchanging your shares of the Fund for the shares of another Prudential Mutual
Fund is considered a sale for tax purposes. In other words, it's a "taxable
event." Therefore, if the shares you exchanged have increased in value since you
purchased them, you have capital gains, which are subject to the taxes described
above.
Any gain or loss you may have from selling or exchanging Fund shares will not be
reported on the Form 1099. Therefore, unless you hold your shares in a qualified
tax-deferred plan or account, you or your financial adviser should keep track of
the dates on which you buy and sell - or exchange - Fund shares, as well as the
amount of any gain or loss on each transaction. For tax advice, please see your
tax adviser.
AUTOMATIC CONVERSION OF CLASS B SHARES
We have obtained a legal opinion that the conversion of Class B shares into
Class A shares - which happens automatically approximately seven years after
purchase - is not a "taxable event" because it does not involve an actual sale
of your Class B shares. This opinion, however, is not binding on the IRS. For
more information about the automatic conversion of Class B shares, see "Class B
Shares Convert to Class A Shares After Approximately Seven Years" in the next
section.
16
<PAGE>
HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUND
HOW TO BUY SHARES
STEP 1: OPEN AN ACCOUNT
If you don't have an account with us or a securities firm that is permitted to
buy or sell shares of the Fund for you, call Prudential Mutual Fund Services LLC
(PMFS) at (800) 225-1852 or contact:
PRUDENTIAL MUTUAL FUNDS SERVICES LLC
ATTN: INVESTMENT SERVICES
P.O. BOX 15020
NEWBRUNSWICK, NJ 08906-5020
To purchase by wire, call the number above to obtain an application. After PMFS
receives your completed application, you will receive an account number. For
additional information about purchasing shares of the Fund, see the back cover
page of this prospectus. We have the right to reject any purchase order
(including an exchange into the Fund) or suspend or modify the sale of Fund
shares.
STEP 2: CHOOSE A SHARE CLASS
Individual investors can choose among Class A, Class B, Class C and Class Z
shares of the Fund, although Class Z shares are available only to a limited
group of investors.
Multiple share classes let you choose a cost structure that better meets your
needs. With Class A shares, you pay the sales charge at the time of purchase,
but the operating expenses each year are lower than the expenses of Class B and
Class C shares. With Class B shares, you only pay a sales charge if you sell
your shares within certain time periods (that is why it is called a Contingent
Deferred Sales Charge, or CDSC), but the operating expenses each year are higher
than the Class A share expenses. With Class C shares, you pay a low front-end
sales charge and a low CDSC, but the operating expenses are also higher than the
expenses for Class A shares.
WHEN CHOOSING A SHARE CLASS, YOU SHOULD CONSIDER THE FOLLOWING:
. The amount of your investment
. The length of time you expect to hold the shares and the impact of the
varying distribution fees
. The different sales charges that apply to each share class-Class A's front-
end sales charge vs. Class B's CDSC vs. Class C's low front- end sales charge
and low CDSC
. Whether you qualify for any reduction or waiver of sales charges
17
<PAGE>
. The fact that Class B shares automatically convert to Class A shares
approximately seven years after purchase
. Whether you qualify to purchase Class Z shares
SHARE CLASS COMPARISON. Use this chart to help you compare the Fund's different
share classes. The discussion following this chart will tell you whether you are
entitled to a reduction or waiver of any sales charges.
<TABLE>
<CAPTION>
Class A Class B Class C Class Z
<S> <C> <C> <C> <C>
Minimum purchase amount/1/ $1,000 $1,000 $2,500 None
Minimum amount for
subsequent purchases/1/ $ 100 $ 100 $ 100 None
Maximum initial sales charge 5% of the public None 1% of the public None
offering price offering price
Contingent Deferred Sales
Charge (CDSC)/2/ None If sold 1% on None
during: sales made
Year 1 5% within 18
Year 2 4% months of purchase/2/
Year 3 3%
Year 4 2%
Year 5/6 1%
Year 7 0%
Annual distribution (12b-1) .30 of 1% (.25 of
and service fees (shown as a 1% currently) 1% 1% None
percentage of
average net assets)/3/
</TABLE>
/1/ The minimum investment requirements do not apply to certain retirement and
employee savings plans and custodial accounts for minors. The minimum
initial and subsequent investment for purchases made through the Automatic
Investment Plan is $50. For more information, see "Additional Shareholder
Services-Automatic Investment Plan."
/2/ For more information about the CDSC and how it is calculated, see
"Contingent Deferred Sales Charges (CDSC)." Class C shares bought before
November 2, 1998 have a 1% CDSC if sold within one year.
/3/ These distribution fees are paid from the Fund's assets on a continuous
basis. Over time, the fees will increase the cost of your investment and
may cost you more than paying other types of sales charges.
18
<PAGE>
REDUCING OR WAIVING CLASS A'S INITIAL SALES CHARGE
The following describes the different ways investors can reduce or avoid paying
Class A's initial sales charge.
Increase the Amount of Your Investment. You can reduce Class A's sales charge by
increasing the amount of your investment. This table shows you how the sales
charge decreases as the amount of your investment increases.
<TABLE>
<CAPTION>
Sales charge as % Sales charge as % Dealer
Amount of purchase of offering price of amount invested reallowance
<S> <C> <C> <C>
Less than $25,000 5.00% 5.26% 4.75%
$25,000 to $49,999 4.50% 4.71% 4.25%
$50,000 to $99,999 4.00% 4.17% 3.75%
$100,000 to $249,999 3.25% 3.36% 3.00%
$250,000 to $499,999 2.50% 2.56% 2.40%
$500,000 to $999,999 2.00% 2.04% 1.90%
$1 million and above/1/ None None None
</TABLE>
/1/ If you invest $1 million or more, you can buy only Class A shares, unless
you qualify to buy Class Z shares.
To satisfy the purchase amounts above, you can:
. invest with an eligible group of related investors;
. buy the Class A shares of two or more Prudential Mutual Funds at the
same time;
. use your RIGHTS OF ACCUMULATION, which allow you to combine the value of
Prudential Mutual Fund shares you already own with the value of the shares
you are purchasing for purposes of determining the applicable sales charge;
or
. sign a LETTER OF INTENT, stating in writing that you or an eligible group of
related investors will purchase a certain amount of shares in the Fund and
other Prudential Mutual Funds within 13 months.
Benefit Plans. 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-
which we call BENEFIT PLANS-can avoid Class A's initial sales charges if the
Benefit Plan has existing assets of at least $1 million invested in shares of
Prudential Mutual Funds (excluding money market funds other than those acquired
under the exchange privilege) or 250 eligible employees or participants. Class
A shares may also be purchased without a sales charge by participants who are
repaying loans from Benefit Plans where Prudential (or its affiliates) provides
administrative or recordkeeping services, sponsors the product or provides
account services.
19
<PAGE>
Certain Prudential retirement programs - such as PruArray Association Benefit
Plans and PruArray Savings Programs - may also be exempt from Class A's sales
charges. For more information, see the SAI or contact your Prudential
professional. In addition, waivers are available to investors in certain
programs sponsored by brokers, investment advisers and financial planners who
have agreements with Prudential Investments Advisory Group relating to:
. Mutual fund "wrap" or asset allocation programs where the sponsor places Fund
trades and charges its clients a management, consulting or other fee for its
services;
. Mutual fund "supermarket" programs where the sponsor links its customers'
accounts to a master account in the sponsor's name; or
. Retirement programs where Prudential provides no administrative services.
Other Types of Investors. Other investors may pay no sales charges, including
certain officers, employees or agents of Prudential and its affiliates,
Prudential Mutual Funds, the subadvisers of the Prudential Mutual Funds and of
brokers that have entered into a selected dealer agreement with the Distributor.
To qualify for a reduction or waiver of sales charges, you must notify the
Transfer Agent or your broker at the time of your purchase. For more
information about reducing or eliminating Class A's sales charge, see the SAI,
"Purchase, Redemption and Pricing of Fund Shares - Reduction and Waiver of
Initial Sales Charges - Class A Shares."
WAIVING CLASS C'S INITIAL SALES CHARGE
[Prudential Retirement Plans. The initial sales charge will be waived for
purchases of Class C shares by both qualified and non-qualified retirement and
deferred compensation plans participating in the PruArray Plan if Prudential
also provides administrative or recordkeeping services.
Investments of Redemption Proceeds from Other Investment Companies. The initial
sales charge will be waived for purchases of Class C shares if the purchase is
made with money from the redemption of shares of any unaffiliated investment
company, as long as the shares were not held in an account at Prudential
Securities Incorporated or one of its affiliates. Such purchases must be made
within 60 days of the redemption. If you are entitled to the waiver, you must
notify either the Transfer Agent or your dealer. The Transfer Agent may require
any supporting documents it considers to be appropriate.]
20
<PAGE>
QUALIFYING FOR CLASS Z SHARES
Class Z shares of the Fund can be purchased by any of the following:
. Any Benefit Plan as defined above, and certain nonqualified plans, provided
the Benefit Plan-in combination with other plans sponsored by the same
employer or group of related employers-has at least $50 million in defined
contribution assets
. Participants in any fee-based program sponsored by Prudential or an affiliate
which includes mutual funds as investment options and the Fund as an
available option
. Certain participants in the MEDLEY Program (group variable annuity contracts)
sponsored by Prudential for whom Class Z shares of the Prudential Mutual
Funds are an available option
. Benefit Plans for which an affiliate of the Distributor serves as record-
keeper and as of September 20, 1996 were either Class Z shareholders of the
Prudential Mutual Funds or executed a letter of intent to purchase Class Z
shares of the Prudential Mutual Funds
. The Prudential Securities Cash Balance Pension Plan, an employee defined
benefit plan sponsored by Prudential Securities
. Current and former Directors/Trustees of the Prudential Mutual Funds
(including the Fund)
. Employees of Prudential and/or Prudential Securities who participate in a
Prudential-sponsored employee savings plan
. Prudential with an investment of $10 million or more
In connection with the sale of shares, the Manager, the Distributor or one of
their affiliates may pay brokers, financial advisers and other persons a
commission of up to 4% of the purchase price for Class B shares, up to 2% of the
purchase price for Class C shares and a finder's fee for Class Z shares from
their own resources based on a percentage of the net asset value of shares sold
or otherwise.
CLASS B SHARES CONVERT TO CLASS A SHARES AFTER APPROXIMATELY SEVEN YEARS
If you buy Class B shares and hold them for approximately seven years, we will
automatically convert them into Class A shares without charge. At that time, we
will also convert any Class B shares that you purchased with reinvested
dividends and other distributions. Since the 12b-1 fees for Class A shares are
lower than for Class B shares, converting to Class A shares lowers your Fund
expenses.
When we do the conversion, you will get fewer Class A shares than the
number of Class B shares converted if the price of the Class A shares is higher
than the price of Class B shares. The total dollar value will be the same, so
you will not have lost any money by getting fewer Class A shares. We do the
conversions quarterly, not on the anniversary date of your purchase. For more
information, see the SAI, "Purchase, Redemption and Pricing of Fund Shares -
Conversion Feature - Class B Shares."
21
<PAGE>
STEP 3: UNDERSTANDING THE PRICE YOU'LL PAY
The price you pay for each share of the Fund is based on the share value. The
share value of a mutual fund-known as the NET ASSET VALUE or NAV - is determined
by a simple calculation - it's the total value of the Fund (assets minus
liabilities) divided by the total number of shares outstanding. For example, if
the value of the investments held by Fund XYZ (minus its liabilities) is $1,000
and there are 100 shares of Fund XYZ owned by shareholders, the price of one
share of the fund-or the NAV - is $10 ($1,000 divided by 100). Portfolio
securities are valued based upon market quotations or, if not readily available,
at fair value as determined in good faith under procedures established by the
Fund's Board. Most national newspapers report the NAVs of most mutual funds,
which allows investors to price mutual funds daily.
<TABLE>
<S> <C>
MUTUAL FUND SHARES We determine the NAV of our shares once
- --------------------------------------- each business day at 4:15 p.m. New York
The NAV of mutual fund shares Time on days that the New York Stock
changes every day because the Exchange is open for trading. We do not
value of a fund's portfolio determine NAV on days when we have not
changes constantly. For received any orders to purchase, sell
example, if Fund XYZ holds ACME or exchange, or when changes in the
Corp. stock in its portfolio and value of the Fund's portfolio do not
the price of ACME stock goes up, materially affect the NAV.
while the value of the fund's
other holdings remains the same
and expenses don't change, the
NAV of Fund XYZ will increase.
- ---------------------------------------
</TABLE>
WHAT PRICE WILL YOU PAY FOR SHARES OF THE FUND? For Class A and Class C shares,
you'll pay the public offering price, which is NAV next determined after we
receive your order to purchase, plus an initial sales charge (unless you're
entitled to a waiver). For Class B and Class Z shares, you will pay the NAV next
determined after we receive your order to purchase (remember, there are no up-
front sales charges for these share classes). Your broker may charge you a
separate or additional fee for purchases of shares.
STEP 4: ADDITIONAL SHAREHOLDER SERVICES
As a Fund shareholder, you can take advantage of the following services and
privileges:
Automatic Reinvestment. As we explained in the "Fund Distributions and Tax
Issues" section, the Fund pays out - or distributes - its net investment income
and capital gains to all shareholders. For your convenience, we will
automatically reinvest your distributions in the Fund at NAV, without any sales
charge. If you want your distributions paid in cash, you can indicate this
preference on your application, notify your broker or notify the Transfer Agent
in writing (at the address below) at least five business days before the date we
determine who receives dividends:
22
<PAGE>
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTENTION: ACCOUNT MAINTENANCE
P.O. BOX 15015
NEW BRUNSWICK, NJ 08906-5015
Automatic Investment Plan. You can make regular purchases of the Fund for as
little as $50 by having the funds automatically withdrawn from your bank or
brokerage account at specified intervals.
Retirement Plan Services. Prudential offers a wide variety of retirement plans
for individuals and institutions, including large and small businesses. For
information on IRAs, including Roth IRAs, or SEP-IRAs for a one-person business,
please contact your broker or a Prudential professional. If you are interested
in opening a 401(k) or other company-sponsored retirement plan (SIMPLES, SEP
plans, Keoghs, 403(b)(7) plans, pension and profit-sharing plans), a Prudential
professional will help you determine which retirement plan best meets your
needs. Complete instructions about how to establish and maintain your plan and
how to open accounts for you and your employees will be included in the
retirement plan kit you receive in the mail.
The PruTector Program. Optional group term life insurance -which protects the
value of your Prudential Mutual Fund investment for your beneficiaries against
market downturns - is available to investors who purchase their shares through
Prudential. This insurance is subject to various restrictions and charges and
is not available in all states.
Systematic Withdrawal Plan. A systematic withdrawal plan is available that will
provide you with monthly or quarterly checks. Remember, the sale of Class B and
Class C shares may be subject to a CDSC.
Reports to Shareholders. Every year we will send you an annual report (along
with an updated prospectus) and a semi-annual report, which contain important
financial information about the Fund. To reduce expenses, we will send one
annual shareholder report, one semi-annual shareholder report and one annual
prospectus per household.
23
<PAGE>
HOW TO SELL YOUR SHARES
You can sell your shares of the Fund for cash (in the form of a check) at any
time, subject to certain restrictions.
When you sell shares of the Fund-also known as redeeming your shares-the price
you will receive will be the NAV next determined after the Transfer Agent, the
Distributor or your broker receives your order to sell. If your broker holds
your shares, he must receive your order to sell by 4:15 p.m. New York time to
process the sale on that day. Otherwise, contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTENTION: REDEMPTION SERVICES
P.O. BOX 15010
NEW BRUNSWICK, NJ 08906-5010
Generally, we will pay you for the shares that you sell within seven days after
the Transfer Agent receives your sell order. If you hold shares through a
broker, payment will be credited to your account. If you are selling shares you
recently purchased with a check, we may delay your sale until your check clears,
which can take up to 10 days. Your broker may charge you a separate or
additional fee for sales of shares.
RESTRICTIONS ON SALES
There are certain times when you may not be able to sell shares of the Fund, or
when we may delay paying you the proceeds from a sale. This may happen during
unusual market conditions or emergencies when the Fund can't determine the value
of its assets or sell its holdings. If you invest by check, we will only process
your redemptions after your check clears. This can take up to 10 calendar
days. You can avoid delay if you purchase shares by wire, certified check or
cashier's check. For more information, see the SAI, "Purchase, Redemption and
Pricing of Fund Shares - Sale of Shares."
If you hold your shares directly with the Transfer Agent, you may have to have
the signature on your sell order guaranteed by a financial institution. For more
information, see the SAI, "Purchase, Redemption and Pricing of Fund Shares -
Sale of Shares - Signature Guarantee."
Contingent Deferred Sales Charges (CDSC)
If you sell Class B shares within six years of purchase or Class C shares within
18 months of purchase (one year for Class C shares purchased before November 2,
1998), you will have to pay a CDSC. To keep the CDSC as low as possible, we will
sell amounts representing shares in the following order:
24
<PAGE>
. Amounts representing shares you purchased with reinvested dividends and
distributions
. Amounts representing the increase in NAV above the total amount of payments
for shares made during the past six years (five years for Class B shares
purchased before January 22, 1990)
. Amounts representing shares held beyond the CDSC period (six years for Class
B shares and 18 months for Class C shares)
Since shares that fall into any of the categories listed above are not subject
to the CDSC, selling them first helps you to avoid - or at least minimize-the
CDSC.
Having sold the exempt shares first, if there are any remaining shares that are
subject to the CDSC, we will apply the CDSC to the value of your oldest shares
first. To value these shares, we will use the original purchase price or the
current value, whichever is less.
As we noted before in the "Share Class Comparison" chart, the CDSC for Class B
shares is 5% in the first year, 4% in the second, 3% in the third, 2% in the
fourth and 1% in the fifth and sixth years. The rate decreases on the first day
of the month following the anniversary date of your purchase, not on the
anniversary date itself. The CDSC of 1% for Class C shares - which is applied to
shares sold within 18 months of purchase (one year for Class C shares purchased
before November 2, 1998) - is the lesser of the original purchase price or the
redemption proceeds. For purposes of determining how long you've held your
shares, all purchases during the month are grouped together and considered to
have been made on the last day of the month.
The CDSC will be calculated from the first day of the month after initial
purchase, excluding any time shares were held in a money market fund.
WAIVER OF THE CDSC-CLASS B SHARES
The CDSC will be waived if the Class B shares are sold:
. After a shareholder is deceased or disabled (or, in the case of a trust
account, the death or disability of the grantor). This waiver applies to
individual shareholders, as well as shares owned in joint tenancy (with
rights of survivorship), provided the shares were purchased before the death
or disability
. To provide for certain distributions-made without IRS penalty-from a tax-
deferred retirement plan, IRA or Section 403(b) custodial account
. On certain sales from a Systematic Withdrawal Plan
For more information, see the SAI, "Purchase, Redemption and Pricing of Fund
Shares - Waiver of Contingent Deferred Sales Charges-Class B Shares."
25
<PAGE>
WAIVER OF THE CDSC - CLASS C SHARES
[The CDSC will be waived for purchases of Class C shares by both qualified and
non-qualified retirement and deferred compensation plans participating in the
PruArray Plan if Prudential also provides administrative or recordkeeping
services.]
REDEMPTION IN KIND
If the sales of Fund shares you make during any 90-day period reach the lesser
of $250,000 or 1% of the value of the Fund's net assets, we can then give you
securities from the Fund's portfolio instead of cash. If you want to sell the
securities for cash, you would have to pay the costs charged by a broker.
SMALL ACCOUNTS
If you make a sale that reduces your account value to less than $500, we may
sell the rest of your shares (without charging any CDSC) and close your account.
We would do this to minimize the Fund's expenses paid by other shareholders. We
will give you 60 days' notice, during which time you can purchase additional
shares to avoid this action. This involuntary sale does not apply to
shareholders who own their shares as part of a 401(k) plan, an IRA or some other
tax-deferred plan or account.
90-DAY REPURCHASE PRIVILEGE
After you redeem your shares, you have a 90-day period during which you may
reinvest any of the redemption proceeds in shares of the same Fund without
paying an initial sales charge. Also, if you paid a CDSC when you redeemed your
shares, we will credit your new account with the appropriate numbers of shares
to reflect the amount of the CDSC you paid. In order to take advantage of this
privilege, you must notify the Transfer Agent or your broker at the time of the
repurchase. See the SAI, "Purchase, Redemption and Pricing of Fund Shares -
Sale of Shares."
RETIREMENT PLANS
To sell shares and receive a distribution from your retirement account, call
your broker or the Transfer Agent for a distribution request form. There are
special distribution and income tax withholding requirements for distributions
from retirement plans and you must submit a withholding form with your request
to avoid delay. If your retirement plan account is held for you by your employer
or plan trustee, you must arrange for the distribution request to be signed and
sent by the plan administrator or trustee. For additional information, see the
SAI.
HOW TO EXCHANGE YOUR SHARES
You can exchange your shares of the Fund for shares of the same class in certain
other Prudential Mutual Funds-including certain money market funds - if you
satisfy the minimum investment requirements. For example, you can exchange Class
A shares of the Fund for Class A
26
<PAGE>
shares of another Prudential Mutual Fund, but you can't exchange Class A shares
for Class B, Class C or Class Z shares. Class B and Class C shares may not be
exchanged into money market funds other than Prudential Special Money Market
Fund, Inc. We may change the terms of the exchange privilege after giving you 60
days' notice.
If you hold shares through a broker, you must exchange shares through your
broker. Otherwise contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: EXCHANGE PROCESSING
P.O. BOX: 15010
New Brunswick, NJ 08906-5010
There is no sales charge for such exchanges. However, if you exchange - and
then sell - Class B shares within approximately six years of your original
purchase or Class C shares within 18 months of your original purchase, you must
still pay the applicable CDSC. If you have exchanged Class B shares into a money
market fund, the time you hold the shares in the money market account will not
be counted for purposes of calculating the required holding period for CDSC
liability.
Remember, as we explained in the section entitled "If You Sell or Exchange
Your Shares," exchanging shares is considered a sale for tax purposes.
Therefore, if the shares you exchange are worth more than you paid for them, you
may have to pay capital gains tax. For additional information about exchanging
shares, see the SAI, "Shareholder Investment Account - Exchange Privilege".
[If you own Class B or Class C shares and qualify to purchase either Class
A shares without paying an initial sales charge or Class Z shares, we will
automatically exchange your Class B or Class C shares which are not subject to a
CDSC for Class A or Class Z shares, as appropriate. We make such exchanges on a
quarterly basis, if you notify the Transfer Agent that you qualify for this
exchange privilege. We have obtained legal opinion that this exchange is not a
"taxable event" for federal income tax purposes. This opinion is not binding on
the IRS.]
FREQUENT TRADING
You should not use the Fund for frequent trading in response to short-term
changes in the market. Doing this makes it harder for us to efficiently manage
the Fund, and it also increases transaction costs. If we believe you are engaged
in this kind of trading, we reserve the right to refuse any of your purchase
orders or exchanges. The Fund will reject all exchanges and purchases from any
person or group that we believe is following a market timing strategy unless we
have an agreement to follow certain procedures, including a daily dollar limit
on trading.
27
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights will help you evaluate the Fund's financial
performance. The TOTAL RETURN in each chart represents the rate that a
shareholder earned on an investment in that share class of the Fund, assuming
reinvestment of all dividends and other distributions. The information is for
each share class for the periods indicated.
Review each chart with the financial statements and report of independent
accountants, which appear in the SAI and are available upon request. Additional
performance information for each share class is contained in the annual report,
which you can receive at no charge.
CLASS A SHARES
The financial highlights for the two years ended October 31, 1998 were audited
by LLP, and the financial highlights for the three years
ended October 31, 1996 were audited by other independent auditors, whose reports
were unqualified.
<TABLE>
<CAPTION>
CLASS A SHARES (FISCAL YEARS ENDED 10-31-98)
PER SHARE OPERATING PERFORMANCE 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ $15.43 $14.40 $14.03 $14.38
Income from investment operations:
Net investment income .45 .47 .48 .41
Net realized and unrealized gain (loss) 6.29 1.75 .95 .06
on investment transactions
Total from investment operations 6.74 2.22 1.43 .47
- ----------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income ( ) (.43) (.49) (.54) (.29)
Distributions from net realized gains ( ) (.74) (.70) (.52) (.53)
Total distributions ( ) (1.17) (1.19) (1.06) (.82)
Net asset value, end of year $ $21.00 $15.43 $14.40 $14.03
Total return/1/ % 45.68% 15.97% 11.15% 3.48%
- ----------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
Net assets, end of year (000) $ $570,146 $341,717 $276,990 $150,502
Average net assets (000) $ $454,892 $310,335 $236,688 $131,398
Ratios to average net assets:
Expenses, including distribution fees % .94% .98% 1.03% 1.09%
Expenses, excluding
distribution fees % .69% .73% .78% .85%
Net investment income % 2.32% 3.26% 3.36% 2.97%
Portfolio turnover % 36% 36% 74% 70%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
/1/ Total return assumes reinvestment of dividends and any other distributions,
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each
period reported.
28
<PAGE>
CLASS B SHARES
The financial highlights for the two years ended October 31, 1998 were audited
by LLP, and the financial highlights for the three years ended October 31, 1996
were audited by other independent auditors, whose reports were unqualified.
CLASS B SHARES (FISCAL YEARS ENDED 10-31-98)
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ $15.39 $14.36 $14.00 $14.35
Income from investment operations:
Net investment income .29 .39 .37 .31
Net realized and unrealized gain (loss) 6.29 .71 .95 .06
on investment transactions
Total from investment operations 6.58 2.10 1.32 .37
- ----------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income ( ) (.30) (.37) (.44) (.19)
Distributions from net realized gains ( ) (.74) (.70) (.52) (.53)
Total distributions ( ) (1.04) (1.07) (.96) (.72)
Net asset value, end of year $ $20.93 $15.39 $14.36 $14.00
Total return/1/ % 44.60% 15.12% 10.29% 2.73%
- ----------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------
Net assets, end of year (000) $ $1,250,216 $929,948 $906,793 $954,951
Average net assets (000) $ $1,072,118 $951,220 $911,856 $784,063
Ratios to average net assets:
Expenses, including distribution fees % 1.69% 1.73% 1.78% 1.85%
Expenses, excluding distribution fees % .69% .73% .78% .85%
Net investment income % 1.60% 2.51% 2.66% 2.21%
Portfolio turnover % 36% 36% 74% 70%
- ----------------------------------------------------------------------------------------------
</TABLE>
/1/ Total return assumes reinvestment of dividends and any other distributions,
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each
period reported.
29
<PAGE>
CLASS C SHARES
The financial highlights for the two years ended October 31, 1998 were audited
by LLP, and the financial highlights for the two years ended October 31, 1996
and the period from August 1, 1994 through October 31, 1994 were audited by
other independent auditors, whose reports were unqualified.
CLASS C SHARES (FISCAL YEARS ENDED 10-31-98)
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE 1998 1997 1996 1995 1994/1/
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ $ 15.39 $14.36 $14.00 $ 14.35
Income from investment operations:
Net investment income .37 .38 .40 .08
Net realized and unrealized gain (loss) 6.21 1.72 .92 (.02)
on investment transactions
Total from investment operations 6.58 2.10 1.32 .06
- ----------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income ( ) (.30) (.37) (.44) (.05)
Distributions from net realized gains ( ) (.74) (.70) (.52) ---
Total distributions ( ) (1.04) (1.07) (.96) (.05)
Net asset value, end of period $ $20.93 $15.39 $14.36 $14.00
Total return/2/ % 44.60% 15.12% 10.29% 0.45%
- ----------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------
Net assets, end of period (000) $ $17,911 $8,511 $4,586 $1,527
Average net assets (000) $ $11,432 $6,730 $3,132 $762
Ratios to average net assets:
Expenses, including distribution fees % 1.69% 1.73% 1.78% 2.05%/3/
Expenses, excluding distribution fees % .69% .73% .78% 1.05%/3/
Net investment income % 1.53% 2.51% 2.57% 2.42%/3/
Portfolio turnover % 36% 36% 74% 70%
- ----------------------------------------------------------------------------------------------
</TABLE>
/1/ Information shown is for the period 8-1-94, when Class C shares were first
offered, through 10-31-94.
/2/ Total return assumes reinvestment of dividends and any other distributions,
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each
period reported. Total return for periods of less than a full year is not
annualized.
/3/ Annualized.
30
<PAGE>
CLASS Z SHARES
The financial highlights for the two years ended October 31, 1998 were audited
by LLP, and the financial highlights for period from March 1, 1996 through
October 31, 1996 were audited by other independent auditors, whose reports were
unqualified.
CLASS Z SHARES (FISCAL YEARS ENDED 10-31-98)
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE 1998 1997 1996/1/
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $ $15.42 $15.13
Income from investment operations:
Net investment income .36 .38
Net realized and unrealized gain (loss) 6.43 .30
on investment transactions
Total from investment operations 6.79 .68
- --------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (.47) (.39)
Distributions from net realized gains (.74) ---
Total distributions (1.21) (.39)
Net asset value, end of period $ $21.00 $15.42
Total return/2/ % 46.12% 4.55%
- --------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996
- --------------------------------------------------------------------------------
Net assets, end of period (000) $ $74,956 $44,509
Average net assets (000) $ $57,369 $24,641
Ratios to average net assets:
Expenses, including distribution fees % .69% .73%/3/
Expenses, excluding distribution fees % .69% .73%/3/
Net investment income % 2.58% 3.51%/3/
Portfolio turnover % 36% 36%
- --------------------------------------------------------------------------------
</TABLE>
/1/ Information shown is for the period 3-1-96, when Class Z shares were first
offered, through 10-31-96.
/2/ Total return assumes reinvestment of dividends and any other distributions.
It is calculated assuming shares are purchased on the first day and sold on
the last day of each period reported. Total return for periods of less than
a full year is not annualized.
/3/ Annualized.
31
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential offers a broad range of mutual funds designed to meet your individual
needs. For information about these funds, contact your broker or Prudential
professional or call us at (800) 225-1852. Read the prospectus carefully before
you invest or send money.
STOCK FUNDS
PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
PRUDENTIAL EMERGING GROWTH FUND, INC.
PRUDENTIAL EQUITY FUND, INC.
PRUDENTIAL EQUITY INCOME FUND
PRUDENTIAL INDEX SERIES FUND
Prudential Small-Cap Index Fund
Prudential Stock Index Fund
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
PRUDENTIAL MID-CAP VALUE FUND
PRUDENTIAL REAL ESTATE SECURITIES FUND
PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
PRUDENTIAL 20/20 FOCUS FUND
PRUDENTIAL UTILITY FUND, INC.
NICHOLAS-APPLEGATE FUND, INC.
Nicholas-Applegate Growth Equity Fund
Asset Allocation/Balanced Funds
PRUDENTIAL BALANCED FUND
PRUDENTIAL DIVERSIFIED FUNDS
Conservative Growth Fund
Moderate Growth Fund
High Growth Fund
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Prudential Active Balanced Fund
GLOBAL FUNDS
Global Stock Funds
PRUDENTIAL DEVELOPING MARKETS FUND
Prudential Developing Markets Equity Fund
Prudential Latin America Equity Fund
PRUDENTIAL EUROPE GROWTH FUND, INC.
PRUDENTIAL GLOBAL GENESIS FUND, INC.
PRUDENTIAL INDEX SERIES FUND
32
<PAGE>
Prudential Europe Index Fund
Prudential Pacific Index Fund
PRUDENTIAL NATURAL RESOURCES FUND, INC.
PRUDENTIAL PACIFIC GROWTH FUND, INC.
PRUDENTIAL WORLD FUND, INC.
Global Series
International Stock Series
GLOBAL UTILITY FUND, INC.
Global Bond Funds
PRUDENTIAL GLOBAL LIMITED MATURITY FUND, INC.
Limited Maturity Portfolio
PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC.
PRUDENTIAL INTERNATIONAL BOND FUND, INC.
THE GLOBAL TOTAL RETURN FUND, INC.
BOND FUNDS
Taxable Bond Funds
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
PRUDENTIAL GOVERNMENT SECURITIES TRUST
Short-Intermediate Term Series
PRUDENTIAL HIGH YIELD FUND, INC.
PRUDENTIAL HIGH YIELD TOTAL RETURN FUND, INC.
PRUDENTIAL INDEX SERIES FUND
Prudential Bond Market Index Fund
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
Income Portfolio
Tax-Exempt Bond Funds
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
California Series
California Income Series
PRUDENTIAL MUNICIPAL BOND FUND
High Income Series
Insured Series
PRUDENTIAL MUNICIPAL SERIES FUND
Florida Series
Massachusetts Series
New Jersey Series
New York Series
North Carolina Series
33
<PAGE>
Ohio Series
Pennsylvania Series
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
MONEY MARKET FUNDS
Taxable Money Market Funds
CASH ACCUMULATION TRUST
Liquid Assets Fund
National Money Market Fund
PRUDENTIAL GOVERNMENT SECURITIES TRUST
Money Market Series
U.S. Treasury Money Market Series
PRUDENTIAL SPECIAL MONEY MARKET FUND, INC.
Money Market Series
PRUDENTIAL MONEYMART ASSETS, INC.
Tax-Free Money Market Funds
PRUDENTIAL TAX-FREE MONEY FUND, INC.
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
California Money Market Series
PRUDENTIAL MUNICIPAL SERIES FUND
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
Command Funds
COMMAND MONEY FUND
COMMAND GOVERNMENT FUND
COMMAND TAX-FREE FUND
Institutional Money Market Funds
PRUDENTIAL INSTITUTIONAL LIQUIDITY PORTFOLIO, INC.
Institutional Money Market Series
34
<PAGE>
FOR MORE INFORMATION
Please read this prospectus before you invest in the
Fund and keep it for future reference. For information
or shareholder questions contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
P.O. BOX 15005
NEW BRUNSWICK, NJ 08906-5005
(800) 225-1852
(732) 417-7555
(if calling from outside the U.S.)
_____________________________________________
Brokers should contact:
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC
P.O. BOX 15035
NEW BRUNSWICK, NJ 08906-5035
(800) 225-1852
______________________________________________
Visit Prudential's web site at HTTP://WWW.PRUDENTIAL.COM
______________________________________________
Additional information about the Fund can be obtained
without charge and can be found in the following
documents:
STATEMENT OF ADDITIONAL INFORMATION (SAI)
(incorporated by reference into this prospectus)
ANNUAL REPORT
(contains a discussion of the market conditions and
investment strategies that significantly affected the
Fund's performance)
SEMI-ANNUAL REPORT
35
<PAGE>
You can also obtain copies of Fund documents from the
Securities and Exchange Commission as follows:
By Mail:
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-6009
(The SEC charges a fee to copy documents.)
In Person:
Public Reference Room
in Washington, DC
(For hours of operation, call 1(800) SEC-0330.)
Via the Internet:
http://www.sec.gov
- --------------------------------------------------------
CUSIP Numbers:
Class A: 743916-20-7
Class B: 743916-10-8
Class C: 743916-30-6
Class Z: 743916-40-5
Investment Company Act File No: 811-4864
MF 131A
36
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
Statement of Additional Information
dated December 30, 1998
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
equity-related securities, debt securities and certain derivatives, including
options on stocks and stock indices. Common stocks may include securities of
foreign issuers. There can be no assurance that the Fund's investment
objective will be achieved. See "Description of the Fund, Its Investments and
Risks."
The Fund's address is Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077, and its telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Fund's Prospectus dated December 30, 1998, 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>
Fund History.............................................. B-2 --
Description of the Fund, Its Investments and Risks........ B-2 --
Investment Restrictions................................... B-12 --
Management of the Fund.................................... B-13 --
Control Persons and Principal Holders of Securities....... B-16 --
Investment Advisory and Other Services.................... B-16 --
Brokerage Allocation and Other Practices.................. B-21 --
Capital Shares, Other Securities and Organization......... B-22 --
Purchase, Redemption and Pricing of Fund Shares........... B-24 --
Shareholder Investment Account............................ B-33 --
Net Asset Value........................................... B-38 --
Taxes, Dividends and Distributions........................ B-39 --
Performance Information................................... B-40 --
Financial Statements...................................... B-43 --
Report of Independent Accountants......................... B-55 --
Description of Security Ratings........................... A-1 --
Appendix I--General Investment Information................ I-1 --
Appendix II--Historical Performance Data.................. II-1 --
Appendix III--Information Relating to Prudential.......... III-1 --
</TABLE>
- -------------------------------------------------------------------------------
MF131B
<PAGE>
FUND HISTORY
The Fund 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.
DESCRIPTION OF THE FUND, ITS INVESTMENTS AND RISKS
(A) CLASSIFICATION. The Fund is a diversified, open-end, management investment
company.
(B) AND (C) INVESTMENT STRATEGIES, POLICIES AND RISKS. The Fund's investment
objective is both capital appreciation and current income. While the principal
investment policies and strategies for seeking to achieve this objective are
described in the Fund's Prospectus, the Fund may from time to time also use
the securities, instruments, policies and strategies described below in
seeking to achieve its objective. The Fund may not be successful in achieving
its objective and you could lose money.
EQUITY AND EQUITY-RELATED SECURITIES
Equity-related securities include common stocks, preferred stocks,
securities convertible or exchangeable for common stocks or preferred stocks,
equity investments in partnerships, joint ventures and other forms of non-
corporate investments, American Depositary Receipts (ADRs) and American
Depositary Shares (ADS), and warrants and rights exercisable for equity
securities. Common stocks may include securities of foreign issuers.
A convertible security is typically a bond, debenture, corporate note,
preferred stock or other similar security that may be converted at a stated
price within a specified period of time into a specified number of shares of
common stock or other equity securities of the same or a different issuer. A
warrant or right entitles the holder to purchase equity securities at a
specific price for a specific period of time. Convertible securities are
generally senior to common stocks in a corporation's capital structure, but
are usually subordinated to similar non-convertible 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 non-
convertible 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. Convertible securities also include
preferred stocks which technically are equity securities.
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.
FIXED-INCOME OBLIGATIONS
The Fund may invest up to 35% of its total assets in fixed-income
obligations other than money market instruments. The Fund anticipates that it
will primarily invest in fixed-income securities rated A or better by Moody's
Investors Service, Inc. (Moody's) or Standard & Poor's Ratings Group (S&P) or
BBB+ or better by Duff & Phelps Credit Rating Co. (Duff & Phelps) or
comparably rated by another nationally recognized statistical rating
organization (NRSRO). 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 or
another NRSRO (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 or another
NRSRO, respectively). After 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 this in determining whether the Fund should
continue to hold the security in its portfolio. Securities rated Baa by
Moody's 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. 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.
B-2
<PAGE>
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, the 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.
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 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.
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.
FOREIGN SECURITIES
The Fund may invest up to 30% of its total assets in foreign money market
instruments and debt and equity securities. ADRs and ADSs are not considered
foreign securities within this limitation. 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 investments may
be less liquid than the securities of U.S. corporations and are certainly less
liquid than securities issued or guaranteed by the U.S. Government, its
instrumentalities or agencies.
Foreign securities involve certain risks, which should be considered
carefully by an investor in the Fund. These risks include political or
economic instability in the country of the issuer, the difficulty of
predicting international 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 agencies. 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,
for certain foreign countries, there is a possibility of expropriation,
confiscatory taxation or diplomatic developments which could affect investment
in those countries. Finally, 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 "Hedging and Return
Enhancement Strategies--Special Risks Related to Forward Foreign Currency
Exchange Contracts" below.
REAL ESTATE INVESTMENT TRUSTS
The Fund may invest in securities of real estate investment trusts or REITs.
Unlike corporations, REITs do not have to pay income taxes if they meet
certain requirements of the Internal Revenue Code. To qualify, a REIT must
distribute at least 95% of its taxable income to its shareholders and receive
at least 75% of that income from rents, mortgages and sales of property. REITs
offer investors greater liquidity and diversification than direct ownership of
a handful of properties, as well as greater income potential than an
investment in common stocks. Like any investment in real estate, though, a
REIT's performance depends on several factors, such as its ability to find
tenants for its properties, to renew leases and to finance property purchases
and renovations.
B-3
<PAGE>
HEDGING AND RETURN ENHANCEMENT STRATEGIES
The Fund also may engage in various portfolio strategies, including using
derivatives, to reduce certain risks of its investments and to attempt to
enhance return. The Fund, and thus its investors, may lose money through any
unsuccessful use of these strategies. 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
"Taxes, Dividends and Distributions" below. 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
securities that are traded on national securities exchanges or in the over-
the-counter market to enhance return or to hedge the Fund's portfolio. These
options will be on equity securities and financial indices (e.g., S&P 500).
The Fund may write covered put and call options to generate additional income
through the receipt of premiums, purchase put options in an effort to protect
the value of a security that it owns against a decline in market value and
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.
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. There
is no limitation on the amount of call options the Fund may write.
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, as long
as the Fund is obligated under the option, it (i) owns an offsetting position
in the underlying security or (ii) segregates cash or other liquid assets in
an amount equal to or greater than its obligation under the option. Under the
first circumstance, the Fund's losses are limited because it owns the
underlying security; under the second circumstance, in the case of a written
call option, the Fund's losses are potentially unlimited.
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.
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 (including cross hedges) with
respect to a particular currency for an amount greater than the aggregate
market value (determined at the time of making any sale of foreign currency)
of the securities being hedged.
FUTURES CONTRACTS AND OPTIONS THEREON
The Fund may purchase and sell financial futures contracts and options
thereon which are traded on a commodities exchange or board of trade for
certain hedging and risk management purposes and to attempt to enhance return
in accordance with
B-4
<PAGE>
regulations of the Commodity Futures Trading Commission. These futures
contracts and options thereon will be on financial indices. The Fund, and thus
its investors, may lose money through any unsuccessful use of these
strategies.
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 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 market 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.
RISKS OF HEDGING AND RETURN 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. The Fund, and thus
its investors, may lose money through any unsuccessful use of these
strategies. If the investment adviser's predictions of movements in the
direction of the securities, foreign currency or interest rate markets are
inaccurate, the adverse consequences to the Fund may leave the Fund in a worse
position than if such strategies were not used. Risks inherent in the use of
options, foreign currency and futures contracts and options on futures
contracts include (1) dependence on the investment adviser's ability to
predict correctly movements in the direction of interest rates, securities
prices and currency markets; (2) imperfect correlation between the price of
options and futures contracts and options thereon and movements in the prices
of the securities 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 risk that the counterparty may be
unable to complete the transaction; and (6) the possible inability of the Fund
to purchase or sell a portfolio security at a time that otherwise would be
favorable for it to do so, or the possible need for the Fund to sell a
portfolio security at a disadvantageous time, due to the need for the Fund to
maintain "cover" or to segregate securities in connection with hedging
transactions. See "Taxes, Dividends and Distributions."
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 with its Custodian, or pledge to a broker as collateral for the
option, cash, other liquid assets or "qualified securities" with a market
value at the time the option is written of not less than 100% of the current
index value times the multiplier times the number of contracts.
If the Fund has written an option on an industry or market segment index, it
will segregate with its Custodian, or pledge to a broker as collateral for the
option, 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 or pledged 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.
B-5
<PAGE>
If at the close of business on any day the market value of such qualified
securities so segregated or pledged falls below 100% of the current index
value times the multiplier times the number of contracts, the Fund will so
segregate or pledge an amount in cash or other liquid assets, 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 or other liquid
assets, equal in value to the amount by which the call is in-the-money times
the multiplier times the number of contracts. Any amount segregated pursuant
to the foregoing sentence may be applied to the Fund's obligation to segregate
additional amounts in the event that the market value of the qualified
securities falls below 100% of the current index value times the multiplier
times the number of contracts. A "qualified security" is an equity security
which is listed on a 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 or other liquid assets segregated 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
return 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 contracts by the
Fund, an amount of cash and other liquid assets, equal to the market value of
the futures contracts, will be segregated with the Fund's Custodian and/or in
a margin account with a broker 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.
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: (1) there may be insufficient trading interest in certain
options; (2) restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; (3) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options or underlying securities; (4) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (5) the
facilities of an exchange or a clearing corporation may not at all times be
adequate to handle current trading volume; or (6) one or more exchanges could,
for economic or other reasons, decide, or be compelled at some future date, to
discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that exchange (or in the
class or series of options) would cease to exist, although outstanding options
on that exchange that had been issued by a clearing corporation as a result of
trades on that exchange would continue to be exercisable in accordance with
their terms. There is no assurance that higher than anticipated trading
activity or other unforeseen events might not, at times, render certain of the
facilities of any of the clearing
B-6
<PAGE>
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.
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.
B-7
<PAGE>
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 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. If the
Fund enters into a position hedging transaction, the transaction will be
"covered" by the position being hedged or the Fund's Custodian or sub-
custodian will segregate cash or other liquid assets of the Fund (less the
value of the "covering" positions, if any) in an amount equal to the value of
the Fund's total assets committed to the consummation of the given forward
contract. The assets segregated will be marked-to-market daily, and if the
value of the securities segregated declines, additional cash or securities
will be segregated so that the value of the account will, at all times, equal
the amount of the Fund's net commitment with respect to such contract.
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.
B-8
<PAGE>
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, Dividends and
Distributions."
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.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase or sell securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions arise when
securities are purchased or sold by 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 segregate cash or other liquid assets
having a value equal to or greater than the Fund's purchase commitments. The
securities so purchased are subject to market fluctuation and no interest
accrues to the purchaser during the period between purchase and settlement. At
the time of delivery of the securities the value may be more or less than the
purchase price and an increase in the percentage of the Fund's assets
committed to the purchase of securities on a when-issued or delayed delivery
basis may increase the volatility of the Fund's net asset value.
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
conversion or exchange, cash or other liquid assets in an amount equal to such
consideration must be segregated 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.
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
mutually agreed-upon time and price. The period of maturity is usually quite
short, possibly overnight or a few days, although it may extend over a number
of months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Fund's money
is invested in the repurchase agreement. The Fund's repurchase agreements will
at all times be fully collateralized by U.S. Government obligations in an
amount at least equal to the resale price. The instruments held as collateral
are valued daily, and if the value of the instruments declines, the Fund will
require additional collateral. If the seller defaults and the value of the
collateral securing the repurchase agreement declines, the Fund may incur a
loss.
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.
The Fund participates in a joint repurchase account with other investment
companies managed by Prudential Investments Fund Management LLC (PIFM)
pursuant to an order of the Securities and Exchange Commission (Commission).
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.
B-9
<PAGE>
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
advantage 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.
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 that the loans are callable at any time by the Fund.
As a matter of fundamental policy, the Fund will not lend more than 33% of the
value of its total assets. The loans must at all times be secured by cash or
other liquid assets or secured by an irrevocable letter of credit in favor of
the Fund in an amount equal to at least 100%, determined daily, of the market
value of the loaned securities. The collateral is segregated pursuant to
applicable regulations. During the time portfolio securities are on loan, the
borrower will pay the Fund an amount equivalent to any dividend or interest
paid on such securities and the Fund may invest the cash collateral and earn
additional income, or it may receive an agreed-upon amount of interest income
from the borrower. The advantage of such loans is that the Fund continues to
receive payments in lieu of the interest and dividends on the loaned
securities, while at the same time earning interest either directly from the
borrower or on the collateral, which will be invested in short-term
obligations.
A loan may be terminated by the borrower 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 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.
SEGREGATED ASSETS
When the Fund is required to segregate assets in connection with certain
hedging transactions, it will mark cash or liquid securities as segregated
with the Fund's Custodian. "Liquid assets" mean cash, U.S. Government
securities, equity securities (including foreign securities), debt obligations
or other liquid, unencumbered assets, marked-to-market daily.
ILLIQUID SECURITIES
The Fund may hold up to 15% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven
days, securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable in securities
markets either within or outside of the United States. Restricted securities
eligible for resale pursuant to Rule 144A under the Securities Act of 1933, as
amended (the Securities Act), and privately placed commercial paper that have
a readily available market are not considered illiquid for purposes of this
limitation. The investment adviser will monitor the liquidity of such
restricted securities under the supervision of the Trustees. The Fund's
investment in Rule 144A securities could have the effect of increasing
illiquidity to the extent that qualified institutional buyers become, for a
limited time, uninterested in purchasing Rule 144A securities. Repurchase
agreements subject to demand are deemed to have a maturity equal to the
applicable notice period.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act, 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
B-10
<PAGE>
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.
The staff of the Commission 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."
(D) DEFENSIVE STRATEGY AND SHORT-TERM INVESTMENTS
When conditions dictate a temporary defensive strategy or pending investment
of proceeds from sales of the Fund's shares, the Fund may invest without limit
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. 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 an NRSRO
such as Moody's, S&P or Duff & Phelps or, if unrated, will be of equivalent
quality in the judgment of the Fund's investment adviser.
(E) 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,
1998 and 1997 were % and 36%, 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 will be taxed as ordinary income rather than long-term capital
gains compared to investment companies with lower portfolio turnover. See
"Brokerage Allocation and Other Practices" and "Taxes, Dividends and
Distributions."
B-11
<PAGE>
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) 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.
(7) 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.)
(8) Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter
under certain federal securities laws.
(9) Make investments for the purpose of exercising control or management.
(10) Invest in securities of other registered investment companies, except
by purchases in the open market involving only customary brokerage commissions
and as a result of which not more than 10% 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.
(11) 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.
(12) Make loans, except through repurchase agreements and loans of portfolio
securities (limited to 33% of the Fund's total assets).
(13) 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.
B-12
<PAGE>
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.
MANAGEMENT OF THE FUND
<TABLE>
<CAPTION>
NAME, ADDRESS** AND POSITION PRINCIPAL OCCUPATIONS
(AGE) WITH FUND DURING PAST FIVE YEARS
------------------- --------- ----------------------
<C> <C> <S>
Edward D. Beach (73) Trustee President and Director of BMC Fund, Inc., a closed-end
investment company; formerly, Vice Chairman of
Broyhill Furniture Industries, Inc.; Certified Public
Accountant; Secretary and Treasurer of Broyhill Family
Foundation, Inc.; Member of the Board of Trustees of
Mars Hill College; Director of The High Yield Income
Fund, Inc. and Director or Trustee of funds within
the Prudential Mutual Funds.
Delayne Dedrick Gold Trustee Marketing and Management Consultant; Director of The
(59) High Yield Income Fund, Inc. and Director or Trustee
of funds within the Prudential Mutual Funds.
*Robert F. Gunia (51) Vice President Vice President (since September 1997), Prudential
and Trustee Investments; Executive Vice President and Treasurer
(since December 1996), Prudential Investments Fund
Management LLC (PIFM); Senior Vice President (since
March 1987) of Prudential Securities Incorporated
(Prudential Securities); formerly Chief Administrative
Officer (July 1990-September 1996), Director (January
1989-September 1996), and Executive Vice President,
Treasurer and Chief Financial Officer (June 1987-
September 1996) of Prudential Mutual Fund Management,
Inc.; Vice President and Director (since May 1989) of
The Asia Pacific Fund, Inc.; Director of The High
Yield Income Fund, Inc. and Director or Trustee of
funds within the Prudential Mutual Funds.
Douglas H. McCorkindale Trustee Vice Chairman (since March 1984) and President (since
(58) September 1997) of Gannett Co. Inc., Director of
Continental Airlines, Inc., Gannett Co., Inc. and
Frontier Corporation and Director or Trustee of
funds within the Prudential Mutual Funds.
*Mendel A. Melzer, CFA Trustee Chief Investment Officer (since October 1996) of
(38) Prudential Mutual Funds; formerly Chief Financial
751 Broad St. Officer of Prudential Investments (November 1995-
Newark, NJ 07102 September 1996), Senior Vice President and Chief
Financial Officer of Prudential Preferred Financial
Services (April 1993-November 1995), Managing Director
of Prudential Investment Advisors (April 1991-April
1993) and Senior Vice President of Prudential Capital
Corporation (July 1989-April 1991); Chairman and
Director of Prudential Series Fund, Inc.; Director of
The High Yield Income Fund, Inc. and Director or
Trustee of funds within the Prudential Mutual Funds.
</TABLE>
B-13
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS** AND POSITION PRINCIPAL OCCUPATIONS
(AGE) WITH FUND DURING PAST FIVE YEARS
------------------- --------- ----------------------
<C> <C> <S>
Thomas T. Mooney (56) Trustee President of the Greater Rochester Metro Chamber of
Commerce; former Rochester City Manager; Trustee of
Center for Governmental Research, Inc.; Director of
Blue Cross of Rochester, The Business Council of New
York State, Executive Service Corps of Rochester,
Monroe County Water Authority, Rochester Jobs, Inc.,
Monroe County Industrial Development Corporation,
Northeast Midwest Institute and The High Yield Income
Fund, Inc.; President, Director and Treasurer of First
Financial Fund, Inc. and The High Yield Plus Fund,
Inc. and Director or Trustee of funds within the
Prudential Mutual Funds.
Stephen P. Munn (55) Trustee Chairman (since January 1994), Director and President
(since 1988) and Chief Executive Officer (1988-
December 1993) of Carlisle Companies Incorporated
(manufacturer of industrial products) and Director or
Trustee of funds within the Prudential Mutual Funds.
*Richard A. Redeker (54) President and Employee of Prudential Investments; formerly President,
751 Broad St. Trustee Chief Executive Officer and Director (October 1993-
Newark, NJ 07102 September 1996), Prudential Mutual Fund Management,
Inc., Executive Vice President, Director and Member of
Operating Committee (October 1993-September 1996),
Prudential Securities, Director (October 1993-
September 1996) of Prudential Securities Group, Inc.,
Executive Vice President, The Prudential Investment
Corporation (January 1994-September 1996), Director
(January 1994-September 1996), Prudential Mutual Fund
Distributors, Inc. and Prudential Mutual Fund
Services, Inc., and Senior Executive Vice President
and Director of Kemper Financial Services, Inc.
(September 1978-September 1993); President and
Director of The High Yield Income Fund, Inc. and
Director or Trustee of funds within the Prudential
Mutual Funds.
Robin B. Smith (58) Trustee Chairman and Chief Executive Officer (since August
1996), formerly President and Chief Executive Officer
(January 1988-August 1996) and President and Chief
Operating Officer (September 1981-December 1988) of
Publishers Clearing House; Director of BellSouth
Corporation, Texaco Inc., Spring Industries Inc. and
Kmart Corporation and Director or Trustee of funds
within the Prudential Mutual Funds.
Louis A. Weil, III (57) Trustee Publisher and Chief Executive Officer (since January
1996) and Director (since September 1991) of Central
Newspapers, Inc.; Chairman of the Board (since January
1996), Publisher and Chief Executive Officer (August
1991-December 1995) of Phoenix Newspapers, Inc.;
formerly, Publisher (May 1989-March 1991) of Time
Magazine, President, Publisher and Chief Executive
Officer (February 1986-August 1989) of The Detroit
News and member of the Advisory Board, Chase Manhattan
Bank-Westchester; Director of The High Yield Income
Fund, Inc. and Director or Trustee of funds within
the Prudential Mutual Funds.
Clay T. Whitehead (59) Trustee President, National Exchange Inc. (new business
development firm) (since May 1983) and Director or
Trustee of funds within the Prudential Mutual Funds.
Grace C. Torres (39) Treasurer and First Vice President (since December 1996) of PIFM;
Principal First Vice President (since March 1993) of Prudential
Financial Securities; formerly First Vice President (March 1994-
and Accounting September 1996) of Prudential Mutual Fund Management,
Officer Inc. and Vice President (July 1989-March 1994) of
Bankers Trust Corporation.
</TABLE>
B-14
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS** AND POSITION PRINCIPAL OCCUPATIONS
(AGE) WITH FUND DURING PAST FIVE YEARS
------------------- --------- ----------------------
<C> <C> <S>
Stephen M. Ungerman (44) Assistant Tax Director (since March 1996) of Prudential
Treasurer Investments; formerly First Vice President (February
1993-September 1996) of Prudential Mutual Fund
Management, Inc.
Marguerite E. H. Morri- Assistant Vice President and Associate General Counsel (since
son (42) Secretary December 1996) of PIFM; Vice President and Associate
General Counsel of Prudential Securities; formerly
Vice President and Associate General Counsel (June
1991-September 1996) of Prudential Mutual Fund
Management, Inc.
</TABLE>
- ---------
* "Interested" Trustee, as defined in the Investment Company Act, by reason
of affiliation with Prudential Securities, Prudential or PIFM.
** Unless otherwise stated, the address is c/o Prudential Investments Fund
Management LLC, Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077.
The Fund has Trustees who, in addition to overseeing the actions of the
Fund's Manager, Subadviser and Distributor, decide upon matters of general
policy. The Trustees also review the actions of the Fund's officers, who
conduct and supervise the daily business operations of the Fund.
Trustees and officers of the Fund are also trustees, directors and officers
of some or all of the other investment companies distributed by Prudential
Investment Management Services LLC.
The Trustees have adopted a retirement policy which calls for the retirement
of Trustees on December 31 of the year in which they reach the age of 72,
except that retirement is being phased in for Trustees who were age 68 or
older as of December 31, 1993. Under this phase-in provision, Mr. Beach is
scheduled to retire on December 31, 1999.
Pursuant to 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 $4,000, in addition to certain out-of-pocket
expenses.
Trustees may receive their Trustee's fee pursuant to a deferred fee
agreement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of Trustee's fees which accrue interest at a rate equivalent
to the prevailing rate applicable to 90-day U.S. Treasury bills at the
beginning of each calendar quarter or, pursuant to a Commission exemptive
order, at the daily rate of return of the Fund. Payment of the interest so
accrued is also deferred and accruals become payable at the option of the
Trustee. The Fund's obligation to make payments of deferred Trustees' fees,
together with interest thereon, is a general obligation of the Fund.
B-15
<PAGE>
The following table sets forth the aggregate compensation paid by the Fund
to the Trustees who are not affiliated with the Manager for the fiscal year
ended October 31, 1998 and the aggregate compensation paid to such Trustees
for service on the Fund's Board and the Boards of all other investment
companies managed by PIFM (Fund Complex) for the calendar year ended December
31, 1997.
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT TOTAL 1997 COMPENSATION
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FROM FUND AND FUND
COMPENSATION AS PART OF FUND BENEFITS UPON COMPLEX PAID TO
NAME AND POSITION FROM FUND EXPENSES RETIREMENT TRUSTEES
- ----------------- ------------ ---------------- ---------------- -----------------------
<S> <C> <C> <C> <C>
Edward D. Beach--Trustee $4,000 None N/A $135,000(38/63)*
Delayne D. Gold--Trustee 4,000 None N/A $135,000(38/63)*
Robert F. Gunia--
Trustee+ -- None None None
Donald D. Lennox--Former
Trustee 4,000 None N/A $
Douglas H.
McCorkindale--Trustee** 4,000 None N/A $ 70,000(20/35)*
Mendel A. Melzer--
Trustee+ -- None None None
Thomas T. Mooney--
Trustee** 4,000 None N/A $115,000(31/64)*
Stephen P. Munn--Trustee 4,000 None N/A $ 45,000(15/21)*
Richard A. Redeker--
Trustee+ -- None None None
Robin B. Smith--
Trustee** 4,000 None N/A $ 90,000(27/34)*
Louis A. Weil, III--
Trustee 4,000 None N/A $ 90,000(26/50)*
Clay T. Whitehead--
Trustee 4,000 None N/A $ 45,000(15/21)*
</TABLE>
- ---------
* Indicates number of Funds/portfolios in Fund Complex to which aggregate
compensation relates.
** Total compensation from all of the funds in the Fund Complex for the
calendar year ended December 31, 1997, includes amounts deferred at the
election of Directors under the funds' deferred compensation plans.
Including accrued interest, total compensation amounted to $71,640,
$143,909 and $139,707 for Messrs. McCorkindale and Mooney and Ms. Smith,
respectively.
+ Robert F. Gunia, Mendel A. Melzer and Richard A. Redeker, who are interested
Trustees, do not receive compensation from the Fund or any fund in the
Prudential Mutual Fund Family.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
Trustees of the Fund are eligible to purchase Class Z shares of the Fund,
which are sold without either an initial sales charge or CDSC to a limited
group of investors.
As of October 9, 1998, 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 October 9, 1998, each of the following entities owned more than 5% of
the outstanding voting securities of each of the classes indicated: Boston
Safe Deposit & Trust, as trustee, K-Mart 401(k), PRT 5, 1 Cabot Rd., AIM#028-
0035, Medford, MA 02157 owned 3,987,609 Class Z shares (or approximately 52%
of the outstanding Class Z shares); Pru Defined Contribution Services, FBO
Prudential Bank and Trust, ATTN: John Surdy, 30 Scranton Office Park, Moosic,
PA 18507-1755 owned 858,731 Class Z shares (or approximately 11.2% of the
outstanding Class Z shares).
As of October 9, 1998, Prudential Securities was record holder of 18,678,521
Class A shares (or 54.8% of the outstanding Class A shares), 43,548,455 Class
B shares (or 61.9% of the outstanding Class B shares), 1,274,789 Class C
shares (or 62.7% of the outstanding Class C shares) and 507,063 Class Z shares
(or 6.6% of the outstanding Class Z 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.
B-16
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
(A) MANAGER AND INVESTMENT ADVISER
The manager of the Fund is Prudential Investments Fund Management LLC (PIFM
or the Manager), Gateway Center Three, 100 Mulberry Street, Newark, New Jersey
07102-4077. PIFM serves as manager to all of the other investment companies
that, together with the Fund, comprise the Prudential Mutual Funds. See "How
the Fund Is Managed--Manager" in the Prospectus. As of November 30, 1998, PIFM
managed and/or administered open-end and closed-end management investment
companies with assets of approximately $ billion. According to the Investment
Company Institute, as of November 30, 1998, the Prudential Mutual Funds were
the th largest family of mutual funds in the United States.
PIFM is a subsidiary of Prudential Securities and The Prudential Insurance
Company of America (Prudential). Prudential Mutual Fund Services LLC (PMFS or
the Transfer Agent), a wholly-owned subsidiary of PIFM, serves as the transfer
agent for the Prudential Mutual Funds and, in addition, provides customer
service, recordkeeping and management and administration services to qualified
plans.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PIFM, 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, PIFM is obligated to keep certain books and records of the Fund.
PIFM 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
PMFS, the Fund's transfer and dividend disbursing agent. The management
services of PIFM for the Fund are not exclusive under the terms of the
Management Agreement and PIFM is free to, and does, render management services
to others.
For its services, PIFM 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, .50 of 1% of average daily net assets between $500 million and
$1 billion, .475 of 1% of average daily net assets between $1 billion and $1.5
billion and .45 of 1% of average daily net assets in excess of $1.5 billion.
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
PIFM, but excluding interest, taxes, brokerage commissions, distribution fees
and litigation and indemnification expenses and other extraordinary expenses
not incurred in the ordinary course of the Fund's business) for any fiscal
year exceed the lowest applicable annual expense limitation established and
enforced pursuant to the statutes or regulations of any jurisdiction in which
the Fund's shares are qualified for offer and sale, the compensation due PIFM
will be reduced by the amount of such excess. No jurisdiction currently limits
the Fund's expenses.
In connection with its management of the business affairs of the Fund, PIFM
bears the following expenses:
(a) the salaries and expenses of all of its and the Fund's personnel except
the fees and expenses of Trustees who are not affiliated persons of PIFM or
the Fund's investment adviser;
(b) all expenses incurred by PIFM or by the Fund in connection with managing
the ordinary course of the Fund's business, other than those assumed by the
Fund as described below; and
(c) the costs and expenses payable to The Prudential Investment Corporation,
doing business as Prudential Investments (PI), pursuant to the subadvisory
agreement between PIFM and PI (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 Commission, including the preparation and
printing of the Fund's registration statements and prospectuses for such
purposes, and paying the fees and expenses of notice filings made in
accordance with state securities laws, (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.
B-17
<PAGE>
The Management Agreement provides that PIFM 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.
For the fiscal years ended October 31, 1998, 1997 and 1996, PIFM received
management fees of $ , $8,306,148 and $6,851,420, respectively.
PIFM has entered into the Subadvisory Agreement with PI (the Subadviser), a
wholly-owned subsidiary of Prudential. The Subadvisory Agreement provides that
PI will furnish investment advisory services in connection with the management
of the Fund. In connection therewith, PI is obligated to keep certain books
and records of the Fund. PIFM continues to have responsibility for all
investment advisory services pursuant to the Management Agreement and
supervises PI's performance of such services. PI is reimbursed by PIFM for the
reasonable costs and expenses incurred by PI in furnishing those services.
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, PIFM or PI 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. [PIC
remuneration for last 3 yrs.]
(B) PRINCIPAL UNDERWRITER, DISTRIBUTOR AND RULE 12B-1 PLANS
Prudential Investment Management Services LLC (PIMS or the Distributor),
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, acts
as the distributor of the shares of the Fund. Prior to June 1, 1998,
Prudential Securities Incorporated (Prudential Securities) was the Fund's
distributor. PIMS and Prudential Securities are subsidiaries of Prudential.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the
Fund under Rule 12b-1 under the Investment Company Act and a distribution
agreement (the Distribution Agreement), the Distributor incurs the expenses of
distributing the Fund's Class A, Class B and Class C shares. The Distributor
also incurs the expenses of distributing the Fund's Class Z shares under a
Distribution Agreement, none of which are reimbursed by or paid for by the
Fund. See "How the Fund Is Managed--Distributor" in the Prospectus.
The expenses incurred under the Plans include commissions and account
servicing fees paid to, or on account of, brokers or financial institutions
which have entered into agreements with the Distributor, advertising expenses,
the cost of printing and mailing prospectuses to potential investors and
indirect and overhead costs of the Distributor associated with the sale of
Fund shares, including lease, utility, communications and sales promotion
expenses. The distribution and/or service fees may also be used by the
Distributor to compensate on a continuing basis brokers in consideration for
the distribution, marketing, administrative and other services and activities
provided by brokers with respect to the promotion of the sale of the Fund's
shares and the maintenance of related shareholder accounts.
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.
CLASS A PLAN. Under the Class A Plan, the Fund may pay the Distributor for
its distribution-related activities with respect to Class A shares at an
annual rate of up to .30 of 1% of the average daily net assets of the Class A
shares. The Class A Plan provides that (1) up to .25 of 1% of the average
daily net assets of the Class A shares may be used to pay for personal service
and/or the maintenance of shareholder accounts (service fee) and (2) total
distribution fees (including the service fee of .25 of 1%) may not exceed .30
of 1%. The Distributor has voluntarily limited 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. This voluntary waiver may be terminated at any time
without notice.
For the fiscal year ended October 31, 1998, the Distributor and Prudential
Securities received payments of $ and $ , respectively, under the
Class A Plan and spent approximately $ and $ , respectively, in
distributing the Fund's shares. 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, 1998, the
Distributor and Prudential Securities also received approximately $ and
$ , respectively, in initial sales charges.
B-18
<PAGE>
CLASS B AND CLASS C PLANS. Under the Class B and Class C Plans, the Fund
pays the Distributor for its distribution-related activities with respect to
Class B and Class C shares at an annual rate of up to 1% of the average daily
net assets of each of the Class B and Class C shares. The Class B Plan
provides that (1) up to .25 of 1% of the average daily net assets of the Class
B shares may be paid as a service fee and (2) up to .75 of 1% (not including
the service fee) of the average daily net assets of the Class B shares (asset-
based sales charge) may be used as reimbursement for distribution-related
expenses with respect to the Class B shares. The Class C Plan provides that
(1) up to .25 of 1% of the average daily net assets of the Class C shares may
be paid as a service fee for providing personal service and/or maintaining
shareholder accounts and (2) up to .75 of 1% of the average daily net assets
of the Class C shares may be paid for distribution-related expenses with
respect to Class C shares. The service fee (.25 of 1% of average daily net
assets) is used to pay for personal service and/or the maintenance of
shareholder accounts. The Distributor also receives contingent deferred sales
charges from certain redeeming shareholders.
CLASS B PLAN. For the fiscal year ended October 31, 1998, the Distributor
and Prudential Securities received $ and $ , respectively, from the
Fund under the Class B Plan and spent approximately $ and $ ,
respectively, in distributing the Fund's Class B shares. It is estimated that
of the latter total amount, approximately % ($ ) was spent on printing and
mailing of prospectuses to other than current shareholders; % ($ ) on
compensation to broker-dealers for commissions to representatives and other
expenses, including an allocation of overhead and other branch office
distribution-related expenses, incurred by it for distribution of Fund shares;
and % ($ ) on the aggregate of (1) payments of commissions and account
servicing fees to financial advisers ( % or $ ) and (2) an allocation of
overhead and other branch office distribution-related expenses for payments of
related expenses ( % or $ ). The term "overhead and other branch office
distribution-related expenses" represents (a) the expenses of operating
Prudential Securities' and Pruco Securities Corporation's (Prusec's) branch
offices in connection with the sale of Fund shares, including lease costs, the
salaries and employee benefits of operations and sales support personnel,
utility costs, communications costs and the costs of stationery and supplies,
(b) the costs of client sales seminars, (c) expenses of mutual fund sales
coordinators to promote the sale of Fund shares and (d) other incidental
expenses relating to branch promotion of Fund sales.
The Distributor (and Prudential Securities as its predecessor) also receives
the proceeds of contingent deferred sales charges paid by investors upon
certain redemptions of Class B shares. For the fiscal year ended October 31,
1998, the Distributor and Prudential Securities received approximately $
and $ , respectively, in contingent deferred sales charges attributable to
Class B shares.
CLASS C PLAN. For the fiscal year ended October 31, 1998, the Distributor
and Prudential Securities received $ and $ , respectively, under the
Class C Plan and spent approximately $ and $ , respectively, in
distributing Class C shares. It is estimated that of the latter total amount,
approximately % ($ ) was spent on printing and mailing of prospectuses to
other than current shareholders; % ($ ) on compensation to broker-dealers
for commissions to representatives and other expenses, including an allocation
of overhead and other branch office distribution-related expenses, incurred
for distribution of Fund shares; and % ($ ) on the aggregate of (i)
payments of commissions and account servicing fees to financial advisers ( %
or $ ) and (ii) an allocation of overhead and other branch office
distribution-related expenses for payments of related expenses ( % or $ ).
The Distributor (and Prudential Securities as its predecessor) also receives
the proceeds of contingent deferred sales charges paid by investors upon
certain redemptions of Class C shares. For the fiscal year ended October 31,
1998, the Distributor and Prudential Securities received approximately $
and $ , respectively, in contingent deferred sales charges attributable to
Class C shares.
Distribution expenses attributable to the sale of Class A, Class B and Class
C shares of the Fund are allocated to each such class based upon the ratio of
sales of each such class to the sales of Class A, Class B and Class C shares
of the Fund other than expenses allocable to a particular class. The
distribution fee and sales charge of one class will not be used to subsidize
the sale of another class.
The Class A, Class B and Class C Plans continue in effect from year to year,
provided that each such continuance is approved at least annually by a vote of
the Trustees, including a majority vote of the Trustees who are not interested
persons of the Fund and who have no direct or indirect financial interest in
the Class A, Class B or Class C Plan or in any agreement related to the Plans
(Rule 12b-1 Trustees), cast in person at a meeting called for the purpose of
voting on such continuance. A Plan may be terminated at any time, without
penalty, by the vote of a majority of the Rule 12b-1 Trustees or by the vote
of the holders of a majority of the outstanding shares of the applicable class
of the Fund on not more than 30 days' written notice to any other party to the
Plan. The Plans may not be amended to increase materially the amounts to be
spent for the services described therein without approval by the shareholders
of the applicable class (by both Class A and Class B shareholders, voting
separately, in the case of material amendments to the Class A Plan), and all
material amendments are required to be approved by the 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.
B-19
<PAGE>
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 the Distribution Agreement, the Fund has agreed to indemnify the
Distributor to the extent permitted by applicable law against certain
liabilities under federal securities laws.
In addition to distribution and service fees paid by 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 brokers and other persons which
distribute shares of the Fund (including Class Z shares). Such payments may be
calculated by reference to the net asset value of shares sold by such persons
or otherwise.
[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.]
(C) OTHER SERVICE PROVIDERS
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.
Prudential Mutual Fund Services LLC (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 PIFM. 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 of $10.00
per shareholder account and a new account set-up fee of $2.00 for each
manually established 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.
1177 Avenue of the Americas, New York, New York 10036, serves as the Fund's
independent accountants and in that capacity audits the Fund's annual
financial statements.
BROKERAGE ALLOCATION AND OTHER PRACTICES
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 or any affiliate
in any transaction in which Prudential Securities or any affiliate acts as
principal, except in accordance with rules of the Commission. Thus, it will
not deal in the over-the-counter market with Prudential Securities acting as
market maker, and it will not execute a negotiated trade with Prudential
Securities if execution involves Prudential Securities' acting as principal
with respect to any part of the Fund's order.
B-20
<PAGE>
In placing orders for portfolio securities of the Fund, the Manager's
overriding objective is to obtain the best possible combination of price and
execution. The Manager seeks to effect each transaction at a price and
commission that provides the most favorable total cost or proceeds reasonably
attainable in the circumstances. The factors that the Manager may consider in
selecting a particular broker, dealer or futures commission merchant (firms)
are the Manager's knowledge of negotiated commission rates currently available
and other current transaction costs; the nature of the portfolio transaction;
the size of the transaction; the desired timing of the trade; the activity
existing and expected in the market for the particular transaction;
confidentiality; the execution, clearance and settlement capabilities of the
firms; the availability of research and research related services provided
through such firms; the Manager's knowledge of the financial stability of the
firms; the Manager's knowledge of actual or apparent operational problems of
firms; and the amount of capital, if any, that would be contributed by firms
executing the transaction. Given these factors, the Fund may pay transaction
costs in excess of that which another firm might have charged for effecting
the same transaction.
When the Manager selects a firm that executes orders or is a party to
portfolio transactions, relevant factors taken into consideration are whether
that firm has furnished research and research related products and/or
services, such as research reports, research compilations, statistical and
economic data, computer data bases, quotation equipment and services, research
oriented computer-software, hardware and services, reports concerning the
performance of accounts, valuations of securities, investment related
periodicals, investment seminars and other economic services and consultants.
Such services are used in connection with some or all of the Manager's
investment activities; some of such services, obtained in connection with the
execution of transactions for one investment account, may be used in managing
other accounts, and not all of these services may be used in connection with
the Fund.
The Manager maintains an internal allocation procedure to identify those
firms who have provided it with research and research related products and/or
services, and the amount that was provided, and to endeavor to direct
sufficient commissions to them to ensure the continued receipt of those
services that the Manager believes provides a benefit to the Fund and its
other clients. The Manager makes a good faith determination that the research
and/or service is reasonable in light of the type of service provided and the
price and execution of the related portfolio transactions.
When the Manager deems the purchase or sale of equities to be in the best
interests of the Fund or its other clients, including Prudential, the Manager
may, but is under no obligation to, aggregate the transactions in order to
obtain the most favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of the transactions, as well as the
expenses incurred in the transaction, will be made by the Manager in the
manner it considers to be most equitable and consistent with its fiduciary
obligations to its clients. The allocation of orders among firms and the
commission rates paid are reviewed periodically by the 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 Commission.
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 firms in
connection with comparable transactions involving similar securities or
futures being purchased or sold on an exchange or board of trade during a
comparable period of time. This standard would allow Prudential Securities (or
any affiliate) to receive no more than the remuneration which would be
expected to be received by an unaffiliated firm in a commensurate arm's-length
transaction. Furthermore, the 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) of the Securities Exchange Act of
1934, as amended, 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.
B-21
<PAGE>
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, 1998.
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, 1998 OCTOBER 31, 1997 OCTOBER 31, 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Total brokerage commissions
paid by the Fund........... $ $1,978,946 $1,359,109
Total brokerage commissions
paid to Prudential
Securities................. $ $ 197,650 $ 55,600
Percentage of total
brokerage commissions paid
to Prudential Securities... % 10.0% 4.1%
</TABLE>
The Fund effected approximately % of the total dollar amount of its
transactions involving the payment of commissions to Prudential Securities
during the year ended October 31, 1998. Of the total brokerage commissions
paid during that period, $ (or %) were paid to firms which provide
research, statistical or other services to PI. PIFM has not separately
identified a portion of such brokerage commissions as applicable to the
provision of such research, statistical or other services.
The Fund is required to disclose its holdings of securities of its regular
brokers and dealers (as defined under Rule 10b-1 of the Investment Company
Act) and their parents at October 31, 1998. As of October 31, 1998, the Fund
held securities of in the amount of $ .
CAPITAL SHARES, OTHER SECURITIES AND ORGANIZATION
The Fund is authorized to issue an unlimited number of shares of beneficial
interest, $.01 par value per share divided into four classes, designated Class
A, Class B, Class C and Class Z shares, initially all of one series. Each
class of par value shares represents an interest in the same assets of the
Fund and is identical in all respects except that (1) each class is subject to
different sales charges and distribution and/or service fees (except for Class
Z shares, which are not subject to any sales charges and distribution and/or
service fees), which may affect performance, (2) each class has exclusive
voting rights on any matter submitted to shareholders that relates solely to
its arrangement and has separate voting rights on any matter submitted to
shareholders in which the interests of one class differ from the interests of
any other class, (3) each class has a different exchange privilege, (4) only
Class B shares have a conversion feature and (5) Class Z shares are offered
exclusively for sale to a limited group of investors. In accordance with the
Fund's Declaration of Trust, the Trustees may authorize the creation of
additional series and classes within such series, with such preferences,
privileges, limitations and voting and dividend rights as the Trustees may
determine. The voting rights of the shareholders of a series or class can be
modified only by the majority vote of shareholders of that series or class.
Shares of 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. Each share
of each class is equal as to earnings, assets and voting privileges, except as
noted above, and each class of shares (with the exception of Class Z shares,
which are not subject to any distribution or service fees) bears the expenses
related to the distribution of its shares. Except for the conversion feature
applicable to the Class B shares, there are no conversion, preemptive or other
subscription rights. In the event of liquidation, each share of 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 and to Class Z shareholders, whose shares are not
subject to any distribution and/or service fees.
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.
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
B-22
<PAGE>
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.
Under 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. Under
the Investment Company Act, shareholders of any additional series of shares
would normally have to approve the adoption of any advisory contract relating
to such series and of any changes in the investment policies related thereto.
The Trustees do not intend to authorize 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.
PURCHASE, REDEMPTION AND PRICING OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value (NAV) per share plus a sales charge which, at the election of
the investor, may be imposed either (i) at the time of purchase (Class A or
Class C shares) or (ii) on a deferred basis (Class B or Class C shares). Class
Z shares of the Fund are offered to a limited group of investors at NAV
without any sales charges.
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 is subject to
different sales charges and distribution and/or service fees (except for Class
Z shares, which are not subject to any sales charges and distribution and/or
service fees), which may affect performance, (ii) each class has exclusive
voting rights with respect to any matter submitted to shareholders that
relates solely to its arrangement and has separate voting rights on any matter
submitted to shareholders in which the interests of one class differ from the
interests of any other class, (iii) each class has a different exchange
privilege, (iv) only Class B shares have a conversion feature and (v) Class Z
shares are offered exclusively for sale to a limited group of investors. See
"Distributor" and "Shareholder Investment Account--Exchange Privilege."
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, you
must complete an application and telephone PMFS at (800) 225-1852 (toll-free)
to receive an account number. The following information will be requested:
your name, address, tax identification number, 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 class in which you are eligible to invest (Class A, Class B,
Class C or Class Z shares).
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of 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, Class C or Class Z shares and your name and individual
account number. It is not necessary to call PMFS to make subsequent purchase
orders utilizing Federal Funds. The minimum amount which may be invested by
wire is $1,000.
ISSUANCE OF FUND SHARES FOR SECURITIES
Transactions involving the issuance of Fund shares for securities (rather
than cash) will be limited to (i) reorganizations, (ii) statutory mergers, or
(iii) other acquisitions of portfolio securities that: (a) meet the investment
objective and policies of the Fund, (b) are liquid and not subject to
restrictions on resale, (c) have a value that is readily ascertainable via
listing on or trading in a recognized United States or international exchange
or market, and (d) is approved by the Fund's investment adviser.
B-23
<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%, Class C* shares are sold with a 1% sales charge, and Class B* and Class Z
shares of the Fund are sold at NAV. Using the NAV at October 31, 1998, the
maximum offering price of the Fund's shares is as follows:
<TABLE>
<S> <C>
CLASS A
Net asset value and redemption price per Class A share...................... $
Maximum sales charge (5% of offering price).................................
---
Maximum offering price to public............................................ $
===
CLASS B
Net asset value, redemption price and offering price per Class B share*..... $
===
CLASS C
Net asset value and redemption price per Class C share*..................... $
Sales charge (1% of offering price).........................................
---
Offering price to public.................................................... $
===
CLASS Z
Net asset value, redemption price and offering price per Class Z share...... $
===
</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" in
the Prospectus.
SELECTING A PURCHASE ALTERNATIVE
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund:
If you intend to hold your investment in the Fund for less than 4 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to an initial sales charge of 5% and Class B shares are
subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B
shares.
If you intend to hold your investment for longer than 4 years, but less than
5 years, and do not qualify for a reduced sales charge on Class A shares, you
should consider purchasing Class B or Class C shares over Class A shares. This
is because the initial sales charge plus the cumulative annual distribution-
related fee on Class A shares would exceed those of the Class B and Class C
shares if you redeem your investment during this time period. In addition,
more of your money would be invested initially in the case of Class C shares,
because of the relatively low initial sales charge, and all of your money
would be invested initially in the case of Class B shares, which are sold at
NAV.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B shares, you would not have all of your money invested initially
because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B shares and 5 years in the case of
Class C shares for the higher cumulative annual distribution-related fee on
those shares plus, in the case of Class C shares, the 1% initial sales charge
to exceed the initial sales charge plus the cumulative annual distribution-
related fees on Class A shares. This does not take into account the time value
of money, which further reduces the impact of the higher Class B or Class C
distribution-related fee on the investment, fluctuations in NAV, the effect of
the return on the investment over this period of time or redemptions when the
CDSC is applicable.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES--CLASS A SHARES
Benefit Plan. 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 Section 457 and 403(b)(7) of the Internal
Revenue Code (collectively, Benefit Plans), provided that the Benefit Plan has
B-24
<PAGE>
existing assets of at least $1 million invested in shares of Prudential Mutual
Funds (excluding money market funds other than those acquired pursuant to the
exchange privilege) or 250 eligible employees or participants. In the case of
Benefit Plans whose accounts are held directly with the Transfer Agent or
Prudential Securities and for which the Transfer Agent or Prudential
Securities does individual account recordkeeping (Direct Account Benefit
Plans) and Benefit Plans sponsored by Prudential Securities or its
subsidiaries (Prudential Securities or Subsidiary Prototype Benefit Plans),
Class A shares may be purchased at NAV by participants who are repaying loans
made from such plans to the participant.
Prudential Retirement Programs. Class A shares may be purchased at NAV by
certain savings, retirement and deferred compensation plans, qualified or non-
qualified under the Internal Revenue Code, for which Prudential serves as the
plan administrator or recordkeeper, provided that (1) the plan has at least $1
million in existing assets or 250 eligible employees and (2) the Fund is an
available investment option. These plans include pension, profit-sharing,
stock-bonus or other employee benefit plans under Section 401 of the Internal
Revenue Code, deferred compensation and annuity plans under Sections 457 and
403(b)(7) of the Internal Revenue Code and plans that participate in the
PruArray Program (benefit plan recordkeeping service) (hereafter referred to
as a PruArray Plan). All plans of a company for which Prudential serves as
plan administrator or recordkeeper are aggregated in meeting the $1 million
threshold. The term "existing assets" as used herein includes stock issued by
a plan sponsor, shares of Prudential Mutual Funds and shares of certain
unaffiliated mutual funds that participate in the PruArray Plan (Participating
Fund). "Existing assets" also include monies invested in The Guaranteed
Interest Account (GIA), a group annuity insurance product issued by
Prudential, the Guaranteed Insulated Separate Account, a separate account
offered by Prudential and units of The Stable Value Fund (SVF), and
unaffiliated bank collective fund. Class A shares may also be purchased at NAV
by plans that have monies invested in GIA and SVF, provided (1) the purchase
is made with the proceeds of a redemption from either GIA or SVF and (2) Class
A shares are an investment option of the plan.
PruArray Association Benefit Plans. Class A shares are also offered at NAV
to Benefit Plans or non-qualified plans sponsored by employers which are
members of a common trade, professional or membership association
(Association) that participate in the PruArray Plan provided that the
Association enters into a written agreement with Prudential. Such Benefit
Plans or non-qualified plans may purchase Class A shares at NAV without regard
to the assets or number of participants in the individual employer's qualified
Plan(s) or non-qualified plans so long as the employers in the Association (1)
have retirement plan assets in the aggregate of at least $1 million or 250
participants in the aggregate and (2) maintain their accounts with the
Transfer Agent.
PruArray Savings Program. Class A shares are also offered at NAV to
employees of companies that enter into a written agreement with Prudential
Retirement Services to participate in the PruArray Savings Program. Under this
Program, a limited number of Prudential Mutual Funds are available for
purchase at NAV by Individual Retirement Accounts and Savings Accumulation
Plans of the company's employees. The Program is available only to (1)
employees who open an IRA or Savings Accumulation Plan account with the
Transfer Agent and (2) spouses of employees who open an IRA account with the
Transfer Agent. The program is offered to companies that have at least 250
eligible employees.
Special Rules Applicable to Retirement Plans. After a Benefit Plan or
PruArray Plan qualifies to purchase Class A shares at NAV, all subsequent
purchases will be made at NAV.
Other Waivers. In addition, Class A shares may be purchased at NAV, through
the Distributor or the Transfer Agent, by:
. officers of the Prudential Mutual Funds (including the Fund),
. employees of the Distributor, Prudential Securities, PIFM and their
subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer
Agent,
. employees of subadvisers of the Prudential Mutual Funds provided that
purchases at NAV are permitted by such person's employer,
. Prudential, employees and special agents of Prudential and its
subsidiaries and all persons who have retired directly from active
service with Prudential or one of its subsidiaries,
. registered representatives and employees of brokers who have entered
into a selected dealer agreement with the Distributor provided that
purchases at NAV are permitted by such person's employer,
. investors who have a business relationship with a financial adviser who
joined Prudential Securities from another investment firm, provided that
(1) the purchase is made within 180 days of the commencement of the
financial adviser's employment at Prudential Securities, or within one
year in the case of Benefit Plans, (2) the purchase is made with
proceeds of a redemption of shares of any open-end non-money market fund
sponsored by the financial adviser's
B-25
<PAGE>
previous employer (other than a fund which imposes a distribution or
service fee of .25 of 1% or less) and (3) the financial adviser served as
the client's broker on the previous purchase, and
. investors in Individual Retirement Accounts, provided the purchase is
made with the proceeds of a tax-free rollover of assets from a Benefit
Plan for which Prudential Investments serves as the recordkeeper or
administrator.
For an investor to obtain any reduction or waiver of the initial sales
charges, at the time of the sale either the Transfer Agent must be notified
directly by the investor or the Distributor must be notified by the broker
facilitating the transaction that the sale qualifies for the reduced or waived
sales charge. The reduction or waiver will be granted subject to confirmation
of your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions.
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other Prudential Mutual Funds, the
purchases may be combined to take advantage of the reduced sales charges
applicable to larger purchases. See "How to Buy, Sell and Exchange Shares of
the Fund--Reducing or Waiving Class A's Initial Sales Charge" in the
Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
. an individual;
. the individual's spouse, their children and their parents;
. the individual's and spouse's Individual Retirement Account (IRA);
. any company controlled by the individual (a person, entity or group that
holds 25% or more of the outstanding voting securities of a company will
be deemed to control the company, and a partnership will be deemed to be
controlled by each of its general partners);
. a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children;
. a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse; and
. one or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that
employer).
The Transfer Agent, the Distributor or your broker must be notified at the
time of purchase that the investor is entitled to a reduced sales charge. The
reduced sales charges will be granted subject to confirmation of the
investor's holdings. The Combined Purchase and Cumulative Purchase Privilege
does not apply to individual participants in any retirement or group plans.
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of
related investors, as described above under "Combined Purchase and Cumulative
Purchase Privilege," may aggregate the value of their existing holdings of
shares of 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 your broker will not be
aggregated to determine the reduced sales charge. The value of existing
holdings for purposes of determining the reduced sales charge is calculated
using the maximum offering price (NAV plus maximum sales charge) as of the
previous business day. The Distributor or the Transfer Agent must be notified
at the time of purchase that the investor is entitled to a reduced sales
charge. The reduced sales charges will be granted subject to confirmation of
the investor's holdings. Rights of Accumulation are not available to
individual participants in any retirement or group plans.
LETTERS OF INTENT. Reduced sales charges are also available to investors (or
an eligible group of related investors), including retirement and group plans,
who enter into a written Letter of Intent providing for the purchase, within a
thirteen-month period, of shares of the Fund and shares of other Prudential
Mutual Funds (Investment Letter of Intent). Retirement and group plans may
also qualify to purchase Class A shares at NAV by entering into a Letter of
Intent whereby they agree to enroll, within a thirteen-month period, a
specified number of eligible employees or participants (Participant Letter of
Intent).
For purposes of the Investment Letter of Intent, all shares of 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,
Prudential or its affiliates, and through your broker will not be aggregated
to determine the reduced sales charge.
B-26
<PAGE>
A Letter of Intent permits a purchaser, in the case of an Investment Letter
of Intent, to establish a total investment goal to be achieved by any number
of investments over a thirteen-month period and, in the case of a Participant
Letter of Intent, to establish a minimum eligible employee or participant
enrollment goal over a thirteen-month period. Each investment made during the
period, in the case of an Investment Letter of Intent, will receive the
reduced sales charge applicable to the amount represented by the goal, as if
it were a single investment. In the case of a Participant Letter of Intent,
each investment made during the period will be made at net asset value.
Escrowed Class A shares totaling 5% of the dollar amount of the Letter of
Intent will be held by the Transfer Agent in the name of the purchaser, except
in the case of retirement and group plans where the employer or plan sponsor
will be responsible for paying any applicable sales charge. The effective date
of an Investment Letter of Intent (except in the case of retirement and group
plans) may be back-dated up to 90 days, in order that any investments made
during this 90-day period, valued at the purchaser's cost, can be applied to
the fulfillment of the Letter of Intent goal.
The Investment Letter of Intent does not obligate the investor to purchase,
nor the Fund to sell, the indicated amount. Similarly, the Participant Letter
of Intent does not obligate the retirement or group plan to enroll the
indicated number of eligible employees or participants. In the event the
Letter of Intent goal is not achieved within the thirteen-month period, the
purchaser (or the employer or plan sponsor in the case of any retirement or
group plan) is required to pay the difference between the sales charge
otherwise applicable to the purchases made during this period and the sales
charge actually paid. Such payment may be made directly to the Distributor or,
if not paid, the Distributor will liquidate sufficient escrowed shares to
obtain such difference. Investors electing to purchase Class A shares of the
Fund pursuant to a Letter of Intent should carefully read such Letter of
Intent.
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will, in the
case of an Investment Letter of Intent, be granted subject to confirmation of
the investor's holdings or in the case of a Participant Letter of Intent,
subject to confirmation of the number of eligible employees or participants in
the retirement or group plan. Letters of Intent are not available to
individual participants in any retirement or group plans.
CLASS B SHARES
The offering price of Class B shares for investors choosing one of the
deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent, your Dealer of the Distributor.
Although there is no sales charge imposed at the time of purchase, redemptions
of Class B shares may be subject to a CDSC. See "Sale of Shares--Contingent
Deferred Sales Charges" below.
The Distributor will pay, from its own resources, sales commissions of up to
4% of the purchase price of Class B shares to brokers, financial advisers and
other persons who sell Class B shares at the time of sale. This facilitates
the ability of the Fund to sell the Class B shares without an initial sales
charge being deducted at the time of purchase. The Distributor anticipates
that it will recoup its advancement of sales commissions from the combination
of the CDSC and the distribution fee.
CLASS C SHARES
The offering price of Class C shares is the next determined NAV plus a 1%
sales charge. In connection with the sale of Class C shares, the Distributor
will pay, from its own resources, brokers, financial advisers and other
persons which distribute Class C shares a sales commission of up to 2% of the
purchase price at the time of the sale.
CLASS Z SHARES
Class Z shares of the Fund currently are available for purchase by the
following categories of investors:
. pension, profit-sharing or other employee benefit plans qualified under
Section 401 of the Internal Revenue Code, deferred compensation and
annuity plans under Sections 457 and 403(b)(7) of the Internal Revenue
Code and non-qualified plans for which the Fund is an available option
(collectively, Benefit Plans), provided such Benefit Plans (in
combination with other plans sponsored by the same employer or group of
related employers) have at least $50 million in defined contribution
assets;
. participants in any fee-based program sponsored by Prudential
Securities, The Prudential Savings Bank, F.S.B. or any affiliate which
includes mutual funds as investment options and for which the Fund is an
available option;
. certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by Prudential for whom Class Z shares of the
Prudential Mutual Funds are an available option;
. Benefit Plans for which Prudential Retirement Services serves as
recordkeeper and as of September 20, 1996, (a) were Class Z shareholders
of the Prudential Mutual Funds or (b) executed a letter of intent to
purchase Class Z shares of the Prudential Mutual Funds;
B-27
<PAGE>
. the Prudential Securities Cash Balance Pension Plan, an employee defined
benefit plan sponsored by Prudential Securities;
. current and former Directors/Trustees of the Prudential Mutual Funds
(including the Fund);
. employees of Prudential and/or Prudential Securities who participate in
a Prudential-sponsored employee savings plan and
. Prudential with an investment of $10 million or more.
In connection with the sale of Class Z shares, the Manager, the Distributor
or one of their affiliates may pay dealers, financial advisers and other
persons which distribute shares a finders' fee from its own resources based on
a percentage of the net asset value of shares sold by such persons.
Class Z shares of the Fund may also be purchased by certain savings,
retirement and deferred compensation plans, qualified or non-qualified under
the Internal Revenue Code of 1986, as amended (the Internal Revenue Code),
provided that (1) the plan purchases shares of the Fund pursuant to an
investment management agreement with The Prudential Insurance Company of
America or its affiliates, (2) the Fund is an available investment option
under the agreement and (3) the plan will participate in the PruArray and
SmartPath Programs (benefit plan recordkeeping services) sponsored by
Prudential Mutual Fund Services LLC. [These plans include pension, profit-
sharing, stock-bonus or other employee benefit plans under Section 401 of the
Internal Revenue Code and deferred compensation and annuity plans under
Sections 457 or 403(b)(7) of the Internal Revenue Code.]
SALE OF SHARES
You can redeem your shares at any time for cash at the NAV next determined
after the redemption request is received in proper form (in accordance with
procedures established by the Transfer Agent in connection with investors'
accounts) by the Transfer Agent. In certain cases, however, redemption
proceeds will be reduced by the amount of any applicable CDSC, as described
below. See "Contingent Deferred Sales Charges" below. If you are redeeming
your shares through a broker, your broker must receive your sell order before
the Fund computes its NAV for that day (i.e., 4:15 P.M., New York time) in
order to receive that day's NAV. Your broker will be responsible for
furnishing all necessary documentation to the Distributor and may charge you
for its services in connection with redeeming shares of the Fund.
If you hold shares of the Fund through Prudential Securities, you must
redeem your shares through Prudential Securities. Please contact your
Prudential Securities financial adviser.
If you hold shares in non-certificate form, a written request for redemption
signed by you exactly as the account is registered is required. If you hold
certificates, the certificates, signed in the name(s) shown on the face of the
certificates, must be received by the Transfer Agent, the Distributor or your
broker in order for the redemption request to be processed. If redemption is
requested by a corporation, partnership, trust or fiduciary, written evidence
of authority acceptable to the Transfer Agent must be submitted before such
request will be accepted. All correspondence and documents concerning
redemptions should be sent to the Fund in care of its Transfer Agent,
Prudential Mutual Fund Services LLC, Attention: Redemption Services, P.O. Box
15010, New Brunswick, New Jersey 08906-5010, the Distributor or to your
broker.
SIGNATURE GUARANTEE. If the proceeds of the redemption (1) exceed $50,000,
(2) are to be paid to a person other than the record owner, (3) are to be sent
to an address other than the address on the Transfer Agent's records, or (4)
are to be paid to a corporation, partnership, trust or fiduciary, the
signature(s) on the redemption request and on the certificates, if any, or
stock power must be guaranteed by an "eligible guarantor institution." An
"eligible guarantor institution" includes any bank, broker, dealer or credit
union. The Transfer Agent reserves the right to request additional information
from, and make reasonable inquiries of, any eligible guarantor institution.
For clients of Prusec, a signature guarantee may be obtained from the agency
or office manager of most Prudential Insurance and Financial Services or
Preferred Services offices. In the case of redemptions from a PruArray Plan,
if the proceeds of the redemption are invested in another investment option of
the plan in the name of the record holder and at the same address as reflected
in the Transfer Agent's records, a signature guarantee is not required.
Payment for shares presented for redemption will be made by check within
seven days after receipt by the Transfer Agent, the Distributor or your broker
of the certificate and/or written request, except as indicated below. If you
hold shares through Prudential
Securities, payment for shares presented for redemption will be credited to
your account at your broker, unless you indicate otherwise. Such payment may
be postponed or the right of redemption suspended at times (1) when the New
York Stock Exchange is closed for other than customary weekends and holidays,
(2) when trading on such Exchange is restricted, (3) when an emergency exists
as a result of which disposal by 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 (4) during any other period when
the Commission, by order, so permits; provided that applicable rules and
regulations of the Commission shall govern as to whether the conditions
prescribed in (2), (3) or (4) exist.
B-28
<PAGE>
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, which may take 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 cashier's check.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental
to the best interests of the remaining shareholders of the Fund to make
payment wholly or partly in cash, the Fund may pay the redemption price in
whole or in part by a distribution in kind of securities from the investment
portfolio of the Fund, in lieu of cash, in conformity with applicable rules of
the Commission. Securities will be readily marketable and will be valued in
the same manner as in a regular redemption. If your shares are redeemed in
kind, you would incur transaction costs in converting the assets into cash.
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 NAV 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 CDSC will be imposed
on any such involuntary redemption.
90-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 90 days after the
date of the redemption. Any CDSC paid in connection with such redemption will
be credited (in shares) to your account. (If less than a full repurchase is
made, the credit will be on a pro rata basis.) You must notify the Transfer
Agent, either directly or through The Distributor or your broker, at the time
the repurchase privilege is exercised to adjust your account for the CDSC you
previously paid. Thereafter, any redemptions will be subject to the CDSC
applicable at the time of the redemption. See "Contingent Deferred Sales
Charges" below. Exercise of the repurchase privilege will generally not affect
federal tax treatment of any gain realized upon redemption. However, if the
redemption was made within a 30 day period of the repurchase and if the
redemption resulted in a loss, some or all of the loss, depending on the
amount reinvested, may not be allowed for federal income tax purposes.
CONTINGENT DEFERRED SALES 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 18 months 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 18 months, in the case of Class C
shares (one year for Class C shares purchased before November 2, 1998). A CDSC
will be applied on the lesser of the original purchase price or the current
value of the shares being redeemed. Increases in the value of your shares or
shares acquired through reinvestment of dividends or distributions are not
subject to a CDSC. The amount of any CDSC will be paid to and retained by the
Distributor.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchase of shares, all payments
during a month will be aggregated and deemed to have been made on the last day
of the month. The CDSC will be calculated from the first day of the month
after the initial purchase, excluding the time shares were held in a money
market fund. See "Shareholder Investment Account--Exchange Privilege."
The following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------------- -------------------------
<S> <C>
First........................................ 5.0%
Second....................................... 4.0%
Third........................................ 3.0%
Fourth....................................... 2.0%
Fifth........................................ 1.0%
Sixth........................................ 1.0%
Seventh...................................... None
</TABLE>
B-29
<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 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 are:
(1) in the case of a tax-deferred retirement plan, a lump-sum or other
distribution after retirement;
(2) in the case of an IRA (including a Roth IRA), a lump-sum or other
distribution after attaining age 59 1/2 or a periodic distribution based on
life expectancy;
(3) in the case of a Section 403(b) custodial account, a lump sum or other
distribution after attaining age 59 1/2; and
(4) a tax-free return of an excess contribution or plan distributions
following the death or disability of the shareholder, provided that the shares
were purchased prior to death or disability.
The waiver does not apply in the case of a tax-free rollover or transfer of
assets, other than one following a separation from service (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 Prudential Securities or Subsidiary Prototype Benefit Plans, the
CDSC will be waived on redemptions which represent borrowings from such plans.
Shares purchased with amounts used to repay a loan from such plans on which a
CDSC was not previously deducted will thereafter be subject to a CDSC without
regard to the time such amounts were previously invested. In the case of a
401(k) plan, the CDSC will also be waived upon the redemption of shares
purchased with amounts used to repay loans made from the account to the
participant and from which a CDSC was previously deducted.
Systematic Withdrawal Plan. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12%
of the total dollar amount subject to the CDSC may be redeemed without charge.
The Transfer Agent will calculate the total amount available for this waiver
annually on the anniversary date of your purchase or, for shares purchased
prior to March 1, 1997, on March 1 of the current year. The CDSC will be
waived (or reduced) on redemptions until this threshold 12% is reached.
In addition, the CDSC will be waived on redemptions of shares held by
Trustees of the Fund.
You must notify the Fund's Transfer Agent either directly or through your
broker, at the time of redemption, that you are entitled to waiver of the CDSC
and provide the Transfer Agent with such supporting documentation as it may
deem appropriate. The waiver will be granted subject to confirmation of your
entitlement.
B-30
<PAGE>
In connection with these waivers, the Transfer Agent will require you to
submit the supporting documentation set forth below.
<TABLE>
<S> <C>
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
is unable to engage in any letter from a physician on the
substantial gainful activity by physician's letterhead stating that
reason of any medically the shareholder (or, in the case of a
determinable physical or mental trust, the grantor) is permanently
impairment which can be expected disabled. The letter must also
to result in death or to be of indicate the date 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.
</TABLE>
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. For example, if you purchased $100,000 of Class B
shares of the Fund and the following year purchased an additional $450,000 of
Class B shares with the result that the aggregate cost of your Class B shares
of the Fund following the second purchase was $550,000, the quantity discount
would be available for the second purchase of $450,000 but not for the first
purchase of $100,000. The quantity discount will be imposed at the following
rates depending on whether the aggregate value exceeded $500,000 or $1
million:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF DOLLARS INVESTED
OR REDEMPTION PROCEEDS
--------------------------------------
YEAR SINCE PURCHASE
PAYMENT MADE $500,001 TO $1 MILLION OVER $1 MILLION
------------------- ---------------------- ---------------
<S> <C> <C>
First.......................... 3.0% 2.0%
Second......................... 2.0% 1.0%
Third.......................... 1.0% 0%
Fourth and thereafter.......... 0% 0%
</TABLE>
You must notify the Fund's Distributor or Transfer Agent either directly or
through Prudential Securities or Prusec, at the time of redemption, that you
are entitled to the reduced CDSC. The reduced CDSC will be granted subject to
confirmation of your holdings.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS C SHARES
Prudential Retirement Plans. The CDSC will be waived on redemptions from
qualified and non-qualified retirement and deferred compensation plans for
which Prudential provides administrative or recordkeeping services that
participate in the PruArray Plan.
B-31
<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. 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 NAV of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted.
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been
made on the last day of the month, or for Class B shares acquired through
exchange, or a series of exchanges, on the last day of the month in which the
original payment for purchases of such Class B shares was made. For Class B
shares previously exchanged for shares of a money market fund, the time period
during which such shares were held in the money market fund will be excluded.
For example, Class B shares held in a money market fund for one year would not
convert to Class A shares until approximately eight years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase
of such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (1) that the
dividends and other distributions paid on Class A, Class B, Class C and Class
Z shares will not constitute "preferential dividends" under the Internal
Revenue Code and (2) that the conversion of shares does not constitute a
taxable event. The conversion of Class B shares into Class A shares may be
suspended if such opinions or rulings are no longer available. If conversions
are suspended, Class B shares of the Fund will continue to be subject,
possibly indefinitely, to their higher annual distribution and service fee.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which the shares are held for the
investor by the Transfer Agent. If a 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 NAV
B-32
<PAGE>
by returning the check or the proceeds to the Transfer Agent within 30 days
after the payment date. Such investment will be made at the NAV per share next
determined after receipt of the check or proceeds by the Transfer Agent. Such
shareholder will receive credit for any CDSC paid in connection with the
amount of proceeds being reinvested.
EXCHANGE PRIVILEGE
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 the relative NAV next determined after
receipt of an order in proper form. An exchange will be treated as a
redemption and purchase for tax purposes. 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.
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.
If you hold shares through Prudential Securities, you must exchange your
shares by contacting your Prudential Securities financial adviser.
If you hold certificates, the certificates, signed in the name(s) shown on
the face of the certificates, must be returned in order for the shares to be
exchanged.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
In periods of severe market or economic conditions the telephone exchange of
shares may be difficult to implement and you should make exchanges by mail by
writing to Prudential Mutual Fund Services LLC, at the address noted above.
CLASS A. Shareholders of the Fund may exchange their Class A shares for
Class A shares of certain other Prudential Mutual Funds, shares of Prudential
Government Securities Trust (Short-Intermediate Term Series) and shares of the
money market funds specified below. No fee or sales load will be imposed upon
the exchange. Shareholders of money market funds who acquired such shares upon
exchange of Class A shares may use the exchange privilege only to acquire
Class A shares of the Prudential Mutual Funds participating in the exchange
privilege.
The following money market funds participate in the Class A exchange
privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets, Inc. (Class A shares)
Prudential Tax-Free Money Fund, Inc.
B-33
<PAGE>
CLASS B AND CLASS C. Shareholders of the Fund may exchange their Class B and
Class C shares of the Fund for Class B and Class C shares, respectively, of
certain other Prudential Mutual Funds and shares of Prudential Special Money
Market Fund, Inc., a money market fund. No CDSC will be payable upon such
exchange, but a CDSC may be payable upon the redemption of the Class B and
Class C shares acquired as a result of the exchange. The applicable sales
charge will be that imposed by the fund in which shares were initially
purchased and the purchase date will be deemed to be the first day of the
month after the initial purchase, rather than the date of the exchange.
Class B and Class C shares of the Fund may also be exchanged for shares of
Prudential Special Money Market Fund, Inc. without imposition of any CDSC at
the time of exchange. Upon subsequent redemption from such money market fund
or after re-exchange into the Fund, such shares will be subject to the CDSC
calculated without regard to the time such shares were held in the money
market fund. In order to minimize the period of time in which shares are
subject to a CDSC, shares exchanged out of the money market fund will be
exchanged on the basis of their remaining holding periods, with the longest
remaining holding periods being transferred first. In measuring the time
period shares are held in a money market fund and "tolled" for purposes of
calculating the CDSC holding period, exchanges are deemed to have been made on
the last day of the month. Thus, if shares are exchanged into the Fund from a
money market fund during the month (and are held in the Fund at the end of the
month), the entire month will be included in the CDSC holding period.
Conversely, if shares are exchanged into a money market fund prior to the last
day of the month (and are held in the money market fund on the last day of the
month), the entire month will be excluded from the CDSC holding period. For
purposes of calculating the seven year holding period applicable to the Class
B conversion feature, the time period during which Class B shares were held in
a money market fund will be excluded.
At any time after acquiring shares of other funds participating in the Class
B or Class C Exchange Privilege, a shareholder may again exchange those shares
(and any reinvested dividends and distributions) for Class B or Class C shares
of 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.
CLASS Z. Class Z shares may be exchanged for Class Z shares of other
Prudential Mutual Funds.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV and for
shareholders who qualify to purchase Class Z shares. Under this exchange
privilege, amounts representing any Class B and Class C shares which are not
subject to a CDSC held in such a shareholder's account will be automatically
exchanged for Class A shares for shareholders who qualify to purchase Class A
shares at NAV on a quarterly basis, unless the shareholder elects otherwise.
Similarly, shareholders who qualify to purchase Class Z shares will have their
Class B and Class C shares which are not subject to a CDSC and their Class A
shares exchanged for Class Z shares on a quarterly basis. Eligibility for this
exchange privilege will be calculated on the business day prior to the date of
the exchange. Amounts representing Class B or Class C shares which are not
subject to a CDSC include the following: (1) amounts representing Class B or
Class C shares acquired pursuant to the automatic reinvestment of dividends
and distributions, (2) amounts representing the increase in the 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, Prusec or
another broker that they are eligible for this special exchange privilege.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares
when they elect to have those assets become a part of the fee-based program.
Upon leaving the program (whether voluntarily or not), such Class Z shares
(and, to the extent provided for in the program, Class Z shares acquired
through participation in the program) will be exchanged for Class A shares at
net asset value. Similarly, participants in Prudential Securities' 401(k) Plan
for which the Fund's Class Z shares is an available option and who wish to
transfer their Class Z shares out of the Prudential Securities 401(k) Plan
following separation from service (i.e., voluntary or involuntary termination
of employment or retirement) will have their Class Z shares exchanged for
Class A shares at NAV.
The Prudential Securities Cash Balance Pension Plan may only exchange its
Class Z shares for Class Z shares of those Prudential Mutual Funds which
permit investment by the Prudential Securities Cash Balance Pension Plan.
Additional details about the exchange privilege and prospectuses for each of
the Prudential Mutual Funds are available from the Fund's Transfer Agent, the
Distributor or your broker. The exchange privilege may be modified, terminated
or suspended on sixty days' notice, and any fund, including the Fund, or the
Distributor, has the right to reject any exchange application relating to such
fund's shares.
B-34
<PAGE>
DOLLAR COST AVERAGING
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more
shares when the price is low and fewer shares when the price is high. The
average cost per share is lower than it would be if a constant number of
shares were bought at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class beginning in 2011, the cost of four years at
a private college could reach $210,000 and over $90,000 at a public
university./1/
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 and
private universities is available from The College Board Annual Survey of
Colleges, 1993. Average costs for private institutions include tuition, fees,
room and board for the 1993-1994 academic year.
/2/The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not
intended to reflect the performance of an investment in shares of 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 INVESTMENT PLAN (AIP)
Under AIP, 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 brokerage account (including a Prudential Securities Command Account) to be
debited to invest specified dollar amounts in shares of the Fund. The
investor's bank must be a member of the Automatic Clearing House System. Share
certificates are not issued to AIP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, the Distributor or your broker.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders through the
Transfer Agent, the Distributor or your broker. Such withdrawal plan provides
for monthly or quarterly checks in any amount, except as provided below, up to
the value of the shares in the shareholder's account. Withdrawals of Class B
or Class C shares may be subject to a CDSC. 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 (1) a $10,000 minimum
account value applies, (2) withdrawals may not be for less than $100 and (3)
the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at NAV on
shares held under this plan.
The Transfer Agent, the Distributor or your broker 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.
B-35
<PAGE>
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
(1) the purchase of Class A and Class C shares and (2) the redemption of Class
B and Class C shares. Each shareholder should consult his or her own tax
adviser with regard to the tax consequences of the systematic withdrawal plan,
particularly if used in connection with a retirement plan.
TAX-DEFERRED RETIREMENT PLANS
Various tax-deferred retirement plans, including a 401(k) plan, self-
directed individual retirement accounts and "tax-deferred accounts" under
Section 403(b)(7) of the Internal Revenue Code are available through the
Distributor. These plans are for use by both self-employed individuals and
corporate employers. These plans permit either self-direction of accounts by
participants, or a pooled account arrangement. Information regarding the
establishment of these plans, the administration, custodial fees and other
details are available from 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 $ 26,165 $ 31,291
15 years 44,675 58,649
20 years 68,109 98,846
25 years 97,780 157,909
30 years 135,346 244,692
</TABLE>
- ---------
/1/The chart is for illustrative purposes only and does not represent the
performance of 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.
Distributions from a Roth IRA which meet the conditions required under the
Internal Revenue Code will not be subject to tax upon withdrawal from the
account.
MUTUAL FUND PROGRAMS
From time to time, the Fund may be included in a mutual fund program with
other Prudential Mutual Funds. Under such a program, a group of portfolios
will be selected and thereafter marketed collectively. Typically, these
programs are created with an investment theme, e.g., to seek greater
diversification, protection from interest rate movements or access to
different management styles. In the event such a program is instituted, there
may be a minimum investment requirement for the program as a whole. The Fund
may waive or reduce the minimum initial investment requirements in connection
with such a program.
The mutual funds in the program may be purchased individually or as part of
a program. Since the allocation of portfolios included in the program may not
be appropriate for all investors, individuals should consult their financial
advisor concerning the appropriate blend of portfolios for them. If investors
elect to purchase the individual mutual funds that constitute the program in
an investment ratio different from that offered by the program, the standard
minimum investment requirements for the individual mutual funds will apply.
B-36
<PAGE>
NET ASSET VALUE
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.
Under the Investment Company Act, the Trustees are responsible for
determining in good faith the fair value of securities of the Fund. In
accordance with procedures adopted by the Trustees, the value of investments
listed on a securities exchange and NASDAQ National Market System securities
(other than options on stock and stock indices) are valued at the last sale
price of such exchange system on the day of valuation or, if there was no sale
on such day, the mean between the last bid and asked prices on such day, or at
the bid price on such day in the absence of an asked price. Corporate bonds
(other than convertible debt securities) and U.S. Government securities that
are actively traded in the over-the-counter market, including listed
securities for which the primary market is believed by the Manager in
consultation with the Subadviser to be over-the-counter, are valued on the
basis of valuations provided by an independent pricing agent or principal
market maker which uses information with respect to transactions in bonds,
quotations from bond dealers, agency ratings, market transactions in
comparable securities and various relationships between securities in
determining value. Convertible debt securities that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed by the Manager in consultation with the Subadviser to be
over-the-counter, are valued at the mean between the last reported bid and
asked prices provided by principal market makers. Options on stock and stock
indices traded on an exchange are valued at the mean between the most recently
quoted bid and asked prices on the respective exchange and futures contracts
and options thereon are valued at their last sale prices as of the close of
trading on the applicable commodities exchange or board of trade or, if there
was no sale on the applicable commodities exchange or board of trade on such
day, at the mean between the most recently quoted bid and asked prices on such
exchange or board of trade. Quotations of foreign securities in a foreign
currency are converted to U.S. dollar equivalents at the current rate obtained
from a recognized bank or dealer, and forward currency exchange contracts are
valued at the current cost of covering or offsetting such contacts. Should an
extraordinary event, which is likely to affect the value of the security,
occur after the close of an exchange on which a portfolio security is traded,
such security will be valued at fair value considering factors determined in
good faith by the investment adviser under procedures established by and under
the general supervision of the Fund's Board of Trustees.
Securities or other assets for which reliable market quotations are not
readily available or for which the pricing agent or principal market maker
does not provide a valuation or methodology or provides a valuation or
methodology that, in the judgment of the Manager or Subadviser (or Valuation
Committee or Board of Trustees) does not represent fair value, are valued by
the Valuation Committee or Board of Trustees in consultation with the Manager
or Subadviser, including its portfolio manager, traders, and its research and
credit analysts, on the basis of the following factors: cost of the security,
transactions in comparable securities, relationships among various securities
and such other factors as may be determined by the Manager, Subadviser, Board
of Directors or Valuation Committee to materially affect the value of the
security. Short-term debt securities are valued at cost, with interest accrued
or discount amortized to the date of maturity, if their original maturity was
60 days or less, unless this is determined by the Trustees not to represent
fair value. Short-term securities with remaining maturities of more than 60
days, for which market quotations are readily available, are valued at their
current market quotations as supplied by an independent pricing agent or
principal market maker. The Fund will compute its NAV at 4:15 P.M., New York
time, on each day the New York Stock Exchange is open for trading except on
days on which no orders to purchase, sell or redeem Fund shares have been
received or days on which changes in the value of the Fund's portfolio
securities do not affect NAV. In the event the New York Stock Exchange closes
early on any business day, the NAV of the Fund's shares shall be determined at
the time between such closing and 4:15 P.M., New York time. The New York Stock
Exchange is closed on the following holidays: New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
NAVs and dividends. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A shares as a result of the larger distribution-
related fee to which Class B and Class C shares are subject. The NAV of Class
Z shares will generally be higher than the NAV of Class A, Class B or Class C
shares as a result of the fact that the Class Z shares are not subject to any
distribution or service fee. It is expected, however, that the NAV of the four
classes will tend to converge immediately after the recording of dividends, if
any, which will differ by approximately the amount of the distribution and/or
service fee expense accrual differential among the classes.
B-37
<PAGE>
TAXES, DIVIDENDS AND DISTRIBUTIONS
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 income
tax on income and capital gains which are distributed to shareholders, 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, payments with respect to
securities loans and gains from the sale or other disposition of securities or
options thereon or foreign currencies, or other income (including but not
limited to, gains from options, futures or forward contracts) derived with
respect to its business of investing in such securities or currencies; (b) the
Fund diversify its holdings so that, at the end of each quarter of the taxable
year, (i) at least 50% of the value of the Fund's assets is represented by
cash, U.S. Government securities and other securities limited in respect of
any one issuer to an amount not greater than 5% of the value of the Fund's
assets and 10% of the outstanding voting securities of such issuer, and (ii)
not more than 25% of the value of its assets is invested in the securities of
any one issuer (other than U.S. Government securities); and (c) the Fund
distribute to its shareholders at least 90% of its net investment income and
net short-term gains (i.e., the excess of net short-term capital gains over
net long-term capital losses) in each year.
Gains or losses on sales of securities by the Fund will be treated as long-
term capital gains or losses if the securities have been held by it for more
than one year, except in certain cases where the Fund acquires a put or writes
a call thereon or otherwise holds an offsetting position with respect to the
securities. Other gains or losses on the sale of securities will be short-term
capital gains or losses. Gains and losses on the sale, lapse or other
termination of options on securities will generally be treated as gains and
losses from the sale of securities. 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, constructive sale, straddle and anti-
conversion provisions of the Internal Revenue Code which may, among other
things, require the Fund to defer recognition of losses. In addition, debt
securities acquired by the Fund may be subject to original issue discount and
market discount rules which, respectively, may cause the Fund to accrue income
in advance of the receipt of cash with respect to interest or cause gains to
be treated as ordinary income.
"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. Except
with respect to certain forward foreign currency exchange contracts, 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 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.
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.
B-38
<PAGE>
Any dividends or distributions paid shortly after a purchase by an investor
may have the effect of reducing the per share net asset value of the
investor's shares by the per share amount of the dividends or distributions.
Furthermore, such dividends or distributions, although in effect a return of
capital, are subject to federal income taxes. Therefore, prior to purchasing
shares of 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 and Class Z 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, Class C and Class Z shares. See "Net Asset
Value."
The Fund is required under the Internal Revenue Code to distribute 98% of
its ordinary income in the same calendar year in which it is earned. The Fund
is also required to distribute during the calendar year 98% of the capital
gain net income it earned during the twelve months ending on October 31 of
such calendar year. In addition, the Fund must distribute during the calendar
year any undistributed ordinary income and undistributed capital gain net
income from the prior year or the twelve-month period ending on October 31 of
such prior calendar year, respectively. To the extent it does not meet these
distribution requirements, the Fund will be subject to a non-deductible 4%
excise tax on the undistributed amount. For purposes of this excise tax,
income on which the Fund pays income tax is treated as distributed.
The Fund may, from time to time, invest in Passive Foreign Investment
Companies (PFICs). PFICs are foreign corporations which derive a majority of
their income from passive sources. For tax purposes, the Fund's investments in
PFICs may subject the Fund to federal income taxes on certain income and gains
realized by the Fund. Under proposed Treasury regulations, the Fund would be
able to avoid such taxes and interest by electing to "mark-to-market" its
investments in PFICs (i.e., treat them as sold for fair market value at the
end of the year).
Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Income tax
treaties between certain countries and the United States may reduce or
eliminate such taxes. It is impossible to determine in advance the effective
rate of foreign tax to which the Fund will be subject, since the amount of the
Fund's assets to be invested in various countries is not known.
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, Class C and Class Z shares.
Average annual total return is computed according to the following formula:
P(1 + T) n = ERV
<TABLE>
<S> <C> <C> <C>
Where: P = hypothetical initial payment of $1000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1000 payment made at the
beginning of the 1, 5 or 10 year periods at the end of the 1, 5 or 10 year
periods (or fractional portion thereof).
</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.
B-39
<PAGE>
The average annual total returns for Class A shares for the one year, five
year and since inception (January 22, 1990) periods ended October 31, 1998
were , and , respectively. The average annual total returns for Class B
shares for the one year, five year and ten year periods ended October 31, 1998
were , and , respectively. The average annual total returns for Class C
shares for the one year and since inception (August 1, 1994) periods ended
October 31, 1998 were and , respectively. The average annual total
returns for the Class Z shares for the one year and since inception (March 1,
1996) periods ended October 31, 1998 were and , respectively.
AGGREGATE TOTAL RETURN. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B,
Class C and Class Z shares.
Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed according to the following formula:
ERV--P
P
<TABLE>
<S> <C> <C> <C>
Where: P = a hypothetical initial payment of $1000.
ERV = ending redeemable value at the end of the 1, 5 or 10 year periods (or fractional portion thereof) of
a hypothetical
$1000 payment made at the beginning of the 1, 5 or 10 year periods.
</TABLE>
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.
The aggregate total returns for Class A shares for the one year, five year
and since inception periods ended on October 31, 1998 were %, % and
%, respectively. The aggregate total returns for Class B shares for the one
year, five year and ten year periods ended on October 31, 1998 were %, %
and %, respectively. The aggregate total returns for Class C shares for the
one year and since inception periods ended October 31, 1998 were % and
%, respectively. The aggregate total returns for the Class Z shares for the
one year and since inception periods ended October 31, 1998 were % and
%, respectively.
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, Class C
and Class Z shares. The yield will be computed by dividing the Fund's net
investment income per share earned during this 30-day period by the maximum
offering price per share on the last day of this period. Yield is calculated
according to the following formula:
a - b
YIELD = 2[( ----- +1) to the 6th power -1 ]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
Yield fluctuates and an annualized yield quotation is not a representation
by the Fund as to what an investment in the Fund will actually yield for any
given period.
The Fund's 30-day yields for the 30 days ended October 31, 1998 were %,
%, % and % for the Class A, Class B, Class C and Class Z shares,
respectively.
B-40
<PAGE>
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. 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/
PERFORMANCE COMPARISON OF DIFFERENT TYPES OF INVESTMENTS
OVER THE LONG TERM (1/1926-12/1997)
COMMON STOCKS 11.0%
LONG-TERM GOVT. BONDS 5.2%
INFLATION 3.1%
/1/ Source: Ibbotson Associates, "Stocks, Bonds, Bills and Inflation--1998
Yearbook" (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. All rights reserved. Common stock returns
are based on the Standard & Poor's 500 Stock Index, a market-weighted,
unmanaged index of 500 common stocks in a variety of industry sectors. It is a
commonly used indicator of broad stock price movements. This chart is for
illustrative purposes only, and is not intended to represent the performance
of any particular investment or fund. Investors cannot invest directly in an
index. Past performance is not a guarantee of future results.
B-41
<PAGE>
Portfolio of Investments as of
October 31, 1997 PRUDENTIAL EQUITY INCOME FUND
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------------
LONG-TERM INVESTMENTS--96.0%
COMMON STOCKS--91.6%
- ------------------------------------------------------------------
Aerospace/Defense--0.6%
121,400 Thiokol Corp. $ 11,115,688
- ------------------------------------------------------------------
Airlines--3.2%
533,000 AMR Corp.* 62,061,187
- ------------------------------------------------------------------
Aluminum--2.8%
440,000 Aluminum Co. of America 32,120,000
309,820 Kaiser Aluminum Corp.* 3,892,114
282,984 Reynolds Metals Co. 17,244,337
---------------
53,256,451
- ------------------------------------------------------------------
Apparel--1.1%
572,700 Kellwood Co. 19,793,944
40,800 Oxford Industries, Inc. 1,417,800
---------------
21,211,744
- ------------------------------------------------------------------
Automobiles & Trucks--5.2%
1,493,558 Chrysler Corp. 52,647,919
430,000 Ford Motor Co. 18,785,625
450,000 General Motors Corp. 28,884,375
---------------
100,317,919
- ------------------------------------------------------------------
Building & Construction--1.2%
463,000 Kaufman & Broad Home Corp. 9,867,688
750,000 Ryland Group, Inc. 13,406,250
---------------
23,273,938
- ------------------------------------------------------------------
Business Services--0.2%
161,780 Crescent Operating, Inc.* 3,761,385
- ------------------------------------------------------------------
Chemicals--3.4%
523,600 Dow Chemical Co. 47,516,700
756,628 Millennium Chemicals, Inc. 17,780,758
---------------
65,297,458
Computer Hardware--2.3%
709,500 Digital Equipment Corp* $ 35,519,344
719,800 Intergraph Corp.* 7,737,850
---------------
43,257,194
- ------------------------------------------------------------------
Electrical Equipment--2.4%
301,000 Esterline Technologies Corp.* 10,948,875
154,800 Instron Corp. 2,554,200
700,000 Kuhlman Corp. 24,412,500
364,400 Newport Corp. 5,921,500
210,200 Pacific Scientific Co. 3,074,175
---------------
46,911,250
- ------------------------------------------------------------------
Energy--0.6%
274,100 Energy Group Plc., ADR*
(United Kingdom) 11,066,788
- ------------------------------------------------------------------
Energy Systems--3.9%
2,042,700 McDermott International, Inc. 74,175,544
- ------------------------------------------------------------------
Financial Services--12.0%
959,577 Bear Stearns Cos., Inc. 38,083,212
325,800 Edwards (A.G.), Inc. 10,690,313
1,932,000 Lehman Brothers Holdings, Inc. 90,924,750
883,000 PaineWebber Group, Inc. 39,017,562
660,000 Salomon Inc. 51,273,750
---------------
229,989,587
- ------------------------------------------------------------------
Forest & Paper--1.2%
72,600 Fletcher Challenge Forest Ltd.,
ADR
(New Zealand) 744,150
771,400 Louisiana-Pacific Corp. 16,199,400
125,600 Potlatch Corp. 6,264,300
---------------
23,207,850
</TABLE>
- ------------------------------------------------------------------
See Notes to Financial Statements.
B-42
<PAGE>
Portfolio of Investments as of
October 31, 1997 PRUDENTIAL EQUITY INCOME FUND
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------------
Gas Distribution--1.4%
518,200 BG Plc., ADR (United Kingdom) $ 21,861,562
87,950 KN Energy, Inc. 3,825,825
30,100 Yankee Energy System, Inc. 714,875
---------------
26,402,262
- ------------------------------------------------------------------
Gas Pipelines--2.2%
2,408,300 NOVA Corp. 21,674,700
280,100 Sonat, Inc. 12,867,094
360,800 TransCanada Pipelines Ltd. 6,742,450
---------------
41,284,244
- ------------------------------------------------------------------
Insurance--3.6%
586,200 Marsh & McLennan Cos., Inc. 41,620,200
393,400 Ohio Casualty Corp. 17,407,950
178,400 Selective Insurance Group, Inc. 9,655,900
---------------
68,684,050
- ------------------------------------------------------------------
Integrated Producers--2.2%
676,000 Elf Aquitaine, ADR (France) 41,743,000
- ------------------------------------------------------------------
Media--3.0%
220,000 Dun & Bradstreet Corp. 6,283,750
1,952,755 Westinghouse Electric Corp. 51,625,960
---------------
57,909,710
- ------------------------------------------------------------------
Mining--0.3%
225,700 Ashanti Goldfields Co. Ltd., GDR
(Ghana) 2,228,788
194,678 Coeur D'Alene Mines Corp.* 2,019,784
298,499 Echo Bay Mines, Ltd.* 1,212,652
---------------
5,461,224
- ------------------------------------------------------------------
Miscellaneous Industrial--1.7%
1,274,100 Hanson Plc., ADR (United
Kingdom) 32,489,550
Oil & Gas Exploration/Production--3.4%
1,000,000 Occidental Petroleum Corp. $ 27,875,000
916,807 Pioneer Natural Resources Co. 36,729,580
---------------
64,604,580
- ------------------------------------------------------------------
Oil Refining & Marketing--0.3%
382,300 Quaker State Corp. 5,925,650
- ------------------------------------------------------------------
Paper & Packaging--1.0%
759,900 Gibson Greetings Inc.* 18,712,538
- ------------------------------------------------------------------
Realty Investment Trust--18.4%
271,000 AMLI Residential Properties
Trust 6,300,750
397,800 Beacon Properties Corp. 16,757,325
255,100 Bradley Real Estate, Inc. 5,006,337
792,400 CCA Prison Realty Trust 27,337,800
1,617,800 Crescent Real Estate Equities,
Inc. 58,240,800
1,266,500 Crown American Realty Trust 11,952,594
200,000 Equity Inns Inc. 3,150,000
1,605,100 Equity Residential Properties
Trust 81,057,550
567,700 Gables Residential Trust 15,008,569
533,400 Glimcher Realty Trust 11,834,812
500,000 Haagen (Alexander) Properties
Inc. 8,375,000
392,000 Irvine Apartment Communities,
Inc. 12,054,000
286,200 JDN Realty Corp. 9,766,575
96,000 JP Realty, Inc. 2,340,000
62,550 Kimco Realty Corp. 2,001,600
230,000 Malan Realty Investors, Inc. 4,125,625
632,600 Manufactured Home Communities,
Inc. 15,815,000
62,600 Pennsylvania Real Estate
Investment Trust 1,529,788
586,093 Security Capital Pacific Trust 13,113,831
285,700 Simon De Bartolo Group, Inc. 8,838,844
300,000 Sunstone Hotel Investors, Inc. 5,268,750
166,600 Tri Net Corporate Realty Trust,
Inc. 6,028,837
400,000 Vornado Realty Trust 17,850,000
355,000 Walden Residential Properties,
Inc. 8,653,125
---------------
352,407,512
</TABLE>
- ------------------------------------------------------------------
See Notes to Financial Statements.
B-43
<PAGE>
Portfolio of Investments as of
October 31, 1997 PRUDENTIAL EQUITY INCOME FUND
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------------
Retail--4.9%
1,509,300 Limited, Inc. (The) $ 35,562,881
80,500 Blair Corp. 1,449,000
200,000 Heilig-Meyers Co. 2,675,000
758,400 Penney (J.C.) Co., Inc. 44,508,600
280,200 Tandy Corp. 9,631,875
---------------
93,827,356
- ------------------------------------------------------------------
Steel--2.4%
1,346,200 USX-U.S. Steel Group, Inc. 45,770,800
- ------------------------------------------------------------------
Telecommunication Services--1.1%
470,200 Telefonos de Mexico, SA de CV,
ADR (Mexico) 20,336,150
- ------------------------------------------------------------------
Tobacco--3.8%
606,500 B.A.T Industries Plc., ADR
(United Kingdom) 10,841,188
548,200 Imperial Tobacco Group Plc.,
ADR*
(United Kingdom) 6,595,531
1,767,420 RJR Nabisco Holdings Corp. 56,005,121
---------------
73,441,840
- ------------------------------------------------------------------
Trucking & Shipping--0.7%
287,950 Alexander & Baldwin Inc. 7,918,625
190,500 Yellow Corp.* 5,226,844
---------------
13,145,469
- ------------------------------------------------------------------
Utilities--0.2%
161,100 New York State Electric & Gas
Corp. 4,299,356
- ------------------------------------------------------------------
Wood Processing--0.9%
396,700 Rayonier Inc. 17,330,831
---------------
Total common stocks
(cost $1,243,847,311) 1,752,680,105
---------------
PREFERRED STOCKS--3.1%
- ------------------------------------------------------------------
Energy Systems--0.3%
88,000 McDermott International, Inc.,
Conv. $2.875, Ser. C $ 4,884,000
- ------------------------------------------------------------------
Integrated Producers--0.1%
48,099 Unocal Capital Trust, Conv.
6.25% 2,849,866
- ------------------------------------------------------------------
Mining--0.1%
60,000 Hecla Mining Co., Conv. 7.00%,
Ser. B 2,842,500
- ------------------------------------------------------------------
Realty Investment Trust--0.1%
54,600 Security Capital Pacific Trust,
Conv. $1.75, Ser. A 1,672,125
- ------------------------------------------------------------------
Retail--1.4%
454,200 K-Mart Financing I, Conv. 7.75% 25,861,012
- ------------------------------------------------------------------
Steel--1.1%
250,800 Bethlehem Steel Corp., Conv.
$3.50 10,784,400
118,900 USX Capital Trust I, Conv.,
6.75% 5,647,750
262,500 Worthington Industries Inc.,
Conv. 7.25% 4,134,375
---------------
20,566,525
---------------
Total preferred stocks
(cost $60,934,908) 58,676,028
---------------
WARRANTS*--0.0%
- ------------------------------------------------------------------
Realty Investment Trust
34,726 Security Capital Group-Class B
expiring 9/18/98 @$28.00
(cost $0) 167,119
---------------
</TABLE>
- ------------------------------------------------------------------
See Notes to Financial Statements.
B-44
<PAGE>
Portfolio of Investments as of
October 31, 1997 PRUDENTIAL EQUITY INCOME FUND
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<S> <C> <C> <C>
- ------------------------------------------------------------------
CONVERTIBLE BONDS--0.8%
- ------------------------------------------------------------------
Integrated Oil--0.1%
Ba3 $ 1,871 Oryx Energy Co., Sub.
Deb.,
7.50%, 5/15/14 $ 1,899,065
- ------------------------------------------------------------------
Realty Investment Trust--0.3%
Haagen (Alexander)
Properties Inc.,
B2 700 Sub. Deb., Ser. A,
7.50%, 1/15/01 695,625
B2 1,200 Sub. Deb., Ser. B,
7.50%, 1/15/01 1,192,500
Malan Realty Investors,
Inc.,
B3 3,800 Sub. Deb.,
9.50%, 7/15/04 4,028,532
--------------
5,916,657
- ------------------------------------------------------------------
Retail--0.4%
B2 8,000 Charming Shoppes Inc.
7.50%, 7/15/06 7,840,000
--------------
Total convertible bonds
(cost $15,454,015) 15,655,722
--------------
FOREIGN GOVERNMENT OBLIGATIONS--0.5%
NR NZ$ 15,580 New Zealand Gov't.
Bonds,
8.00%, 4/15/04
(cost $10,819,084) $ 10,385,627
--------------
Total long-term
investments
(cost $1,331,055,318) 1,837,564,601
--------------
SHORT-TERM INVESTMENTS--2.5%
- ------------------------------------------------------------------
REPURCHASE AGREEMENT--2.5%
47,092 Joint Repurchase
Agreement Account
5.70%, 11/3/97,
(cost $47,092,000;
(Note 5)) 47,092,000
--------------
- ------------------------------------------------------------------
Total Investments--98.5%
(cost $1,378,147,318;
Note 4) 1,884,656,601
Other assets in excess
of
liabilities--1.5% 28,572,447
--------------
Net Assets--100% $1,913,229,048
==============
</TABLE>
- -------------------------
* Non-income producing security.
ADR--American Depository Receipt.
GDR--Global Depository Receipt.
NR--Not rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description
of Moody's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-45
<PAGE>
Statement of Assets and Liabilities PRUDENTIAL EQUITY INCOME FUND
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets October 31, 1997
<S> <C>
Investments, at value (cost $1,378,147,318)............................................................... $1,884,656,601
Foreign currency, at value (cost $402,057)................................................................ 388,035
Cash...................................................................................................... 220,948
Receivable for investments sold........................................................................... 43,332,142
Receivable for Fund shares sold........................................................................... 9,516,192
Dividends and interest receivable......................................................................... 6,754,795
Other assets.............................................................................................. 32,379
----------------
Total assets........................................................................................... 1,944,901,092
----------------
Liabilities
Payable for investments purchased......................................................................... 26,329,106
Payable for Fund shares reacquired........................................................................ 2,309,803
Distribution fee payable.................................................................................. 1,234,136
Management fee payable.................................................................................... 849,317
Foreign withholding tax payable........................................................................... 564,897
Accrued expenses.......................................................................................... 384,785
----------------
Total liabilities...................................................................................... 31,672,044
----------------
Net Assets................................................................................................ $1,913,229,048
================
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................. $ 912,967
Paid-in capital in excess of par....................................................................... 1,230,349,275
----------------
1,231,262,242
Undistributed net investment income.................................................................... (564,897)
Accumulated net realized gains......................................................................... 176,230,283
Net unrealized appreciation on investments and foreign currencies...................................... 506,301,420
----------------
Net assets, October 31, 1997.............................................................................. $1,913,229,048
================
Class A:
Net asset value and redemption price per share
($570,145,639 / 27,151,344 shares of beneficial interest issued and outstanding).................... $21.00
Maximum sales charge (5% of offering price)............................................................ 1.11
----------------
Maximum offering price to public....................................................................... $22.11
================
Class B:
Net asset value, offering price and redemption price per share
($1,250,216,165 / 59,720,668 shares of beneficial interest issued and outstanding).................. $20.93
================
Class C:
Net asset value, offering price and redemption price per share
($17,911,214 / 855,645 shares of beneficial interest issued and outstanding)........................ $20.93
================
Class Z:
Net asset value, offering price and redemption price per share
($74,956,030 / 3,569,053 shares of beneficial interest issued and outstanding)...................... $21.00
================
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-46
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
Statement of Operations
- ------------------------------------------------------------------
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income October 31, 1997
----------------
<S> <C>
Income
Dividends (net of foreign withholding taxes
of $908,113)............................ $ 46,963,677
Interest................................... 5,447,044
------------
Total income............................ 52,410,721
------------
Expenses
Management fee............................. 8,306,148
Distribution fee--Class A.................. 1,137,230
Distribution fee--Class B.................. 10,721,183
Distribution fee--Class C.................. 114,317
Transfer agent's fees and expenses......... 1,973,000
Reports to shareholders.................... 376,000
Registration fees.......................... 150,000
Custodian's fees and expenses.............. 138,000
Trustees' fees and expenses................ 36,000
Insurance.................................. 33,000
Audit fee and expenses..................... 25,000
Legal fees and expenses.................... 25,000
Miscellaneous.............................. 5,477
------------
Total expenses.......................... 23,040,355
------------
Net investment income......................... 29,370,366
------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions.................... 184,450,185
Foreign currency transactions.............. (10,200
------------
184,439,985
------------
Net change in unrealized appreciation
(depreciation) on:
Investments................................ 363,959,364
Foreign currency transactions.............. (24,737
------------
363,934,627
------------
Net gain on investments and foreign currency
transactions............................... 548,374,612
------------
Net Increase in Net Assets
Resulting from Operations..................... $577,744,978
============
</TABLE>
PRUDENTIAL EQUITY INCOME FUND
Statement of Changes in Net Assets
- ------------------------------------------------------------------
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended October 31,
in Net Assets ----------------------
1997 1996
---- ----
<S> <C> <C>
Operations
Net investment income....... $ 29,370,366 $ 34,699,725
Net realized gain on
investments and foreign
currency transactions.... 184,439,985 61,035,712
Net change in unrealized
appreciation of
investments and foreign
currencies............... 363,934,627 84,686,616
-------------- --------------
Net increase in net assets
resulting from
operations............... 577,744,978 180,422,053
-------------- --------------
Dividends and distributions (Note 1)
Dividends from net
investment income
Class A.................. (10,388,275) (10,168,241)
Class B.................. (17,820,066) (23,129,087)
Class C.................. (186,974) (166,270)
Class Z.................. (1,432,974) (610,849)
-------------- --------------
(29,828,289) (34,074,447)
-------------- --------------
Distributions from net
realized gains
Class A.................. (16,446,394) (13,884,497)
Class B.................. (44,123,354) (43,458,487)
Class C.................. (407,245) (241,179)
Class Z.................. (2,197,282) --
-------------- --------------
(63,174,275) (57,584,163)
-------------- --------------
Fund share transactions (net of
share conversions) (Note 6)
Proceeds from shares sold... 699,979,865 396,300,467
Net asset value of shares
issued in reinvestment of
dividends and
distributions............ 84,965,746 83,809,013
Cost of shares reacquired... (681,144,020) (432,557,290)
-------------- --------------
Net increase in net assets
from Fund share
transactions............. 103,801,591 47,552,190
-------------- --------------
Total increase................. 588,544,005 136,315,633
Net Assets
Beginning of year.............. 1,324,685,043 1,188,369,410
-------------- --------------
End of year.................... $1,913,229,048 $1,324,685,043
============== ==============
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-47
<PAGE>
Notes to Financial Statements PRUDENTIAL EQUITY INCOME FUND
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 Policies
The following is a summary 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 or at the
bid price in the absence of an asked price. 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. Securities which are otherwise not readily marketable or
securities for which market quotations are not readily available are valued in
good faith at fair value in accordance with procedures adopted by the Fund's
Board of Trustees.
Short-term securities which mature in more than 60 days are valued based upon
current market quotations. Short-term securities which mature in 60 days or less
are valued at amortized cost which approximates market value.
In connection with transactions in repurchase agreements, it is the Fund's
policy that its custodian or designated subcustodians under triparty repurchase
agreements, as the case may be, take possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. If the seller defaults and the value of
the collateral declines or if bankruptcy proceedings are commenced with respect
to the seller of the security, realization of the collateral by the Fund may be
delayed or limited.
Foreign Currency Translation: The books and records of the Fund are maintained
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on
the following basis:
(i) market value of investment securities, other assets and liabilities--at the
current rates of exchange;
(ii) purchases and sales of investment securities, income and expenses--at the
rates of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the period, the Fund does not isolate that
portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of the securities held at period end. Similarly, the Fund does not
isolate the effect of changes in foreign exchange rates from the fluctuations
arising from changes in the market prices of long-term debt securities sold
during the period. Accordingly, such realized foreign currency gains and losses
are included in the reported net realized gains/losses on investment
transactions.
Net realized losses on foreign currency transactions of $10,200 represents net
foreign exchange gains and losses from sales and maturities of short-term
securities and forward currency contracts, holding of foreign currencies,
currency gains or losses realized between the trade and settlement dates on
securities transactions, and the difference between the amounts of interest and
foreign taxes recorded on the Fund's books and the U.S. dollar equivalent
amounts actually received or paid. Net currency gains and losses from valuing
foreign currency denominated assets (excluding investments) and liabilities at
period end exchange rates are reflected as a component of net unrealized
appreciation/depreciation on investments and foreign currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of U.S. companies as a result of,
among other factors, the possibility of political or economic instability and
the level of governmental supervision and regulation of foreign securities
markets.
Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date; interest income is recorded on the accrual basis. Expenses are
recorded on the accrual basis which may require the use of certain estimates by
management.
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.
B-48
<PAGE>
Notes to Financial Statements PRUDENTIAL EQUITY INCOME FUND
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 treatment of
distributions from Real Estate Investment Trusts.
Reclassification of Capital Accounts: The Fund accounts for and reports
distributions to shareholders in accordance with American Institute of Certified
Public Accountants (AICPA) Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to decrease undistributed net investment income by
$3,482,366, decrease accumulated net realized gains on investments by
$5,355,954, decrease paid-in capital in excess of par by $5,126 and increase net
unrealized appreciation on investments by $8,843,446. Net investment income, net
realized gains and net assets were not affected by these changes.
- --------------------------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Investments Fund Management
LLC ("PIFM"). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM has entered into a subadvisory agreement with The Prudential
Investment Corporation ("PIC"); PIC furnishes investment advisory services in
connection with the management of the Fund. PIFM pays for the cost of the
subadviser's services, the compensation of officers of the Fund, occupancy and
certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PIFM is computed daily and payable monthly at an annual
rate of .60 of 1% of the Fund's average daily net assets up to $500 million, .50
of 1% of the next $500 million, .475 of 1% of the next $500 million and .45 of
1% of the average daily net assets in excess of $1.5 billion.
The Fund has a distribution agreement with Prudential Securities Incorporated
("PSI"), which acts as the distributor of the Class A, Class B, Class C and
Class Z shares of the Fund. The Fund compensates PSI for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution (the "Class A, B and C Plans") regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
No distribution or service fees are paid to PSI as distributor for Class Z
shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%,
of the average daily net assets of the Class A, B and C shares, respectively.
Such expenses under the Plans were .25 of 1% of the average daily net assets of
Class A shares and 1% of the average daily net assets of both the Class B and C
shares for the year ended October 31, 1997.
PSI has advised the Fund that it has received approximately $793,900 in
front-end sales charges resulting from sales of Class A shares during the year
ended October 31, 1997. From these fees, PSI paid such sales charges to dealers,
which in turn paid commissions to salespersons and incurred other distribution
costs.
PSI has advised the Fund that for the year ended October 31, 1997, it received
approximately $1,538,000 and $8,400 in contingent deferred sales charges imposed
upon certain redemptions by Class B and Class C shareholders, respectively.
PSI, PIFM and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America.
The Fund, along with other affiliated registered investment companies (the
"Funds"), entered into a credit agreement (the "Agreement") on December 31, 1996
with an unaffiliated lender. The maximum commitment under the Agreement is
$200,000,000. The Agreement expires on December 30, 1997. Interest on any such
borrowings outstanding will be at market rates. The purpose of the Agreement is
to serve as an alternative source of funding for capital share redemptions. The
Fund has not borrowed any amounts pursuant to the Agreement as of October 31,
1997. The Funds pay a commitment fee at an annual rate of .055 of 1% on the
unused portion of the credit facility. The commitment fee is accrued and paid
quarterly on a pro-rata basis by the Funds.
- --------------------------------------------------------------------------------
B-49
<PAGE>
Notes to Financial Statements PRUDENTIAL EQUITY INCOME FUND
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ("PMFS"), a wholly-owned subsidiary of PIFM,
serves as the Fund's transfer agent and during the year ended October 31, 1997,
the Fund incurred fees of approximately $1,645,000 for the services of PMFS. As
of October 31, 1997, approximately $149,200 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 year ended October 31, 1997, PSI earned approximately $197,700 in
brokerage commissions from portfolio transactions executed on behalf of the
Fund.
- -------------------------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the year ended October 31, 1997 were $569,534,570 and $582,148,397,
respectively.
The cost basis of investments for federal income tax purposes at October 31,
1997 was $1,378,934,777 and, accordingly, net unrealized appreciation for
federal income tax purposes was $505,721,824 (gross unrealized
appreciation--$521,069,507; gross unrealized depreciation--$15,347,683).
- -------------------------------------------------------------------------------
Note 5. Joint Repurchase Agreement Account
The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Treasury or Federal agency obligations. As of October 31, 1997, the Fund
had a 5.87% undivided interest in repurchase agreements in the joint account.
The undivided interest for the Fund represented $47,092,000 in principal amount.
As of such date, each repurchase agreement in the joint account and the value of
the collateral therefor were as follows:
Bear, Stearns & Co. Inc., 5.70%, in the principal amount of $236,000,000,
repurchase price $236,112,100, due 11/3/97. The value of the collateral
including accrued interest is $241,912,917.
Credit Suisse First Boston Corp., 5.72%, in the principal amount of
$237,440,000, repurchase price $237,553,180, due 11/3/97. The value of the
collateral including accrued interest is $246,134,363.
Deutsche Morgan Grenfell Inc., 5.70%, in the principal amount of $236,000,000,
repurchase price $236,112,100, due 11/3/97. The value of the collateral
including accrued interest is $240,720,618.
SBC Warburg Dillon Read Inc., 5.66%, in the principal amount of $92,714,000,
repurchase price $92,757,730, due 11/3/97. The value of the collateral including
accrued interest is $94,588,984.
- -------------------------------------------------------------------------------
Note 6. Capital
The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are
sold with a front-end sales charge of up to 5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a contingent
deferred sales charge of 1% during the first year. Class B shares will
automatically convert to Class A shares on a quarterly basis approximately seven
years after purchase. Special exchange privileges are also available for
shareholders who qualify to purchase Class A shares at net asset value or Class
Z shares. Class Z shares are not subject to any sales or redemption charge and
are offered exclusively for sale to a limited group of investors.
The Fund has authorized an unlimited number of shares of beneficial interest at
$.01 par value divided into four classes, designated Class A, Class B, Class C
and Class Z.
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- --------------------------------- ----------- -------------
<S> <C> <C>
Year ended October 31, 1997:
Shares sold...................... 24,088,902 $ 429,955,821
Shares issued in reinvestment of
dividends and distributions.... 1,457,169 24,726,140
Shares reacquired................ (23,710,223) (422,399,190)
----------- -------------
Net increase in shares
outstanding before
conversion..................... 1,835,848 32,282,771
Shares issued upon conversion
and/or exchange from Class B... 3,168,790 57,758,918
----------- -------------
Net increase in shares
outstanding.................... 5,004,638 $ 90,041,689
=========== =============
</TABLE>
- --------------------------------------------------------------------------------
B-50
<PAGE>
Notes to Financial Statements PRUDENTIAL EQUITY INCOME FUND
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Shares Amount
- --------------------------------- ----------- -------------
<S> <C> <C>
Year ended October 31, 1996:
Shares sold...................... 12,763,330 $ 192,448,233
Shares issued in reinvestment of
dividends and distributions.... 1,507,878 22,207,619
Shares reacquired................ (14,423,817) (217,449,877)
----------- -------------
Net decrease in shares
outstanding before
conversion..................... (152,609) (2,794,025)
Shares issued upon conversion
and/or exchange from Class B... 3,062,717 46,622,970
----------- -------------
Net increase in shares
outstanding.................... 2,910,108 $ 43,828,945
=========== =============
<CAPTION>
Class B
- -------------------------------------------------------------------------------
<S> <C> <C>
Year ended October 31, 1997:
Shares sold...................... 11,692,362 $ 220,160,621
Shares issued in reinvestment of
dividends and distributions.... 3,363,615 56,041,561
Shares reacquired................ (12,575,129) (224,049,253)
----------- -------------
Net increase in shares
outstanding before
conversion..................... 2,480,848 52,152,929
Shares reacquired upon conversion
and/or exchange into Class A... (3,179,464) (57,758,918)
----------- -------------
Net decrease in shares
outstanding.................... (698,616) $ (5,605,989)
=========== =============
Year ended October 31, 1996:
Shares sold...................... 9,998,793 $ 149,942,657
Shares issued in reinvestment of
dividends and distributions.... 4,135,093 60,601,069
Shares reacquired................ (13,775,123) (206,554,247)
----------- -------------
Net increase in shares
outstanding before
conversion..................... 358,763 3,989,479
Shares issued upon conversion
and/or exchange into Class A... (3,073,755) (46,622,970)
----------- -------------
Net decrease in shares
outstanding.................... (2,714,992) $ (42,633,491)
=========== =============
<CAPTION>
Class C Shares Amount
- --------------------------------- ----------- -------------
<S> <C> <C>
Year ended October 31, 1997:
Shares sold...................... 479,888 $ 9,368,720
Shares issued in reinvestment of
dividends and distributions.... 33,855 567,873
Shares reacquired................ (211,033) (3,840,172)
----------- -------------
Net increase in shares
outstanding.................... 302,710 $ 6,096,421
=========== =============
Year ended October 31, 1996:
Shares sold...................... 325,017 $ 4,877,161
Shares issued in reinvestment of
dividends and distributions.... 26,486 389,591
Shares reacquired................ (117,902) (1,769,009)
----------- -------------
Net increase in shares
outstanding before
conversion..................... 233,601 $ 3,497,743
=========== =============
<CAPTION>
Class Z
- --------------------------------------------------------------------------------
<S> <C> <C>
Year ended October 31, 1997:
Shares sold...................... 2,149,748 $ 40,494,703
Shares issued in reinvestment of
dividends and distributions.... 213,923 3,630,172
Shares reacquired................ (1,680,122) (30,855,405)
----------- -------------
Net increase in shares
outstanding.................... 683,549 $ 13,269,470
=========== =============
March 1, 1996* through
October 31, 1996:
Shares sold...................... 3,294,056 $ 49,032,416
Shares issued in reinvestment of
dividends and distributions.... 39,927 610,734
Shares reacquired................ (448,479) (6,784,157)
----------- -------------
Net increase in shares
outstanding.................... 2,885,504 $ 42,858,993
=========== =============
- ---------------
* Commencement of offering of Class Z shares.
</TABLE>
- ------------------------------------------------------------
Note 7. Dividends
On December 5, 1997 the Board of Trustees of the Fund declared the following
dividends per share, payable on December 15, 1997 to shareholders of record on
December 10, 1997.
<TABLE>
<CAPTION>
Class Class B Class
A and C Z
--------- --------- ------
<S> <C> <C> <C>
Ordinary Income................... $ .12 $ .0825 $.1325
Long-Term Capital Gains........... $1.89 $ 1.89 $ 1.89
</TABLE>
- --------------------------------------------------------------------------------
B-51
<PAGE>
Financial Highlights PRUDENTIAL EQUITY INCOME FUND
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
------------------------------------------------------------
Year Ended October 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year..................... $ 15.43 $ 14.40 $ 14.03 $ 14.38 $ 12.16
-------- -------- -------- -------- --------
Income from investment operations
Net investment income.................................. .45 .47 .48 .41 .47
Net realized and unrealized gain on investment
transactions........................................ 6.29 1.75 .95 .06 2.65
-------- -------- -------- -------- --------
Total from investment operations.................... 6.74 2.22 1.43 .47 3.12
-------- -------- -------- -------- --------
Less distributions
Dividends from net investment income................... (.43) (.49) (.54) (.29) (.46)
Distributions from net realized gains.................. (.74) (.70) (.52) (.53) (.44)
-------- -------- -------- -------- --------
Total distributions................................. (1.17) (1.19) (1.06) (.82) (.90)
-------- -------- -------- -------- --------
Net asset value, end of year........................... $ 21.00 $ 15.43 $ 14.40 $ 14.03 $ 14.38
======== ======== ======== ======== ========
TOTAL RETURN(a):....................................... 45.68% 15.97% 11.15% 3.48% 26.93%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000).......................... $570,146 $341,717 $276,990 $150,502 $104,017
Average net assets (000)............................... $454,892 $310,335 $236,688 $131,398 $ 70,895
Ratios to average net assets:
Expenses, including distribution fees............... .94% .98% 1.03% 1.09% 1.07%
Expenses, excluding distribution fees............... .69% .73% .78% .85% .87%
Net investment income............................... 2.32% 3.26% 3.36% 2.97% 3.44%
For Class A, B, C and Z shares:
Portfolio turnover rate................................ 36% 36% 74% 70% 57%
Average commission rate paid per share................. $ .0488 $ .0563 N/A N/A N/A
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-52
<PAGE>
Financial Highlights PRUDENTIAL EQUITY INCOME FUND
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
--------------------------------------------------------------
Year Ended October 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year..................... $ 15.39 $ 14.36 $ 14.00 $ 14.35 $ 12.14
---------- -------- -------- -------- --------
Income from investment operations
Net investment income.................................. .29 .39 .37 .31 .37
Net realized and unrealized gain on investment
transactions........................................ 6.29 1.71 .95 .06 2.64
---------- -------- -------- -------- --------
Total from investment operations.................... 6.58 2.10 1.32 .37 3.01
---------- -------- -------- -------- --------
Less distributions
Dividends from net investment income................... (.30) (.37) (.44) (.19) (.36)
Distributions from net realized gains.................. (.74) (.70) (.52) (.53) (.44)
---------- -------- -------- -------- --------
Total distributions................................. (1.04) (1.07) (.96) (.72) (.80)
---------- -------- -------- -------- --------
Net asset value, end of year........................... $ 20.93 $ 15.39 $ 14.36 $ 14.00 $ 14.35
========== ======== ======== ======== ========
TOTAL RETURN(a):....................................... 44.60% 15.12% 10.29% 2.73% 25.93%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000).......................... $1,250,216 $929,948 $906,793 $954,951 $527,868
Average net assets (000)............................... $1,072,118 $951,220 $911,856 $784,063 $304,898
Ratios to average net assets:
Expenses, including distribution fees............... 1.69% 1.73% 1.78% 1.85% 1.87%
Expenses, excluding distribution fees............... .69% .73% .78% .85% .87%
Net investment income............................... 1.60% 2.51% 2.66% 2.21% 2.58%
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-53
<PAGE>
Financial Highlights PRUDENTIAL EQUITY INCOME FUND
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
----------------------------------------------------------
Year August 1,
Ended 1994(c)
October 31, Through
------------------------------------------ October 31,
1997 1996 1995 1994
<S> <C> <C> <C> <C>
--------- ----------- ----------- -----------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................... $ 15.39 $ 14.36 $ 14.00 $ 13.99
--------- ------- ------- -------
Income from investment operations
Net investment income.................................. .37 .38 .40 .08
Net realized and unrealized gain (loss) on investment
transactions........................................ 6.21 1.72 .92 (.02)
--------- ------- ------- -------
Total from investment operations.................... 6.58 2.10 1.32 .06
--------- ------- ------- -------
Less distributions
Dividends from net investment income................... (.30) (.37) (.44) (.05)
Distributions from net realized gains.................. (.74) (.70) (.52) --
--------- ------- ------- -------
Total distributions................................. (1.04) (1.07) (.96) (.05)
--------- ------- ------- -------
Net asset value, end of period......................... $ 20.93 $ 15.39 $ 14.36 $ 14.00
======== ======= ======= =======
TOTAL RETURN(a):....................................... 44.60% 15.12% 10.29% 0.45%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........................ $ 17,911 $ 8,511 $ 4,586 $ 1,527
Average net assets (000)............................... $ 11,432 $ 6,730 $ 3,132 $ 762
Ratios to average net assets:
Expenses, including distribution fees............... 1.69% 1.73% 1.78% 2.05%(b)
Expenses, excluding distribution fees............... .69% .73% .78% 1.05%(b)
Net investment income............................... 1.53% 2.51% 2.57% 2.42%(b)
<CAPTION>
Class Z
---------------------------
March 1,
Year 1996(d)
Ended Through
October 31, October 31,
1997 1996
----------- -----------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................... $ 15.42 $ 15.13
------- -------
Income from investment operations
Net investment income.................................. .36 .38
Net realized and unrealized gain (loss) on investment
transactions........................................ 6.43 .30
------- -------
Total from investment operations.................... 6.79 .68
------- -------
Less distributions
Dividends from net investment income................... (.47) (.39)
Distributions from net realized gains.................. (.74) --
------- -------
Total distributions................................. (1.21) (.39)
------- -------
Net asset value, end of period......................... $ 21.00 $ 15.42
======= =======
TOTAL RETURN(a):....................................... 46.12% 4.55%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........................ $74,956 $44,509
Average net assets (000)............................... $57,369 $24,641
Ratios to average net assets:
Expenses, including distribution fees............... .69% .73%(b)
Expenses, excluding distribution fees............... .69% .73%(b)
Net investment income............................... 2.58% 3.51%(b)
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions.
(b) Annualized.
(c) Commencement of offering of Class C shares.
(d) Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-54
<PAGE>
Report of Independent Accountants PRUDENTIAL EQUITY INCOME FUND
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
Prudential Equity Income Fund
1177 Avenue of the Americas
New York, New York
December 19, 1997
- --------------------------------------------------------------------------------
B-55
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE SHAREHOLDER AND BOARD OF TRUSTEES OF PRUDENTIAL EQUITY INCOME FUND:
We have audited the accompanying statements of changes in net assets of
Prudential Equity Income Fund for the year ended October 31, 1996, and the
financial highlights contained in the prospectus for each of the periods
presented. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express
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. 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 changes in net assets and the
financial highlights of Prudential Equity Income Fund for the respective stated
periods in conformity with generally accepted accounting principles.
New York, New York
December 5, 1996
<PAGE>
Portfolio of Investments as
of April 30, 1998 (Unaudited) PRUDENTIAL EQUITY INCOME FUND
- -----------------------------------------------------------------------
Shares Description Value (Note 1)
- -----------------------------------------------------------------------
LONG-TERM INVESTMENTS--97.7%
COMMON STOCKS--92.8%
- -----------------------------------------------------------------------
Airlines--3.1%
483,000 AMR Corp.(a) $ 73,597,125
- -----------------------------------------------------------------------
Aluminum--5.0%
977,300 Aluminum Co. of America 75,740,750
309,820 Kaiser Aluminum Corp.(a) 3,233,746
642,984 Reynolds Metals Co. 42,436,944
---------------
121,411,440
- -----------------------------------------------------------------------
Apparel--0.8%
572,700 Kellwood Co. 18,290,606
40,800 Oxford Industries, Inc. 1,453,500
---------------
19,744,106
- -----------------------------------------------------------------------
Automobiles & Trucks--5.2%
1,493,558 Chrysler Corp. 60,022,362
750,000 Ford Motor Co. 34,359,375
450,000 General Motors Corp. 30,318,750
---------------
124,700,487
- -----------------------------------------------------------------------
Building & Construction--1.4%
630,300 Kaufman & Broad Home Corp. 18,318,094
750,000 Ryland Group, Inc. 15,703,125
---------------
34,021,219
- -----------------------------------------------------------------------
Business Services--0.2%
161,780 Crescent Operating, Inc.(a) 3,538,938
- -----------------------------------------------------------------------
Chemicals--5.3%
1,015,800 Dow Chemical Co. 98,215,162
856,628 Millennium Chemicals, Inc. 30,731,530
---------------
128,946,692
Computer Hardware--1.4%
496,500 Digital Equipment Corp.(a) $ 27,617,812
719,800 Intergraph Corp.(a) 6,118,300
---------------
33,736,112
- -----------------------------------------------------------------------
Diversfied Consumer Products--0.7%
219,200 Eastman Kodak Co. 15,823,500
- -----------------------------------------------------------------------
Diversified Industries--2.1%
1,451,555 CBS Corp. 51,711,647
- -----------------------------------------------------------------------
Electrical Equipment--2.4%
602,000 Esterline Technologies Corp.(a) 13,846,000
154,800 Instron Corp. 2,979,900
700,000 Kuhlman Corp. 34,300,000
364,400 Newport Corp. 7,424,650
---------------
58,550,550
- -----------------------------------------------------------------------
Energy Systems--3.4%
1,986,600 McDermott International, Inc. 82,195,575
- -----------------------------------------------------------------------
Financial Services--11.1%
196,563 Associates First Capital Corp. 14,680,799
959,577 Bear Stearns Cos., Inc. 54,755,863
220,000 Dun & Bradstreet Corp. 7,810,000
325,800 Edwards (A.G.), Inc. 14,661,000
1,612,000 Lehman Brothers Holdings, Inc. 114,552,750
1,324,500 PaineWebber Group, Inc. 59,354,156
29,232 Travelers Group, Inc. 1,788,633
---------------
267,603,201
- -----------------------------------------------------------------------
Forest & Paper--3.2%
72,600 Fletcher Challenge Forest Ltd. ADR
(New Zealand) 485,512
392,400 Georgia-Pacific Corp. 30,288,375
- -----------------------------------------------------------------------
See Notes to Financial Statements.
B-57
<PAGE>
Portfolio of Investments as
of April 30, 1998 (Unaudited) PRUDENTIAL EQUITY INCOME FUND
- -----------------------------------------------------------------------
Shares Description Value (Note 1)
- -----------------------------------------------------------------------
Forest & Paper (cont'd.)
1,096,400 Louisiana-Pacific Corp. $ 23,983,750
206,800 Potlatch Corp. 9,797,150
200,000 Weyerhaeuser Co. 11,525,000
---------------
76,079,787
- -----------------------------------------------------------------------
Gas Distribution--1.0%
914,467 BG PLC, S.A. ADR
(United Kingdom) 24,404,838
- -----------------------------------------------------------------------
Gas Pipelines--1.4%
1,830,500 NOVA Corp. 20,821,937
280,100 Sonat, Inc. 12,429,438
---------------
33,251,375
- -----------------------------------------------------------------------
Insurance--3.4%
586,200 Marsh & McLennan Cos., Inc. 53,417,475
393,400 Ohio Casualty Corp. 19,030,725
356,800 Selective Insurance Group, Inc. 9,812,000
---------------
82,260,200
- -----------------------------------------------------------------------
Integrated Producers--1.8%
676,000 Elf Aquitaine, S.A. ADR (France) 43,897,750
- -----------------------------------------------------------------------
Mining--0.4%
700,000 Ashanti Goldfields Co. Ltd. GDR
(Africa) 6,912,500
194,678 Coeur D'Alene Mines Corp.(a) 2,275,299
298,499 Echo Bay Mines, Ltd.(a) 1,063,403
37,500 Zeigler Coal Holding Company 677,344
---------------
10,928,546
- -----------------------------------------------------------------------
Miscellaneous Industrial--2.2%
1,796,000 Hanson PLC, S.A. ADR
(United Kingdom) 53,206,500
- -----------------------------------------------------------------------
Oil & Gas Exploration/Production--3.1%
1,000,000 Occidental Petroleum Corp. 29,437,500
1,896,527 Pioneer Natural Resources Co. 45,398,115
---------------
74,835,615
Oil Refining & Marketing--1.1%
1,500,000 Quaker State Corp. $ 27,093,750
- -----------------------------------------------------------------------
Paper & Packaging--1.2%
759,900 Gibson Greetings Inc.(a) 19,876,135
486,300 Longview Fibre Co. 8,236,706
---------------
28,112,841
- -----------------------------------------------------------------------
Realty Investment Trust--13.6%
271,000 AMLI Residential Properties
Trust 6,216,063
134,300 Bradley Real Estate, Inc. 2,795,119
590,000 Capital Automotive REIT 9,181,875
718,700 CCA Prison Realty Trust 25,468,931
1,817,800 Crescent Real Estate Equities,
Inc. 62,032,425
1,266,500 Crown American Realty Trust 12,823,313
200,000 Equity Inns, Inc. 2,950,000
559,426 Equity Office Properties Trust 15,908,677
1,605,100 Equity Residential Properties
Trust 78,850,537
543,900 Gables Residential Trust 14,821,275
530,300 Glimcher Realty Trust 11,268,875
500,000 Haagen (Alexander) Properties,
Inc. 8,093,750
388,100 Irvine Apartment Communities,
Inc. 11,861,306
34,900 JDN Realty Corp. 1,110,256
96,000 JP Realty, Inc. 2,322,000
62,550 Kimco Realty Corp. 2,318,259
230,000 Malan Realty Investors, Inc. 4,053,750
410,300 Manufactured Home Communities,
Inc. 10,360,075
62,600 Pennsylvania Real Estate
Investment Trust 1,486,750
190,427 Security Capital Pacific Trust 4,260,804
16,800 Simon De Bartolo Group, Inc. 553,350
198,700 Sunstone Hotel Investors, Inc. 3,079,850
166,600 Tri Net Corporate Realty Trust,
Inc. 5,966,363
533,400 Vornado Realty Trust 21,369,337
355,000 Walden Residential Properties,
Inc. 8,653,125
---------------
327,806,065
- -----------------------------------------------------------------------
See Notes to Financial Statements.
B-58
<PAGE>
Portfolio of Investments as
of April 30, 1998 (Unaudited) PRUDENTIAL EQUITY INCOME FUND
- -----------------------------------------------------------------------
Shares Description Value (Note 1)
- -----------------------------------------------------------------------
Retail--5.2%
1,509,300 The Limited, Inc. $ 50,655,881
80,500 Blair Corp. 2,223,813
1,099,300 Heilig-Meyers Co. 15,458,906
758,400 Penney (J.C.) Co., Inc. 53,893,800
66,300 Tandy Corp. 3,298,425
---------------
125,530,825
- -----------------------------------------------------------------------
Steel--3.0%
1,866,900 USX-U.S. Steel Group, Inc. 73,042,462
- -----------------------------------------------------------------------
Telecommunication Services--2.9%
359,600 Telebras ADR 43,803,775
470,200 Telefonos de Mexico, S.A. ADR
(Mexico) 26,625,075
---------------
70,428,850
- -----------------------------------------------------------------------
Tobacco--3.7%
606,500 B.A.T Industries PLC, ADR
(United
Kingdom) 11,788,844
548,200 Imperial Tobacco Group PLC,
ADR(a) (United Kingdom) 7,674,800
2,487,420 RJR Nabisco Holdings Corp. 69,181,368
---------------
88,645,012
- -----------------------------------------------------------------------
Trucking & Shipping--0.5%
287,950 Alexander & Baldwin, Inc. 8,242,569
190,500 Yellow Corp.(a) 3,417,094
---------------
11,659,663
- -----------------------------------------------------------------------
Waste Management--2.2%
1,546,900 Waste Management, Inc. 51,821,150
- -----------------------------------------------------------------------
Wood Processing--0.8%
396,700 Rayonier, Inc. 19,884,588
---------------
Total common stocks
(cost $1,532,672,488) 2,238,470,409
---------------
PREFERRED STOCKS--3.9%
- -----------------------------------------------------------------------
Integrated Producers--0.1%
48,099 Unocal Capital Trust, Conv.
6.25% $ 2,789,742
- -----------------------------------------------------------------------
Manufacturing--0.2%
262,500 Worthington Industries, Inc.
Conv. 7.25% 3,953,906
- -----------------------------------------------------------------------
Mining--0.1%
60,000 Hecla Mining Co., Conv. 7.00%,
Ser. B 2,670,000
- -----------------------------------------------------------------------
Realty Investment Trust--0.1%
Security Capital Pacific Trust,
54,600 Conv. $1.75, Ser. A 1,627,763
- -----------------------------------------------------------------------
Retail--2.1%
768,000 K-Mart Financing I, Conv. 7.75% 50,496,000
- -----------------------------------------------------------------------
Steel--0.8%
250,800 Bethlehem Steel Corp., Conv.
$3.50 12,540,000
118,900 USX Capital Trust I, Conv.,
6.75% 6,071,331
---------------
18,611,331
- -----------------------------------------------------------------------
Transportation-Road & Rail--0.5%
243,900 Union Pacific Capital Trust 12,987,675
---------------
Total preferred stocks
(cost $86,581,224) 93,136,417
---------------
Units
- -----
WARRANTS(a)
- -----------------------------------------------------------------------
Engineering & Construction
Morrison Knudsen Corp.
12,044 expiring 3/11/03 @$12.00 60,220
- -----------------------------------------------------------------------
Realty Investment Trust
Security Capital Group-Class B
34,726 expiring 9/18/98 @$28.00 97,667
---------------
Total warrants
(cost $0) 157,887
---------------
- -----------------------------------------------------------------------
See Notes to Financial Statements.
B-59
<PAGE>
Portfolio of Investments as
of April 30, 1998 (Unaudited) PRUDENTIAL EQUITY INCOME FUND
- -----------------------------------------------------------------------
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
- -----------------------------------------------------------------------
CONVERTIBLE BONDS--0.6%
- -----------------------------------------------------------------------
Integrated Oil--0.1%
Oryx Energy Co., Sub.
Deb.,
Ba3 $1,871 7.50%, 5/15/14 $1,871,000
- -----------------------------------------------------------------------
Realty Investment Trust--0.2%
Haagen (Alexander)
Properties, Inc.,
Sub. Deb., Ser. A,
B2 700 7.50%, 1/15/01 696,766
Sub. Deb., Ser. B,
B2 1,200 7.50%, 1/15/01 1,194,456
Malan Realty Investors,
Inc.,
Sub. Deb.,
B3 3,800 9.50%, 7/15/04 3,895,000
--------------
5,786,222
- -----------------------------------------------------------------------
Retail--0.3%
Charming Shoppes, Inc.
B2 8,000 7.50%, 7/15/06 7,603,760
--------------
Total convertible bonds
(cost $15,481,951) 15,260,982
--------------
FOREIGN GOVERNMENT OBLIGATIONS--0.4%
New Zealand Gov't. Bonds,
NR NZ$15,580 8.00%, 4/15/04
(cost $10,819,084) $8,985,482
--------------
Total long-term
investments
(cost $1,645,554,747) 2,356,011,177
--------------
SHORT-TERM INVESTMENT--2.3%
- -----------------------------------------------------------------------
REPURCHASE AGREEMENT--2.3%
55,897 Joint Repurchase
Agreement Account
5.50%, 5/1/98,
(cost $55,897,000; Note
5) 55,897,000
--------------
- -----------------------------------------------------------------------
Total Investments--100.0%
(cost $1,701,451,747;
Note 4) 2,411,908,177
Other assets in excess of
liabilities 346,914
--------------
Net Assets--100% $2,412,255,091
==============
- ---------------
(a) Non-income producing security.
ADR--American Depository Receipt.
GDR--Global Depository Receipt.
NR--Not rated by Moody's or Standard & Poor's.
PLC--Public Limited Company.
The Fund's current Statement of Additional Information contains a
description of Moody's ratings.
- -----------------------------------------------------------------------
See Notes to Financial Statements.
B-60
<PAGE>
<TABLE>
<CAPTION>
Statement of Assets and Liabilities (Unaudited) PRUDENTIAL EQUITY INCOME FUND
- ---------------------------------------------------------------------------------------------------------------
Assets April 30, 1998
--------------
<S> <C>
Investments, at value (cost $1,701,451,747)................................................ $2,411,908,177
Foreign currency, at value (cost $343,913)................................................. 345,091
Cash....................................................................................... 284,229
Receivable for Fund shares sold............................................................ 6,024,377
Dividends and interest receivable.......................................................... 5,743,492
Receivable for investments sold............................................................ 2,867,815
Other assets............................................................................... 23,517
--------------
Total assets............................................................................ 2,427,196,698
--------------
Liabilities
Payable for investments purchased.......................................................... 7,135,635
Payable for Fund shares reacquired......................................................... 4,977,521
Distribution fee payable................................................................... 1,457,363
Management fee payable..................................................................... 986,110
Foreign withholding tax payable............................................................ 294,451
Accued expenses............................................................................ 90,527
--------------
Total liabilities....................................................................... 14,941,607
--------------
Net Assets................................................................................. $2,412,255,091
==============
Net assets were comprised of:
Shares of beneficial interest, at par................................................... $ 1,097,017
Paid-in capital in excess of par........................................................ 1,604,392,060
--------------
1,605,489,077
Distributions in excess of net investment income........................................ (1,912,595)
Accumulated net realized gains.......................................................... 98,220,512
Net unrealized appreciation on investments and foreign currencies....................... 710,458,097
--------------
Net assets, April 30, 1998................................................................. $2,412,255,091
==============
Class A:
Net asset value and redemption price per share
($732,523,179 / 33,239,656 shares of beneficial interest issued and outstanding)..... $22.04
Maximum sales charge (5% of offering price)............................................. 1.16
--------------
Maximum offering price to public........................................................ $23.20
==============
Class B:
Net asset value, offering price and redemption price per share
($1,559,893,326 / 71,020,154 shares of beneficial interest issued and outstanding)... $21.96
==============
Class C:
Net asset value, offering price and redemption price per share
($35,754,661 / 1,627,912 shares of beneficial interest issued and outstanding)....... $21.96
==============
Class Z:
Net asset value, offering price and redemption price per share
($84,083,925 / 3,814,016 shares of beneficial interest issued and outstanding)....... $22.05
==============
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
B-61
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
Statement of Operations (Unaudited)
- -----------------------------------------------------------------------
Six Months
Ended
Net Investment Income April 30, 1998
--------------
Income
Dividends (net of foreign withholding
taxes of $63,575)...................... $ 27,420,810
Interest.................................. 2,726,106
--------------
Total income........................... 30,146,916
--------------
Expenses
Management fee............................ 5,318,108
Distribution fee--Class A................. 793,483
Distribution fee--Class B................. 6,799,127
Distribution fee--Class C................. 124,823
Transfer agent's fees and expenses........ 1,003,000
Reports to shareholders................... 104,000
Custodian's fees and expenses............. 72,000
Registration fees......................... 54,500
Trustees' fees and expenses............... 18,000
Insurance................................. 13,000
Audit fee and expenses.................... 12,500
Legal fees and expenses................... 12,000
Miscellaneous............................. 4,500
--------------
Total expenses......................... 14,329,041
--------------
Net investment income........................ 15,817,875
--------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions................... 101,904,209
Foreign currency transactions............. (97,032)
--------------
101,807,177
--------------
Net change in unrealized appreciation on:
Investments............................... 203,947,147
Foreign currency transactions............. 17,310
--------------
203,964,457
--------------
Net gain on investments and foreign currency
transactions.............................. 305,771,634
--------------
Net Increase in Net Assets
Resulting from Operations.................... $321,589,509
==============
[CAPTION]
PRUDENTIAL EQUITY INCOME FUND
Statement of Changes in Net Assets (Unaudited)
- -----------------------------------------------------------------------
Six Months
Ended Year Ended
Increase (Decrease) April 30, October 31,
in Net Assets 1998 1997
---------- ------------
Operations
Net investment income....... $ 15,817,875 $ 29,370,366
Net realized gain on
investments and foreign
currency transactions.... 101,807,177 184,439,985
Net change in unrealized
appreciation of
investments and foreign
currencies............... 203,964,457 363,934,627
-------------- --------------
Net increase in net assets
resulting from
operations............... 321,589,509 577,744,978
-------------- --------------
Dividends and distributions (Note 1)
Dividends from net investment income
Class A.................. (6,200,850) (10,388,275)
Class B.................. (8,461,394) (17,820,066)
Class C.................. (152,828) (186,974)
Class Z.................. (1,002,803) (1,432,974)
-------------- --------------
(15,817,875) (29,828,289)
-------------- --------------
Distributions in excess of
net investment income
Class A.................. (528,318) --
Class B.................. (720,919) --
Class C.................. (13,021) --
Class Z.................. (85,440) --
-------------- --------------
(1,347,698) --
-------------- --------------
Distributions from net realized gains
Class A.................. (54,361,373) (16,446,394)
Class B.................. (114,880,805) (44,123,354)
Class C.................. (1,798,135) (407,245)
Class Z.................. (8,584,415) (2,197,282)
-------------- --------------
(179,624,728) (63,174,275)
-------------- --------------
Fund share transactions (net of
share conversions) (Note 6)
Proceeds from shares sold... 576,410,828 699,979,865
Net asset value of shares
issued in reinvestment of
dividends and
distributions............ 180,974,312 84,965,746
Cost of shares reacquired... (383,158,305) (681,144,020)
-------------- --------------
Net increase in net assets
from Fund share
transactions............. 374,226,835 103,801,591
-------------- --------------
Total increase................. 499,026,043 588,544,005
Net Assets
Beginning of period............ 1,913,229,048 1,324,685,043
-------------- --------------
End of period.................. $2,412,255,091 $1,913,229,048
============== ==============
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-62
<PAGE>
Notes to Financial Statements (Unaudited) PRUDENTIAL EQUITY INCOME FUND
- --------------------------------------------------------------------------------
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 Policies
The following is a summary 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 or at the
bid price in the absence of an asked price. 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. Securities which are otherwise not readily marketable or
securities for which market quotations are not readily available are valued in
good faith at fair value in accordance with procedures adopted by the Fund's
Board of Trustees.
Short-term securities which mature in more than 60 days are valued based upon
current market quotations. Short-term securities which mature in 60 days or less
are valued at amortized cost which approximates market value.
In connection with transactions in repurchase agreements, it is the Fund's
policy that its custodian or designated subcustodians under triparty repurchase
agreements, as the case may be, take possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. If the seller defaults and the value of
the collateral declines or if bankruptcy proceedings are commenced with respect
to the seller of the security, realization of the collateral by the Fund may be
delayed or limited.
Foreign Currency Translation: The books and records of the Fund are maintained
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on
the following basis:
(i) market value of investment securities, other assets and liabilities--at the
current rates of exchange;
(ii) purchases and sales of investment securities, income and expenses--at the
rates of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the period, the Fund does not isolate that
portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of the securities held at period end. Similarly, the Fund does not
isolate the effect of changes in foreign exchange rates from the fluctuations
arising from changes in the market prices of long-term debt securities sold
during the period. Accordingly, such realized foreign currency gains and losses
are included in the reported net realized gains/losses on investment
transactions.
Net realized losses on foreign currency transactions of $97,032 represents net
foreign exchange gains and losses from sales and maturities of short-term
securities and forward currency contracts, holding of foreign currencies,
currency gains or losses realized between the trade and settlement dates on
securities transactions, and the difference between the amounts of interest and
foreign taxes recorded on the Fund's books and the U.S. dollar equivalent
amounts actually received or paid. Net currency gains and losses from valuing
foreign currency denominated assets (excluding investments) and liabilities at
period end exchange rates are reflected as a component of net unrealized
appreciation/depreciation on investments and foreign currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of U.S. companies as a result of,
among other factors, the possibility of political or economic instability and
the level of governmental supervision and regulation of foreign securities
markets.
Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date; interest income is recorded on the accrual basis. Expenses are
recorded on the accrual basis which may require the use of certain estimates by
management.
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.
- --------------------------------------------------------------------------------
B-63
<PAGE>
Notes to Financial Statements (Unaudited) PRUDENTIAL EQUITY INCOME FUND
- --------------------------------------------------------------------------------
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 treatment of
distributions from Real Estate Investment Trusts.
Reclassification of Capital Accounts: The Fund accounts for and reports
distributions to shareholders in accordance with American Institute of Certified
Public Accountants (AICPA) Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to decrease accumulated net realized gains on investments and
increase net unrealized appreciation on investments by $192,220. Net investment
income, net realized gains and net assets were not affected by these changes.
- --------------------------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM has entered into a subadvisory agreement with The Prudential
Investment Corporation ('PIC'); PIC furnishes investment advisory services in
connection with the management of the Fund. PIFM pays for the cost of the
subadviser's services, the compensation of officers of the Fund, occupancy and
certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PIFM is computed daily and payable monthly at an annual
rate of .60 of 1% of the Fund's average daily net assets up to $500 million, .50
of 1% of the next $500 million, .475 of 1% of the next $500 million and .45 of
1% of the average daily net assets in excess of $1.5 billion.
The Fund has a distribution agreement with Prudential Securities Incorporated
('PSI'), which acts as the distributor of the Class A, Class B, Class C and
Class Z shares of the Fund. The Fund compensates PSI for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution (the 'Class A, B and C Plans') regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
No distribution or service fees are paid to PSI as distributor for Class Z
shares of the Fund. Effective July 1, 1998 Prudential Investment Management
Services LLC will become the distributor of the Fund and will serve the Fund
under the same terms and conditions as under the arrangement with PSI.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%,
of the average daily net assets of the Class A, B and C shares, respectively.
Such expenses under the Plans were .25 of 1% of the average daily net assets of
Class A shares and 1% of the average daily net assets of both the Class B and C
shares for the six months ended April 30, 1998.
PSI has advised the Fund that it has received approximately $1,263,200 in
front-end sales charges resulting from sales of Class A shares during the six
months ended April 30, 1998. From these fees, PSI paid such sales charges to
dealers, which in turn paid commissions to salespersons and incurred other
distribution costs.
PSI has advised the Fund that for the six months ended April 30, 1998, it
received approximately $551,000 and $7,400 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PSI, PIFM and PIC are indirect, wholly owned subsidiaries of The Prudential
Insurance Company of America.
The Fund, along with other affiliated registered investment companies (the
"Funds"), entered into a credit agreement (the "Agreement") on December 31, 1996
with an unaffiliated lender. The maximum commitment under the Agreement is
$200,000,000. Interest on any such borrowings outstanding will be at market
rates. The purpose of the Agreement is to serve as an alternative source of
funding for capital share redemptions. The Fund did not borrow any amounts
pursuant to the Agreement during the six months ended April 30, 1998. The Funds
pay a commitment fee at an annual rate of .055 of 1% on the unused portion of
the credit facility. The commitment fee is accrued and paid quarterly on a pro
rata basis by the Funds. The Agreement expired on December 30, 1997 and has been
extended through December 29, 1998 under the same terms.
- --------------------------------------------------------------------------------
B-64
<PAGE>
Notes to Financial Statements (Unaudited) PRUDENTIAL EQUITY INCOME FUND
- --------------------------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent and during the six months ended April 30,
1998, the Fund incurred fees of approximately $1,000,000 for the services of
PMFS. As of April 30, 1998, approximately $204,500 of such fees were due to
PMFS. Transfer agent fees and expenses in the Statement of Operations include
certain out-of-pocket expenses paid to nonaffiliates.
For the six months ended April 30, 1998, PSI earned approximately $64,100 in
brokerage commissions from portfolio transactions executed on behalf of the
Fund.
- --------------------------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the six months ended April 30, 1998 were $476,912,543 and $261,307,216,
respectively.
The cost basis of investments for federal income tax purposes at April 30, 1998
was $1,701,451,747 and, accordingly, net unrealized appreciation for federal
income tax purposes was $710,456,430 (gross unrealized
appreciation--$746,494,985; gross unrealized depreciation--$36,038,555).
- --------------------------------------------------------------------------------
Note 5. Joint Repurchase Agreement Account
The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Treasury or Federal agency obligations. As of April 30, 1998, the Fund
had a 4.87% undivided interest in repurchase agreements in the joint account.
The undivided interest for the Fund represented $55,897,000 in principal amount.
As of such date, each repurchase agreement in the joint account and the value of
the collateral therefor were as follows:
Bear, Stearns & Co. Inc., 5.53%, in the principal amount of $310,000,000,
repurchase price $310,047,619, due 5/1/98. The value of the collateral including
accrued interest was $316,688,713.
Credit Suisse First Boston Corp., 5.54%, in the principal amount of
$310,000,000, repurchase price $310,047,706, due 5/1/98. The value of the
collateral including accrued interest was $321,763,994.
J.P. Morgan Securities, Inc., 5.53%, in the principal amount of $310,000,000,
repurchase price $310,047,619, due 5/1/98. The value of the collateral including
accrued interest was $316,200,983.
UBS Securities LLC, 5.375%, in the principal amount of $218,770,000, repurchase
price $218,802,664, due 5/1/98. The value of the collateral including accrued
interest was $223,146,143.
- --------------------------------------------------------------------------------
Note 6. Capital
The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are
sold with a front-end sales charge of up to 5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a contingent
deferred sales charge of 1% during the first year. Class B shares will
automatically convert to Class A shares on a quarterly basis approximately seven
years after purchase. Special exchange privileges are also available for
shareholders who qualify to purchase Class A shares at net asset value or Class
Z shares. Class Z shares are not subject to any sales or redemption charge and
are offered exclusively for sale to a limited group of investors.
The Fund has authorized an unlimited number of shares of beneficial interest at
$.01 par value divided into four classes, designated Class A, Class B, Class C
and Class Z.
Transactions in shares of beneficial interest were as follows:
Class A Shares Amount
- ------- ------ ------
Six months ended April 30, 1998:
Shares sold...................... 10,792,790 $ 224,136,877
Shares issued in reinvestment of
dividends and distributions.... 2,874,412 56,689,346
Shares reacquired................ (8,603,749) (175,726,982)
----------- -------------
Net increase in shares
outstanding before
conversion..................... 5,063,453 105,099,241
Shares issued upon conversion
and/or exchange from Class B... 1,024,859 20,788,919
----------- -------------
Net increase in shares
outstanding.................... 6,088,312 $ 125,888,160
=========== =============
Year ended October 31, 1997:
Shares sold...................... 24,088,902 $ 429,955,821
Shares issued in reinvestment of
dividends and distributions.... 1,457,169 24,726,140
Shares reacquired................ (23,710,223) (422,399,190)
----------- -------------
Net increase in shares
outstanding before
conversion..................... 1,835,848 32,282,771
Shares issued upon conversion
and/or exchange from Class B... 3,168,790 57,758,918
----------- -------------
Net increase in shares
outstanding.................... 5,004,638 $ 90,041,689
=========== =============
- --------------------------------------------------------------------------------
B-65
<PAGE>
Notes to Financial Statements (Unaudited) PRUDENTIAL EQUITY INCOME FUND
- --------------------------------------------------------------------------------
Class B Shares Amount
- ------- ------ ------
Six months ended April 30, 1998:
Shares sold...................... 13,185,047 $ 272,684,789
Shares issued in reinvestment of
dividends and distributions.... 5,739,813 112,732,028
Shares reacquired................ (6,597,071) (135,954,614)
----------- -------------
Net increase in shares
outstanding before
conversion..................... 12,327,789 249,462,203
Shares reacquired upon conversion
and/or exchange into Class A... (1,028,303) (20,788,919)
----------- -------------
Net increase in shares
outstanding.................... 11,299,486 $ 228,673,284
=========== =============
Year ended October 31, 1997:
Shares sold...................... 11,692,362 $ 220,160,621
Shares issued in reinvestment of
dividends and distributions.... 3,363,615 56,041,561
Shares reacquired................ (12,575,129) (224,049,253)
============ ==============
Net increase in shares
outstanding before
conversion..................... 2,480,848 52,152,929
Shares reacquired upon conversion
and/or exchange into Class A... (3,179,464) (57,758,918)
----------- -------------
Net decrease in shares
outstanding.................... (698,616) $ (5,605,989)
=========== =============
Class C
- -------
Six months ended April 30, 1998:
Shares sold...................... 831,950 $ 17,312,533
Shares issued in reinvestment of
dividends and distributions.... 96,048 1,888,496
Shares reacquired................ (155,731) (3,248,868)
----------- -------------
Net increase in shares
outstanding.................... 772,267 $ 15,952,161
=========== =============
Class C Shares Amount
- ------- ------ ------
Year ended October 31, 1997:
Shares sold...................... 479,888 $ 9,368,720
Shares issued in reinvestment of
dividends and distributions.... 33,855 567,873
Shares reacquired................ (211,033) (3,840,172)
----------- -------------
Net increase in shares
outstanding.................... 302,710 $ 6,096,421
=========== =============
Class Z
- -------
Six months ended April 30, 1998:
Shares sold...................... 2,997,588 $ 62,276,629
Shares issued in reinvestment of
dividends and distributions.... 490,185 9,664,442
Shares reacquired................ (3,242,810) (68,227,841)
----------- -------------
Net increase in shares
outstanding.................... 244,963 $ 3,713,230
=========== =============
Year ended October 31, 1997:
Shares sold...................... 2,149,748 $ 40,494,703
Shares issued in reinvestment of
dividends and distributions.... 213,923 3,630,172
Shares reacquired................ (1,680,122) (30,855,405)
----------- -------------
Net increase in shares
outstanding.................... 683,549 $ 13,269,470
=========== =============
- --------------------------------------------------------------------------------
Note 7. Dividends
On June 22, 1998 the Board of Trustees of the Fund declared the following
dividends per share, payable on June 30, 1998 to shareholders of record on June
25, 1998.
Class Class B Class
A and C Z
--------- --------- ------
Ordinary Income................... $0.10 $ 0.06 $ 0.11
- --------------------------------------------------------------------------------
B-66
<PAGE>
Financial Highlights (Unaudited) PRUDENTIAL EQUITY INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
-----------------------------------------------------------------------------
Six Months
Ended Year Ended October 31,
April 30, ------------------------------------------------------------
1998 1997 1996 1995 1994 1993
------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 21.00 $ 15.43 $ 14.40 $ 14.03 $ 14.38 $ 12.16
------------ -------- -------- -------- -------- --------
Income from investment operations
Net investment income................... .21 .45 .47 .48 .41 .47
Net realized and unrealized gain on
investment transactions.............. 2.94 6.29 1.75 .95 .06 2.65
------------ -------- -------- -------- -------- --------
Total from investment operations..... 3.15 6.74 2.22 1.43 .47 3.12
------------ -------- -------- -------- -------- --------
Less distributions
Dividends from net investment income.... (.22) (.43) (.49) (.54) (.29) (.46)
Distributions from net realized gains... (1.89) (.74) (.70) (.52) (.53) (.44)
------------ -------- -------- -------- -------- --------
Total distributions.................. (2.11) (1.17) (1.19) (1.06) (.82) (.90)
------------ -------- -------- -------- -------- --------
Net asset value, end of period.......... $ 22.04 $ 21.00 $ 15.43 $ 14.40 $ 14.03 $ 14.38
------------ -------- -------- -------- -------- --------
------------ -------- -------- -------- -------- --------
TOTAL RETURN(a):........................ 16.24% 45.68% 15.97% 11.15% 3.48% 26.93%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $732,523 $570,146 $341,717 $276,990 $150,502 $104,017
Average net assets (000)................ $640,047 $454,892 $310,335 $236,688 $131,398 $ 70,895
Ratios to average net assets:
Expenses, including distribution
fees.............................. .88%(b) .94% .98% 1.03% 1.09% 1.07%
Expenses, excluding distribution
fees.............................. .63%(b) .69% .73% .78% .85% .87%
Net investment income................ 1.98%(b) 2.32% 3.26% 3.36% 2.97% 3.44%
For Class A, B, C and Z shares:
Portfolio turnover rate................. 13% 36% 36% 74% 70% 57%
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(b) Annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-67
<PAGE>
Financial Highlights (Unaudited) PRUDENTIAL EQUITY INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
---------------------------------------------------------------------------------
Six Months
Ended Year Ended October 31,
April 30, ----------------------------------------------------------------
1998 1997 1996 1995 1994 1993
------------ ---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 20.93 $ 15.39 $ 14.36 $ 14.00 $ 14.35 $ 12.14
------------ ---------- ---------- -------- -------- --------
Income from investment operations
Net investment income................... .13 .29 .39 .37 .31 .37
Net realized and unrealized gain on
investment transactions.............. 2.93 6.29 1.71 .95 .06 2.64
------------ ---------- ---------- -------- -------- --------
Total from investment operations..... 3.06 6.58 2.10 1.32 .37 3.01
------------ ---------- ---------- -------- -------- --------
Less distributions
Dividends from net investment income.... (.14) (.30) (.37) (.44) (.19) (.36)
Distributions from net realized gains... (1.89) (.74) (.70) (.52) (.53) (.44)
------------ ---------- ---------- -------- -------- --------
Total distributions.................. (2.03) (1.04) (1.07) (.96) (.72) (.80)
------------ ---------- ---------- -------- -------- --------
Net asset value, end of period.......... $ 21.96 $ 20.93 $ 15.39 $ 14.36 $ 14.00 $ 14.35
============ ========== ========== ======== ======== ========
TOTAL RETURN(a):........................ 15.81% 44.60% 15.12% 10.29% 2.73% 25.93%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $1,559,893 $1,250,216 $ 929,948 $906,793 $954,951 $527,868
Average net assets (000)................ $1,371,095 $1,072,118 $ 951,220 $911,856 $784,063 $304,898
Ratios to average net assets:
Expenses, including distribution
fees.............................. 1.63%(b) 1.69% 1.73% 1.78% 1.85% 1.87%
Expenses, excluding distribution
fees.............................. .63%(b) .69% .73% .78% .85% .87%
Net investment income................ 1.23%(b) 1.60% 2.51% 2.66% 2.21% 2.58%
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(b) Annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-68
<PAGE>
Financial Highlights (Unaudited) PRUDENTIAL EQUITY INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
-------------------------------------------------------------------------
August 1,
Six Months 1994(c)
Ended Year Ended October 31, Through
April 30, ---------------------------------------- October 31,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------ -----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 20.93 $ 15.39 $14.36 $14.00 $ 13.99
------------ ------ ----- ------ -----
Income from investment operations
Net investment income................... .14 .37 .38 .40 .08
Net realized and unrealized gain (loss)
on investment transactions........... 2.92 6.21 1.72 .92 (.02)
------------ ------ ----- ------ -----
Total from investment operations..... 3.06 6.58 2.10 1.32 .06
------------ ------ ----- ------ -----
Less distributions
Dividends from net investment income.... (.14) (.30) (.37) (.44) (.05)
Distributions from net realized gains... (1.89) (.74) (.70) (.52) --
------------ ------ ----- ------ -----
Total distributions.................. (2.03) (1.04) (1.07) (.96) (.05)
------------ ------ ----- ------ -----
Net asset value, end of period.......... $ 21.96 $ 20.93 $15.39 $14.36 $ 14.00
============ ====== ===== ====== =====
TOTAL RETURN(a):........................ 15.81% 44.60% 15.12% 10.29% 0.45%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $ 35,755 $ 17,911 $8,511 $4,586 $ 1,527
Average net assets (000)................ $ 25,172 $ 11,432 $6,730 $3,132 $ 762
Ratios to average net assets:
Expenses, including distribution
fees.............................. 1.63%(b) 1.69% 1.73% 1.78% 2.05%(b)
Expenses, excluding distribution
fees.............................. .63%(b) .69% .73% .78% 1.05%(b)
Net investment income................ 1.19%(b) 1.53% 2.51% 2.57% 2.42%(b)
<CAPTION>
Class Z
--------------------------------------------
March 1,
Six Months Year 1996(d)
Ended Ended Through
April 30, October 31, October 31,
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 21.00 $ 15.42 $ 15.13
------------ ----------- -----------
Income from investment operations
Net investment income................... .23 .36 .38
Net realized and unrealized gain (loss)
on investment transactions........... 2.95 6.43 .30
------------ ----------- -----------
Total from investment operations..... 3.18 6.79 .68
------------ ----------- -----------
Less distributions
Dividends from net investment income.... (.24) (.47) (.39)
Distributions from net realized gains... (1.89) (.74) --
------------ ----------- -----------
Total distributions.................. (2.13) (1.21) (.39)
------------ ----------- -----------
Net asset value, end of period.......... $ 22.05 $ 21.00 $ 15.42
============ =========== ===========
TOTAL RETURN(a):........................ 16.41% 46.12% 4.55%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $ 84,084 $74,956 $44,509
Average net assets (000)................ $ 96,879 $57,369 $24,641
Ratios to average net assets:
Expenses, including distribution
fees.............................. .63%(b) .69% .73%(b)
Expenses, excluding distribution
fees.............................. .63%(b) .69% .73%(b)
Net investment income................ 2.20%(b) 2.58% 3.51%(b)
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(b) Annualized.
(c) Commencement of offering of Class C shares.
(d) Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-69
<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 the best bonds 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 the 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. These obligations have an original
maturity not exceeding one year, unless explicitly noted.
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obliqations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
. Leading market positions in well-established industries.
. High rates of return on funds employed.
. Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
. Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
. Well-established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This normally
will be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
A-1
<PAGE>
STANDARD & POOR'S RATINGS GROUP
DEBT RATINGS
AAA: An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA: An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A: An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB: An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
BB, B, CCC AND CC: Obligations rated BB, B, CCC and CC are regarded as
having significant speculative characteristics. BB indicates the least degree
of speculation and CC the highest. While such obligations will likely have
some quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
COMMERCIAL PAPER RATINGS
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-1: This 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 this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
DUFF & PHELPS CREDIT RATING CO.
LONG-TERM DEBT AND PREFERRED STOCK RATINGS
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA: High credit quality. Protection factors are strong. Risk is modest but
may vary sightly from time to time because of economic conditions.
A: Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.
BBB: Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.
BB: Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B: Below investment grade and possessing risk that obligations will not be
met when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
Duff & Phelps refines each generic rating classification from AA through B
with a "+" or a "-".
CCC: Well below investment grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
SHORT-TERM DEBT RATINGS
DUFF 1 +: Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free U.S. Treasury short-
term obligations.
DUFF 1: Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk factors
are minor.
DUFF 1-: High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
DUFF 2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
A-2
<PAGE>
APPENDIX I--GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk, providing balance. Asset
allocation among different types of securities within an overall investment
portfolio helps to reduce risk and to potentially provide stable returns,
while enabling investors to work toward their financial goal(s). Asset
allocation is also a strategy to gain exposure to better performing asset
classes while maintaining investment in other asset classes.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable
returns. Owning a portfolio of securities mitigates the individual risks (and
returns) of any one security. Additionally, diversification among types of
securities reduces the risks (and general returns) of any one type of
security.
DURATION
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to
changes in interest rates. When interest rates fall, bond prices generally
rise. Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, i.e., principal and interest
rate payments. Duration is expressed as a measure of time in years--the longer
the duration of a bond (or a bond portfolio), the greater the impact of
interest rate changes on the bond's (or the bond portfolio's) price. Duration
differs from effective maturity in that duration takes into account call
provisions, coupon rates and other factors. Duration measures interest rate
risk only and not other risks, such as credit risk and, in the case of non-
U.S. dollar denominated securities, currency risk. Effective maturity measures
the final maturity dates of a bond (or a bond portfolio).
MARKET TIMING
Market timing--buying securities when prices are low and selling them when
prices are relatively higher--may not work for many investors because it is
impossible to predict with certainty how the price of a security will
fluctuate. However, owning a security for a long period of time may help
investors offset short-term price volatility and realize positive returns.
POWER OF COMPOUNDING
Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth
of assets. The long-term investment results of compounding may be greater than
that of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.
STANDARD DEVIATION
Standard deviation is an absolute (non-relative) measure of volatility
which, for a mutual fund, depicts how widely the returns varied over a certain
period of time. When a fund has a high standard deviation, its range of
performance has been very wide, implying greater volatility potential.
Standard deviation is only one of several measures of a fund's volatility.
I-1
<PAGE>
APPENDIX II--HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
The following chart shows the long-term performance of various asset classes
and the rate of inflation.
HISTORICAL PERFORMANCE DATA
Value of $1.00 invested on 1/1/26 through 12/31/97.
Small Stocks $5,519.97
Common Stocks 1,828.33
Long-Term Bonds 39.07
Treasury Bills 14.25
Inflation 9.02
Source: Stocks, Bonds, Bills, and Inflation 1998 Yearbook, Ibbotson
Associates, Chicago (annually updates work by Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. All rights reserved. This chart is for
illustrative purposes only and is not indicative of the past, present, or
future performance of any asset class or any Prudential Mutual Fund.
Generally, stock returns are due to capital appreciation and the reinvestment
of any gains. Bond returns are due to reinvesting interest. Also, stock prices
usually are more volatile than bond prices over the long-term. Small stock
returns for 1926-1980 are those of stocks comprising the 5th quintile of the
New York Stock Exchange. Thereafter, returns are those of the Dimensional Fund
Advisors (DFA) Small Company Fund. Common stock returns are based on the S&P
Composite Index, a market-weighted, unmanaged index 500 stocks (currently) in
a variety of industries. It is often used as a broad measure of stock market
performance.
Long-term government bond returns are measured using a constant one-bond
portfolio with a maturity of roughly 20 years. Treasury bill returns are for a
one-month bill. Treasuries are guaranteed by the government as to the timely
payment of principal and interest; equities are not. Inflation is measured by
the consumer price index (CPI).
II-1
<PAGE>
Set forth below is historical performance data relating to various sectors of
the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1987
through 1997. The total returns of the indices include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Fund or of any sector in which the
Fund invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees
of a mutual fund. See "Fund Expenses" in the prospectus. The net effect of the
deduction of the operating expenses of a mutual fund on these historical total
returns, including the compounded effect over time, could be substantial.
Historical Total Returns of Different Bond Market Sectors
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
YEAR 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
Treasury
Bonds/1/ 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% -3.4% 18.4% 2.7% 9.6%
- ------------------------------------------------------------------------------------------------------------
U.S. Government
Mortgage
Securities/2/ 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% -1.6% 16.8% 5.4% 9.5%
- ------------------------------------------------------------------------------------------------------------
U.S. Investment Grade
Corporate Bonds/3/ 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% -3.9% 22.3% 3.3% 10.2%
- ------------------------------------------------------------------------------------------------------------
U.S. High Yield
Corporate Bonds/4/ 5.0% 12.5% 0.8% -9.6% 46.2% 15.8% 17.1% -1.0% 19.2% 11.4% 12.8%
- ------------------------------------------------------------------------------------------------------------
World Government
Bonds/5/ 35.2% 2.3% -3.4% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1% (4.3%)
- ------------------------------------------------------------------------------------------------------------
Difference between
highest and lowest 33.2% 10.2% 18.8% 24.9% 30.9% 11.0% 10.3% 9.9% 5.5% 8.7% 17.1
returns percent
- ------------------------------------------------------------------------------------------------------------
</TABLE>
/1/ LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over
150 public issues of the U.S. Treasury having maturities of at least one year.
/2/ LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
/3/ LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year.
/4/ LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch
Investors Service). All bonds in the index have maturities of at least one
year.
/5/ SALOMON BROTHERS WORLD GOVERNMENT INDEX (NON U.S.) includes over 800 bonds
issued by various foreign governments or agencies, excluding those in the
U.S., but including those in Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.
II-2
<PAGE>
This chart shows the growth of a
This chart illustrates the hypothetical $10,000 investment made
performance of major world stock in the stocks representing the S&P
markets for the period from 500 stock index with and without
December 31, 1986 through December reinvested dividends.
31, 1997. It does not represent
the performance of any Prudential
Mutual Fund.
1969-1997
Capital Appreciation and
Average Annual Total Returns of Reinvesting Dividends $304,596
Major World Stock Markets Capital Appreciation Only 105,413
12/31/86-12/31/97 (in U.S.
Dollars)
Netherlands 20.5% Source: Stocks, Bonds, Bills, and
Spain 20.4% Inflation 1998 Yearbook, Ibbotson
Sweden 20.4% Associates, Chicago (annually
Hong Kong 19.7% updates work by Roger G. Ibbotson
Belgium 19.5% and Rex A. Sinquefield). Used with
Switzerland 17.9% permission. All rights reserved.
USA 17.1% This chart is used for illustrative
UK 16.6% purposes only and is not intended to
France 15.6% represent the past, present or
Germany 12.1% future performance of any Prudential
Austria 9.6% Mutual Fund. Common stock total
Japan 6.6% return is based on the Standard &
Poor's 500 Stock Index, a market-
value-weighted index made up of 500
Source: Morgan Stanley Capital of the largest stocks in the U.S.
International (MSCI) and Lipper based upon their stock market value.
Analytical Services, Inc. as of Investors cannot invest directly in
12/31/97. Used with permission. indices.
Morgan Stanley Country indices are
unmanaged indices which include
those stocks making up the largest
two-thirds of each country's total
stock market capitalization.
Returns reflect the reinvestment
of all distributions. This chart
is for illustrative purposes only
and is not indicative of the past,
present or future performance of
any specific investment. Investors
cannot invest directly in stock
indices.
---------------------------------------
WORLD STOCK MARKET CAPITALIZATION BY
REGION
World Total: $12.5 Trillion
PIE CHART
U.S. 49.8%
Europe 32.1%
Pacific Basin 15.6%
Canada 2.5%
Source: Morgan Stanley Capital
International, December 31, 1997.
Used with permission. This chart
represents the capitalization of
major world stock markets as
measured by the Morgan Stanley
Capital International (MSCI) World
Index. The total market
capitalization is based on the value
of approximately 1577 companies in
22 countries (representing
approximately 60% of the aggregate
market value of the stock
exchanges). This chart is for
illustrative purposes only and does
not represent the allocation of any
Prudential Mutual Fund.
II-3
<PAGE>
This chart below shows the historical volatility of general interest rates
as measured by the long U.S. Treasury Bond.
LONG U.S. TREASURY BOND YIELD IN PERCENT (1926-1997)
[PLOT POINTS TO COME]
- ---------------------------------------
Source: Stocks, Bonds, Bills, and Inflation 1998 Yearbook, Ibbotson
Associates, Chicago (annually updates work by Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. All rights reserved. The chart illustrates
the historical yield of the long-term U.S. Treasury Bond from 1926-1997.
Yields represent that of an annually renewed one-bond portfolio with a
remaining maturity of approximately 20 years. This chart is for illustrative
purposes and should not be construed to represent the yields of any Prudential
Mutual Fund.
The following chart, although not relevant to share ownership in the Fund,
may provide useful information about the effects of a hypothetical investment
diversified over different asset portfolios. The chart shows the range of
annual total returns for major stock and bond indices for the period from
December 31, 1976 through December 31, 1996. The horizontal "Best Returns
Zone" band shows that a hypothetical blended portfolio constructed of one-
third U.S. stock (S&P 500), one-third foreign stock (EAFE Index), and one-
third U.S. bonds (Lehman Index) would have eliminated the "highest highs" and
"lowest lows" of any single asset class.
[CHART]
- ---------
* Source: Prudential Investment Corporation based on data from Lipper
Analytical New Application (LANA). Past performance is not indicative of
future results. The S&P 500 Index is a weighted, unmanaged index comprised of
500 stocks which provides a broad indication of stock price movements. The
Morgan Stanley EAFE Index is an unmanaged index comprised of 20 overseas stock
markets in Europe, Australia, New Zealand and the Far East. The Lehman
Aggregate Index includes all publicly-issued investment grade debt with
maturities over one year, including U.S. government and agency issues, 15 and
30 year fixed-rate government agency mortgage securities, dollar denominated
SEC registered corporate and government securities, as well as asset-backed
securities. Investors cannot invest directly in stock or bond market indices.
II-4
<PAGE>
APPENDIX III--INFORMATION RELATING TO PRUDENTIAL
Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating
to the Prudential Mutual Funds. See "Management of the Fund--Manager" in the
Prospectus. The data will be used in sales materials relating to the
Prudential Mutual Funds. Unless otherwise indicated, the information is as of
December 31, 1997 and is subject to change thereafter. All information relies
on data provided by The Prudential Investment Corporation (PIC) or from other
sources believed by the Manager to be reliable. Such information has not been
verified by the Fund.
INFORMATION ABOUT PRUDENTIAL
The Manager and PIC/1/ are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December
31, 1997. Principal products and services include life and health insurance,
other healthcare products, property and casualty insurance, securities
brokerage, asset management, investment advisory services and real estate
brokerage. Prudential (together with its subsidiaries) employs more than
79,000 persons worldwide, and maintains a sales force of approximately 10,100
agents and 6,500 domestic and international financial advisors. Prudential is
a major issuer of annuities, including variable annuities. Prudential seeks to
develop innovative products and services to meet consumer needs in each of its
business areas. Prudential uses the rock of Gibraltar as its symbol. The
Prudential rock is a recognized brand name throughout the world.
Insurance. Prudential has been engaged in the insurance business since 1875.
It insures or provides financial services to nearly 40 million people
worldwide. Long one of the largest issuers of life insurance, Prudential has
25 million life insurance policies in force today with a face value of almost
$1 trillion. Prudential has the largest capital base ($12.1 billion) of any
life insurance company in the United States. The Prudential provides auto
insurance for more than 1.5 million cars and insures more than 1.2 million
homes.
Money Management. The Prudential is one of the largest pension fund managers
in the country, providing pension services to 1 in 3 Fortune 500 firms. It
manages $36 billion of individual retirement plan assets, such as 401(k)
plans. As of December 31, 1997, Prudential had more than $370 billion in
assets under management. Prudential Investments, a business group of
Prudential (of which Prudential Mutual Funds is a key part) manages over $211
billion in assets of institutions and individuals. In Pensions & Investments,
May 12, 1996, Prudential was ranked third in terms of total assets under
management.
Real Estate. The Prudential Real Estate Affiliates, the fourth largest real
estate brokerage network in the United States, has more than 37,000 brokers
and agents and more than 1,100 offices throughout the United States./2/
Healthcare. Over two decades ago, the Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, approximately 4.9
million Americans receive healthcare from a Prudential managed care
membership.
Financial Services. The Prudential Savings Bank FSB, a wholly-owned
subsidiary of the Prudential, has nearly $1 billion in assets and serves
nearly 1.5 million customers across 50 states.
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
As of December 30, 1997 Prudential Investments Fund Management is the
eighteenth largest mutual fund companies in the country, with over 2.5 million
shareholders invested in more than 50 mutual fund portfolios and variable
annuities with more than 3.7 million shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers who manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment
portfolios.
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser
in national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in
surveys conducted by national and regional publications and media
organizations such as The Wall Street Journal, The New York Times, Barron's
and USA Today.
- ---------
/1/ PIC serves as the Subadviser to substantially all of the Prudential Mutual
Funds. Wellington Management Company serves as the subadviser to Global
Utility Fund, Inc., Nicholas-Applegate Capital Management as the
subadviser to Nicholas-Applegate Fund, Inc., Jennison Associates Capital
Corp. as one of the subadvisers to The Prudential Investment Portfolios,
Inc. and Mercator Asset Management LP as the subadviser to International
Stock Series, a portfolio of Prudential World Fund, Inc. There are
multiple subadvisers for The Target Portfolio Trust.
/2/ As of December 31, 1996.
III-1
<PAGE>
Equity Funds. Forbes magazine listed Prudential Equity Fund among twenty
mutual funds on its Honor Roll in its mutual fund issue of August 28, 1995.
Honorees are chosen annually among mutual funds (excluding sector funds) which
are open to new investors and have had the same management for at least five
years. Forbes considers, among other criteria, the total return of a mutual
fund in both bull and bear markets as well as a fund's risk profile.
Prudential Equity Fund is managed with a "value" investment style by PIC. In
1995, Prudential Securities introduced Prudential Jennison Fund, a growth-
style equity fund managed by Jennison Associates LLC, a premier institutional
equity manager and a subsidiary of Prudential.
High Yield Funds. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor
approximately 200 issues held in the Prudential High Yield Fund (currently the
largest fund of its kind in the country) along with 100 or so other high yield
bonds, which may be considered for purchase./3/ Non-investment grade bonds,
also known as junk bonds or high yield bonds, are subject to a greater risk of
loss of principal and interest including default risk than higher-rated bonds.
Prudential high yield portfolio managers and analysts meet face-to-face with
almost every bond issuer in the High Yield Fund's portfolio annually, and have
additional telephone contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets--from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from Pulp and Paper Forecaster to Women's
Wear Daily--to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential
Mutual Fund.
Prudential Mutual Funds trade approximately $31 billion in U.S. and foreign
government securities a year. PIC seeks information from government policy
makers. In 1995, Prudential's portfolio managers met with several senior U.S.
and foreign government officials, on issues ranging from economic conditions
in foreign countries to the viability of index-linked securities in the United
States.
Prudential Mutual Funds' portfolio managers and analysts met with over 1,200
companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.
Prudential Mutual Fund global equity managers conducted many of their visits
overseas, often holding private meetings with a company in a foreign language
(our global equity managers speak 7 different languages, including Mandarin
Chinese).
Trading Data./4/ On an average day, Prudential Mutual Funds' U.S. and
foreign equity trading desks traded $77 million in securities representing
over 3.8 million shares with nearly 200 different firms. Prudential Mutual
Funds' bond trading desks traded $157 million in government and corporate
bonds on an average day. That represents more in daily trading than most bond
funds tracked by Lipper even have in assets./5/ Prudential Mutual Funds' money
market desk traded $3.2 billion in money market securities on an average day,
or over $800 billion a year. They made a trade every 3 minutes of every
trading day. In 1994, the Prudential Mutual Funds effected more than 40,000
trades in money market securities and held on average $20 billion of money
market securities./6/
Based on complex-wide data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Services LLC, the Transfer Agent of the
Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free number. On
an annual basis, that represents approximately 1.8 million telephone calls
answered.
- ---------
/3/ As of December 31, 1995. The number of bonds and the size of the Fund are
subject to change.
/4/ Trading data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PIC serves as the subadviser, portfolios
of the Prudential Series Fund and institutional and non-US accounts
managed by Prudential Mutual Fund Investment Management, a division of
PIC, for the year ended December 31, 1995.
/5/ Based on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate
U.S. Government, Short Investment Grade Debt, Intermediate Investment
Grade Debt, General U.S. Treasury, General U.S. Government and Mortgage
Funds.
/6/ As of December 31, 1994.
III-2
<PAGE>
INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 6,000 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
Annuities. As of December 31, 1997, assets held by Prudential Securities for
its clients approximated $235 billion. During 1997, over 29,000 new customer
accounts were opened each month at Prudential Securities./7/
Prudential Securities has a two-year Financial Advisor training program plus
advanced education programs, including Prudential Securities "university,"
which provides advanced education in a wide array of investment areas.
In 1995, Prudential Securities' equity research team ranked 8th in
Institutional Investor magazine's 1995 "All America Research Team" survey.
Three Prudential Securities' analysts were ranked as first-team finishers./8/
In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial Architects SM, a state-of-the-art asset allocation software program
which helps Financial Advisors to evaluate a client's objectives and overall
financial plan, and a comprehensive mutual fund information and analysis
system that compares different mutual funds.
For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
- ---------
/7/ As of December 31, 1997.
/8/ On an annual basis, Institutional Investor magazine surveys more than 700
institutional money managers, chief investment officers and research
directors, asking them to evaluate analysts in 76 industry sectors. Scores
are produced by taking the number of votes awarded to an individual
analyst and weighting them based on the size of the voting institution. In
total, the magazine sends its survey to approximately 2,000 institutions
and a group of European and Asian institutions.
III-3
<PAGE>
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS.
(a)(1) Amended and Restated Declaration of Trust. Incorporated by
reference to Exhibit 1(a) to Post-Effective Amendment No. 13 to the
Registration Statement on Form N-1A filed via EDGAR on December 21,
1994 (File No. 33-9269).
(2) Amended Certificate of Designation.*
(b) By-laws. Incorporated by reference to Exhibit 2(b) to Post-Effective
Amendment No. 11 to the Registration Statement on Form N-1A filed
via EDGAR on May 6, 1994 (File No. 33-9269).
(c) (1) Specimen receipt for shares of beneficial interest, $.01 par
value. Incorporated by reference to Exhibit 4(a) to Post-Effective
Amendment No. 18 to the Registration Statement on Form N-1A filed
via EDGAR on December 30, 1997 (File No. 33-9269).
(2) Instruments Defining Rights of Shareholders. Incorporated by
reference to Exhibit 4(c) to Post-Effective Amendment No. 10 to the
Registration Statement on Form N-1A filed via EDGAR on December 30,
1993 (File No. 33-9269).
(d) (1) Amended and Restated Management Agreement between the Registrant
and Prudential Mutual Fund Management, Inc. Incorporated by
reference to Exhibit 5(a) to Post-Effective Amendment No. 15 to the
Registration Statement on Form N-1A filed via EDGAR on October 30,
1995 (File No. 33-9269).
(2) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation. Incorporated by
reference to Exhibit 5(b) to Post-Effective Amendment No. 18 to the
Registration Statement on Form N-1A filed via EDGAR on December 30,
1997 (File No. 33-9269).
(e) (1) Distribution Agreement with Prudential Investment Management
Services LLC.*
(2) Selected Dealer Agreement.*
(g) Custodian Contract between the Registrant and State Street Bank and
Trust Company. Incorporated by reference to Exhibit 8 to Post-
Effective Amendment No. 18 to the Registration Statement on Form N-
1A filed via EDGAR on December 30, 1997 (File No. 33-9269).
(h) Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc. Incorporated by reference to
Exhibit 9 to Post-Effective Amendment No. 18 to the Registration
Statement on Form N-1A filed via EDGAR on December 30, 1997 (File
No. 33-9269).
(i) Opinion of Counsel. Incorporated by reference to Exhibit 10 to Post-
Effective Amendment No. 18 to the Registration Statement on Form N-
1A filed via EDGAR on December 30, 1997 (File No. 33-9269).
(m) (1) Amended and Restated Distribution and Service Plan for Class A
shares.*
(2) Amended and Restated Distribution and Service Plan for Class B
shares.*
(3) Amended and Restated Distribution and Service Plan for Class C
shares.*
(n) Financial Data Schedules.*
(o) Amended Rule 18f-3 Plan.*
- ---------
*Filed herewith.
C-1
<PAGE>
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 25. INDEMNIFICATION.
As permitted by Sections 17(h) and (i) of the Investment Company Act of 1940
(the 1940 Act) and pursuant to Article V, Sections 5.2 and 5.3 of the
Declaration of Trust (Exhibit a(1) to the Registration Statement) and to
Article X of the Fund's By-Laws (Exhibit b to the Registration Statement),
officers, Trustees, employees and agents of the Registrant will not be liable
to the Registrant, any shareholder, officer, Trustee, employee, agent or other
person for any action or failure to act, except for bad faith, willful
misfeasance, gross negligence or reckless disregard of duties, and those
individuals may be indemnified against liabilities in connection with the
Registrant, subject to the same exceptions. As permitted by Section 17(i) of
the 1940 Act, pursuant to Section 10 of the Distribution Agreement (Exhibit e
to the Registration Statement), the Distributor of the Registrant may be
indemnified against liabilities which it may incur, except liabilities arising
from bad faith, gross negligence, willful misfeasance or reckless disregard of
duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (Securities Act) may be permitted to Trustees, officers
and controlling persons of the Registrant pursuant to the foregoing provisions
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the 1940 Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a Trustee,
officer, or controlling person of the Registrant in connection with the
successful defense of any action, suit or proceeding) is asserted against the
Registrant by such Trustee, officer or controlling person in connection with
the shares being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the 1940 Act and will be governed
by the final adjudication of such issue.
The Registrant maintains an insurance policy insuring its officers and
Trustees against liabilities, and certain costs of defending claims against
such officers and Trustees, to the extent such officers and Trustees are not
found to have committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of
indemnification payments to officers and Trustees under certain circumstances.
Section 9 of the Management Agreement (Exhibit d(1) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit d(2) to the
Registration Statement) limit the liability of Prudential Investments Fund
Management LLC (PIFM) and The Prudential Investment Corporation (PIC),
respectively, to liabilities arising from willful misfeasance, bad faith or
gross negligence in the performance of their respective duties or from
reckless disregard by them of their respective obligations and duties under
the agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and the Distribution Agreement in a manner
consistent with Release No. 11330 of the Securities and Exchange Commission
under the 1940 Act so long as the interpretation of Section 17(h) and 17(i) of
such Act remain in effect and are consistently applied.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
(a) Prudential Investments Fund Management LLC
See "How the Fund Is Managed--Manager" in the Prospectus constituting Part A
of this Registration Statement and "Investment Advisory and Other Services" in
the Statement of Additional Information constituting Part B of this
Registration Statement.
The business and other connections of the officers of PIFM are listed in
Schedules A and D of Form ADV of PIFM as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference
(File No. 801-31104).
C-2
<PAGE>
The business and other connections of PIFM's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is Gateway Center Three, 100 Mulberry Street, Newark,
NJ 07102-4077.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATIONS
---------------- ------------------ ---------------------
<C> <S> <C>
Robert F. Gunia Executive Vice Vice President, Prudential Investments; Executive Vice
President and President and Treasurer, PIFM; Senior Vice President,
Treasurer Prudential Securities
Neil A. McGuinness Executive Vice Executive Vice President and Director of Marketing,
President Prudential Mutual Funds & Annuities (PMF&A);
Executive Vice President, PIFM
Brian M. Storms Officer-in-Charge, President, PMF&A; Officer-in-Charge, President, Chief
President, Chief Executive Officer and Chief Operating Officer, PIFM
Executive Officer
and Chief Operating
Officer
Robert J. Sullivan Executive Vice Executive Vice President, PMF&A; Executive Vice
President President, PIFM
</TABLE>
(b) The Prudential Investment Corporation (PIC)
See "How the Fund Is Managed--Investment Adviser" in the Prospectus
constituting Part A of this Registration Statement and "Investment Advisory
and Other Services" in the Statement of Additional Information constituting
Part B of this Registration Statement.
The business and other connections of PIC's directors and executive officers
are as set forth below. Except as otherwise indicated, the address of each
person is Prudential Plaza, Newark, NJ 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
---------------- ----------------- ---------------------
<C> <S> <C>
E. Michael Caulfield Chairman Chief Executive Officer of Prudential Investments
of the (PIC) of The Prudential Insurance Company of America
Board, (Prudential)
President
and Chief
Executive
Officer
and
Director
John R. Strangfeld Vice President of Private Asset Management Group of
President Prudential; Senior Vice President, Prudential; Vice
and President and Director, PIC
Director
</TABLE>
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) Prudential Investment Management Services LLC (PIMS)
PIMS is distributor for Cash Accumulation Trust, Command Government Fund,
Command Money Fund, Command Tax-Free Fund, The Global Total Return Fund, Inc.,
Global Utility Fund, Inc., Nicholas-Applegate Fund, Inc. (Nicholas-Applegate
Growth Equity Fund), Prudential Balanced Fund, Prudential California Municipal
Fund, Prudential Distressed Securities Fund, Inc., Prudential Diversified Bond
Fund, Inc., Prudential Emerging Growth Fund, Inc., Prudential Equity Fund,
Inc., Prudential Equity Income Fund, Prudential Europe Growth Fund, Inc.,
Prudential Global Genesis Fund, Inc., Prudential Global Limited Maturity Fund,
Inc., Prudential Government Income Fund, Inc., Prudential Government
Securities Trust, Prudential High Yield Fund, Inc., Prudential High Yield
Total Return Fund, Inc., Prudential Index Series Fund, Prudential
Institutional Liquidity Portfolio, Inc., Prudential Intermediate Global Income
Fund, Inc., Prudential International Bond Fund, Inc., Prudential Mid-Cap Value
Fund, Prudential MoneyMart Assets, Inc., Prudential Mortgage Income Fund,
Inc., Prudential Municipal Bond Fund, Prudential Municipal Series Fund,
Prudential National Municipals Fund, Inc., Prudential Natural Resources Fund,
Inc., Prudential Pacific Growth Fund, Inc., Prudential Real Estate Securities
Fund, Prudential Small-Cap Quantum Fund, Inc., Prudential Small Company Value
Fund, Inc., Prudential Special Money Market Fund, Inc., Prudential Structured
Maturity Fund, Inc., Prudential 20/20 Focus Fund, Prudential Utility Fund,
Inc., Prudential World Fund, Inc., The Prudential Investment Portfolios, Inc.
and The Target Portfolio Trust.
C-3
<PAGE>
(b) Information concerning the directors and officers of PIMS is set forth
below.
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(1) UNDERWRITER REGISTRANT
- ------- ------------- -------------
<S> <C> <C>
E. Michael Caulfield.... President None
Mark R. Fetting......... Executive Vice President None
Gateway Center Three
100 Mulberry Street
Newark, New Jersey
07102
Jean D. Hamilton........ Executive Vice President None
Ronald P. Joelson....... Executive Vice President None
Brian M. Storms......... Executive Vice President None
Gateway Center Three
100 Mulberry Street
Newark, New Jersey
07102
John R. Strangfeld...... Executive Vice President None
Mario A. Mosse ......... Senior Vice President and Chief Operating Officer None
Scott S. Wallner........ Vice President, Secretary and Chief Legal Officer None
Michael G. Williamson... Vice President, Comptroller and Chief Financial Officer None
C. Edward Chaplin....... Treasurer None
</TABLE>
- ---------
(/1/)The address of each person named is Gateway Center Three, 100 Mulberry
Street, Newark, New Jersey 07102-4077 unless otherwise indicated.
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder are maintained at the offices
of State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171; The Prudential Investment Corporation, Prudential Plaza,
745 Broad Street, Newark, New Jersey 07102; the Registrant, Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077; and Prudential
Mutual Fund Services LLC, Raritan Plaza One, Edison, New Jersey 08837.
Documents required by Rules 31a-1(b)(5), (6), (7), (9), (10) and (11) and 31a-
1(f) and Rules 31a-1(b)(4) and (11) and 31a-1(d) will be kept at Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, and the
remaining accounts, books and other documents required by such other pertinent
provisions of Section 31(a) and the Rules promulgated thereunder will be kept
by State Street Bank and Trust Company and Prudential Mutual Fund Services
LLC.
ITEM 29. MANAGEMENT SERVICES.
Other than as set forth under the captions "How the Fund Is Managed--
Manager" and "How the Fund is Managed--Distributor" in the Prospectus and the
caption "Investment Advisory and Other Services" in the Statement of
Additional Information, constituting Parts A and B, respectively, of this
Post-Effective Amendment to the Registration Statement, Registrant is not a
party to any management-related service contract.
ITEM 30. UNDERTAKINGS.
Not applicable.
C-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment Company
Act, the Registrant has duly caused this Post-Effective Amendment to the
Registration Statement to be signed on its behalf by the undersigned, duly
authorized, in the City of Newark, and State of New Jersey, on the 21st day of
October, 1998.
PRUDENTIAL EQUITY INCOME FUND
/s/ Richard A. Redeker
----------------------------------
(RICHARD A. REDEKER, PRESIDENT)
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Grace C. Torres Treasurer and Principal Financial October 21, 1998
- ---------------------------------
GRACE C. TORRES and Accounting Officer
/s/ Edward D. Beach Trustee October 21, 1998
- ---------------------------------
EDWARD D. BEACH
/s/ Delayne D. Gold Trustee October 21, 1998
- ---------------------------------
DELAYNE D. GOLD
/s/ Robert F. Gunia Trustee October 21, 1998
- ---------------------------------
ROBERT F. GUNIA
/s/ Douglas H. McCorkindale Trustee October 21, 1998
- ---------------------------------
DOUGLAS H. MCCORKINDALE
/s/ Mendel A. Melzer Trustee October 21, 1998
- ---------------------------------
MENDEL A. MELZER
/s/ Thomas T. Mooney Trustee October 21, 1998
- ---------------------------------
THOMAS T. MOONEY
/s/ Stephen P. Munn Trustee October 21, 1998
- ---------------------------------
STEPHEN P. MUNN
/s/ Richard A. Redeker President and Trustee October 21, 1998
- ---------------------------------
RICHARD A. REDEKER
/s/ Robin B. Smith Trustee October 21, 1998
- ---------------------------------
ROBIN B. SMITH
/s/ Louis A. Weil, III Trustee October 21, 1998
- ---------------------------------
LOUIS A. WEIL, III
/s/ Clay T. Whitehead Trustee October 21, 1998
- ---------------------------------
CLAY T. WHITEHEAD
</TABLE>
C-5
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
(a)(1) Amended and Restated Declaration of Trust. Incorporated by
reference to Exhibit 1(a) to Post-Effective Amendment No. 13 to
the Registration Statement on Form N-1A filed via EDGAR on
December 21, 1994 (File No. 33-9269).
(a)(2) Amended Certificate of Designation.*
(b) By-laws. Incorporated by reference to Exhibit 2(b) to Post-
Effective Amendment No. 11 to the Registration Statement on
Form N-1A filed via EDGAR on May 6, 1994 (File No. 33-9269).
(c)(1) Specimen receipt for shares of beneficial interest, $.01 par
value. Incorporated by reference to Exhibit 4(a) to Post-
Effective Amendment No. 18 to the Registration Statement on
Form N-1A filed via EDGAR on December 30, 1997 (File No. 33-
9269).
(c)(2) Instruments Defining Rights of Shareholders. Incorporated by
reference to Exhibit 4(c) to Post-Effective Amendment No. 10 to
the Registration Statement on Form N-1A filed via EDGAR on
December 30, 1993 (File No. 33-9269).
(d)(1) Amended and Restated Management Agreement between the
Registrant and Prudential Mutual Fund Management, Inc.
Incorporated by reference to Exhibit 5(a) to Post-Effective
Amendment No. 15 to the Registration Statement on Form N-1A
filed via EDGAR on October 30, 1995 (File No. 33-9269).
(d)(2) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and The Prudential Investment Corporation.
Incorporated by reference to Exhibit 5(b) to Post-Effective
Amendment No. 18 to the Registration Statement on Form N-1A
filed via EDGAR on December 30, 1997 (File No. 33-9269).
(e)(1) Distribution Agreement with Prudential Investment Management
Services LLC.*
(e)(2) Selected Dealer Agreement.*
(g) Custodian Contract between the Registrant and State Street Bank
and Trust Company. Incorporated by reference to Exhibit 8 to
Post-Effective Amendment No. 18 to the Registration Statement
on Form N-1A filed via EDGAR on December 30, 1997 (File No. 33-
9269).
(h) Transfer Agency and Service Agreement between the Registrant
and Prudential Mutual Fund Services, Inc. Incorporated by
reference to Exhibit 9 to Post-Effective Amendment No. 18 to
the Registration Statement on Form N-1A filed via EDGAR on
December 30, 1997 (File No. 33-9269).
(i) Opinion of Counsel. Incorporated by reference to Exhibit 10 to
Post-Effective Amendment No. 18 to the Registration Statement
on Form N-1A filed via EDGAR on December 30, 1997 (File No. 33-
9269).
(m)(1) Amended and Restated Distribution and Service Plan for Class A
shares.*
(m)(2) Amended and Restated Distribution and Service Plan for Class B
shares.*
(m)(3) Amended and Restated Distribution and Service Plan for Class C
shares.*
(n) Financial Data Schedules.*
(o) Amended Rule 18f-3 Plan.*
</TABLE>
- ----------
*Filed herewith.
<PAGE>
EXHIBIT 99.(A)(2)
PRUDENTIAL EQUITY INCOME FUND
Form of
Amended and Restated Certificate of Designation
-----------------------------------------------
The undersigned, being the duly elected and acting Assistant Secretary of
the Prudential Equity Income Fund, a trust with transferable shares established
under Massachusetts law of the type commonly called a Massachusetts business
trust (the "Trust"), DOES HEREBY CERTIFY that, pursuant to the authority
-----
conferred upon the Trustees of the Trust by Section 6.9 and Section 9.3 of the
Amended and Restated Declaration of Trust dated August 16, 1994 and filed with
the Secretary of The Commonwealth of Massachusetts on September 15, 1994 (the
"Declaration of Trust"), and pursuant to the affirmative vote of a majority of
- ---------------------
the Trustees at a meeting duly called and held on August 25, 1998, the Amended
and Restated Certificate of Designation dated July 27, 1994 and filed with the
Secretary of such Commonwealth on July 28, 1994, as most recently
amended and restated, effective January 2, 1996, by an Amended Certificate of
Designation dated December 14, 1995 and filed with the Secretary of such
Commonwealth on December 15, 1995, is hereby further amended and restated
effective as of November 2, 1998 to read in its entirety as follows:
The shares of beneficial interest of the Trust (the "Shares") shall not be
------
divided into series, but shall be classified into four classes (each, a
"Class"), designated "Class A Shares," "Class B Shares," "Class C Shares" and
-----
"Class Z Shares," respectively, of which an unlimited number may be issued.
Class A Shares, Class B Shares, Class C Shares and Class Z Shares outstanding on
the date on which the amendments provided for herein become effective shall be
and shall continue to be Class A Shares, Class B Shares, Class C Shares and
Class Z Shares of the Trust.
(2) The holders of Class A Shares, Class B Shares, Class C Shares and Class
Z Shares shall be considered Shareholders of the Trust for all purposes
(including, without limitation, for purposes of receiving reports and notices
and the right to vote) and, for matters reserved to the Shareholders of one or
more other Classes by the Declaration of Trust or by any instrument establishing
and designating a particular Class, or as required by the Investment Company Act
of 1940 and/or the rules and regulations of the Securities and Exchange
Commission thereunder (collectively, as from time to time in effect, the "1940
----
Act") or other applicable laws. The holders of Shares of each Class shall be
- ---
entitled to one vote per Share, and to a fraction of a vote proportional to each
fractional Share held, on all matters on which Shares of that Class shall be
entitled to vote, all as provided in the Declaration of Trust.
(3) The Shares of each Class shall represent an equal proportionate
interest in the share of such Class in the Trust Property, adjusted for any
liabilities specifically allocable to the Shares of that Class, and each Share
of a Class shall have identical voting, dividend, liquidation and other rights,
and the same terms and conditions, as the Shares of each other Class, except
that the expenses related directly or indirectly to the distribution of the
Shares of a Class, and any service fees to which such Class is subject (as
determined by the Trustees), shall be borne solely by such Class, and such
expenses shall be appropriately reflected in the determination of the net asset
value and the dividend, distribution and liquidation rights of such Class.
(4) Each Class shall be subject to such asset-based charges as may be
imposed pursuant
<PAGE>
-2-
to a plan under Rule 12b-1 of the 1940 Act (a "Plan") in effect for such Class,
----
and/or to such service fees for the maintenance of shareholder accounts and
personal services for such Class in such amounts as shall be determined by the
Trustees from time to time, and the Shares of each Class may be issued and sold
subject to such sales charges and/or contingent deferred sales charges, and upon
such other terms, as may from time to time be determined by the Trustees and
described in the Trust's then current registration statement under the
Securities Act.
(5) Subject to compliance with the requirements of the 1940 Act, the
Trustees shall have the authority to provide (a) that holders of Shares of any
Class shall have the right to convert such Shares into shares of such one or
more other registered investment companies as shall have agreed with the Trust
to accord such shareholders such right, (b) that holders of any Class of Shares
shall have the right to convert such Shares into Shares of one or more other
Classes, and (c) that Shares of any Class shall be automatically converted into
Shares of another Class, in each case in accordance with such requirements and
procedures as the Trustees may from time to time establish, all as may be
specified for the purpose in the Trust's then current registration statement
under the Securities Act applicable to the Shares accorded such right or rights.
(6) Shareholders of each Class shall vote as a separate Class on any
matter to the extent required by, and any matter shall be deemed to have been
effectively acted upon with respect to any Class as provided in, Rule 18f-2
under the 1940 Act, as from time to time in effect, or any successor rule, and
by the Declaration of Trust. Except as otherwise required by the 1940 Act, the
Shareholders of each Class, voting as a separate Class, shall have sole and
exclusive voting rights with respect to matters relating to expenses being borne
solely by such Class.
(7) The Trustees from time to time in office shall have the authority at
any time and from time to time to reallocate assets and expenses or to change
the designation of any Class now or hereafter created, or otherwise to change
the special and relative rights of any such Class, provided, that no such change
--------
shall adversely affect the rights of holders of outstanding Shares of any Class.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of the Trust,
this 20 day of October, 1998.
/s/
_______________________________________
Marguerite E. H. Morrison
Assistant Secretary
<PAGE>
-3-
ACKNOWLEDGMENT
--------------
STATE OF NEW JERSEY)
: October 20, 1998
COUNTY OF ESSEX ) ss
Then personally appeared before me the above named Marguerite
E. H. Morrison, Assistant Secretary, and acknowledged the foregoing instrument
to be her free act and deed.
/s/
--------------------------------------
Notary Public
[NOTARIAL SEAL]
<PAGE>
EXHIBIT 99.(E)(1)
Prudential Equity Income Fund
-----------------------------
Distribution Agreement
----------------------
Agreement made as of June 1, 1998, between Prudential Equity Income
Fund (the Fund) and Prudential Investment Management Services LLC, a Delaware
limited liability company (the Distributor).
WITNESSETH
WHEREAS, the Fund is registered under the Investment Company Act of
1940, as amended (the Investment Company Act), as a diversified, open-end,
management investment company and it is in the interest of the Fund to offer its
shares for sale continuously;
WHEREAS, the shares of the Fund may be divided into classes and/or
series (all such shares being referred to herein as Shares) and the Fund
currently is authorized to offer Class A, Class B, Class C and Class Z shares:
WHEREAS, the Distributor is a broker-dealer registered under the
Securities Exchange Act of 1934, as amended, and is engaged in the business of
selling shares of registered investment companies either directly or through
other broker-dealers;
WHEREAS, the Fund and the Distributor wish to enter into an agreement
with each other, with respect to the continuous offering of the Fund's Shares
from and after the date hereof in order to promote the growth of the Fund and
facilitate the distribution of its Shares; and
WHEREAS, the Fund has adopted a plan (or plans) of distribution
pursuant to Rule 12b-1 under the Investment Company Act with respect to certain
of its classes and/or series of Shares (the Plans) authorizing payments by the
Fund to the Distributor with respect to the distribution of such classes and/or
series of Shares and the maintenance of related shareholder accounts.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor
------------------------------
The Fund hereby appoints the Distributor as the principal underwriter
and distributor of the Shares of the Fund to sell Shares to the public on behalf
of the Fund and the Distributor hereby accepts such appointment and agrees to
act hereunder.
<PAGE>
The Fund hereby agrees during the term of this Agreement to sell Shares of the
Fund through the Distributor on the terms and conditions set forth below.
Section 2. Exclusive Nature of Duties
--------------------------
Except with respect to a period of time (not to exceed 60 days) during
which the Distributor and Prudential Securities Incorporated will serve as co-
distributors of the Fund in the transition of distribution services from
Prudential Securities Incorporated to the Distributor, the Distributor shall be
the exclusive representative of the Fund to act as principal underwriter and
distributor of the Fund's Shares, provided that:
2.1 The exclusive rights granted to the Distributor to sell Shares of
the Fund shall not apply to Shares of the Fund issued in connection with the
merger or consolidation of any other investment company or personal holding
company with the Fund or the acquisition by purchase or otherwise of all (or
substantially all) the assets or the outstanding shares of any such company by
the Fund.
2.2 Such exclusive rights shall not apply to Shares issued by the
Fund pursuant to reinvestment of dividends or capital gains distributions or
through the exercise of any conversion feature or exchange privilege.
2.3 Such exclusive rights shall not apply to Shares issued by the
Fund pursuant to the reinstatement privilege afforded redeeming shareholders.
2.4 Such exclusive rights shall not apply to purchases made through
the Fund's transfer and dividend disbursing agent in the manner set forth in the
currently effective Prospectus of the Fund. The term "Prospectus" shall mean
the Prospectus and Statement of Additional Information included as part of the
Fund's Registration Statement, as such Prospectus and Statement of Additional
Information may be amended or supplemented from time to time, and the term
"Registration Statement" shall mean the Registration Statement filed by the Fund
with the Securities and Exchange Commission and effective under the Securities
Act of 1933, as amended (Securities Act), and the Investment Company Act, as
such Registration Statement is amended from time to time.
Section 3. Purchase of Shares from the Fund
--------------------------------
3.1 The Distributor shall have the right to buy from the Fund on
behalf of investors the Shares needed, but not more than the Shares needed
(except for clerical errors in transmission) to fill unconditional orders for
Shares placed with the Distributor by investors or registered and qualified
securities dealers and other financial institutions (selected dealers).
3.2 The Shares shall be sold by the Distributor on behalf of the Fund
and
<PAGE>
delivered by the Distributor or selected dealers, as described in Section 6.4
hereof, to investors at the offering price as set forth in the Prospectus.
3.3 The Fund shall have the right to suspend the sale of any or all
classes and/or series of its Shares at times when redemption is suspended
pursuant to the conditions in Section 4.3 hereof or at such other times as may
be determined by the Board. The Fund shall also have the right to suspend the
sale of any or all classes and/or series of its Shares if a banking moratorium
shall have been declared by federal or New Jersey authorities.
3.4 The Fund, or any agent of the Fund designated in writing by the
Fund, shall be promptly advised of all purchase orders for Shares received by
the Distributor. Any order may be rejected by the Fund; provided, however, that
the Fund will not arbitrarily or without reasonable cause refuse to accept or
confirm orders for the purchase of Shares. The Fund (or its agent) will confirm
orders upon their receipt, will make appropriate book entries and upon receipt
by the Fund (or its agent) of payment therefor, will deliver deposit receipts
for such Shares pursuant to the instructions of the Distributor. Payment shall
be made to the Fund in New York Clearing House funds or federal funds. The
Distributor agrees to cause such payment and such instructions to be delivered
promptly to the Fund (or its agent).
Section 4. Repurchase or Redemption of Shares by the Fund
----------------------------------------------
4.1 Any of the outstanding Shares may be tendered for redemption at
any time, and the Fund agrees to repurchase or redeem the Shares so tendered in
accordance with its Declaration of Trust as amended from time to time, and in
accordance with the applicable provisions of the Prospectus. The price to be
paid to redeem or repurchase the Shares shall be equal to the net asset value
determined as set forth in the Prospectus. All payments by the Fund hereunder
shall be made in the manner set forth in Section 4.2 below.
4.2 The Fund shall pay the total amount of the redemption price as
defined in the above paragraph pursuant to the instructions of the Distributor
on or before the seventh day subsequent to its having received the notice of
redemption in proper form. The proceeds of any redemption of Shares shall be
paid by the Fund as follows: (i) in the case of Shares subject to a contingent
deferred sales charge, any applicable contingent deferred sales charge shall be
paid to the Distributor, and the balance shall be paid to or for the account of
the redeeming shareholder, in each case in accordance with applicable provisions
of the Prospectus; and (ii) in the case of all other Shares, proceeds shall be
paid to or for the account of the redeeming shareholder, in each case in
accordance with applicable provisions of the Prospectus.
4.3 Redemption of any class and/or series of Shares or payment may be
suspended at times when the New York Stock Exchange is closed for other than
3
<PAGE>
customary weekends and holidays, when trading on said Exchange is restricted,
when an emergency exists as a result of which disposal by the Fund of securities
owned by it is not reasonably practicable or it is not reasonably practicable
for the Fund fairly to determine the value of its net assets, or during any
other period when the Securities and Exchange Commission, by order, so permits.
Section 5. Duties of the Fund
------------------
5.1 Subject to the possible suspension of the sale of Shares as
provided herein, the Fund agrees to sell its Shares so long as it has Shares of
the respective class and/or series available.
5.2 The Fund shall furnish the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Shares, and this shall
include one certified copy, upon request by the Distributor, of all financial
statements prepared for the Fund by independent public accountants. The Fund
shall make available to the Distributor such number of copies of its Prospectus
and annual and interim reports as the Distributor shall reasonably request.
5.3 The Fund shall take, from time to time, but subject to the
necessary approval of the Board and the shareholders, all necessary action to
register the same under the Securities Act, to the end that there will be
available for sale such number of Shares as the Distributor reasonably may
expect to sell. The Fund agrees to file from time to time such amendments,
reports and other documents as may be necessary in order that there will be no
untrue statement of a material fact in the Registration Statement, or necessary
in order that there will be no omission to state a material fact in the
Registration Statement which omission would make the statements therein
misleading.
5.4 The Fund shall use its best efforts to notify such states as the
Distributor and the Fund may approve of its intention to sell any appropriate
number of its Shares; provided that the Fund shall not be required to amend its
Declaration of Trust or By-Laws to comply with the laws of any state, to
maintain an office in any state, to change the terms of the offering of its
Shares in any state from the terms set forth in its Registration Statement, to
qualify as a foreign corporation in any state or to consent to service of
process in any state other than with respect to claims arising out of the
offering of its Shares. Any such notification may be withheld, terminated or
withdrawn by the Fund at any time in its discretion. As provided in Section 9
hereof, the expense of notification and maintenance of notification shall be
borne by the Fund. The Distributor shall furnish such information and other
material relating to its affairs and activities as may be required by the Fund
in connection with
4
<PAGE>
such notifications.
Section 6. Duties of the Distributor
-------------------------
6.1 The Distributor shall devote reasonable time and effort to effect
sales of Shares, but shall not be obligated to sell any specific number of
Shares. Sales of the Shares shall be on the terms described in the Prospectus.
The Distributor may enter into like arrangements with other investment
companies. The Distributor shall compensate the selected dealers as set forth in
the Prospectus.
6.2 In selling the Shares, the Distributor shall use its best efforts
in all respects duly to conform with the requirements of all federal and state
laws relating to the sale of such securities. Neither the Distributor nor any
selected dealer nor any other person is authorized by the Fund to give any
information or to make any representations, other than those contained in the
Registration Statement or Prospectus and any sales literature approved by
appropriate officers of the Fund.
6.3 The Distributor shall adopt and follow procedures for the
confirmation of sales to investors and selected dealers, the collection of
amounts payable by investors and selected dealers on such sales and the
cancellation of unsettled transactions, as may be necessary to comply with the
requirements of Securities Exchange Act Rule 10b-10 and the rules of the
National Association of Securities Dealers, Inc. (NASD).
6.4 The Distributor shall have the right to enter into selected
dealer agreements with registered and qualified securities dealers and other
financial institutions of its choice for the sale of Shares, provided that the
Fund shall approve the forms of such agreements. Within the United States, the
Distributor shall offer and sell Shares only to such selected dealers as are
members in good standing of the NASD or are institutions exempt from
registration under applicable federal securities laws. Shares sold to selected
dealers shall be for resale by such dealers only at the offering price
determined as set forth in the Prospectus.
Section 7. Payments to the Distributor
---------------------------
7.1 With respect to classes and/or series of Shares which impose a
front-end sales charge, the Distributor shall receive and may retain any portion
of any front-end sales charge which is imposed on such sales and not reallocated
to selected dealers as set forth in the Prospectus, subject to the limitations
of Rule 2830 of the Conduct Rules of the NASD. Payment of these amounts to the
Distributor is not contingent upon the adoption or continuation of any
applicable Plans.
7.2 With respect to classes and/or series of Shares which impose a
contingent deferred sales charge, the Distributor shall receive and may retain
any
5
<PAGE>
contingent deferred sales charge which is imposed on such sales as set forth
in the Prospectus, subject to the limitations of Rule 2830 of the Conduct Rules
of the NASD. Payment of these amounts to the Distributor is not contingent upon
the adoption or continuation of any Plan.
Section 8. Payment of the Distributor under the Plan
-----------------------------------------
8.1 The Fund shall pay to the Distributor as compensation for
services under any Plans adopted by the Fund and this Agreement a distribution
and service fee with respect to the Fund's classes and/or series of Shares as
described in each of the Fund's respective Plans and this Agreement.
8.2 So long as a Plan or any amendment thereto is in effect, the
Distributor shall inform the Board of the commissions and account servicing fees
with respect to the relevant class and/or series of Shares to be paid by the
Distributor to account executives of the Distributor and to broker-dealers,
financial institutions and investment advisers which have dealer agreements with
the Distributor. So long as a Plan (or any amendment thereto) is in effect, at
the request of the Board or any agent or representative of the Fund, the
Distributor shall provide such additional information as may reasonably be
requested concerning the activities of the Distributor hereunder and the costs
incurred in performing such activities with respect to the relevant class and/or
series of Shares.
Section 9. Allocation of Expenses
----------------------
The Fund shall bear all costs and expenses of the continuous offering
of its Shares (except for those costs and expenses borne by the Distributor
pursuant to a Plan and subject to the requirements of Rule 12b-1 under the
Investment Company Act), including fees and disbursements of its counsel and
auditors, in connection with the preparation and filing of any required
Registration Statements and/or Prospectuses under the Investment Company Act or
the Securities Act, and all amendments and supplements thereto, and preparing
and mailing annual and periodic reports and proxy materials to shareholders
(including but not limited to the expense of setting in type any such
Registration Statements, Prospectuses, annual or periodic reports or proxy
materials). The Fund shall also bear the cost of expenses of making notice
filings for the Shares for sale, and, if necessary or advisable in connection
therewith, of qualifying the Fund as a broker or dealer, in such states of the
United States or other jurisdictions as shall be selected by the Fund and the
Distributor pursuant to Section 5.4 hereof and the cost and expense payable to
each such state for continuing notification therein until the Fund decides to
discontinue such notification pursuant to Section 5.4 hereof. As set forth in
Section 8 above, the Fund shall also bear the expenses it assumes pursuant to
any Plan, so long as such Plan is in effect.
6
<PAGE>
Section 10. Indemnification
---------------
10.1 The Fund agrees to indemnify, defend and hold the Distributor,
its officers and directors and any person who controls the Distributor within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
reasonable counsel fees incurred in connection therewith) which the Distributor,
its officers, members or any such controlling person may incur under the
Securities Act, or under common law or otherwise, arising out of or based upon
any untrue statement of a material fact contained in the Registration Statement
or Prospectus or arising out of or based upon any alleged omission to state a
material fact required to be stated in either thereof or necessary to make the
statements in either thereof not misleading, except insofar as such claims,
demands, liabilities or expenses arise out of or are based upon any such untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with information furnished by the Distributor to the Fund
for use in the Registration Statement or Prospectus; provided, however, that
this indemnity agreement shall not inure to the benefit of any such officer,
member or controlling person unless a court of competent jurisdiction shall
determine in a final decision on the merits, that the person to be indemnified
was not liable by reason of willful misfeasance, bad faith or gross negligence
in the performance of its duties, or by reason of its reckless disregard of its
obligations under this Agreement (disabling conduct), or, in the absence of such
a decision, a reasonable determination, based upon a review of the facts, that
the indemnified person was not liable by reason of disabling conduct, by (a) a
vote of a majority of a quorum of Trustees or Trustees who are neither
"interested persons" of the Fund as defined in Section 2(a)(19) of the
Investment Company Act nor parties to the proceeding, or (b) an independent
legal counsel in a written opinion. The Fund's agreement to indemnify the
Distributor, its officers and members and any such controlling person as
aforesaid is expressly conditioned upon the Fund's being promptly notified of
any action brought against the Distributor, its officers or members, or any such
controlling person, such notification to be given by letter or telegram
addressed to the Fund at its principal business office. The Fund agrees promptly
to notify the Distributor of the commencement of any litigation or proceedings
against it or any of its officers or directors in connection with the issue and
sale of any Shares.
10.2 The Distributor agrees to indemnify, defend and hold the Fund,
its officers and Trustees and any person who controls the Fund, if
any, within the meaning of Section 15 of the Securities Act, free and harmless
from and against any and all claims, demands, liabilities and expenses
(including the cost of investigating or defending against such claims, demands
or liabilities and any reasonable counsel fees incurred in connection therewith)
which the Fund, its officers
7
<PAGE>
and Trustees or any such controlling person may incur under the Securities Act
or under common law or otherwise, but only to the extent that such liability or
expense incurred by the Fund, its Trustees or officers or such controlling
person resulting from such claims or demands shall arise out of or be based upon
any alleged untrue statement of a material fact contained in information
furnished by the Distributor to the Fund for use in the Registration Statement
or Prospectus or shall arise out of or be based upon any alleged omission to
state a material fact in connection with such information required to be stated
in the Registration Statement or Prospectus or necessary to make such
information not misleading. The Distributor's agreement to indemnify the Fund,
its officers and Trustees and any such controlling person as aforesaid, is
expressly conditioned upon the Distributor's being promptly notified of any
action brought against the Fund, its officers and Trustees or any such
controlling person, such notification being given to the Distributor at its
principal business office.
Section 11. Duration and Termination of this Agreement
------------------------------------------
11.1 This Agreement shall become effective as of the date first above
written and shall remain in force for two years from the date hereof and
thereafter, but only so long as such continuance is specifically approved at
least annually by (a) the Board of the Fund, or by the vote of a majority of the
outstanding voting securities of the applicable class and/or series of the Fund,
and (b) by the vote of a majority of those Trustees who are not
parties to this Agreement or interested persons of any such parties and who have
no direct or indirect financial interest in this Agreement or in the operation
of any of the Fund's Plans or in any agreement related thereto (Independent
Trustees), cast in person at a meeting called for the purpose of
voting upon such approval.
11.2 This Agreement may be terminated at any time, without the
payment of any penalty, by a majority of the independent Trustees or
by vote of a majority of the outstanding voting securities of the applicable
class and/or series of the Fund, or by the Distributor, on sixty (60) days'
written notice to the other party. This Agreement shall automatically terminate
in the event of its assignment.
11.3 The terms "affiliated person," "assignment," "interested person"
and "vote of a majority of the outstanding voting securities", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.
Section 12. Amendments to this Agreement
----------------------------
This Agreement may be amended by the parties only if such amendment
8
<PAGE>
is specifically approved by (a) the Board of the Fund, or by the vote of a
majority of the outstanding voting securities of the applicable class and/or
series of the Fund, and (b) by the vote of a majority of the independent
Trustees cast in person at a meeting called for the purpose of voting on such
amendment.
Section 13. Separate Agreement as to Classes and/or Series
----------------------------------------------
The amendment or termination of this Agreement with respect to any
class and/or series shall not result in the amendment or termination of this
Agreement with respect to any other class and/or series unless explicitly so
provided.
Section 14. Governing Law
-------------
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of New Jersey as at the time in effect and
the applicable provisions of the Investment Company Act. To the extent that the
applicable law of the State of New Jersey, or any of the provisions herein,
conflict with the applicable provisions of the Investment Company Act, the
latter shall control.
Section 15. Enforcement of Claims
---------------------
The name "Prudential Equity Income Fund" is the designation of the
Trustees under an Amended and Restated Declaration of Trust dated August 16,
1994, and all persons dealing with the Fund must look solely to the property of
the Fund for the enforcement of any claims against the Fund, and neither the
Trustees, officers, agents or shareholders assume any personal liability for
obligations entered into on behalf of the Fund.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year above written.
Prudential Investment Management Services LLC
/s/ Brian M. Storms
By: -------------------------
Brian M. Storms
Prudential Equity Income Fund
-----------------------------
/s/ Robert F. Gunia
By: -------------------------
Robert F. Gunia
9
<PAGE>
EXHIBIT 99.(E)(2)
DEALER AGREEMENT
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC
Prudential Investment Management Services LLC ("Distributor") and
_________________ ("Dealer") have agreed that Dealer will participate in the
distribution of shares ("Shares") of all the funds and series thereof (as they
may exist from time to time) comprising the Prudential Mutual Fund Family (each
a "Fund" and collectively the "Funds") and any classes thereof for which
Distributor now or in the future serves as principal underwriter and
distributor, subject to the terms of this Dealer Agreement ("Agreement"). Any
such additional Funds will be included in this Agreement upon Distributor's
written notification to Dealer.
1. LICENSING
---------
a. Dealer represents and warrants that it is: (i) a broker-dealer
registered with the Securities and Exchange Commission ("SEC"); (ii) a member in
good standing of the National Association of Securities Dealers, Inc. ("NASD");
and (iii) licensed by the appropriate regulatory agency of each state or other
jurisdiction in which Dealer will offer and sell Shares of the Funds, to the
extent necessary to perform the duties and activities contemplated by this
Agreement.
b. Dealer represents and warrants that each of its partners,
directors, officers, employees, and agents who will be utilized by Dealer with
respect to its duties and activities under this Agreement is either
appropriately licensed or exempt from such licensing requirements by the
appropriate regulatory agency of each state or other jurisdiction in which
Dealer will offer and sell Shares of the Funds.
c. Dealer agrees that: (i) termination or suspension of its
registration with the SEC; (ii) termination or suspension of its membership with
the NASD; or (iii) termination or suspension of its license to do business by
any state or other jurisdiction or federal regulatory agency shall immediately
cause the termination of this Agreement. Dealer further agrees to immediately
notify Distributor in writing of any such action or event.
d. Dealer agrees that this Agreement is in all respects subject to the
Conduct Rules of the NASD and such Conduct Rules shall control any provision to
the contrary in this Agreement.
e. Dealer agrees to be bound by and to comply with all applicable
state and federal laws and all rules and regulations promulgated thereunder
generally affecting the sale or distribution of mutual fund shares.
2. ORDERS
------
a. Dealer agrees to offer and sell Shares of the Funds (including
those of each of its classes) only at the regular public offering price
applicable to such Shares and in effect at the time of each transaction. The
procedures relating to all orders and the handling of each order (including the
manner of computing the net asset value of Shares and the effective time of
orders received from Dealer) are subject to: (i) the terms of the then current
prospectus and statement of
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<PAGE>
additional information (including any supplements, stickers or amendments
thereto) relating to each Fund, as filed with the SEC ("Prospectus"); (ii) the
new account application for each Fund, as supplemented or amended from time to
time; and (iii) Distributor's written instructions and multiple class pricing
procedures and guidelines, as provided to Dealer from time to time. To the
extent that the Prospectus contains provisions that are inconsistent with this
Agreement or any other document, the terms of the Prospectus shall be
controlling.
b. Distributor reserves the right at any time, and without notice to
Dealer, to suspend the sale of Shares or to withdraw or limit the offering of
Shares. Distributor reserves the unqualified right not to accept any specific
order for the purchase or sale of Shares.
c. In all offers and sales of the Shares to the public, Dealer is not
authorized to act as broker or agent for, or employee of, Distributor, any Fund
or any other dealer, and Dealer shall not in any manner represent to any third
party that Dealer has such authority or is acting in such capacity. Rather,
Dealer agrees that it is acting as principal for Dealer's own account or as
agent on behalf of Dealer's customers in all transactions in Shares, except as
provided in Section 3.i. hereof. Dealer acknowledges that it is solely
responsible for all suitability determinations with respect to sales of Shares
of the Funds to Dealer's customers and that Distributor has no responsibility
for the manner of Dealer's performance of, or for Dealer's acts or omissions in
connection with, the duties and activities Dealer provides under this Agreement.
d. All orders are subject to acceptance by Distributor in its sole
discretion and become effective only upon confirmation by Distributor.
e. Distributor agrees that it will accept from Dealer orders placed
through a remote terminal or otherwise electronically transmitted via the
National Securities Clearing Corporation ("NSCC") Fund/Serv Networking program,
provided, however, that appropriate documentation thereof and agreements
relating thereto are executed by both parties to this Agreement, including in
particular the standard NSCC Networking Agreement and any other related
agreements between Distributor and Dealer deemed appropriate by Distributor, and
that all accounts opened or maintained pursuant to that program will be governed
by applicable NSCC rules and procedures. Both parties further agree that, if
the NSCC Fund/Serv Networking program is used to place orders, the standard NSCC
Networking Agreement will control insofar as there is any conflict between any
provision of the Dealer Agreement and the standard NSCC Networking Agreement.
3. DUTIES OF DEALER
----------------
a. Dealer agrees to purchase Shares only from Distributor or from
Dealer's customers.
b. Dealer agrees to enter orders for the purchase of Shares only from
Distributor and only for the purpose of covering purchase orders Dealer has
already received from its customers or for Dealer's own bona fide investment.
c. Dealer agrees to date and time stamp all orders received by Dealer
and promptly, upon receipt of any and all orders, to transmit to Distributor all
orders received prior to
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<PAGE>
the time described in the Prospectus for the calculation of each Fund's net
asset value so as to permit Distributor to process all orders at the price next
determined after receipt by Dealer, in accordance with the Prospectus. Dealer
agrees not to withhold placing orders for Shares with Distributor so as to
profit itself as a result of such inaction.
d. Dealer agrees to maintain records of all purchases and sales of
Shares made through Dealer and to furnish Distributor or regulatory authorities
with copies of such records upon request. In that regard, Dealer agrees that,
unless Dealer holds Shares as nominee for its customers or participates in the
NSCC Fund/Serv Networking program, at certain matrix levels, it will provide
Distributor with all necessary information to comply properly with all federal,
state and local reporting requirements and backup and nonresident alien
withholding requirements for its customer accounts including, without
limitation, those requirements that apply by treating Shares issued by the Funds
as readily tradable instruments. Dealer represents and agrees that all Taxpayer
Identification Numbers ("TINs") provided are certified, and that no account that
requires a certified TIN will be established without such certified TIN. With
respect to all other accounts, including Shares held by Dealer in omnibus
accounts and Shares purchased or sold through the NSCC Fund/Serv Networking
program, at certain matrix levels, Dealer agrees to perform all federal, state
and local tax reporting with respect to such accounts, including without
limitation redemptions and exchanges.
e. Dealer agrees to distribute or cause to be delivered to its
customers Prospectuses, proxy solicitation materials and related information and
proxy cards, semi-annual and annual shareholder reports and any other materials
in compliance with applicable legal requirements, except to the extent that
Distributor expressly undertakes to do so in writing.
f. Dealer agrees that if any Share is repurchased by any Fund or is
tendered for redemption within seven (7) business days after confirmation by
Distributor of the original purchase order from Dealer, Dealer shall forfeit its
right to any concession or commission received by Dealer with respect to such
Share and shall forthwith refund to Distributor the full concession allowed to
Dealer or commission paid to Dealer on the original sale. Distributor agrees to
notify Dealer of such repurchase or redemption within a reasonable time after
settlement. Termination or cancellation of this Agreement shall not relieve
Dealer from its obligation under this provision.
g. Dealer agrees that payment for Shares ordered from Distributor shall
be in Fed Funds, New York clearinghouse or other immediately available funds and
that such funds shall be received by Distributor by the earlier of: (i) the end
of the third (3rd) business day following Dealer's receipt of the customer's
order to purchase such Shares; or (ii) the settlement date established in
accordance with Rule 15c6-1 under the Securities Exchange Act of 1934, as
amended. If such payment is not received by Distributor by such date, Dealer
shall forfeit its right to any concession or commission with respect to such
order, and Distributor reserves the right, without notice, forthwith to cancel
the sale, or, at its option, to sell the Shares ordered back to the Fund, in
which case Distributor may hold Dealer responsible for any loss, including loss
of profit, suffered by Distributor resulting from Dealer's failure to make
payment as aforesaid. If a purchase is made by check, the purchase is deemed
made upon conversion of the purchase instrument into Fed Funds, New York
clearinghouse or other immediately available funds.
A-3
<PAGE>
h. Dealer agrees that it: (i) shall assume responsibility for any loss
to the Fund caused by a correction to any order placed by Dealer that is made
subsequent to the trade date for the order, provided such order correction was
not based on any negligence on Distributor's part; and (ii) will immediately pay
such loss to the Fund upon notification.
i. Dealer agrees that in connection with orders for the purchase of
Shares on behalf of any IRAs, 401(k) plans or other retirement plan accounts, by
mail, telephone, or wire, Dealer shall act as agent for the custodian or trustee
of such plans (solely with respect to the time of receipt of the application and
payments), and Dealer shall not place such an order with Distributor until it
has received from its customer payment for such purchase and, if such purchase
represents the first contribution to such a retirement plan account, the
completed documents necessary to establish the retirement plan. Dealer agrees to
indemnify Distributor and its affiliates for any claim, loss, or liability
resulting from incorrect investment instructions received by Distributor from
Dealer.
j. Dealer agrees that it will not make any conditional orders for the
purchase or redemption of Shares and acknowledges that Distributor will not
accept conditional orders for Shares.
k. Dealer agrees that all out-of-pocket expenses incurred by it in
connection with its activities under this Agreement will be borne by Dealer.
l. Dealer agrees that it will keep in force appropriate broker's
blanket bond insurance policies covering any and all acts of Dealer's partners,
directors, officers, employees, and agents adequate to reasonably protect and
indemnify the Distributor and the Funds against any loss which any party may
suffer or incur, directly or indirectly, as a result of any action by Dealer or
Dealer's partners, directors, officers, employees, and agents.
m. Dealer agrees that it will maintain the required net capital as
specified by the rules and regulations of the SEC, NASD and other regulatory
authorities.
4. DEALER COMPENSATION
-------------------
a. On each purchase of Shares by Dealer from Distributor, the total
sales charges and dealer concessions or commissions, if any, payable to Dealer
shall be as stated on Schedule A to this Agreement, which may be amended by
Distributor from time to time. Distributor reserves the right, without prior
notice, to suspend or eliminate such dealer concession or commissions by
amendment, sticker or supplement to the then current Prospectus for each Fund.
Such sales charges and dealer concessions or commissions, are subject to
reduction under a variety of circumstances as described in each Fund's then
current Prospectus. For an investor to obtain any reduction, Distributor must be
notified at the time of the sale that the sale qualifies for the reduced sales
charge. If Dealer fails to notify Distributor of the applicability of a
reduction in the sales charge at the time the trade is placed, neither
Distributor nor any Fund will be liable for amounts necessary to reimburse any
investor for the reduction that should have been effected. Dealer acknowledges
that no sales charge or concession or commission will be paid to Dealer on the
reinvestment of dividends or capital gains reinvestment or on Shares acquired in
exchange for Shares of another Fund, or class thereof, having the same
sales charge structure as the Fund, or class thereof, from which the exchange
was made, in accordance with the Prospectus.
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<PAGE>
b. In accordance with the Funds' Prospectuses, Distributor or any
affiliate may, but is not obligated to, make payments to dealers from
Distributor's own resources as compensation for certain sales that are made at
net asset value ("Qualifying Sales"). If Dealer notifies Distributor of a
Qualifying Sale, Distributor may make a contingent advance payment up to the
maximum amount available for payment on the sale. If any of the Shares
purchased in a Qualifying Sale are redeemed within twelve (12) months of the end
of the month of purchase, Distributor shall be entitled to recover any advance
payment attributable to the redeemed Shares by reducing any account payable or
other monetary obligation Distributor may owe to Dealer or by making demand upon
Dealer for repayment in cash. Distributor reserves the right to withhold
advances to Dealer, if for any reason Distributor believes that it may not be
able to recover unearned advances from Dealer.
c. With respect to any Fund that offers Shares for which distribution
plans have been adopted under Rule 12b-1 under the Investment Company Act of
1940, as amended ("Rule 12b-1 Plans"), Distributor also is authorized to pay the
Dealer continuing distribution and/or service fees, as specified in Schedule A
and the relevant Fund Prospectus, with respect to Shares of any such Fund, to
the extent that Dealer provides distribution, marketing, administrative and
other services and activities regarding the promotion of such Shares and the
maintenance of related shareholder accounts.
d. In connection with the receipt of distribution fees and/or service
fees under Rule 12b-1 Plans applicable to Shares purchased by Dealer's
customers, Distributor directs Dealer to provide enhanced shareholder services
such as: processing purchase and redemption transactions; establishing
shareholder accounts; and providing certain information and assistance with
respect to the Funds. (Redemption levels of shareholder accounts assigned to
Dealer will be considered in evaluating Dealer's continued ability to receive
payments of distribution and/or service fees.) In addition, Dealer agrees to
support Distributor's marketing efforts by, among other things, granting
reasonable requests for visits to Dealer's office by Distributor's wholesalers
and marketing representatives, including all Funds covered by a Rule 12b-1 Plan
on Dealer's "approved," "preferred" or other similar product lists, if
applicable, and otherwise providing satisfactory product, marketing and sales
support. Further, Dealer agrees to provide Distributor with supporting
documentation concerning the shareholder services provided, as Distributor may
reasonably request from time to time.
e. All Rule 12b-1 Plan distribution and/or servicing fees shall be
based on the value of Shares attributable to Dealer's customers and eligible for
such payment, and shall be calculated on the basis of and at the rates set forth
in the compensation schedule then in effect. Without prior approval by a
majority of the outstanding shares of a Fund, the aggregate annual fees paid to
Dealer pursuant to any Rule 12b-1 Plan shall not exceed the amounts stated as
the "annual maximums" in each Fund's Prospectus, which amount shall be a
specified percent of the value of the Fund's net assets held in Dealer's
customers' accounts that are eligible for payment pursuant to the Rule 12b-1
Plans (determined in the same manner as each Fund uses to compute its net assets
as set forth in its then current Prospectus).
f. The provisions of any Rule 12b-1 Plan between the Funds and the
Distributor shall control over this Agreement in the event of any inconsistency.
Each Rule 12b-1 Plan in effect on the date of this Agreement is described in the
relevant Fund's Prospectus. Dealer
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<PAGE>
hereby acknowledges that all payments under Rule 12b-1 Plans are subject to
limitations contained in such Rule 12b-1 Plans and may be varied or discontinued
at any time.
5. REDEMPTIONS, REPURCHASES AND EXCHANGES
--------------------------------------
a. The Prospectus for each Fund describes the provisions whereby the
Fund, under all ordinary circumstances, will redeem Shares held by shareholders
on demand. Dealer agrees that it will not make any representations to
shareholders relating to the redemption of their Shares other than the
statements contained in the Prospectus and the underlying organizational
documents of the Fund, to which it refers, and that Dealer will pay as
redemption proceeds to shareholders the net asset value, minus any applicable
deferred sales charge or redemption fee, determined after receipt of the order
as discussed in the Prospectus.
b. Dealer agrees not to repurchase any Shares from its customers at a
price below that next quoted by the Fund for redemption or repurchase, i.e., at
the net asset value of such Shares, less any applicable deferred sales charge,
or redemption fee, in accordance with the Fund's Prospectus. Dealer shall,
however, be permitted to sell Shares for the account of the customer or record
owner to the Funds at the repurchase price then currently in effect for such
Shares and may charge the customer or record owner a fair service fee or
commission for handling the transaction, provided Dealer discloses the fee or
commission to the customer or record owner. Nevertheless, Dealer agrees that it
shall not under any circumstances maintain a secondary market in such
repurchased Shares.
c. Dealer agrees that, with respect to a redemption order it has made,
if instructions in proper form, including any outstanding certificates, are not
received by Distributor within the time customary or the time required by law,
the redemption may be canceled forthwith without any responsibility or liability
on Distributor's part or on the part of any Fund, or Distributor, at its option,
may buy the shares redeemed on behalf of the Fund, in which latter case
Distributor may hold Dealer responsible for any loss, including loss of profit,
suffered by Distributor resulting from Distributor's failure to settle the
redemption.
d. Dealer agrees that it will comply with any restrictions and
limitations on exchanges described in each Fund's Prospectus, including any
restrictions or prohibitions relating to frequent purchases and redemptions
(i.e., market timing).
6. MULTIPLE CLASSES OF SHARES
--------------------------
Distributor may, from time to time, provide Dealer with written
guidelines or standards relating to the sale or distribution of Funds offering
multiple classes of Shares with different sales charges and distribution-related
operating expenses.
7. FUND INFORMATION
----------------
a. Dealer agrees that neither it nor any of its partners, directors,
officers, employees, and agents is authorized to give any information or make
any representations concerning Shares of any Fund except those contained in the
Fund's then current Prospectus or in materials provided by Distributor.
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<PAGE>
b. Distributor will supply to Dealer Prospectuses, reasonable
quantities of sales literature, sales bulletins, and additional sales
information as provided by Distributor. Dealer agrees to use only advertising or
sales material relating to the Funds that: (i) is supplied by Distributor, or
(ii) conforms to the requirements of all applicable laws or regulations of any
government or authorized agency having jurisdiction over the offering or sale of
Shares of the Funds and is approved in writing by Distributor in advance of its
use. Such approval may be withdrawn by Distributor in whole or in part upon
written notice to Dealer, and Dealer shall, upon receipt of such notice,
immediately discontinue the use of such sales literature, sales bulletins and
advertising. Dealer is not authorized to modify or translate any such materials
without Distributor's prior written consent.
8. SHARES
------
a. Distributor acts solely as agent for the Fund and Distributor shall
have no obligation or responsibility with respect to Dealer's right to purchase
or sell Shares in any state or jurisdiction.
b. Distributor shall periodically furnish Dealer with information
identifying the states or jurisdictions in which it is believed that all
necessary notice, registration or exemptive filings for Shares have been made
under applicable securities laws such that offers and sales of Shares may be
made in such states or jurisdictions. Distributor shall have no obligation to
make such notice, registration or exemptive filings with respect to Shares in
any state or jurisdiction.
c. Dealer agrees not to transact orders for Shares in states or
jurisdictions in which it has been informed that Shares may not be sold or in
which it and its personnel are not authorized to sell Shares.
d. Distributor shall have no responsibility, under the laws regulating
the sale of securities in the United States or any foreign jurisdiction, with
respect to the qualification or status of Dealer or Dealer's personnel selling
Fund Shares. Distributor shall not, in any event, be liable or responsible for
the issue, form, validity, enforceability and value of such Shares or for any
matter in connection therewith.
e. Dealer agrees that it will make no offers or sales of Shares in any
foreign jurisdiction, except with the express written consent of Distributor.
9. INDEMNIFICATION
---------------
a. Dealer agrees to indemnify, defend and hold harmless Distributor and
the Funds and their predecessors, successors, and affiliates, each current or
former partner, officer, director, employee, shareholder or agent and each
person who controls or is controlled by Distributor from any and all losses,
claims, liabilities, costs, and expenses, including attorney fees, that may be
assessed against or suffered or incurred by any of them howsoever they arise,
and as they are incurred, which relate in any way to: (i) any alleged violation
of any statute or regulation (including without limitation the securities laws
and regulations of the United States or any state or foreign country) or any
alleged tort or breach of contract, related to the offer or sale by Dealer of
Shares of the Funds pursuant to this Agreement (except to the extent that
Distributor's negligence or failure to follow correct instructions received from
Dealer is the cause of such loss,
A-7
<PAGE>
claim, liability, cost or expense); (ii) any redemption or exchange pursuant to
instructions received from Dealer or its partners, affiliates, officers,
directors, employees or agents; or (iii) the breach by Dealer of any of its
representations and warranties specified herein or the Dealer's failure to
comply with the terms and conditions of this Agreement, whether or not such
action, failure, error, omission, misconduct or breach is committed by Dealer or
its predecessor, successor, or affiliate, each current or former partner,
officer, director, employee or agent and each person who controls or is
controlled by Dealer.
b. Distributor agrees to indemnify, defend and hold harmless Dealer
and its predecessors, successors and affiliates, each current or former partner,
officer, director, employee or agent, and each person who controls or is
controlled by Dealer from any and all losses, claims, liabilities, costs and
expenses, including attorney fees, that may be assessed against or suffered or
incurred by any of them which arise, and which relate to any untrue statement of
or omission to state a material fact contained in the Prospectus or any written
sales literature or other marketing materials provided by the Distributor to the
Dealer, required to be stated therein or necessary to make the statements
therein not misleading.
c. Dealer agrees to notify Distributor, within a reasonable time, of
any claim or complaint or any enforcement action or other proceeding with
respect to Shares offered hereunder against Dealer or its partners, affiliates,
officers, directors, employees or agents, or any person who controls Dealer,
within the meaning of Section 15 of the Securities Act of 1933, as amended.
d. Dealer further agrees promptly to send Distributor copies of (i)
any report filed pursuant to NASD Conduct Rule 3070, including, without
limitation quarterly reports filed pursuant to Rule 3070(c), (ii) reports filed
with any other self-regulatory organization in lieu of Rule 3070 reports
pursuant to Rule 3070(e) and (iii) amendments to Dealer's Form BD.
e. Each party's obligations under these indemnification provisions
shall survive any termination of this Agreement.
10. TERMINATION; AMENDMENT
----------------------
a. In addition to the automatic termination of this Agreement
specified in Section 1.c. of this Agreement, each party to this Agreement may
unilaterally cancel its participation in this Agreement by giving thirty (30)
days prior written notice to the other party. In addition, each party to this
Agreement may terminate this Agreement immediately by giving written notice to
the other party of that other party's material breach of this Agreement. Such
notice shall be deemed to have been given and to be effective on the date on
which it was either delivered personally to the other party or any officer or
member thereof, or was mailed postpaid or delivered to a telegraph office for
transmission to the other party's designated person at the addresses shown
herein or in the most recent NASD Manual.
b. This Agreement shall terminate immediately upon the appointment of
a Trustee under the Securities Investor Protection Act or any other act of
insolvency by Dealer.
c. The termination of this Agreement by any of the foregoing means
shall have no effect upon transactions entered into prior to the effective date
of termination and shall
A-8
<PAGE>
not relieve Dealer of its obligations, duties and indemnities specified in this
Agreement. A trade placed by Dealer subsequent to its voluntary termination of
this Agreement will not serve to reinstate the Agreement. Reinstatement, except
in the case of a temporary suspension of Dealer, will only be effective upon
written notification by Distributor.
d. This Agreement is not assignable or transferable and will
terminate automatically in the event of its "assignment," as defined in the
Investment Company Act of 1940, as amended and the rules, regulations and
interpretations thereunder. The Distributor may, however, transfer any of its
duties under this Agreement to any entity that controls or is under common
control with Distributor.
e. This Agreement may be amended by Distributor at any time by
written notice to Dealer. Dealer's placing of an order or accepting payment of
any kind after the effective date and receipt of notice of such amendment shall
constitute Dealer's acceptance of such amendment.
11. DISTRIBUTOR'S REPRESENTATIONS AND WARRANTIES
--------------------------------------------
Distributor represents and warrants that:
a. It is a limited liability company duly organized and existing and
in good standing under the laws of the state of Delaware and is duly registered
or exempt from registration as a broker-dealer in all states and jurisdictions
in which it provides services as principal underwriter and distributor for the
Funds.
b. It is a member in good standing of the NASD.
c. It is empowered under applicable laws and by Distributor's charter
and by-laws to enter into this Agreement and perform all activities and services
of the Distributor provided for herein and that there are no impediments, prior
or existing, regulatory, self-regulatory, administrative, civil or criminal
matters affecting Distributor's ability to perform under this Agreement.
d. All requisite actions have been taken to authorize Distributor to
enter into and perform this Agreement.
12. ADDITIONAL DEALER REPRESENTATIONS AND WARRANTIES
------------------------------------------------
In addition to the representations and warranties found elsewhere in
this Agreement, Dealer represents and warrants that:
a. It is duly organized and existing and in good standing under the
laws of the state, commonwealth or other jurisdiction in which Dealer is
organized and that Dealer will not offer Shares of any Fund for sale in any
state or jurisdiction where such Shares may not be legally sold or where Dealer
is not qualified to act as a broker-dealer.
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<PAGE>
b. It is empowered under applicable laws and by Dealer's
organizational documents to enter into this Agreement and perform all activities
and services of the Dealer provided for herein and that there are no
impediments, prior or existing, regulatory, self-regulatory, administrative,
civil or criminal matters affecting Dealer's ability to perform under this
Agreement.
c. All requisite actions have been taken to authorize Dealer to enter
into and perform this Agreement.
d. It is not, at the time of the execution of this Agreement, subject
to any enforcement or other proceeding with respect to its activities under
state or federal securities laws, rules or regulations.
13. SETOFF; DISPUTE RESOLUTION; GOVERNING LAW
-----------------------------------------
a. Should any of Dealer's concession accounts with Distributor have a
debit balance, Distributor shall be permitted to offset and recover the amount
owed from any other account Dealer has with Distributor, without notice or
demand to Dealer.
b. In the event of a dispute concerning any provision of this
Agreement, either party may require the dispute to be submitted to binding
arbitration under the commercial arbitration rules and procedures of the NASD.
The parties agree that, to the extent permitted under such arbitration rules and
procedures, the arbitrators selected shall be from the securities industry.
Judgment upon any arbitration award may be entered by any state or federal court
having jurisdiction.
c. This Agreement shall be governed and construed in accordance with
the laws of the state of New Jersey, not including any provision which would
require the general application of the law of another jurisdiction.
14. INVESTIGATIONS AND PROCEEDINGS
------------------------------
The parties to this Agreement agree to cooperate fully in any
securities regulatory investigation or proceeding or judicial proceeding with
respect to each's activities under this Agreement and promptly to notify the
other party of any such investigation or proceeding.
15. CAPTIONS
--------
All captions used in this Agreement are for convenience only, are not
a party hereof, and are not to be used in construing or interpreting any aspect
hereof.
16. ENTIRE UNDERSTANDING
--------------------
This Agreement contains the entire understanding of the parties hereto
with respect to the subject matter contained herein and supersedes all previous
agreements. This Agreement shall be binding upon the parties hereto when signed
by Dealer and accepted by Distributor.
A-10
<PAGE>
17. SEVERABILITY
------------
Whenever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law.
If, however, any provision of this Agreement is held under applicable law to be
invalid, illegal, or unenforceable in any respect, such provision shall be
ineffective only to the extent of such invalidity, and the validity, legality
and enforceability of the remaining provisions of this Agreement shall not be
affected or impaired in any way.
18. ENTIRE AGREEMENT
----------------
This Agreement contains the entire understanding of the parties hereto
with respect to the subject matter contained herein and supersedes all previous
agreements and/or understandings of the parties. This Agreement shall be binding
upon the parties hereto when signed by Dealer and accepted by Distributor.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year set forth below.
PRUDENTIAL INVESTMENT MANAGEMENT
SERVICES LLC
By: ________________________________
Name:________________________________
Title:_______________________________
Date:________________________________
DEALER: _____________________________
By: ________________________________
(Signature)
Name: ______________________________
Title: _____________________________
Address:_____________________________
_____________________________
_____________________________
Telephone: _________________________
NASD CRD # ________________________
Prudential Dealer # ________________
(Internal Use Only)
Date: ______________________________
A-11
<PAGE>
EXHIBIT 99.M (1)
Prudential Equity Income Fund
-----------------------------
Amended and Restated
Distribution and Service Plan
(Class A Shares)
--------------
Introduction
------------
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Rule 2830 of the Conduct
Rules of the National Association of Securities Dealers, Inc. (NASD) has been
adopted by Prudential Equity Income Fund (the Fund) and by Prudential Investment
Management Services LLC, the Fund's distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which the
Fund will employ the Distributor to distribute Class A shares issued by the Fund
(Class A shares). Under the Plan, the Fund intends to pay to the Distributor,
as compensation for its services, a distribution and service fee with respect to
Class A shares.
A majority of the Board of Directors/Trustees of the Fund, including a
majority of those Directors/Trustees who are not "interested persons" of the
Fund (as defined in the Investment Company Act) and who have no direct or
indirect financial interest in the operation of this Plan or any agreements
related to it (the Rule 12b-1 Directors/Trustees), have determined by votes cast
in person at a meeting called for the purpose of voting on this Plan that there
is a reasonable likelihood that adoption and continuation of this Plan will
benefit the Fund and its shareholders. Expenditures under this Plan by the Fund
for Distribution Activities (defined below) are primarily
1
<PAGE>
intended to result in the sale of Class A shares of the Fund within the meaning
of paragraph (a)(2) of Rule 12b-1 promulgated under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
The Plan
--------
The material aspects of the Plan are as follows:
1. Distribution Activities
-----------------------
The Fund shall engage the Distributor to distribute Class A shares of the
Fund and to service shareholder accounts using all of the facilities of the
Distributor's distribution network, including sales personnel and branch office
and central support systems, and also using such other qualified broker-dealers
and financial institutions as the Distributor may select, including Prudential
Securities Incorporated (Prudential Securities) and Pruco Securities Corporation
(Prusec). Services provided and activities undertaken to distribute Class A
shares of the Fund are referred to herein as "Distribution Activities."
2. Payment of Service Fee
-----------------------
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class A shares (service
fee). The Fund shall
2
<PAGE>
calculate and accrue daily amounts payable by the Class A shares of the Fund
hereunder and shall pay such amounts monthly or at such other intervals as the
Board of Directors/Trustees may determine.
3. Payment for Distribution Activities
-----------------------------------
The Fund shall pay to the Distributor as compensation for its services a
distribution fee, together with the service fee (described in Section 2 hereof),
of .30 of 1% per annum of the average daily net assets of the Class A shares of
the Fund for the performance of Distribution Activities. The Fund shall
calculate and accrue daily amounts payable by the Class A shares of the Fund
hereunder and shall pay such amounts monthly or at such other intervals as the
Board of Directors/Trustees may determine. Amounts payable under the Plan shall
be subject to the limitations of Rule 2830 of the NASD Conduct Rules.
Amounts paid to the Distributor by the Class A shares of the Fund will not
be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class A shares according to the
ratio of the sales of Class A shares to the total sales of the Fund's shares
over the Fund's fiscal year or such other allocation method approved by the
Board of Directors/Trustees. The allocation of distribution expenses among
classes will be subject to the review of the Board of Directors/Trustees.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
3
<PAGE>
(a) sales commissions and trailer commissions paid to, or on
account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
Distribution Activities, including central office and branch expenses;
(c) amounts paid to Prudential Securities or Prusec for performing
services under a selected dealer agreement between Prudential
Securities or Prusec and the Distributor for sale of Class A shares of
the Fund, including sales commissions, trailer commissions paid to, or
on account of, agents and indirect and overhead costs associated with
Distribution Activities;
(d) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund prospectuses,
statements of additional information and periodic financial reports
and sales literature to persons other than current shareholders of the
Fund; and
(e) sales commissions (including trailer commissions) paid to, or on
account of, broker-dealers and financial institutions (other than
Prudential Securities or Prusec) which have entered into selected
dealer agreements with the Distributor with respect to Class A shares
of the Fund.
4. Quarterly Reports; Additional Information
-----------------------------------------
An appropriate officer of the Fund will provide to the Board of
Directors/Trustees of the Fund for review, at least quarterly, a written report
specifying in reasonable detail the amounts expended for Distribution Activities
(including payment of the service fee) and the purposes for which such
expenditures were made in compliance with the requirements of Rule 12b-1. The
Distributor will provide to the Board of Directors/Trustees of the Fund such
additional information as the Board shall from time to time reasonably request,
including information about Distribution Activities undertaken or to be
undertaken by the Distributor.
4
<PAGE>
The Distributor will inform the Board of Directors/Trustees of the Fund of
the commissions and account servicing fees to be paid by the Distributor to
account executives of the Distributor and to broker-dealers and financial
institutions which have selected dealer agreements with the Distributor.
5. Effectiveness; Continuation
---------------------------
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class A shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities of
the Class A shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the Board of Directors/Trustees of the Fund and a majority of the
Rule 12b-1 Directors/Trustees by votes cast in person at a meeting called for
the purpose of voting on the continuation of the Plan.
6. Termination
-----------
This Plan may be terminated at any time, without the payment of any
penalty, by a majority of the Rule 12b-1 Directors/Trustees, or by vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class A shares of the Fund, or by the Distributor, on sixty
(60) days' written notice to the other party. This Plan shall automatically
terminate in the event of its assignment.
7. Amendments
----------
5
<PAGE>
The Plan may not be amended to change the combined service and distribution
fees to be paid as provided for in Sections 2 and 3 hereof so as to increase
materially the amounts payable under this Plan unless such amendment shall be
approved by the vote of a majority of the outstanding voting securities (as
defined in the Investment Company Act) of the Class A shares of the Fund. All
material amendments of the Plan shall be approved by a majority of the Board of
Directors/Trustees of the Fund and a majority of the Rule 12b-1
Directors/Trustees by votes cast in person at a meeting called for the purpose
of voting on the Plan.
8. Rule 12b-1 Directors/Trustees
-----------------------------
While the Plan is in effect, the selection and nomination of the
Directors/Trustees shall be committed to the discretion of the Rule 12b-1
Directors/Trustees.
9. Records
-------
The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.
10. Enforcement of Claims
---------------------
The name "Prudential Equity Income Fund" is the designation of the Trustees
under an Amended and Restated Declaration of Trust dated August 16, 1994, and
all persons dealing with the Fund must look solely to the property of the Fund
for the enforcement of any claims against the Fund, and neither the Trustees,
officers, agents or shareholders assume any personal liability for obligations
entered into on behalf of the Fund.
Dated: August 1, 1994
Amended: June 1, 1998
6
<PAGE>
EXHIBIT 99.M (2)
Prudential Equity Income Fund
_____________________________
Amended and Restated
Distribution and Service Plan
(Class B Shares)
--------------
Introduction
------------
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Rule 2830 of the Conduct
Rules of the National Association of Securities Dealers, Inc. (NASD) has been
adopted by Prudential Equity Income Fund (the Fund) and by Prudential Investment
Management Services LLC, the Fund's distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which the
Fund will employ the Distributor to distribute Class B shares issued by the Fund
(Class B shares). Under the Plan, the Fund wishes to pay to the Distributor, as
compensation for its services, a distribution and service fee with respect to
Class B shares.
A majority of the Board of Directors/Trustees of the Fund, including a
majority who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of this Plan or any agreements related to it (the Rule 12b-1
Directors/Trustees), have determined by votes cast in person at a meeting called
for the purpose of voting on this Plan that there is a reasonable likelihood
that adoption and continuation of this Plan will benefit the Fund and its
shareholders. Expenditures under this Plan by the Fund for Distribution
Activities (defined below) are primarily intended to result in the sale of Class
B shares
1
<PAGE>
of the Fund within the meaning of paragraph (a)(2) of Rule 12b-1 promulgated
under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
The Plan
--------
The material aspects of the Plan are as follows:
1. Distribution Activities
-----------------------
The Fund shall engage the Distributor to distribute Class B shares of the
Fund and to service shareholder accounts using all of the facilities of the
Distributor's distribution network including sales personnel and branch office
and central support systems, and also using such other qualified broker-dealers
and financial institutions as the Distributor may select, including Prudential
Securities Incorporated (Prudential Securities) and Pruco Securities Corporation
(Prusec). Services provided and activities undertaken to distribute Class B
shares of the Fund are referred to herein as "Distribution Activities."
2. Payment of Service Fee
----------------------
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class B shares (service
fee). The Fund shall
2
<PAGE>
calculate and accrue daily amounts payable by the Class B shares of the Fund
hereunder and shall pay such amounts monthly or at such other intervals as the
Board of Directors/Trustees may determine.
3. Payment for Distribution Activities
-----------------------------------
The Fund shall pay to the Distributor as compensation for its services a
distribution fee of .75 of 1% per annum of the average daily net assets of the
Class B shares of the Fund for the performance of Distribution Activities. The
Fund shall calculate and accrue daily amounts payable by the Class B shares of
the Fund hereunder and shall pay such amounts monthly or at such other intervals
as the Board of Directors/Trustees may determine. Amounts payable under the
Plan shall be subject to the limitations of Rule 2830 of the NASD Conduct Rules.
Amounts paid to the Distributor by the Class B shares of the Fund will not
be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class B shares according to the
ratio of the sale of Class B shares to the total sales of the Fund's shares over
the Fund's fiscal year or such other allocation method approved by the Board of
Directors/Trustees. The allocation of distribution expenses among classes will
be subject to the review of the Board of Directors/Trustees. Payments hereunder
will be applied to distribution expenses in the order in which they are
incurred, unless otherwise determined by the Board of Directors/Trustees.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
3
<PAGE>
(a) sales commissions (including trailer commissions) paid to, or on
account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
performance of Distribution Activities including central office and
branch expenses;
(c) amounts paid to Prudential Securities or Prusec for performing
services under a selected dealer agreement between Prudential
Securities or Prusec and the Distributor for sale of Class B shares of
the Fund, including sales commissions and trailer commissions paid to,
or on account of, agents and indirect and overhead costs associated
with Distribution Activities;
(d) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund prospectuses,
statements of additional information and periodic financial reports
and sales literature to persons other than current shareholders of the
Fund; and
(e) sales commissions (including trailer commissions) paid to, or on
account of, broker-dealers and other financial institutions (other
than Prudential Securities or Prusec) which have entered into selected
dealer agreements with the Distributor with respect to Class B shares
of the Fund.
4. Quarterly Reports; Additional Information
-----------------------------------------
An appropriate officer of the Fund will provide to the Board of
Directors/Trustees of the Fund for review, at least quarterly, a written report
specifying in reasonable detail the amounts expended for Distribution Activities
(including payment of the service fee) and the purposes for which such
expenditures were made in compliance with the requirements of Rule 12b-1. The
Distributor will provide to the Board of Directors/Trustees of the Fund such
additional information as they shall from time to time reasonably request,
including information about Distribution Activities undertaken or to be
undertaken by the Distributor.
4
<PAGE>
The Distributor will inform the Board of Directors/Trustees of the Fund of
the commissions and account servicing fees to be paid by the Distributor to
account executives of the Distributor and to broker-dealers and other financial
institutions which have selected dealer agreements with the Distributor.
5. Effectiveness; Continuation
---------------------------
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class B shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities of
the Class B shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the Board of Directors/Trustees of the Fund and a majority of the
Rule 12b-1 Directors/Trustees by votes cast in person at a meeting called for
the purpose of voting on the continuation of the Plan.
6. Termination
-----------
This Plan may be terminated at any time, without the payment of any
penalty, by a majority of the Rule 12b-1 Directors/Trustees, or by vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class B shares of the Fund, or by the Distributor, on sixty
(60) days' written notice to the other party. This Plan shall automatically
terminate in the event of its assignment.
7. Amendments
----------
5
<PAGE>
The Plan may not be amended to change the combined service and distribution
expenses to be paid as provided for in Sections 2 and 3 hereof so as to increase
materially the amounts payable under this Plan unless such amendment shall be
approved by the vote of a majority of the outstanding voting securities (as
defined in the Investment Company Act) of the Class B shares of the Fund. All
material amendments of the Plan shall be approved by a majority of the Board of
Directors/Trustees of the Fund and a majority of the Rule 12b-1
Directors/Trustees by votes cast in person at a meeting called for the purpose
of voting on the Plan.
8. Rule 12b-1 Directors/Trustees
-----------------------------
While the Plan is in effect, the selection and nomination of the Rule 12b-1
Directors/Trustees shall be committed to the discretion of the Rule 12b-1
Directors/Trustees.
9. Records
-------
The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.
10. Enforcement of Claims
---------------------
The name "Prudential Equity Income Fund" is the designation of the Trustees
under an Amended and Restated Declaration of Trust dated August 16, 1994, and
all persons dealing with the Fund must look solely to the property of the Fund
for the enforcement of any claims against the Fund, and neither the Trustees,
officers, agents or shareholders assume any personal liability for obligations
entered into on behalf of the Fund.
Dated: August 1, 1994
Amended: June 1, 1998
6
<PAGE>
EXHIBIT 99.M(3)
Prudential Equity Income Fund
_____________________________
Amended and Restated
Distribution and Service Plan
(Class C Shares)
--------------
Introduction
------------
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Rule 2830 of the Conduct
Rules of the National Association of Securities Dealers, Inc. (NASD) has been
adopted by Prudential Equity Income Fund (the Fund) and by Prudential
Investment Management Services LLC, the Fund's distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which the
Fund will employ the Distributor to distribute Class C shares issued by the Fund
(Class C shares). Under the Plan, the Fund wishes to pay to the Distributor, as
compensation for its services, a distribution and service fee with respect to
Class C shares.
A majority of the Board of Directors/Trustees of the Fund, including a
majority who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of this Plan or any agreements related to it (the Rule 12b-1
Directors/Trustees), have determined by votes cast in person at a meeting called
for the purpose of voting on this Plan that there is a reasonable likelihood
that adoption and continuation of this Plan will benefit the Fund and its
shareholders. Expenditures under this Plan by the Fund for Distribution
Activities (defined below) are primarily intended to result in the sale of Class
C shares
1
<PAGE>
of the Fund within the meaning of paragraph (a)(2) of Rule 12b-1 promulgated
under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
The Plan
--------
The material aspects of the Plan are as follows:
1. Distribution Activities
-----------------------
The Fund shall engage the Distributor to distribute Class C shares of the
Fund and to service shareholder accounts using all of the facilities of the
Distributor's distribution network including sales personnel and branch office
and central support systems, and also using such other qualified broker-dealers
and financial institutions as the Distributor may select, including Prudential
Securities Incorporated (Prudential Securities) and Pruco Securities Corporation
(Prusec). Services provided and activities undertaken to distribute Class C
shares of the Fund are referred to herein as "Distribution Activities."
2. Payment of Service Fee
----------------------
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class C shares (service
fee). The Fund shall
2
<PAGE>
calculate and accrue daily amounts payable by the Class C shares of the Fund
hereunder and shall pay such amounts monthly or at such other intervals as the
Board of Directors/Trustees may determine.
3. Payment for Distribution Activities
-----------------------------------
The Fund shall pay to the Distributor as compensation for its services a
distribution fee of .75 of 1% per annum of the average daily net assets of the
Class C shares of the Fund for the performance of Distribution Activities. The
Fund shall calculate and accrue daily amounts payable by the Class C shares of
the Fund hereunder and shall pay such amounts monthly or at such other intervals
as the Board of Directors/Trustees may determine. Amounts payable under the
Plan shall be subject to the limitations of Rule 2830 of the NASD Conduct Rules.
Amounts paid to the Distributor by the Class C shares of the Fund will not
be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class C shares according to the
ratio of the sale of Class C shares to the total sales of the Fund's shares over
the Fund's fiscal year or such other allocation method approved by the Board of
Directors/Trustees. The allocation of distribution expenses among classes will
be subject to the review of the Board of Directors/Trustees. Payments hereunder
will be applied to distribution expenses in the order in which they are
incurred, unless otherwise determined by the Board of Directors/Trustees.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
3
<PAGE>
(a) sales commissions (including trailer commissions) paid to, or on
account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
performance of Distribution Activities including central office and
branch expenses;
(c) amounts paid to Prudential Securities or Prusec for performing
services under a selected dealer agreement between Prudential
Securities or Prusec and the Distributor for sale of Class C shares of
the Fund, including sales commissions and trailer commissions paid to,
or on account of, agents and indirect and overhead costs associated
with Distribution Activities;
(d) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund prospectuses,
statements of additional information and periodic financial reports
and sales literature to persons other than current shareholders of the
Fund; and
(e) sales commissions (including trailer commissions) paid to, or on
account of, broker-dealers and other financial institutions (other
than Prudential Securities or Prusec) which have entered into selected
dealer agreements with the Distributor with respect to Class C shares
of the Fund.
4. Quarterly Reports; Additional Information
-----------------------------------------
An appropriate officer of the Fund will provide to the Board of
Directors/Trustees of the Fund for review, at least quarterly, a written report
specifying in reasonable detail the amounts expended for Distribution Activities
(including payment of the service fee) and the purposes for which such
expenditures were made in compliance with the requirements of Rule 12b-1. The
Distributor will provide to the Board of Directors/Trustees of the Fund such
additional information as they shall from time to time reasonably request,
including information about Distribution Activities undertaken or to be
undertaken by the Distributor.
4
<PAGE>
The Distributor will inform the Board of Directors/Trustees of the Fund of
the commissions and account servicing fees to be paid by the Distributor to
account executives of the Distributor and to broker-dealers and other financial
institutions which have selected dealer agreements with the Distributor.
5. Effectiveness; Continuation
---------------------------
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class C shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities of
the Class C shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the Board of Directors/Trustees of the Fund and a majority of the
Rule 12b-1 Directors/Trustees by votes cast in person at a meeting called for
the purpose of voting on the continuation of the Plan.
6. Termination
-----------
This Plan may be terminated at any time, without the payment of any
penalty, by a majority of the Rule 12b-1 Directors/Trustees, or by vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class C shares of the Fund, or by the Distributor, on sixty
(60) days' written notice to the other party. This Plan shall automatically
terminate in the event of its assignment.
7. Amendments
----------
5
<PAGE>
The Plan may not be amended to change the combined service and distribution
expenses to be paid as provided for in Sections 2 and 3 hereof so as to increase
materially the amounts payable under this Plan unless such amendment shall be
approved by the vote of a majority of the outstanding voting securities (as
defined in the Investment Company Act) of the Class C shares of the Fund. All
material amendments of the Plan shall be approved by a majority of the Board of
Directors/Trustees of the Fund and a majority of the Rule 12b-1
Directors/Trustees by votes cast in person at a meeting called for the purpose
of voting on the Plan.
8. Rule 12b-1 Directors/Trustees
-----------------------------
While the Plan is in effect, the selection and nomination of the Rule 12b-1
Directors/Trustees shall be committed to the discretion of the Rule 12b-1
Directors/Trustees.
9. Records
-------
The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.
10. Enforcement of Claims
---------------------
The name "Prudential Equity Income Fund" is the designation of the Trustees
under an Amended and Restated Declaration of Trust dated August 16, 1994, and
all persons dealing with the Fund must look solely to the property of the Fund
for the enforcement of any claims against the Fund, and neither the Trustees,
officers, agents or shareholders assume any personal liability for obligations
entered into on behalf of the Fund.
Dated: August 1, 1994
Amended: June 1, 1998
6
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> EQUITY INCOME FUND (CLASS A)
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> APR-30-1998
<INVESTMENTS-AT-COST> 1,701,451,747
<INVESTMENTS-AT-VALUE> 2,412,253,268
<RECEIVABLES> 14,635,684
<ASSETS-OTHER> 307,746
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 7,135,635
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 7,805,972
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,605,489,077
<SHARES-COMMON-STOCK> 109,701,738
<SHARES-COMMON-PRIOR> 91,296,710
<ACCUMULATED-NII-CURRENT> (2,009,627)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 98,317,544
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 710,458,097
<NET-ASSETS> (200,998,448)
<DIVIDEND-INCOME> 27,420,810
<INTEREST-INCOME> 2,726,106
<OTHER-INCOME> 0
<EXPENSES-NET> 14,329,041
<NET-INVESTMENT-INCOME> 15,817,875
<REALIZED-GAINS-CURRENT> 101,807,177
<APPREC-INCREASE-CURRENT> 203,964,457
<NET-CHANGE-FROM-OPS> 321,589,509
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (17,165,573)
<DISTRIBUTIONS-OF-GAINS> (179,624,728)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 576,410,828
<NUMBER-OF-SHARES-REDEEMED> (383,158,305)
<SHARES-REINVESTED> 180,974,312
<NET-CHANGE-IN-ASSETS> 499,026,043
<ACCUMULATED-NII-PRIOR> (564,897)
<ACCUMULATED-GAINS-PRIOR> 176,230,283
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,318,108
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 14,329,041
<AVERAGE-NET-ASSETS> 640,047,000
<PER-SHARE-NAV-BEGIN> 21.00
<PER-SHARE-NII> 3.15
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (2.11)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 22.04
<EXPENSE-RATIO> 0.88
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> EQUITY INCOME FUND (CLASS B)
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> APR-30-1998
<INVESTMENTS-AT-COST> 1,701,451,747
<INVESTMENTS-AT-VALUE> 2,412,253,268
<RECEIVABLES> 14,635,684
<ASSETS-OTHER> 307,746
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 7,135,635
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 7,805,972
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,605,489,077
<SHARES-COMMON-STOCK> 109,701,738
<SHARES-COMMON-PRIOR> 91,296,710
<ACCUMULATED-NII-CURRENT> (2,009,627)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 98,317,544
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 710,458,097
<NET-ASSETS> (200,998,448)
<DIVIDEND-INCOME> 27,420,810
<INTEREST-INCOME> 2,726,106
<OTHER-INCOME> 0
<EXPENSES-NET> 14,329,041
<NET-INVESTMENT-INCOME> 15,817,875
<REALIZED-GAINS-CURRENT> 101,807,177
<APPREC-INCREASE-CURRENT> 203,964,457
<NET-CHANGE-FROM-OPS> 321,589,509
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (17,165,573)
<DISTRIBUTIONS-OF-GAINS> (179,624,728)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 576,410,828
<NUMBER-OF-SHARES-REDEEMED> (383,158,305)
<SHARES-REINVESTED> 180,974,312
<NET-CHANGE-IN-ASSETS> 499,026,043
<ACCUMULATED-NII-PRIOR> (564,897)
<ACCUMULATED-GAINS-PRIOR> 176,230,283
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,318,108
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 14,329,041
<AVERAGE-NET-ASSETS> 1,371,095,000
<PER-SHARE-NAV-BEGIN> 20.93
<PER-SHARE-NII> 3.06
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (2.03)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 21.96
<EXPENSE-RATIO> 1.63
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> EQUITY INCOME FUND (CLASS C)
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> APR-30-1998
<INVESTMENTS-AT-COST> 1,701,451,747
<INVESTMENTS-AT-VALUE> 2,412,253,268
<RECEIVABLES> 14,635,684
<ASSETS-OTHER> 307,746
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 7,135,635
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 7,805,972
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,605,489,077
<SHARES-COMMON-STOCK> 109,701,738
<SHARES-COMMON-PRIOR> 91,296,710
<ACCUMULATED-NII-CURRENT> (2,009,627)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 98,317,544
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 710,458,097
<NET-ASSETS> (200,998,448)
<DIVIDEND-INCOME> 27,420,810
<INTEREST-INCOME> 2,726,106
<OTHER-INCOME> 0
<EXPENSES-NET> 14,329,041
<NET-INVESTMENT-INCOME> 15,817,875
<REALIZED-GAINS-CURRENT> 101,807,177
<APPREC-INCREASE-CURRENT> 203,964,457
<NET-CHANGE-FROM-OPS> 321,589,509
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (17,165,573)
<DISTRIBUTIONS-OF-GAINS> (179,624,728)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 576,410,828
<NUMBER-OF-SHARES-REDEEMED> (383,158,305)
<SHARES-REINVESTED> 180,974,312
<NET-CHANGE-IN-ASSETS> 499,026,043
<ACCUMULATED-NII-PRIOR> (564,897)
<ACCUMULATED-GAINS-PRIOR> 176,230,283
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,318,108
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 14,329,041
<AVERAGE-NET-ASSETS> 25,172,000
<PER-SHARE-NAV-BEGIN> 20.93
<PER-SHARE-NII> 3.06
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (2.03)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 21.96
<EXPENSE-RATIO> 1.63
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 004
<NAME> EQUITY INCOME FUND (CLASS Z)
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> APR-30-1998
<INVESTMENTS-AT-COST> 1,701,451,747
<INVESTMENTS-AT-VALUE> 2,412,253,268
<RECEIVABLES> 14,635,684
<ASSETS-OTHER> 307,746
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 7,135,635
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 7,805,972
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,605,489,077
<SHARES-COMMON-STOCK> 109,701,738
<SHARES-COMMON-PRIOR> 91,296,710
<ACCUMULATED-NII-CURRENT> (2,009,627)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 98,317,544
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 710,458,097
<NET-ASSETS> (200,998,448)
<DIVIDEND-INCOME> 27,420,810
<INTEREST-INCOME> 2,726,106
<OTHER-INCOME> 0
<EXPENSES-NET> 14,329,041
<NET-INVESTMENT-INCOME> 15,817,875
<REALIZED-GAINS-CURRENT> 101,807,177
<APPREC-INCREASE-CURRENT> 203,964,457
<NET-CHANGE-FROM-OPS> 321,589,509
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (17,165,573)
<DISTRIBUTIONS-OF-GAINS> (179,624,728)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 576,410,828
<NUMBER-OF-SHARES-REDEEMED> (383,158,305)
<SHARES-REINVESTED> 180,974,312
<NET-CHANGE-IN-ASSETS> 499,026,043
<ACCUMULATED-NII-PRIOR> (564,897)
<ACCUMULATED-GAINS-PRIOR> 176,230,283
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,318,108
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 14,329,041
<AVERAGE-NET-ASSETS> 84,084,000
<PER-SHARE-NAV-BEGIN> 21.00
<PER-SHARE-NII> 3.18
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (2.13)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 22.05
<EXPENSE-RATIO> 0.63
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<PAGE>
EXHIBIT 99.(O)
PRUDENTIAL EQUITY INCOME FUND
(the Fund)
AMENDED AND RESTATED PLAN PURSUANT TO RULE 18F-3
The Fund hereby adopts this plan pursuant to Rule 18f-3 under the
Investment Company Act of 1940 (the 1940 Act), setting forth the separate
arrangement and expense allocation of each class of shares in the Fund. Any
material amendment to this plan is subject to prior approval of the Board of
Trustees, including a majority of the independent Trustees.
CLASS CHARACTERISTICS
CLASS A SHARES: Class A shares are subject to a high initial sales charge and a
- --------------
distribution and/or service fee pursuant to Rule 12b-1 under
the 1940 Act (Rule 12b-1 fee) not to exceed .30 of 1% per
annum of the average daily net assets of the class. The
initial sales charge is waived or reduced for certain
eligible investors.
CLASS B SHARES: Class B shares are not subject to an initial sales charge but
- --------------
are subject to a high contingent deferred sales charge
(declining from 5% to zero over a six-year period) which
will be imposed on certain redemptions and a Rule 12b-1 fee
not to exceed 1% per annum of the average daily net assets
of the class. The contingent deferred sales charge is waived
for certain eligible investors. Class B shares automatically
convert to Class A shares approximately seven years after
purchase.
CLASS C SHARES: Class C shares issued before November 2, 1998 are not subject
- --------------
to an initial sales charge but are subject to a 1%
contingent deferred sales charge which will be imposed on
certain redemptions within the first 12 month after purchase
and a Rule 12b-1 fee not to exceed 1% per annum of the
average daily net assets of the class. Class C shares
issued on or after November 2, 1998 are subject to a low
initial sales charge and a 1% contingent deferred sales
charge which will be imposed on certain redemptions within
the first 18 months after purchase and a Rule 12b-1 fee not
to exceed 1% per annum of the average daily net assets of
the class.
<PAGE>
Class Z SHARES: Class Z shares are not subject to either an initial or
- --------------
contingent deferred sales charge, nor are they subject to
any Rule 12b-1 fee.
INCOME AND EXPENSE ALLOCATIONS
Income, any realized and unrealized capital gains and losses, and expenses
not allocated to a particular class of the Fund will be allocated to each
class of the Fund on the basis of the net asset value of that class in
relation to the net asset value of the Fund.
DIVIDENDS AND DISTRIBUTIONS
Dividends and other distributions paid by the Fund to each class of shares,
to the extent paid, will be paid on the same day and at the same time, and
will be determined in the same manner and will be in the same amount,
except that the amount of the dividends and other distributions declared
and paid by a particular class of the Fund may be different from that paid
by another class of the Fund because of Rule 12b-1 fees and other expenses
borne exclusively by that class.
EXCHANGE PRIVILEGE
Holders of Class A Shares, Class B Shares, Class C Shares and Class Z
Shares shall have such exchange privileges as set forth in the Fund's
current prospectus. Exchange privileges may vary among classes and among
holders of a Class.
CONVERSION FEATURES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be
effected at relative net asset value without the imposition of any
additional sales charge.
GENERAL
A. Each class of shares shall have exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and shall
have separate voting rights on any matter submitted to shareholders in
which the interests of one class differ from the interests of any other
class.
B. On an ongoing basis, the Trustees, pursuant to their fiduciary
responsibilities under the 1940 Act and otherwise, will monitor the Fund
for the
2
<PAGE>
existence of any material conflicts among the interests of its several
classes. The Trustees, including a majority of the independent Trustees,
shall take such action as is reasonably necessary to eliminate any such
conflicts that may develop. Prudential Investments Fund Management LLC, the
Fund's Manager, will be responsible for reporting any potential or existing
conflicts to the Trustees.
C. For purposes of expressing an opinion on the financial statements of the
Fund, the methodology and procedures for calculating the net asset value
and dividends/distributions of the Fund's several classes and the proper
allocation of income and expenses among such classes will be examined
annually by the Fund's independent auditors who, in performing such
examination, shall consider the factors set forth in the relevant auditing
standards adopted, from time to time, by the American Institute of
Certified Public Accountants.
Approved: August 26, 1998
Effective: November 2, 1998
3
