<PAGE>
Prudential Equity Income Fund
- -------------------------------------------------------------------------------
PROSPECTUS DATED DECEMBER 30, 1997
- -------------------------------------------------------------------------------
Prudential Equity Income Fund (the Fund) is an open-end, diversified, manage-
ment investment company. Its investment objective is both current income and
capital appreciation. It seeks to achieve this objective by investing primar-
ily in common stocks and convertible securities that provide investment income
returns above those of the Standard & Poor's 500 Stock Index or the NYSE Com-
posite Index. In normal circumstances, the Fund intends to invest at least 65%
of its total assets in such securities. The balance of the Fund's assets may
be invested in other common stocks, other securities convertible into common
stocks, debt 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 "How the Fund Invests--Investment Objective and Policies." The
Fund's address is Gateway Center Three, 100 Mulberry Street, Newark, New Jer-
sey 07102-4077, and its telephone number is (800) 225-1852.
The Fund's purchase and sale of put and call options and related short-term
trading may result in a high portfolio turnover rate. These activities may be
considered speculative and may result in higher risks and costs to the Fund.
The Fund may also buy and sell stock index futures and options thereon for the
purpose of hedging its securities portfolio or enhancing its return and may
buy and sell options on stock indices, in each case in accordance with limits
described herein. See "How the Fund Invests--Investment Objective and Poli-
cies."
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. Additional information
about the Fund has been filed with the Securities and Exchange Commission (the
Commission) in a Statement of Additional Information, dated December 30, 1997,
which information is incorporated herein by reference (is legally considered a
part of this Prospectus) and is available without charge upon request to the
Fund at the address or telephone number noted above. The Commission maintains
a Website (http://www.sec.gov) that contains the Statement of Additional In-
formation, material incorporated by reference, and other information regarding
the Fund.
- -------------------------------------------------------------------------------
Investors are advised to read this Prospectus and retain it for future
reference.
- -------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADE-
QUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OF-
FENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL EQUITY INCOME FUND?
Prudential Equity Income Fund is a mutual fund. A mutual fund pools the
resources of investors by selling its shares to the public and investing
the proceeds of such sale in a portfolio of securities designed to achieve
its investment objective. Technically, the Fund is an open-end,
diversified, management investment company.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is both current income and capital
appreciation. It seeks to achieve this objective by investing primarily in
common stocks and convertible securities that provide investment income
returns above those of the Standard & Poor's 500 Stock Index or the NYSE
Composite Index. There can be no assurance that the Fund's objective will
be achieved. See "How the Fund Invests--Investment Objective and Policies"
at page 9.
WHAT ARE THE FUND'S RISK FACTORS AND SPECIAL CHARACTERISTICS?
The Fund may invest up to 30% of its total assets in the securities of
foreign issuers and up to 35% of its total assets in fixed-income
obligations, including securities rated Baa or lower by Moody's Investors
Service, Inc. or BBB or lower by Standard & Poor's Ratings Group or Duff &
Phelps Credit Rating Co. or another nationally recognized statistical
rating organization, which may be subject to special risks. See "How the
Fund Invests--Investment Objective and Policies" at page 9. The Fund may
also engage in various hedging and return enhancement strategies, including
utilizing derivatives. These activities may be considered speculative and
may result in higher risks and costs to the Fund. See "How the Fund
Invests--Hedging and Return Enhancement Strategies--Risks of Hedging and
Return Enhancement Strategies" at page 11. As with an investment in any
mutual fund, an investment in this Fund can decrease in value and you can
lose money.
WHO MANAGES THE FUND?
Prudential Investments Fund Management LLC (PIFM or the Manager) is the
Manager of the Fund and is compensated for its services at an annual rate
of .60 of 1% of the Fund's average daily net assets up to $500 million, .50
of 1% of the Fund's 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. As of November 30, 1997, PIFM served as manager or administrator
to 63 investment companies, including 41 mutual funds, with aggregate
assets of approximately $60 billion. The Prudential Investment Corporation
(PIC), doing business as Prudential Investments (PI, the Subadviser or the
investment adviser), furnishes investment advisory services in connection
with the management of the Fund under a Subadvisory Agreement with PIFM.
See "How the Fund is Managed--Manager" at page 16.
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Securities Incorporated (Prudential Securities, or the
Distributor), a major securities underwriter and securities and commodities
broker, acts as the Distributor of the Fund's Class A, Class B, Class C and
Class Z shares and is paid a distribution and service fee with respect to
Class A shares which is currently being charged at the annual rate of .25
of 1% of the average daily net assets of the Class A shares and is paid a
distribution and service fee with respect to Class B and Class C shares at
an annual rate of 1% of the average daily net assets of each of the Class B
and Class C shares. The Distributor incurs the expense of distributing the
Fund's Class Z shares under a Distribution Agreement with the Fund, none of
which is reimbursed or paid for by the Fund. See "How the Fund is Managed--
Distributor" at page 17.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000
and $5,000 for Class C shares. The minimum subsequent investment is $100
for Class A, Class B and Class C shares. Class Z shares are not subject to
any minimum investment requirements. There is no minimum investment
requirement for certain retirement and employee savings plans or custodial
accounts for the benefit of minors. For purchases made through the
Automatic Savings Accumulation Plan, the minimum initial and subsequent
investment is $50. See "Shareholder Guide--How to Buy Shares of the Fund"
at page 22 and "Shareholder Guide--Shareholder Services" at page 34.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund through its transfer
agent, Prudential Mutual Fund Services LLC (PMFS or the Transfer Agent), at the
net asset value per share (NAV) next determined after receipt of your purchase
order by the Transfer Agent or Prudential Securities plus a sales charge which
may be imposed either (i) at the time of purchase (Class A shares) or (ii) on a
deferred basis (Class B or Class C shares). Class Z shares are offered to a
limited group of investors at NAV without any sales charge. See "How the Fund
Values its Shares" at page 19 and "Shareholder Guide--How to Buy Shares of the
Fund" at page 22.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers four classes of shares:
. Class A Shares: Sold with an initial sales charge of up to 5% of the
offering price.
. Class B Shares: Sold without an initial sales charge but are subject to a
contingent deferred sales charge or CDSC (declining from
5% to zero of the lower of the amount invested or the
redemption proceeds) which will be imposed on certain
redemptions made within six years of purchase. Although
Class B shares are subject to higher ongoing
distribution-related expenses than Class A shares, Class
B shares will automatically convert to Class A shares
(which are subject to lower ongoing distribution-related
expenses) approximately seven years after purchase.
. Class C Shares: Sold without an initial sales charge and, for one year
after purchase, are subject to a 1% CDSC on redemptions.
Like Class B shares, Class C shares are subject to higher
ongoing distribution-related expenses than Class A shares
but do not convert to another class.
. Class Z Shares: Sold without either an initial sales charge or CDSC to a
limited group of investors. Class Z shares are not
subject to any ongoing service or distribution expenses.
See "Shareholder Guide--Alternative Purchase Plan" at page 24.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order. However,
the proceeds of redemptions of Class B and Class C shares may be subject to a
CDSC. See "Shareholder Guide--How to Sell Your Shares" at page 28. Participants
in programs sponsored by Prudential Retirement Services should contact their
client representative for more information about selling their Class Z shares.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Fund expects to pay dividends of net investment income, if any, quarterly
and make distributions of any net capital gains at least annually. Dividends
and distributions will be automatically reinvested in additional shares of the
Fund at NAV without a sales charge unless you request that they be paid to you
in cash. See "Taxes, Dividends and Distributions" at page 19.
3
<PAGE>
FUND EXPENSES
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES+
Maximum Sales Load
Imposed on Purchases
(as a percentage of
offering price)....... 5% None None None
Maximum Sales Load
Imposed on Reinvested
Dividends............. None None None None
Maximum Deferred Sales
Load (as a percentage
of original purchase None
price or redemption
proceeds, whichever is
lower)................ None 5% during the first year, 1% on redemptions made
decreasing by 1% annually within one year of purchase
to 1% in the fifth and sixth
years and 0% the seventh
year*
Redemption Fees........ None None None None
Exchange Fee........... None None None None
<CAPTION>
ANNUAL FUND OPERATING
EXPENSES
(as a percentage of av-
erage net CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
assets) -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Management Fees........ .52% .52% .52% .52%
12b-1 Fees (After Re-
duction).............. .25++ 1.00 1.00 None
Other Expenses......... .17 .17 .17 .17
--- --- --- ---
Total Fund Operating
Expenses (After
Reduction)............ .94% 1.69% 1.69% .69%
=== ==== ==== ===
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming (1) 5% annual
return and (2) redemption at the end of
each time period:
Class A................................. $59 $79 $100 $161
Class B................................. $67 $84 $102 $172
Class C................................. $27 $54 $ 92 $201
Class Z................................. $ 7 $22 $ 39 $ 87
You would pay the following expenses on the
same investment, assuming no redemption:
Class A................................. $59 $79 $100 $161
Class B................................. $17 $54 $ 92 $172
Class C................................. $17 $54 $ 92 $201
Class Z................................. $ 7 $22 $ 39 $ 87
</TABLE>
The above example is based on data for the Fund's fiscal year ended
October 31, 1997. The example should not be considered a representation of
past or future expenses. Actual expenses may be greater or less than those
shown.
The purpose of this table is to assist investors in understanding the
various costs and expenses that an investor in the Fund will bear, whether
directly or indirectly. For more complete descriptions of the various
costs and expenses, see "How the Fund is Managed." "Other Expenses"
includes operating expenses of the Fund, such as Trustees' and
professional fees, registration fees, reports to shareholders and transfer
agency and custodian fees.
--------
* Class B shares will automatically convert to Class A shares
approximately seven years after purchase. See "Shareholder Guide--
Conversion Feature--Class B Shares."
+ Pursuant to rules of the National Association of Securities Dealers,
Inc., the aggregate initial sales charges, deferred sales charges and
asset-based sales charges on shares of the Fund may not exceed 6.25% of
total gross sales, subject to certain exclusions. This 6.25% limitation
is imposed on each class of the Fund rather than on a per shareholder
basis. Therefore, long-term shareholders of the Fund may pay more in
total sales charges than the economic equivalent of 6.25% of such
shareholders' investment in such shares. See "How the Fund is Managed--
Distributor."
++ Although the Class A Distribution and Service Plan provides that the
Fund may pay a distribution fee of up to .30 of 1% per annum of the
average daily net assets of the Class A shares, the Distributor has
agreed to limit its distribution fees with respect to the Class A shares
of the Fund to .25 of 1% of the average daily net assets of the Class A
shares for the fiscal year ending October 31, 1998. Total Fund Operating
Expenses without such limitation would be .99%. See "How the Fund is
Managed--Distributor."
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS A SHARES)
The following financial highlights for the year ended October 31, 1997, have
been audited by Price Waterhouse LLP, independent accountants, and for the six
years ended October 31, 1996 and the period from January 22, 1990 through
October 31, 1990 have been audited by Deloitte & Touche LLP, independent
auditors, whose reports thereon were unqualified. This information should be
read in conjunction with the financial statements and notes thereto, which
appear in the Statement of Additional Information. The financial highlights
contain selected data for a Class A share of beneficial interest outstanding,
total return, ratios to average net assets and other supplemental data for the
periods indicated. The information is based on data contained in the financial
statements. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide--Shareholder
Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------------
JANUARY 22,
1990(a)
YEAR ENDED OCTOBER 31, THROUGH
----------------------------------------------------------------- OCTOBER 31,
1997 1996 1995 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- ------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PER-
FORMANCE:
Net asset value, begin-
ning of period......... $ 15.43 $ 14.40 $ 14.03 $ 14.38 $ 12.16 $ 12.04 $ 9.53 $10.59
-------- -------- -------- -------- -------- ------- ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income... .45 .47 .48 .41 .47 .47 .38 .25
Net realized and
unrealized gain (loss)
on
investment transac-
tions.................. 6.29 1.75 .95 .06 2.65 .60 2.50 (1.01)
-------- -------- -------- -------- -------- ------- ------ ------
Total from investment
operations............ 6.74 2.22 1.43 .47 3.12 1.07 2.88 (.76)
-------- -------- -------- -------- -------- ------- ------ ------
LESS DISTRIBUTIONS
Dividends from net in-
vestment income........ (.43) (.49) (.54) (.29) (.46) (.47) (.37) (.30)
Distributions from net
realized gains......... (.74) (.70) (.52) (.53) (.44) (.48) -- --
-------- -------- -------- -------- -------- ------- ------ ------
Total distributions.... (1.17) (1.19) (1.06) (.82) (.90) (.95) (.37) (.30)
-------- -------- -------- -------- -------- ------- ------ ------
Net asset value, end of
period................. $ 21.00 $ 15.43 $ 14.40 $ 14.03 $ 14.38 $ 12.16 $12.04 $ 9.53
======== ======== ======== ======== ======== ======= ====== ======
TOTAL RETURN(c):........ 45.68% 15.97% 11.15% 3.48% 26.93% 9.50% 30.62% (7.36)%
RATIOS/SUPPLEMENTAL DA-
TA:
Net assets, end of pe-
riod (000)............. $570,146 $341,717 $276,990 $150,502 $104,017 $51,165 $4,013 $1,098
Average net assets
(000).................. $454,892 $310,335 $236,688 $131,398 $ 70,895 $21,931 $2,084 $ 752
Ratios to average net
assets:
Expenses, including
distribution fees..... .94% .98% 1.03% 1.09% 1.07% 1.22% 1.37% 1.59%(b)
Expenses, excluding
distribution fees..... .69% .73% .78% .85% .87% 1.02% 1.17% 1.39%(b)
Net investment income.. 2.32% 3.26% 3.36% 2.97% 3.44% 3.22% 3.43% 3.12%(b)
Portfolio turnover...... 36% 36% 74% 70% 57% 43% 64% 58%
Average commission rate
paid per share......... $ .0488 $ .0563 N/A N/A N/A N/A N/A N/A
</TABLE>
--------
(a) Commencement of offering of Class A shares.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a sale
on the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a
full year are not annualized.
5
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS B SHARES)
The following financial highlights for the year ended October 31, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and for
the nine years ended October 31, 1996, have been audited by Deloitte &
Touche LLP, independent auditors, whose reports thereon were unqualified.
This information should be read in conjunction with the financial statements
and notes thereto, which appear in the Statement of Additional Information.
The financial highlights contain selected data for a Class B share of
beneficial interest outstanding, total return, ratios to average net assets
and other supplemental data for the periods indicated. The information is
based on data contained in the financial statements. Further performance
information is contained in the annual report, which may be obtained without
charge. See "Shareholder Guide--Shareholder Services--Reports to
Shareholders."
<TABLE>
<CAPTION>
CLASS B
----------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988(a)
---------- -------- -------- -------- -------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <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 $ 12.03 $ 9.53 $ 10.89 $ 9.63 $ 8.48
---------- -------- -------- -------- -------- -------- -------- -------- -------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income... .29 .39 .37 .31 .37 .37 .30 .28 .32 .28
Net realized and
unrealized gain (loss)
on investment
transactions........... 6.29 1.71 .95 .06 2.64 .59 2.49 (1.32) 1.26 1.47
---------- -------- -------- -------- -------- -------- -------- -------- -------- -------
Total from investment
operations............ 6.58 2.10 1.32 .37 3.01 .96 2.79 (1.04) 1.58 1.75
---------- -------- -------- -------- -------- -------- -------- -------- -------- -------
LESS DISTRIBUTIONS
Dividends from net
investment income...... (.30) (.37) (.44) (.19) (.36) (.37) (.29) (.32) (.32) (.27)
Distributions from net
realized gains......... (.74) (.70) (.52) (.53) (.44) (.48) -- -- -- (.33)
---------- -------- -------- -------- -------- -------- -------- -------- -------- -------
Total distributions.... (1.04) (1.07) (.96) (.72) (.80) (.85) (.29) (.32) (.32) (.60)
---------- -------- -------- -------- -------- -------- -------- -------- -------- -------
Net asset value, end of
year................... $ 20.93 $ 15.39 $ 14.36 $ 14.00 $ 14.35 $ 12.14 $ 12.03 $ 9.53 $ 10.89 $ 9.63
========== ======== ======== ======== ======== ======== ======== ======== ======== =======
TOTAL RETURN(b):........ 44.60% 15.12% 10.29% 2.73% 25.93% 8.55% 29.58% (9.77)% 16.68% 21.85%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of year
(000).................. $1,250,216 $929,948 $906,793 $954,951 $527,868 $190,846 $151,538 $120,032 $143,169 $60,733
Average net assets
(000).................. $1,072,118 $951,220 $911,856 $784,063 $304,898 $169,524 $136,602 $142,179 $ 84,157 $63,013
Ratios to average net
assets:
Expenses, including
distribution fees..... 1.69% 1.73% 1.78% 1.85% 1.87% 2.02% 2.17% 2.22% 2.08% 2.30%
Expenses, excluding
distribution fees..... .69% .73% .78% .85% .87% 1.02% 1.17% 1.22% 1.12% 1.29%
Net investment income.. 1.60% 2.51% 2.66% 2.21% 2.58% 3.05% 2.67% 2.70% 2.89% 3.19%
Portfolio turnover ..... 36% 36% 74% 70% 57% 43% 64% 58% 60% 35%
Average commission rate
paid per share......... $ .0488 $ .0563 N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
- --------
(a) On March 1, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as manager of the Fund.
(b) 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.
6
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS C SHARES)
The following financial highlights for the year ended October 31, 1997, have
been audited by Price Waterhouse LLP, independent accountants, and for the two
years ended October 31, 1996 and the period from August 1, 1994 through
October 31, 1994, have been audited by Deloitte & Touche LLP, independent
auditors, whose reports thereon were unqualified. This information should be
read in conjunction with the financial statements and notes thereto, which
appear in the Statement of Additional Information. The financial highlights
contain selected data for a Class C share of beneficial interest outstanding,
total return, ratios to average net assets and other supplemental data for the
periods indicated. The information is based on data contained in the financial
statements. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide--Shareholder
Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS C
-------------------------------------
AUGUST 1,
YEAR ENDED 1994(a)
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(c):...................... 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)
Portfolio turnover.................... 36% 36% 74% 70%
Average commission rate paid per
share................................ $ .0488 $.0563 N/A N/A
</TABLE>
--------
(a) Commencement of offering of Class C shares.
(b) Annualized.
(c) 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.
7
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS Z SHARES)
The following financial highlights for the year ended October 31, 1997, have
been audited by Price Waterhouse LLP, independent accountants, and for the
period from March 1, 1996 through October 31, 1996, have been audited by
Deloitte & Touche LLP, independent auditors, whose reports thereon were
unqualified. This information should be read in conjunction with the financial
statements and notes thereto, which appear in the Statement of Additional
Information. The financial highlights contain selected data for a Class Z
share of beneficial interest outstanding, total return, ratios to average net
assets and other supplemental data for the periods indicated. The information
is based on data contained in the financial statements. Further performance
information is contained in the annual report, which may be obtained without
charge. See "Shareholder Guide--Shareholder Services--Reports to
Shareholders."
<TABLE>
<CAPTION>
CLASS Z
-----------------------
MARCH 1,
1996(a)
YEAR ENDED THROUGH
OCTOBER 31, OCTOBER 31,
1997 1996
PER SHARE OPERATING PERFORMANCE: ----------- -----------
<S> <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) 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 (c): ................................. 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 of 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)
Portfolio turnover................................. 36% 36%
Average commission rate paid per share............. $ .0488 $ .0563
</TABLE>
--------
(a) Commencement of offering of Class Z shares.
(b) Annualized.
(c) Total return is calculated assuming a purchase of shares on the first
day and a sale on the last day of the period reported and includes
reinvestment of dividends and distributions. Total returns for periods
of less than a full year are not annualized.
8
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
THE INVESTMENT OBJECTIVE OF THE FUND IS BOTH CURRENT INCOME AND CAPITAL
APPRECIATION. THE FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING
PRIMARILY IN COMMON STOCKS AND CONVERTIBLE SECURITIES THAT PROVIDE INVESTMENT
INCOME RETURNS ABOVE THOSE OF THE STANDARD & POOR'S 500 STOCK INDEX OR THE
NYSE COMPOSITE INDEX. In selecting these investments, the Fund puts emphasis
on earnings, balance sheet and cash flow analyses and the relationships that
these factors have to the price and return of a given security. Under normal
circumstances, the Fund will invest at least 65% of its total assets
(determined at the time of purchase) in such securities. THERE CAN BE NO
ASSURANCE THAT THE FUND'S OBJECTIVE WILL BE ACHIEVED. See "Investment
Objective and Policies" in the Statement of Additional Information.
As with an investment in any mutual fund, an investment in this Fund can
decrease in value and you can lose money.
THE FUND'S INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE FUND'S
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF
1940, AS AMENDED (THE INVESTMENT COMPANY ACT). FUND POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
THE BALANCE OF THE FUND'S TOTAL ASSETS MAY BE INVESTED IN OTHER EQUITY-
RELATED SECURITIES, DEBT SECURITIES (INCLUDING MONEY MARKET INSTRUMENTS) AND
OPTIONS ON STOCK AND ON STOCK INDICES. Common stocks may include securities of
foreign issuers. 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 warrants
and rights exercisable for equity securities.
IN ADDITION, THE FUND MAY (I) PURCHASE AND SELL STOCK INDEX FUTURES AND
OPTIONS THEREON FOR HEDGING OR RETURN ENHANCEMENT PURPOSES OR, WITH RESPECT TO
WRITING OPTIONS ON FUTURES, TO REALIZE A GREATER RETURN (SEE "HEDGING AND
RETURN ENHANCEMENT STRATEGIES" BELOW), (II) PURCHASE SECURITIES ON A WHEN-
ISSUED OR DELAYED DELIVERY BASIS (SEE "OTHER INVESTMENTS AND POLICIES--WHEN-
ISSUED AND DELAYED DELIVERY SECURITIES" BELOW), (III) MAKE SHORT SALES
AGAINST-THE-BOX (SEE "OTHER INVESTMENTS AND POLICIES--SHORT SALES AGAINST-THE-
BOX" BELOW), AND (IV) ENTER INTO REPURCHASE AGREEMENTS (SEE "OTHER INVESTMENTS
AND POLICIES--REPURCHASE AGREEMENTS" BELOW).
CONVERTIBLE SECURITIES
A CONVERTIBLE SECURITY IS 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.
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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.
MONEY MARKET INSTRUMENTS
THE FUND MAY INVEST UP TO 35% OF ITS TOTAL ASSETS IN MONEY MARKET
INSTRUMENTS UNDER NORMAL CIRCUMSTANCES. The Fund may invest in such
instruments without limit when the investment adviser believes that market
conditions warrant a temporary defensive investment posture or pending
investment of proceeds from sales of the Fund's shares. These instruments
include obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities; commercial paper; certificates of deposit;
bankers' acceptances and other obligations of domestic and foreign banks. Such
obligations (other than U.S. Government securities) will be rated, at the time
of purchase, within the two highest quality grades as determined by a
nationally recognized statistical rating organization (NRSRO), such as Moody's
Investors Service, Inc. (Moody's), Standard & Poor's Ratings Group (S&P) or
Duff & Phelps Credit Rating Co. (Duff & Phelps) or, if unrated, will be of
equivalent quality in the judgment of the Fund's investment adviser.
OTHER FIXED-INCOME OBLIGATIONS
THE FUND MAY INVEST UP TO 35% OF ITS TOTAL ASSETS IN OTHER FIXED-INCOME
OBLIGATIONS. The Fund anticipates that it will primarily invest in fixed-
income securities rated A or better by Moody's or S&P or BBB+ or better by
Duff & Phelps or comparably rated by another 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). Subsequent to its purchase by the
Fund, a fixed-income obligation may be assigned a lower rating or cease to be
rated. Such an event would not require the elimination of the issue from the
portfolio, but the investment adviser will consider such an event in
determining whether the Fund should continue to hold the security in its
portfolio. Securities rated Baa by Moody's have speculative characteristics
and changes in economic conditions or other circumstances could lead to a
weakened capacity to make principal and interest payments than higher grade
securities. Securities rated BB, Ba or BB+ or lower by S&P, Moody's or Duff &
Phelps, respectively, are generally considered to be predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal. A
description of corporate bond ratings is contained in the Appendix to the
Statement of Additional Information. The Fund may also invest in unrated
fixed-income securities which, in the opinion of the investment adviser, are
of a quality comparable to rated securities in which the Fund may invest.
RISKS OF INVESTING IN HIGH YIELD SECURITIES
FIXED-INCOME SECURITIES ARE SUBJECT TO THE RISK OF AN ISSUER'S INABILITY TO
MEET PRINCIPAL AND INTEREST PAYMENTS ON THE OBLIGATIONS (CREDIT RISK) AND MAY
ALSO BE SUBJECT TO PRICE VOLATILITY DUE TO SUCH FACTORS AS INTEREST RATE
SENSITIVITY AND THE MARKET PERCEPTION OF THE CREDITWORTHINESS OF THE ISSUER
(MARKET RISK). Lower rated or unrated (i.e., high yield) securities are more
likely to react to developments affecting market and credit risk than are more
highly rated securities, which react primarily to movements in the general
level of interest rates. The investment adviser considers both credit risk and
market risk in making investment decisions for the Fund. See "Investment
Objective and Policies--Risks of Investing in High Yield Securities" in the
Statement of Additional Information.
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FOREIGN SECURITIES
THE FUND MAY INVEST UP TO 30% OF ITS TOTAL ASSETS IN FOREIGN MONEY MARKET
INSTRUMENTS AND DEBT AND EQUITY SECURITIES. For purposes of this limitation,
American Depositary Receipts are not deemed to be foreign securities. In many
instances, foreign securities may provide higher yields but may be subject to
greater fluctuations in price than securities of domestic issuers which have
similar maturities and quality. Under certain market conditions these invest-
ments may be less liquid than the securities of U.S. corporations and are cer-
tainly less liquid than securities issued or guaranteed by the U.S. Govern-
ment, its instrumentalities or agencies.
FOREIGN SECURITIES INVOLVE CERTAIN RISKS, WHICH SHOULD BE CONSIDERED CARE-
FULLY BY AN INVESTOR IN THE FUND. These risks include political or economic
instability in the country of the issuer, the difficulty of predicting inter-
national trade patterns, the possibility of imposition of exchange controls
and the risk of currency fluctuations. Such securities may be subject to
greater fluctuations in price than securities issued by U.S. corporations or
issued or guaranteed by the U.S. Government, its instrumentalities or agen-
cies. In addition, there may be less publicly available information about a
foreign company than about a domestic company. Foreign companies generally are
not subject to uniform accounting, auditing and financial reporting standards
comparable to those applicable to domestic companies. There is generally less
government regulation of securities exchanges, brokers and listed companies
abroad than in the United States, and, with respect to certain foreign coun-
tries, there is a possibility of expropriation, confiscatory taxation or dip-
lomatic developments which could affect investment in those countries. Final-
ly, in the event of a default of any such foreign debt obligations, it may be
more difficult for the Fund to obtain, or to enforce a judgment against, the
issuers of such securities.
If the security is denominated in a foreign currency, it may be affected by
changes in currency rates and in exchange control regulations, and costs may
be incurred in connection with conversions between currencies. The Fund may
enter into forward foreign currency exchange contracts for the purchase or
sale of foreign currency for hedging purposes. See "Investment Objective and
Policies--Special Risks Related to Forward Foreign Currency Exchange
Contracts" in the Statement of Additional Information.
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 Internal Revenue Code requirements. 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.
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
"Investment Objective and Policies" and "Taxes, Dividends and Distributions"
in the Statement of Additional Information. New financial products and risk
management techniques continue to be developed and the Fund may use these new
investments and techniques to the extent consistent with its investment
objective and policies.
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OPTIONS TRANSACTIONS
THE FUND MAY PURCHASE AND WRITE (I.E., SELL) PUT AND CALL OPTIONS ON SECURI-
TIES THAT ARE TRADED ON NATIONAL SECURITIES EXCHANGES OR IN THE OVER-THE-
COUNTER MARKET TO ENHANCE RETURN OR TO HEDGE THE FUND'S PORTFOLIO. These op-
tions will be on equity securities and financial indices (e.g., S&P 500). The
Fund may write covered put and call options to generate additional income
through the receipt of premiums, purchase put options in an effort to protect
the value of a security that it owns against a decline in market value and
purchase call options in an effort to protect against an increase in the price
of securities it intends to purchase. The Fund may also purchase put and call
options to offset previously written put and call options of the same series.
See "Investment Objective and Policies--Limitations on Purchase and Sale of
Stock Options, Options on Stock Indices, Stock Index Futures and Options
Thereon" in the Statement of Additional Information.
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. A written 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) maintains in a segregated account,
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. See "Investment Objective and Policies--Limitations on
Purchase and Sale of Stock Options, Options on Stock Indices, Stock Index
Futures and Options Thereon" in the Statement of Additional Information.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
THE FUND MAY ENTER INTO FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS TO
PROTECT THE VALUE OF ITS PORTFOLIO AGAINST FUTURE CHANGES IN THE LEVEL OF
CURRENCY EXCHANGE RATES. The Fund may enter into such contracts on a spot
(i.e., cash) basis at the rate then prevailing in the currency exchange market
or on a forward basis, by entering into a forward contract to purchase or sell
currency. A forward contract on foreign currency is an obligation to purchase
or sell a specific currency at a future date, which may be any fixed number of
days agreed upon by the parties from the date of the contract at a price set
on the date of the contract. See "Investment Objective and Policies--Special
Risks Related to Forward Foreign Currency Exchange Contracts" in the Statement
of Additional Information.
THE FUND'S DEALINGS IN FORWARD CONTRACTS WILL BE LIMITED TO HEDGING
INVOLVING EITHER SPECIFIED TRANSACTIONS OR PORTFOLIO POSITIONS. Transaction
hedging is the purchase or sale of a forward contract with respect to specific
receivables or payables of the Fund generally arising in connection with the
purchase or sale of its portfolio securities and accruals of interest or
dividends receivable and Fund expenses. Position hedging is the sale of a
foreign currency with respect to portfolio
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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 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 liquidation value of the Fund's total assets.
Although there are no other limits applicable to futures contracts, the value
of all futures contracts sold will not exceed the total market value of the
Fund's portfolio.
THE FUND'S SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON DEPENDS
UPON THE INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET
AND INTEREST RATES AND REQUIRES SKILLS AND TECHNIQUES DIFFERENT FROM THOSE
USED IN SELECTING PORTFOLIO SECURITIES. The correlation between movements in
the price of a futures contract and movements in the price of the securities
being hedged is imperfect and the risk from imperfect correlation increases as
the composition of the Fund's portfolio diverges from the composition of the
relevant index. There is also a risk that the value of the securities being
hedged may increase or decrease at a greater rate than the related futures
contracts, resulting in losses to the Fund. Certain futures exchanges or
boards of trade have established daily limits on the amount that the price of
futures contracts or options thereon may vary, either up or down, from the
previous day's settlement price. These daily limits may restrict the Fund's
ability to purchase or sell certain futures contracts or options thereon on
any particular day.
THE FUND'S ABILITY TO ENTER INTO OR CLOSE OUT FUTURES CONTRACTS AND OPTIONS
THEREON IS LIMITED BY THE REQUIREMENTS OF THE INTERNAL REVENUE CODE OF 1986,
AS AMENDED (THE INTERNAL REVENUE CODE), FOR QUALIFICATION AS A REGULATED IN-
VESTMENT COMPANY. See "Taxes, Dividends and Distributions" in the Statement of
Additional Information.
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 STRATE-
GIES. If the investment adviser's predictions of movements in the direction of
the securities, foreign currency and interest rate markets are inaccurate, the
adverse consequences to the Fund may leave the Fund in a worse position than
if such strategies were not used. Risks inherent in the use of options, for-
eign currency and futures contracts and options on futures contracts include
(1) dependence on the
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investment adviser's ability to predict correctly movements in the direction
of interest rates, securities prices and currency markets; (2) imperfect cor-
relation between the price of options and futures contracts and options
thereon and movements in the prices of the securities being hedged; (3) the
fact that the skills needed to use these strategies are different from those
needed to select portfolio securities; (4) the possible absence of a liquid
secondary market for any particular instrument at any time; (5) the possible
need to defer closing out certain hedged positions to avoid adverse tax conse-
quences; 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 disad-
vantageous time, due to the need for the Fund to maintain "cover" or to segre-
gate securities in connection with hedging transactions. See "Taxes, Dividends
and Distributions" and "Investment Objective and Policies" in the Statement of
Additional Information.
OTHER INVESTMENTS AND POLICIES
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase or sell securities on a when-issued or delayed deliv-
ery basis. When-issued or delayed delivery transactions arise when securities
are purchased or sold by the Fund with payment and delivery taking place in
the future in order to secure what is considered to be an advantageous price
and yield to the Fund at the time of entering into the transaction. The Fund's
Custodian will maintain, in a segregated account of the Fund, cash 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 de-
livery basis may increase the volatility of the Fund's net asset value.
SHORT SALES AGAINST-THE-BOX
The Fund may make short sales of securities or maintain a short position,
provided that at all times when a short position is open, the Fund owns an
equal amount of such securities or securities convertible into or exchangeable
for, with or without payment of any further consideration, such securities;
provided that if further consideration is required in connection with the con-
version or exchange, cash or other liquid assets, in an amount equal to such
consideration must be put in a segregated account, for an equal amount of the
securities of the same issuer as the securities sold short (a short sale
against-the-box). Not more than 25% of the Fund's net assets (determined at
the time of the short sale) may be subject to such sales. The Fund does not
intend to have more than 5% of its net assets (determined at the time of the
short sale) subject to short sales against-the-box during the coming year.
REPURCHASE AGREEMENTS
The Fund may on occasion enter into repurchase agreements, whereby the
seller of a security agrees to repurchase that security from the Fund at a mu-
tually agreed-upon time and price. The period of maturity is usually quite
short, possibly overnight or a few days, although it may extend over a number
of months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Fund's money
is invested in the repurchase agreement. The Fund's repurchase agreements will
at all times be fully collateralized in an amount at least equal to the resale
price. The instruments held as collateral are valued daily, and if the value
of 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 participates in a
joint repurchase account with other investment companies managed by PIFM pur-
suant to an order of the Securities and Exchange Commission (SEC).
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BORROWING
The Fund may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) for temporary, extraordinary
or emergency purposes, or for the clearance of transactions and to take advan-
tage of investment opportunities. The Fund may pledge up to 20% of its total
assets to secure these borrowings. If the Fund's asset coverage for borrowings
falls below 300%, the Fund will take prompt action to reduce its borrowings.
SECURITIES LENDING
The Fund may lend its portfolio securities to brokers or dealers, banks or
other recognized institutional borrowers of securities, provided that the
borrower at all times maintains cash or other liquid assets or secures 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 securities loaned
which are maintained in a segregated account 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. As a matter of fundamental policy, the Fund cannot lend
more than 33% of the value of its total assets. The Fund may pay reasonable
administration and custodial fees in connection with a loan. See "Investment
Objective and Policies--Lending of Securities" in the Statement of Additional
Information.
ILLIQUID SECURITIES
The Fund may hold up to 15% of its net assets in illiquid securities, in-
cluding repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted secu-
rities) and securities that are not readily marketable in securities markets
either within or outside of the United States. Restricted securities eligible
for resale pursuant to Rule 144A under the Securities Act of 1933, as amended
(the Securities Act), and privately placed commercial paper that have a read-
ily available market are not considered illiquid for purposes of this limita-
tion. The investment adviser will monitor the liquidity of such restricted se-
curities under the supervision of the Trustees. 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.
PORTFOLIO TURNOVER
The Fund does not expect to trade in securities for short-term gain. It is
anticipated that the portfolio turnover rate may exceed 100%, although the
rate is not expected to exceed 200%. The portfolio turnover rate is calculated
by dividing the lesser of sales or purchases of portfolio securities by the
average monthly value of the Fund's portfolio securities, excluding securities
having a maturity at the date of purchase of one year or less. High portfolio
turnover may involve correspondingly greater brokerage commissions and other
transaction costs, which will be borne directly by the Fund. See "Portfolio
Transactions and Brokerage" in the Statement of Additional Information. In
addition, high portfolio turnover may result in increased short-term capital
gains which, when distributed to shareholders, are treated as ordinary income.
See "Taxes, Dividends and Distributions."
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities, as defined in the Investment Company
Act. See "Investment Restrictions" in the Statement of Additional Information.
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HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE
FUND'S MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON
MATTERS OF GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE
DAILY BUSINESS OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY
INVESTMENT ADVISORY SERVICES.
For the fiscal year ended October 31, 1997, the Fund's total expenses as a
percentage of average net assets for Class A, Class B, Class C and Class Z
shares were .94%, 1.69%, 1.69% and .69%, respectively. See "Financial
Highlights."
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS THE
MANAGER OF THE FUND AND IS COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF
.60 OF 1% OF THE FUND'S AVERAGE DAILY NET ASSETS UP TO $500 MILLION, .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. PIFM is organized in New
York as a limited liability company. For the fiscal year ended October 31,
1997, the Fund paid management fees to PIFM of .52% of the Fund's average net
assets. See "Manager" in the Statement of Additional Information.
As of November 30, 1997, PIFM served as the manager to 41 open-end
investment companies, constituting all of the Prudential Mutual Funds, and as
manager or administrator to 22 closed-end investment companies, with aggregate
assets of approximately $60 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PIFM MANAGES THE INVESTMENT
OPERATIONS OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS AFFAIRS. See
"Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PIFM AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC), DOING BUSINESS AS PRUDENTIAL INVESTMENTS (PI, THE
SUBADVISER OR THE INVESTMENT ADVISER), PI FURNISHES INVESTMENT ADVISORY
SERVICES IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY
PIFM FOR ITS REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH
SERVICES. Under the Management Agreement, PIFM continues to have
responsibility for all investment advisory services and supervises PI's
performance of such services.
The current portfolio manager of the Fund is Warren E. Spitz, a Managing
Director of PI. Mr. Spitz has responsibility for the day-to-day management of
the Fund's portfolio. Mr. Spitz has managed the Fund's portfolio since January
1987 and has been employed by PI as a portfolio manager since 1987. Mr. Spitz
also serves as the portfolio manager of Prudential Series Fund-High Dividend
Stock Portfolio.
Mr. Spitz utilizes a "value" investing style in managing the Fund. Value
investing is a disciplined approach which attempts to identify strong
companies whose stock is selling at a discount from its perceived true worth.
Mr. Spitz seeks to invest in companies that in his view have the potential to
produce both above-average earnings and dividend growth over the long term.
Stocks of these types of companies are sometimes referred to as "high dividend
stocks." He seeks to invest in securities at prices which in his view are
temporarily low relative to the company's earnings, assets, cash flow and
dividends.
PIFM and PIC are wholly-owned subsidiaries of The Prudential Insurance
Company of America (Prudential), a major diversified insurance and financial
services company.
16
<PAGE>
DISTRIBUTOR
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR THE
DISTRIBUTOR), ONE SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION
ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AND SERVES AS THE
DISTRIBUTOR OF THE CLASS A, CLASS B, CLASS C AND CLASS Z SHARES OF THE FUND.
IT IS AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), THE DISTRIBUTOR INCURS THE EXPENSES OF DISTRIBUTING
THE FUND'S CLASS A, CLASS B, CLASS C AND CLASS Z SHARES. The Distributor also
incurs the expenses of distributing the Fund's Class Z shares under the
Distribution Agreement, none of which is reimbursed by or paid for by the
Fund. These expenses include commissions and account servicing fees paid to,
or on account of, financial advisers of Prudential Securities and
representatives of Pruco Securities Corporation (Prusec), an affiliated
broker-dealer, commissions and account servicing fees paid to, or on account
of, other broker-dealers or financial institutions (other than national banks)
which have entered into agreements with the Distributor, advertising expenses,
the cost of printing and mailing prospectuses to potential investors and
indirect and overhead costs of Prudential Securities and Prusec associated
with the sale of Fund shares, including lease, utility, communications and
sales promotion expenses.
Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
UNDER THE CLASS A PLAN, THE FUND MAY PAY 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 (i) up to .25 of 1% of the average daily net
assets of the Class A shares may be used to pay for personal service and/or
the maintenance of shareholder accounts (service fee) and (ii) total
distribution fees (including the service fee of .25 of 1%) may not exceed .30
of 1% of the average daily net assets of the Class A shares. Prudential
Securities has agreed to limit its distribution-related fees payable under the
Class A Plan to .25 of 1% of the average daily net assets of the Class A
shares for the fiscal year ending October 31, 1998.
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 and Class C Plans provide for the
payment to Prudential Securities of (i) an asset-based sales charge of .75 of
1% of the average daily net assets of each of the Class B and Class C shares
and (ii) a service fee of .25 of 1% of the average daily net assets of each of
the Class B and Class C shares. The service fee is used to pay for personal
service and/or the maintenance of shareholder accounts. Prudential Securities
also receives contingent deferred sales charges from certain redeeming
shareholders. See "Shareholder Guide--How to Sell Your Shares--Contingent
Deferred Sales Charges."
For the fiscal year ended October 31, 1997, the Fund paid distribution
expenses of .25%, 1% and 1% of the average daily net assets of the Class A,
Class B and Class C shares of the Fund, respectively. The Fund records all
payments made under the Plans as expenses in the calculation of net investment
income. See "Distributor" in the Statement of Additional Information.
Distribution expenses attributable to the sale of Class A, Class B or Class
C shares of the Fund will be allocated to each such class based upon the ratio
of sales of each such class to the sales of all shares of the Fund other than
expenses
17
<PAGE>
allocable to a particular class. The distribution fee and sales charge of one
class will not be used to subsidize the sale of another class.
Each Plan provides that it shall continue in effect from year to year
provided that a majority of the Trustees of the Fund, including a majority of
the Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest
in the operation of the Plan or any agreement related to the Plan (the Rule
12b-1 Trustees), vote annually to continue the Plan. Each Plan may be
terminated at any time by vote of a majority of the Rule 12b-1 Trustees or of
a majority of the outstanding shares of the applicable class of the Fund. The
Fund will not be obligated to pay distribution and service fees incurred under
any Plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Fund under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers (including Prudential
Securities) and other persons who 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.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. governing maximum sales charges. See "Distributor" in
the Statement of Additional Information.
FEE WAIVERS
The Distributor has agreed to limit its distribution fee for the Class A
shares as described above under "Distributor." Fee waivers will increase the
Fund's total return. See "Performance Information" in the Statement of
Additional Information and "Fund Expenses" above.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant for
the Fund, provided that the commissions, fees or other remuneration it
receives are fair and reasonable. See "Portfolio Transactions and Brokerage"
in the Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities
and cash and, in that capacity, maintains certain financial and accounting
books and records pursuant to an agreement with the Fund. Its mailing address
is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PIFM. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE FUND'S NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE FUND'S
NET ASSET VALUE TO BE AS OF 4:15 P.M., NEW YORK TIME.
18
<PAGE>
Portfolio securities are valued based on market quotations or, if not
readily available, at fair value as determined in good faith under procedures
established by the Fund's Trustees. For valuation purposes, quotations of
foreign securities in a foreign currency are converted to U.S. dollar
equivalents. See "Net Asset Value" in the Statement of Additional Information.
The Fund will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase,
sell or redeem shares have been received by the Fund or days on which changes
in the value of the Fund's portfolio securities do not materially affect the
NAV.
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 the other three classes
because Class Z shares are not subject to any distribution and/or service
fees. It is expected, however, that the NAV per share 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.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE ITS AVERAGE ANNUAL TOTAL RETURN,
AGGREGATE TOTAL RETURN AND YIELD IN ADVERTISEMENTS OR SALES LITERATURE. TOTAL
RETURN AND YIELD ARE CALCULATED SEPARATELY FOR CLASS A, CLASS B, CLASS C AND
CLASS Z SHARES. These figures are based on historical earnings and are not
intended to indicate future performance. The total return shows how much an
investment in the Fund would have increased (decreased) over a specified
period of time (i.e., one, five or ten years or since inception of the Fund)
assuming that all distributions and dividends by the Fund were reinvested on
the reinvestment dates during the period and less all recurring fees. The
aggregate total return reflects actual performance over a stated period of
time. Average annual total return is a hypothetical rate of return that, if
achieved annually, would have produced the same aggregate total return if
performance had been constant over the entire period. Average annual total
return smoothes out variations in performance and takes into account any
applicable initial or contingent deferred sales charges. Neither average
annual total return nor aggregate total return takes into account any federal
or state income taxes which may be payable upon redemption. The yield refers
to the income generated by an investment in the Fund over a one-month or 30-
day period. This income is then "annualized;" that is, the amount of income
generated by the investment during that 30-day period is assumed to be
generated each 30-day period for twelve periods and is shown as a percentage
of the investment. The income earned on the investment is also assumed to be
reinvested at the end of the sixth 30-day period. The Fund also may include
comparative performance information in advertising or marketing the Fund's
shares. Such performance information may include data from Lipper Analytical
Services, Inc., Morningstar Publications, Inc., other industry publications,
business periodicals and market indices. See "Performance Information" in the
Statement of Additional Information. Further performance information is
contained in the Fund's annual and semi-annual reports to shareholders, which
may be obtained without charge. See "Shareholder Guide--Shareholder Services--
Reports to Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE FUND HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
FUND WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND NET CAPITAL AND CURRENCY GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS
SHAREHOLDERS. See "Taxes, Dividends and Distributions" in the Statement of
Additional Information.
19
<PAGE>
Under the Internal Revenue Code, special rules apply to the treatment of
certain options and futures contracts (Section 1256 contracts). At the end of
each year, such investments held by the Fund will be required to be "marked-
to-market" for federal income tax purposes; that is, treated as having been
sold at market value. Sixty percent of any gain or loss recognized on these
"deemed sales" and on actual dispositions will be treated as long-term capital
gain or loss, and the remainder will be treated as short-term capital gain or
loss. See "Taxes, Dividends and Distributions" in the Statement of Additional
Information.
The Fund may, from time to time, invest in Passive Foreign Investment
Companies (PFICs). PFICs are foreign corporations which derive a majority of
their income from passive sources. For tax purposes, the Fund's investments in
PFICs may subject the Fund to federal income taxes on certain income and gains
realized by the Fund. Certain gains or losses from fluctuations in foreign
currency exchange rates (Section 988 gains and losses) will affect the amount
of ordinary income the Fund will be able to pay as dividends. See "Taxes,
Dividends and Distributions" in the Statement of Additional Information.
TAXATION OF SHAREHOLDERS
Any dividends out of net investment income, together with distributions of
net short-term gains (i.e., the excess of net short-term capital gains over
net long-term capital losses) and net currency gains distributed to
shareholders, will be taxable as ordinary income to the shareholder whether or
not reinvested. See "Taxes, Dividends and Distributions" in the Statement of
Additional Information. Any net capital gains (i.e., the excess of net long-
term capital gains over net short-term capital losses) distributed to
shareholders will be taxable as long-term capital gains to the shareholders,
whether or not reinvested and regardless of the length of time a shareholder
has owned his or her shares. The maximum long-term capital gains rate for
individual shareholders for securities held between 12 and 18 months currently
is 28% and for securities held more than 18 months is 20%. The maximum tax
rate for ordinary income is 39.6%. The maximum long-term capital gains rate
for corporate shareholders currently is the same as the maximum tax rate for
ordinary income.
Both regular and capital gains dividends are taxable to shareholders in the
year in which received, whether they are received in cash or additional
shares. In addition, certain dividends declared by the Fund will be treated as
received by shareholders on December 31 of the year the dividends are
declared. This rule applies to dividends declared by the Fund in October,
November or December of a calendar year, payable to shareholders of record on
a date in any such month, if such dividends are paid during January of the
following calendar year.
Dividends received by corporate shareholders are eligible for a dividends
received deduction of 70% to the extent the Fund's income is derived from
qualified dividends received by the Fund from domestic corporations. Dividends
attributable to foreign dividends, interest income, capital gain net income,
gain or loss from Section 1256 contracts and income from some other sources
will not be eligible for the corporate dividends received deduction. See
"Taxes, Dividends and Distributions" in the Statement of Additional
Information. Corporate shareholders should consult their tax advisers
regarding other requirements applicable to the dividends received deduction.
Any gain or loss realized upon a sale or redemption of Fund shares by a
shareholder who is not a dealer in securities will generally be treated as
long-term capital gain or loss if the shares have been held more than one year
and otherwise as short-term capital gain or loss. Any such loss with respect
to shares that are held for six months or less, however, will be treated as
long-term capital loss to the extent of any capital gain distributions
received by the shareholder. Gain or loss on shares held more than 18 months
will be considered in determining a holder's adjusted net capital gain subject
to a maximum tax rate of 20%.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of any
class of the Fund's shares for any other class of its shares constitutes a
taxable event for federal income tax purposes. However, such opinions are not
binding on the Internal Revenue Service.
20
<PAGE>
WITHHOLDING TAXES
Under the Internal Revenue Code, the Fund is required to withhold and remit
to the U.S. Treasury 31% of dividends, capital gain income and redemption
proceeds on the accounts of certain shareholders who fail to furnish their tax
identification numbers on IRS Form W-9 (or IRS Form W-8 in the case of certain
foreign shareholders) with the required certifications regarding the
shareholder's status under the federal income tax law. Withholding at this
rate is also required from dividends and capital gains distributions (but not
redemption proceeds) payable to shareholders who are otherwise subject to
backup withholding. Dividends of net investment income and short-term capital
gains paid to a foreign shareholder will generally be subject to U.S.
withholding tax at the rate of 30% (or lower treaty rate).
Shareholders are advised to consult their own tax advisers regarding
specific questions as to federal, state or local taxes. See "Taxes, Dividends
and Distributions" in the Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
THE FUND EXPECTS TO PAY DIVIDENDS OF NET INVESTMENT INCOME, IF ANY,
QUARTERLY AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY CAPITAL GAINS IN
EXCESS OF CAPITAL LOSSES. Dividends paid by the Fund with respect to each
class of shares, to the extent any dividends are paid, will be calculated in
the same manner, at the same time, on the same day and will be in the same
amount except that each class other than Class Z will bear its own
distribution charges, generally resulting in lower dividends for Class B and
Class C shares in relation to Class A and Class Z shares and lower dividends
for Class A shares in relation to Class Z shares. Distributions of net capital
gains, if any, will be paid in the same amount per share for each class of
shares. See "How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES BASED ON
THE NAV OF EACH CLASS ON THE RECORD DATE, OR SUCH OTHER DATE AS THE TRUSTEES
MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE
BUSINESS DAYS PRIOR TO THE RECORD DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBU-
TIONS IN CASH. Such election should be submitted to Prudential Mutual Fund
Services LLC, Attention: Account Maintenance, P.O. Box 15015, New Brunswick,
New Jersey 08906-5015. If you hold shares through Prudential Securities, you
should contact your financial adviser to elect to receive dividends and dis-
tributions in cash. The Fund will notify each shareholder after the close of
the Fund's taxable year of both the dollar amount and the taxable status of
that year's dividends and distributions on a per share basis.
IF YOU BUY SHARES ON OR IMMEDIATELY PRIOR TO THE RECORD DATE (THE DATE THAT
DETERMINES WHO RECEIVES THE DIVIDEND), YOU WILL RECEIVE A PORTION OF THE MONEY
YOU INVESTED AS A TAXABLE DIVIDEND. THEREFORE, YOU SHOULD CONSIDER THE TIMING
OF DIVIDENDS WHEN BUYING SHARES OF THE FUND.
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND IS AN OPEN-END INVESTMENT COMPANY WHICH WAS ORGANIZED UNDER THE
LAWS OF MASSACHUSETTS ON SEPTEMBER 18, 1986 AS AN UNINCORPORATED BUSINESS
TRUST, A FORM OF ORGANIZATION THAT IS COMMONLY KNOWN AS A MASSACHUSETTS
BUSINESS TRUST. THE FUND IS AUTHORIZED TO ISSUE AN UNLIMITED NUMBER OF SHARES
OF BENEFICIAL INTEREST, DIVIDED INTO FOUR CLASSES, DESIGNATED CLASS A, CLASS
B, CLASS C AND CLASS Z SHARES. Each class of shares represents an interest in
the same assets of the Fund and is identical in all respects except that (i)
each class 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 on any matter submitted to
shareholders that relates solely to its arrangement and has separate voting
rights on any matter submitted to
21
<PAGE>
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 "How the
Fund is Managed--Distributor." 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. Currently, the Fund
is offering four classes, designated Class A, Class B, Class C and Class Z
shares.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of each class
is equal as to earnings, assets and voting privileges, except as noted above,
and each class of shares (with the exception of Class Z shares, which are not
subject to any distribution or services 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's shares do not have
cumulative voting rights for the election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED ON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON THE VOTE OF 10% OF
THE FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE
OR MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make
the Fund similar in certain respects to a Massachusetts business corporation.
The principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of
the Fund beyond the amount of their investment in the Fund. The Declaration of
Trust of the Fund provides that shareholders will not be subject to any
personal liability for acts or obligations of the Fund and that every written
obligation, contract, instrument or undertaking made by the Fund will contain
a provision to the effect that shareholders are not individually bound
thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information
set forth in the Registration Statement filed by the Fund with the SEC under
the Securities Act of 1933. Copies of the Registration Statement may be
obtained at a reasonable charge from the SEC or may be examined, without
charge, at the office of the SEC in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES LLC (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. Participants in programs
sponsored by Prudential
22
<PAGE>
Retirement Services should contact their client representative for more
information about Class Z shares. The purchase price is the NAV next
determined following receipt of an order by the Transfer Agent or Prudential
Securities plus a sales charge which, at your option, may be imposed either
(i) at the time of purchase (Class A shares) or (ii) on a deferred basis
(Class B or Class C shares). Class Z shares are offered to a limited group of
investors at net asset value without any sales charge. Payments may be made by
cash, wire, check or through your brokerage account. See "Alternative Purchase
Plan" below. See also "How the Fund Values its Shares."
The minimum initial investment is $1,000 for Class A and Class B shares and
$5,000 for Class C shares, except that the minimum initial investment for
Class C shares may be waived from time to time. There is no minimum initial
investment requirement for Class Z shares. The minimum subsequent investment
is $100 for all classes, except for Class Z shares, for which there is no such
minimum. All minimum investment requirements are waived for certain retirement
and employee savings plans or custodial accounts for the benefit of minors.
For purchases made through the Automatic Savings Accumulation Plan, the
minimum initial and subsequent investment is $50. See "Shareholder Services"
below.
Application forms can be obtained from PMFS, Prudential Securities or
Prusec. If a share certificate is desired, it must be requested in writing for
each transaction. Certificates are issued only for full shares. Shareholders
who hold their shares through Prudential Securities will not receive share
certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the investment.
Transactions in Fund shares may be subject to postage and handling charges
imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, you
must first telephone PMFS at (800) 225-1852 (toll-free) to receive an account
number. The following information will be requested: your name, address, tax
identification number, class election, dividend distribution election, amount
being wired and wiring bank. Instructions should then be given by you to your
bank to transfer funds by wire to State Street Bank and Trust Company (State
Street), Boston, Massachusetts, Custody and Shareholder Services Division,
Attention: Prudential Equity Income Fund, specifying on the wire the account
number assigned by PMFS and your name and identifying the 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. See "Net Asset Value" in the
Statement of Additional Information.
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.
23
<PAGE>
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS FOUR CLASSES OF SHARES (CLASS A, CLASS B, CLASS C AND CLASS
Z SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUC-
TURE FOR YOUR INDIVIDUAL CIRCUMSTANCES, GIVEN THE AMOUNT OF THE PURCHASE AND
THE LENGTH OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUM-
STANCES (ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12b-1 FEES
(AS A % OF AVERAGE DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
------------------------------ ------------------------ ------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge .30 of 1% Initial sales charge waived or
of 5% of the public offering (Currently being reduced for certain purchases
price charged at a rate
of .25 of 1%)
CLASS B Maximum contingent deferred 1% Shares convert to Class A
sales charge or CDSC of 5% of shares approximately seven
the lesser of the amount years after purchase
invested or the redemption
proceeds; declines to zero
after six years
CLASS C Maximum CDSC of 1% of the 1% Shares do not convert to
lesser of the amount invested another class
or the redemption proceeds on
redemptions made within one
year of purchase
CLASS Z None None Sold to a limited group of
investors
</TABLE>
The four classes of shares represent an interest in the same portfolio of
investments of the Fund and have the same rights, except that (i) each class
(with the exception of Class Z shares, which are not subject to any
distribution or service fees) bears the separate expenses of its Rule 12b-1
distribution and service plan, (ii) 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,
and (iii) only Class B shares have a conversion feature. The four classes also
have separate exchange privileges. See "How to Exchange Your Shares" below.
The income attributable to each class and the dividends payable on the shares
of each class will be reduced by the amount of the distribution fee (if any)
of each class. Class B and Class C shares bear the expenses of a higher
distribution fee which will generally cause them to have higher expense ratios
and to pay lower dividends than the Class A and Class Z shares.
Financial advisers and other sales agents who sell shares of the Fund will
receive different compensation for selling Class A, Class B, Class C and Class
Z shares and will generally receive more compensation initially for selling
Class A and Class B shares than for selling Class C or Class Z shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER
THINGS, (1) the length of time you expect to hold your investment, (2) the
amount of any applicable sales charge (whether imposed at the time of purchase
or redemption) and distribution-related fees, as noted above, (3) whether you
qualify for any reduction or waiver of any applicable sales charge, (4) the
various exchange privileges among the different classes of shares (see "How to
Exchange Your Shares" below) and (5) the fact that Class B shares
automatically convert to Class A shares approximately seven years after
purchase (see "Conversion Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund:
24
<PAGE>
If you intend to hold your investment in the Fund for less than 7 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 5% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B
shares.
If you intend to hold your investment for 7 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money
invested initially because the sales charge on Class A shares is deducted at
the time of purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B shares and Class C shares for the
higher cumulative annual distribution-related fee on those shares to exceed
the initial sales charge plus cumulative annual distribution-related fees on
Class A shares. This does not take into account the time value of money, which
further reduces the impact of the higher Class B or Class C distribution-
related fee on the investment, fluctuations in NAV, the effect of the return
on the investment over this period of time or redemptions when the CDSC is
applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT
OR UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A
SHARES UNLESS THE PURCHASER IS ELIGIBLE TO PURCHASE CLASS Z SHARES. See
"Reduction and Waiver of Initial Sales Charges" and "Class Z Shares" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial
sales charge alternative is the next determined NAV plus a sales charge
(expressed as a percentage of the offering price and of the amount invested)
as shown in the following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
------------------ --------------- --------------- -----------------
<S> <C> <C> <C>
Less than $25,000............. 5.00% 5.26% 4.75%
$25,000 to $49,999............ 4.50 4.71 4.25
$50,000 to $99,999............ 4.00 4.17 3.75
$100,000 to $249,999.......... 3.25 3.36 3.00
$250,000 to $499,999.......... 2.50 2.56 2.40
$500,000 to $999,999.......... 2.00 2.04 1.90
$1,000,000 and above.......... None None None
</TABLE>
The Distributor may reallow the entire initial sales charge to dealers.
Selling dealers may be deemed to be underwriters, as that term is defined in
the Securities Act.
In connection with the sale of Class A shares at NAV (without payment of an
initial sales charge), the Manager, the Distributor or one of their affiliates
will pay dealers, financial advisers and other persons which distribute shares
a finders' fee from its own resources based on a percentage of the NAV of
shares sold by such persons.
25
<PAGE>
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be
aggregated to determine the applicable reduction. See "Purchase and Redemption
of Fund Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares"
in the Statement of Additional Information.
Benefit Plans. Class A shares may be purchased at NAV, without payment of an
initial sales charge, by pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the
Internal Revenue Code (collectively, Benefit Plans), provided that 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 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 PSI or its subsidiaries
(PSI or Subsidiary Prototype Benefit Plans), Class A shares may be purchased
at NAV by participants who are repaying loans made from such plans to the
participant.
Prudential Retirement 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 (i) the plan has at least $1
million in existing assets or 250 eligible employees and (ii) 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
Transfer Agent's PruArray and SmartPath Programs (benefit plan recordkeeping
services) (hereafter referred to as a PruArray or SmartPath 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 or SmartPath Programs (Participating Funds). "Existing assets"
also include monies invested in The Guaranteed Interest Account (GIA), a group
annuity insurance product issued by Prudential, and units of The Stable Value
Fund (SVF), an unaffiliated bank collective fund. Class A shares may also be
purchased at NAV by plans that have monies invested in GIA and SVF, provided
(i) the purchase is made with the proceeds of a redemption from either GIA or
SVF and (ii) 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 Program 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 (i)
have retirement plan assets in the aggregate of at least $1 million or 250
participants in the aggregate and (ii) 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 (i)
employees who open an IRA or Savings Accumulation Plan account with the
Transfer Agent and (ii) 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 or SmartPath Plan qualifies to purchase Class A shares at NAV, all
subsequent purchases will be made at NAV.
26
<PAGE>
Other Waivers. In addition, Class A shares may be purchased at NAV, through
Prudential Securities or the Transfer Agent, by the following persons: (a)
officers of the Prudential Mutual Funds (including the Fund), (b) employees of
Prudential Securities and 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, (c) employees of subadvisers of
the Prudential Mutual Funds provided that purchases at NAV are permitted by
such person's employer, (d) 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, (e) registered
representatives and employees of dealers who have entered into a selected
dealer agreement with Prudential Securities provided that purchases at NAV are
permitted by such person's employer, (f) investors who have a business
relationship with a financial adviser who joined Prudential Securities from
another investment firm, provided that (i) the purchase is made within 180
days of the commencement of the financial adviser's employment at Prudential
Securities, or within one year in the case of Benefit Plans, (ii) the purchase
is made with proceeds of a redemption of shares of any open-end non-money
market fund sponsored by the financial adviser's previous employer (other than
a fund which imposes a distribution or service fee of .25 of 1% or less) and
(iii) the financial adviser served as the client's broker on the previous
purchase, and (g) 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.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation
of your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions. See "Purchase
and Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--
Class A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one
of the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class
B and Class C shares may be subject to a CDSC. See "How to Sell Your Shares--
Contingent Deferred Sales Charges." The Distributor will pay, from its own
resources, sales commissions of up to 4% of the purchase price of Class B
shares to dealers, 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. See "How the Fund is Managed--Distributor." In connection with the sale
of Class C shares, the Distributor will pay, from its own resources, dealers,
financial advisers and other persons which distribute Class C shares a sales
commission of up to 1% 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:
(i) 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; (ii) 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; (iii) 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;
(iv) Benefit Plans for which Prudential Retirement Services serves as
27
<PAGE>
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; (v) the Prudential Securities
Cash Balance Pension Plan, an employee defined benefit plan sponsored by
Prudential Securities; (vi) current and former Directors/Trustees of the
Prudential Mutual Funds (including the Fund); and (vii) employees of
Prudential and/or Prudential Securities who participate in a Prudential-
sponsored employee savings plan.
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.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES AT ANY TIME FOR CASH AT THE NAV NEXT DETERMINED
AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE TRANSFER AGENT
OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES." In certain
cases, however, redemption proceeds will be reduced by the amount of any
applicable contingent deferred sales charge, as described below. See
"Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM YOUR SHARES 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 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.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to
a person other than the record owner, (c) are to be sent to an address other
than the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the
redemption request and on the certificates, if any, or stock power must be
guaranteed by an "eligible guarantor institution." An "eligible guarantor
institution" includes any bank, broker, dealer or credit union. The Transfer
Agent reserves the right to request additional information from, and make
reasonable inquiries of, any eligible guarantor institution. For clients of
Prusec, a signature guarantee may be obtained from the agency or office
manager of most Prudential Insurance and Financial Services or Preferred
Services offices. In the case of redemptions from a PruArray or SmartPath
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 OF THE CERTIFICATE AND/OR
WRITTEN REQUEST, EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH
PRUDENTIAL SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE
CREDITED TO YOUR PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE
OTHERWISE. Such payment may be postponed or the right of redemption suspended
at times (a) when the New York Stock Exchange is closed for other than
customary weekends and holidays, (b) when trading on such Exchange is
restricted, (c) when an emergency exists as a result of which disposal by the
Fund of securities owned by it is not reasonably practicable or it is not
reasonably practicable for the Fund fairly to determine the value of its net
assets,
28
<PAGE>
or (d) during any other period when the SEC, by order, so permits; provided
that applicable rules and regulations of the SEC shall govern as to whether
the conditions prescribed in (b), (c) or (d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL
THE FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS
BEEN HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE
CHECK BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY
WIRE OR BY CERTIFIED OR 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 SEC. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How the Fund Values its Shares." If
your shares are redeemed in kind, you would incur transaction costs in
converting the assets into cash. The Fund, however, has elected to be governed
by Rule 18f-1 under the Investment Company Act, under which the Fund is
obligated to redeem shares solely in cash up to the lesser of $250,000 or 1%
of the 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 Fund's
Transfer Agent, either directly or through Prudential Securities, 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. For
more information on the rule which disallows a loss on the sale or exchange of
shares of the Fund which are replaced, see "Taxes, Dividends and
Distributions" in the Statement of Additional Information.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C
shares redeemed within one year of purchase will be subject to a 1% CDSC. The
CDSC will be deducted from the redemption proceeds and reduce the amount paid
to you. The CDSC will be imposed on any redemption by you which reduces the
current value of your Class B or Class C shares to an amount which is lower
than the amount of all payments by you for shares during the preceding six
years, in the case of Class B shares, and one year, in the case of Class C
shares. A CDSC will be applied on the lesser of the original purchase price or
the current value of the shares being redeemed. Increases in the value of your
shares or shares acquired through reinvestment of dividends or distributions
are not subject to a CDSC. The amount of any CDSC will be paid to and retained
by the Distributor. See "How the Fund is Managed--Distributor" and "Waiver of
the Contingent Deferred Sales Charges--Class B Shares" below.
29
<PAGE>
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchase of shares, all payments
during a month will be aggregated and deemed to have been made on the last day
of the month. The CDSC will be calculated from the first day of the month
after the initial purchase, excluding the time shares were held in a money
market fund. See "How to Exchange Your Shares."
The following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------------- -------------------------
<S> <C>
First........................................ 5.0%
Second....................................... 4.0%
Third........................................ 3.0%
Fourth....................................... 2.0%
Fifth........................................ 1.0%
Sixth........................................ 1.0%
Seventh...................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in NAV above the total amount of payments
for the purchase of Fund shares made during the preceding six years (five
years for Class B shares purchased prior to January 22, 1990); then of amounts
representing the cost of shares held beyond the applicable CDSC period; and
finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided
to redeem $500 of your investment. Assuming at the time of the redemption the
NAV had appreciated to $12 per share, the value of your Class B shares would
be $1,260 (105 shares at $12 per share). The CDSC would not be applied to the
value of the reinvested dividend shares and the amount which represents
appreciation ($260). Therefore, $240 of the $500 redemption proceeds ($500
minus $260) would be charged at a rate of 4% (the applicable rate in the
second year after purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC
will be waived in the case of a redemption following the death or disability
of a shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint
tenancy (with rights of survivorship), at the time of death or initial
determination of disability, provided that the shares were purchased prior to
death or disability.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include: (i) in the case of a tax-
deferred retirement plan, a lump-sum or other distribution after retirement;
(ii) in the case of an IRA or Section 403(b) custodial account, a lump-sum or
other distribution after attaining
30
<PAGE>
age 59 1/2; and (iii) a tax-free return of an excess contribution or plan
distributions following the death or disability of the shareholder, provided
that the shares were purchased prior to death or disability. The waiver does
not apply in the case of a tax-free rollover or transfer of assets, other than
one following a separation from service (i.e., following voluntary or
involuntary termination of employment or following retirement). Under no
circumstances will the CDSC be waived on redemptions resulting from the
termination of a tax-deferred retirement plan, unless such redemptions
otherwise qualify for a waiver as described above. In the case of Direct
Account and PSI or Subsidiary Prototype Benefit Plans, the CDSC will be waived
on redemptions which represent borrowings from such plans. Shares purchased
with amounts used to repay a loan from such plans on which a CDSC was not
previously deducted will thereafter be subject to a CDSC without regard to the
time such amounts were previously invested. In the case of a 401(k) plan, the
CDSC will also be waived upon the redemption of shares purchased with amounts
used to repay loans made from the account to the participant and from which a
CDSC was previously deducted.
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
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to waiver of the CDSC and provide the Transfer Agent with such
supporting documentation as it may deem appropriate. The waiver will be
granted subject to confirmation of your entitlement. See "Purchase and
Redemption of Fund Shares--Waiver of the Contingent Deferred Sales Charge--
Class B Shares" in the Statement of Additional Information.
A quantity discount may apply to redemptions of Class B shares purchased
prior to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement
of Additional Information.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS C SHARES
PruArray or SmartPath Plan. The CDSC will be waived on redemptions from
qualified and non-qualified retirement and deferred compensation plans that
participate in the Transfer Agent's PruArray and SmartPath Programs.
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.
31
<PAGE>
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible
Shares calculated as described above will generally be either more or less
than the number of shares actually purchased approximately seven years before
such conversion date. For example, if 100 shares were initially purchased at
$10 per share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (i.e., $1,000
divided by $2,100 (47.62%), multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to
shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share net asset value of the Class A shares may be
higher than that of the Class B shares at the time of conversion. Thus,
although the aggregate dollar value will be the same, you may receive fewer
Class A shares than Class B shares converted. See "How the Fund Values its
Shares."
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been
made on the last day of the month, or for Class B shares acquired through
exchange, or a series of exchanges, on the last day of the month in which the
original payment for purchases of such Class B shares was made. For Class B
shares previously exchanged for shares of a money market fund, the time period
during which such shares were held in the money market fund will be excluded.
For example, Class B shares held in a money market fund for one year would not
convert to Class A shares until approximately eight years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase
of such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B, Class C and Class
Z shares will not constitute "preferential dividends" under the Internal
Revenue Code and (ii) that the conversion of shares does not constitute a
taxable event. The conversion of Class B shares into Class A shares may be
suspended if such opinions or rulings are no longer available. If conversions
are suspended, Class B shares of the Fund will continue to be subject,
possibly indefinitely, to their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE FUND, YOU HAVE AN EXCHANGE PRIVILEGE WITH CERTAIN
OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE PRIVILEGE), INCLUDING ONE OR MORE
SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENTS
OF SUCH FUNDS. CLASS A, CLASS B, CLASS C AND CLASS Z SHARES MAY BE EXCHANGED
FOR CLASS A, CLASS B, CLASS C AND CLASS Z SHARES, RESPECTIVELY, OF ANOTHER
FUND ON THE BASIS OF THE RELATIVE NAV. No sales charge will be imposed at the
time of the exchange. Any applicable CDSC payable upon the redemption of
shares exchanged will be calculated from the first day of the month after the
initial purchase, excluding the time shares were held in a money market fund.
Class B and Class C shares may not be exchanged into money market funds other
than Prudential Special Money Market Fund, Inc. For purposes of calculating
the holding period applicable to the Class B conversion feature, the time
period during which Class B shares were held in a money market fund will be
excluded. See "Conversion Feature--Class B Shares" above. An exchange will be
treated as a redemption and purchase for tax purposes. See "Shareholder
Investment Account--Exchange Privilege" in the Statement of Additional
Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE
TRANSFER AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may
call the
32
<PAGE>
Fund at (800) 225-1852 to execute a telephone exchange of shares, on weekdays,
except holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time.
For your protection and to prevent fraudulent exchanges, your telephone call
will be recorded and you will be asked to provide your personal identification
number. A written confirmation of the exchange transaction will be sent to
you. NEITHER THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR
COST WHICH RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE
GENUINE UNDER THE FOREGOING PROCEDURES. All exchanges will be made on the
basis of the relative NAV of the two funds next determined after the request
is received in good order. The Exchange Privilege is available only in states
where the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON
THE FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services 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.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV (see "Alternative
Purchase Plan--Class A Shares--Reduction and Waiver of Initial Sales Charges"
above) and for shareholders who qualify to purchase Class Z shares (see
"Alternative Purchase Plan--Class Z Shares" above). Under this exchange
privilege, amounts representing any Class B and Class C shares (which are not
subject to a CDSC) held in such a shareholder's account will be automatically
exchanged for Class A shares 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 or Prusec 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 PSI's 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 PSI 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.
The exchange privilege is not a right and may be suspended, modified or
terminated on 60 days' notice to shareholders.
FREQUENT TRADING. The Fund and the other Prudential Mutual Funds are not
intended to serve as vehicles for frequent trading in response to short-term
fluctuations in the market. Due to the disruptive effect that market timing
investment
33
<PAGE>
strategies and excessive trading can have on efficient portfolio management,
the Fund reserves the right to refuse purchase orders and exchanges by any
person, group or commonly controlled accounts, if, in the Manager's sole
judgment, such person, group or accounts were following a market timing
strategy or were otherwise engaging in excessive trading (Market Timers).
To implement this authority to protect the Fund and its shareholders from
excessive trading, the Fund will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Fund or its affiliates pursuant to which the Market Timer has agreed to
abide by certain procedures, which include a daily dollar limit on trading.
The Fund may notify the Market Timer of rejection of an exchange or purchase
order subsequent to the day on which the order was placed.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder of the Fund, you can
take advantage of the following services and privileges:
. AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund at NAV
without a sales charge. You may direct the Transfer Agent in writing not less
than five full business days prior to the record date to have subsequent
dividends and/or distributions sent in cash rather than reinvested. If you
hold shares through Prudential Securities, you should contact your financial
adviser.
. AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make
regular purchases of the Fund's shares in amounts as little as $50 via an
automatic debit to a bank account or Prudential Securities account (including
a Command Account). For additional information about this service, you may
contact your Prudential Securities financial adviser, Prusec representative or
the Transfer Agent directly.
. TAX-DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code
are available through the Distributor. These plans are for use by both self-
employed individuals and corporate employers. These plans permit either self-
direction of accounts by participants, or a pooled account arrangement.
Information regarding the establishment of these plans, the administration,
custodial fees and other details is available from Prudential Securities or
the Transfer Agent. If you are considering adopting such a plan, you should
consult with your own legal or tax adviser with respect to the establishment
and maintenance of such a plan.
. SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges."
. REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102. In addition, monthly
unaudited financial data is available upon request from the Fund.
. SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102, or by
telephone at (800) 225-1852 (toll-free) or, from outside the U.S.A., at (908)
417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
34
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential offers a broad range of mutual funds designed to meet your
individual needs. We welcome you to review the investment options available
through our family of funds. For more information on the Prudential Mutual
Funds, including charges and expenses, contact your Prudential Securities
financial adviser or Prusec representative or telephone the Funds at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
TAXABLE BOND FUNDS
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Balanced Fund
Prudential Distressed Securities Fund, Inc.
Prudential Dryden Fund
Prudential Active Balanced Fund
Prudential Bond Market Index Fund
Prudential Europe Index Fund
Prudential Pacific Index Fund
Prudential Small-Cap Index Fund
Prudential Stock Index Fund
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Jennison Series Fund, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Multi-Sector Fund, Inc.
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc. Nicholas-Applegate Growth Equity Fund
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
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations, other than those con-
tained in this Prospectus, in connection with the offer contained herein, and,
if given or made, such other information or representations must not be relied
upon as having been authorized by the Fund or the Distributor. This Prospectus
does not constitute an offer by the Fund or by the Distributor to sell, or a
solicitation of any offer to buy any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful to make such offer in such
jurisdiction.
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND HIGHLIGHTS............................................................ 2
What are the Fund's Risk Factors and Special Characteristics?............. 2
FUND EXPENSES.............................................................. 4
FINANCIAL HIGHLIGHTS....................................................... 5
HOW THE FUND INVESTS....................................................... 9
Investment Objective and Policies......................................... 9
Hedging and Return Enhancement Strategies................................. 11
Other Investments and Policies............................................ 14
Investment Restrictions................................................... 15
HOW THE FUND IS MANAGED.................................................... 16
Manager................................................................... 16
Distributor............................................................... 17
Fee Waivers............................................................... 18
Portfolio Transactions.................................................... 18
Custodian and Transfer and Dividend Disbursing Agent...................... 18
HOW THE FUND VALUES ITS SHARES............................................. 18
HOW THE FUND CALCULATES PERFORMANCE........................................ 19
TAXES, DIVIDENDS AND DISTRIBUTIONS......................................... 19
GENERAL INFORMATION........................................................ 21
Description of Shares..................................................... 21
Additional Information.................................................... 22
SHAREHOLDER GUIDE.......................................................... 22
How to Buy Shares of the Fund............................................. 22
Alternative Purchase Plan................................................. 24
How to Sell Your Shares................................................... 28
Conversion Feature--Class B Shares........................................ 31
How to Exchange Your Shares............................................... 32
Shareholder Services...................................................... 34
THE PRUDENTIAL MUTUAL FUND FAMILY.......................................... A-1
</TABLE>
- -------------------------------------------------------------------------------
MF131A
Class A:743916-207
CUSIP Nos.: Class B:743916-108
Class C:743916-306
Class Z:743916-405
[LOGO]
Prudential
Investments
Prudential
Equity
Income
Fund
Prospectus
December 30, 1997
www.prudential.com
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
Statement of Additional Information
dated December 30, 1997
Prudential Equity Income Fund (the Fund) is an open-end, diversified,
management investment company. Its investment objective is both current income
and capital appreciation. It seeks to achieve this objective by investing
primarily in common stocks and convertible securities that provide investment
income returns above those of the Standard & Poor's 500 Stock Index or the
NYSE Composite Index. In normal circumstances, the Fund intends to invest at
least 65% of its total assets in such securities. In selecting these
investments, the Fund puts emphasis on earnings, balance sheet and cash flow
analysis and the relationships that those factors have to the price and return
of a given security. The balance of the Fund's assets may be invested in other
common stocks, other securities convertible into common stocks, debt
securities and certain derivatives, including options on stocks and stock
indices. Common stocks may include securities of foreign issuers. There can be
no assurance that the Fund's investment objective will be achieved. See
"Investment Objective and Policies."
The Fund's address is 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, 1997, 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>
Investment Objective and Policies........................ B-2 9
Investment Restrictions.................................. B-8 15
Trustees and Officers.................................... B-9 16
Manager.................................................. B-12 16
Distributor.............................................. B-14 17
Portfolio Transactions and Brokerage..................... B-16 18
Purchase and Redemption of Fund Shares................... B-17 22
Shareholder Investment Account........................... B-20 34
Net Asset Value.......................................... B-24 18
Taxes, Dividends and Distributions....................... B-24 19
Performance Information.................................. B-26 19
Organization and Capitalization.......................... B-28 21
Custodian, Transfer and Dividend Disbursing Agent and In-
dependent Accountants................................... B-28 18
Financial Statements..................................... B-30 --
Report of Independent Accountants........................ B-43 --
Independent Auditors' Report............................. B-44 --
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>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is both current income and capital
appreciation. It seeks to achieve this objective by investing primarily in
common stocks and convertible securities that provide investment income
returns above those of the Standard & Poor's 500 Stock Index or the NYSE
Composite Index. There can be no assurance that the Fund's investment
objective will be achieved. See "How the Fund Invests--Investment Objective
and Policies" in the Prospectus.
LIMITATIONS ON PURCHASE AND SALE OF STOCK OPTIONS, OPTIONS ON STOCK INDICES,
STOCK INDEX FUTURES AND OPTIONS THEREON
Except as described below, the Fund will write call options on indices only
if on such date it holds a portfolio of stocks at least equal to the value of
the index times the multiplier times the number of contracts. When the Fund
writes a call option on a broadly-based stock market index, the Fund will
segregate or put into escrow with its Custodian, or pledge to a broker as
collateral for the option, cash, 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 or put into escrow with its Custodian, or pledge to a broker as
collateral for the option, at least ten "qualified securities," which are
stocks of issuers in such industry or market segment, with a market value at
the time the option is written of not less than 100% of the current index
value times the multiplier times the number of contracts. Such stocks will
include stocks which represent at least 50% of the weighting of the industry
or market segment index and will represent at least 50% of the Fund's holdings
in that industry or market segment. No individual security will represent more
than 15% of the amount so segregated, pledged or escrowed in the case of
broadly-based stock market index options or 25% of such amount in the case of
industry or market segment index options.
If at the close of business on any day the market value of such qualified
securities so segregated, escrowed or pledged falls below 100% of the current
index value times the multiplier times the number of contracts, the Fund will
so segregate, escrow or pledge an amount in cash 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 in a
segregated account with its Custodian, it will not be subject to the
requirements described in this paragraph.
The Fund will engage only in transactions in stock index futures contracts
and options thereon as a hedge against changes, resulting from market
conditions, in the values of securities which are held in the Fund's portfolio
or which it intends to purchase or when they are economically appropriate for
the reduction of risks inherent in the ongoing management of the Fund or for
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 deposited in a segregated account with the
Fund's Custodian and/or in a margin account with a broker to collateralize the
position and thereby ensure that the use of such futures is unleveraged.
The Fund will use stock index futures and options thereon as described
herein in a manner consistent with these requirements.
The Fund's ability to enter into stock index futures contracts, options
thereon and options on stocks and stock indices may be limited by certain
requirements for qualification as a regulated investment company under the
Internal Revenue Code. See "Taxes, Dividends and Distributions."
B-2
<PAGE>
RISKS OF TRANSACTIONS IN STOCK OPTIONS
An option position may be closed out only on an exchange, board of trade or
other trading facility which provides a secondary market for an option of the
same series. Although the Fund will generally purchase or write only those
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market on an exchange will exist for any
particular option, or at any particular time, and for some options no
secondary market on an exchange or otherwise may exist. In such event it might
not be possible to effect closing transactions in particular options, with the
result that the Fund would have to exercise its options in order to realize
any profit and would incur brokerage commissions upon the exercise of call
options and upon the subsequent disposition of underlying securities acquired
through the exercise of call options or upon the purchase of underlying
securities for the exercise of put options. If the Fund as a covered call
option writer is unable to effect a closing purchase transaction in a
secondary market, it will not be able to sell the underlying security until
the option expires or it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; (iii) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options or underlying securities; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the
facilities of an exchange or a clearing corporation may not at all times be
adequate to handle current trading volume; or (vi) one or more exchanges
could, for economic or other reasons, decide, or be compelled at some future
date, to discontinue the trading of options (or a particular class or series
of options), in which event the secondary market on that exchange (or in the
class or series of options) would cease to exist, although outstanding options
on that exchange that had been issued by a clearing corporation as a result of
trades on that exchange would continue to be exercisable in accordance with
their terms. There is no assurance that higher than anticipated trading
activity or other unforeseen events might not, at times, render certain of the
facilities of any of the clearing corporations inadequate, and thereby result
in the institution by an exchange of special procedures which may interfere
with the timely execution of customers' orders. However, The Options Clearing
Corporation, based on forecasts provided by the U.S. exchanges, believes that
its facilities are adequate to handle the volume of reasonably anticipated
options transactions, and such exchanges have advised such clearing
corporation that they believe their facilities will also be adequate to handle
reasonably anticipated volume.
RISKS OF OPTIONS ON INDICES
The Fund's purchase and sale of options on indices will be subject to risks
described above under "Risks of Transactions in Stock Options." In addition,
the distinctive characteristics of options on indices create certain risks
that are not present with stock options.
Index prices may be distorted if trading of certain stocks included in the
index is interrupted. Trading in the index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number
of stocks included in the index. If this occurred, the Fund would not be able
to close out options which it had purchased or written and, if restrictions on
exercise were imposed, might be unable to exercise an option it holds, which
could result in substantial losses to the Fund. It is the Fund's policy to
purchase or write options only on indices which include a number of stocks
sufficient to minimize the likelihood of a trading halt in the index.
Trading in index options commenced in April 1983 with the S&P 100 option
(formerly called the CBOE 100). Since that time a number of additional index
option contracts have been introduced, including options on industry indices.
Although the markets for certain index option contracts have developed
rapidly, the markets for other index options are still relatively illiquid.
The ability to establish and close out positions on such options will be
subject to the development and maintenance of a liquid secondary market. It is
not certain that this market will develop in all index option contracts. The
Fund will not purchase or sell any index option contract unless and until, in
the opinion of the investment adviser, the market for such options has
developed sufficiently that the risk in connection with such transactions is
no greater than the risk in connection with options on stocks.
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."
B-3
<PAGE>
Price movements in the Fund's portfolio probably will not correlate
precisely with movements in the level of the index and, therefore, the Fund
bears the risk that the price of the securities held by the Fund may not
increase as much as the index. In such event, the Fund would bear a loss on
the call which is not completely offset by movements in the price of the
Fund's portfolio. It is also possible that the index may rise when the Fund's
portfolio of stocks does not rise. If this occurred, the Fund would experience
a loss on the call which would not be offset by an increase in the value of
its portfolio and might also experience a loss in its portfolio. However,
because the value of a diversified portfolio will, over time, tend to move in
the same direction as the market, movements in the value of the Fund's
portfolio in the opposite direction as the market would be likely to occur for
only a short period or to a small degree.
Unless the Fund has other liquid assets which are sufficient to satisfy the
exercise of a call, the Fund would be required to liquidate portfolio
securities in order to satisfy the exercise. Because an exercise must be
settled within hours after receiving the notice of exercise, if the Fund fails
to anticipate an exercise, it may have to borrow from a bank (in amounts not
exceeding 20% of the Fund's total assets) pending settlement of the sale of
securities in its portfolio and would incur interest charges thereon.
When the Fund has written a call, there is also a risk that the market may
decline between the time the Fund has a call exercised against it, at a price
which is fixed as of the closing level of the index on the date of exercise,
and the time the Fund is able to sell stocks in its portfolio. As with stock
options, the Fund will not learn that an index option has been exercised until
the day following the exercise date but, unlike a call on stock where the Fund
would be able to deliver the underlying securities in settlement, the Fund may
have to sell part of its stock portfolio in order to make settlement in cash,
and the price of such stocks might decline before they can be sold. This
timing risk makes certain strategies involving more than one option
substantially more risky with index options than with stock options. For
example, even if an index call which the Fund has written is "covered" by an
index call held by the Fund with the same strike price, the Fund will bear the
risk that the level of the index may decline between the close of trading on
the date the exercise notice is filed with the clearing corporation and the
close of trading on the date the Fund exercises the call it holds or the time
the Fund sells the call which in either case would occur no earlier than the
day following the day the exercise notice was filed.
SPECIAL RISKS OF PURCHASING PUTS AND CALLS ON INDICES. If the Fund holds an
index option and exercises it before final determination of the closing index
value for that day, it runs the risk that the level of the underlying index
may change before closing. If such a change causes the exercised option to
fall out-of-the-money, the Fund will be required to pay the difference between
the closing index value and the exercise price of the option (times the
applicable multiplier) to the assigned writer. Although the Fund may be able
to minimize this risk by withholding exercise instructions until just before
the daily cutoff time or by selling rather than exercising an option when the
index level is close to the exercise price, it may not be possible to
eliminate this risk entirely because the cutoff times for index options may be
earlier than those fixed for other types of options and may occur before
definitive closing index values are announced.
SPECIAL RISKS RELATED TO FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Fund may enter into forward foreign currency exchange contracts in
several circumstances. When the Fund enters into a contract for the purchase
or sale of a security denominated in a foreign currency, or when the Fund
anticipates the receipt in a foreign currency of dividends or interest
payments on a security which it holds, the Fund may desire to "lock-in" the
U.S. dollar price of the security or the U.S. dollar equivalent of such
dividend or interest payment, as the case may be. By entering into a forward
contract for a fixed amount of dollars, for the purchase or sale of the amount
of foreign currency involved in the underlying transactions, the Fund will be
able to protect itself against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and the subject foreign
currency during the period between the date on which the security is purchased
or sold, or on which the dividend or interest payment is declared, and the
date on which such payment is made or received.
Additionally, when the investment adviser believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, the Fund may enter into a forward contract for a fixed amount of
dollars to sell the amount of foreign currency approximating the value of some
or all of the Fund's portfolio securities denominated in such foreign
currency. The precise matching of the forward contract amounts and the value
of the securities involved will not generally be possible since the future
value of securities in foreign currencies will change as a consequence of
market movements in the value of those securities between the date on which
the forward contract is entered into and the date it matures. The projection
of short-term currency market movement is extremely difficult, and the
successful execution of a short-term hedging strategy is highly uncertain.
B-4
<PAGE>
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 place cash or other liquid assets into a segregated account 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 placed in the segregated account will
be marked-to-market daily, and if the value of the securities placed in the
segregated account declines, additional cash or securities will be placed in
the account 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.
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.
RISKS OF INVESTING IN HIGH YIELD SECURITIES
Fixed-income securities are subject to the risk of an issuer's inability to
meet principal and interest payments on the obligations (credit risk) and may
also be subject to price volatility due to such factors as interest rate
sensitivity, market perception of the creditworthiness of the issuer and
general market liquidity (market risk). Lower rated or unrated (i.e., high
yield) securities are more likely to react to developments affecting market
and credit risk than are more highly rated securities, which react primarily
to movements in the general level of interest rates. The investment adviser
considers both credit risk and market risk in making
B-5
<PAGE>
investment decisions for the Fund. Investors should carefully consider the
relative risks of investing in high yield securities and understand that such
securities are not generally meant for short-term trading.
The amount of high yield securities outstanding proliferated in the 1980's
in conjunction with the increase in merger and acquisition and leveraged
buyout activity. Under adverse economic conditions, there is a risk that
highly leveraged issuers may be unable to service their debt obligations or to
repay their obligations upon maturity. In addition, the secondary market for
high yield securities, which is concentrated in relatively few market makers,
may not be as liquid as the secondary market for more highly rated 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.
DEFENSIVE STRATEGY AND SHORT-TERM INVESTMENTS
When conditions dictate a defensive strategy or during periods of portfolio
structuring or restructuring, the Fund may invest in money market instruments,
including commercial paper of domestic corporations, certificates of deposit,
bankers' acceptances and other obligations of domestic and foreign banks, and
obligations issued or guaranteed by the U.S. Government, its instrumentalities
or its agencies. The Fund will invest in foreign banks and foreign branches of
U.S. banks only if, after giving effect to such investment, all such
investments would constitute less than 10% of the Fund's total assets (taken
at current value). Such investments may be subject to certain risks, including
future political and economic developments, the possible imposition of
withholding taxes on interest income, the seizure or nationalization of
foreign deposits and foreign exchange controls or other restrictions.
REPURCHASE AGREEMENTS
The Fund's repurchase agreements will be collateralized by U.S. Government
obligations. The Fund will enter into repurchase transactions only with
parties meeting creditworthiness standards approved by the Fund's Trustees.
The Fund's investment adviser will monitor the creditworthiness of such
parties under the general supervision of the Trustees. In the event of a
default or bankruptcy by a seller, the Fund will promptly seek to liquidate
the collateral. To the extent that the proceeds from any sale of such
collateral upon a default in the obligation to repurchase are less than the
repurchase price, the Fund will suffer a loss.
The Fund participates in a joint repurchase account with other investment
companies managed by Prudential Investments Fund Management LLC (PIFM)
pursuant to an order of the Securities and Exchange Commission (SEC). On a
daily basis, any uninvested cash balances of the Fund may be aggregated with
those of such investment companies and invested in one or more repurchase
agreements. Each fund participates in the income earned or accrued in the
joint account based on the percentage of its investment.
LENDING OF SECURITIES
Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities to brokers, dealers and financial institutions, provided
that outstanding loans do not exceed in the aggregate 33% of the value of the
Fund's total assets and provided that such loans are callable at any time by
the Fund and are at all times secured by cash or equivalent collateral that is
equal to at least the market value, determined daily, of the loaned
securities. The advantage of such loans is that the Fund continues to receive
payments in lieu of the interest and dividends on the loaned securities, while
at the same time earning interest either directly from the borrower or on the
collateral which will be invested in short-term obligations.
A loan may be terminated by the borrower on one business day's notice or by
the Fund at any time. If the borrower fails to maintain the requisite amount
of collateral, the loan automatically terminates and the Fund can use the
collateral to replace the
B-6
<PAGE>
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 ACCOUNTS
When the Fund is required to segregate assets in connection with certain
hedging transactions, it will maintain cash or liquid securities in a
segregated account 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 not hold more than 15% of its net assets in repurchase
agreements which have a maturity of longer than seven days or in other
illiquid securities, including securities that are illiquid by virtue of the
absence of a readily available market (either within or outside of the United
States) or legal or contractual restrictions on resale. Historically, illiquid
securities have included securities subject to contractual or legal
restrictions on resale because they have not been registered under the
Securities Act of 1933, as amended (Securities Act), securities which are
otherwise not readily marketable and repurchase agreements having a maturity
of longer than seven days. Securities which have not been registered under the
Securities Act are referred to as private placements or restricted securities
and are purchased directly from the issuer or in the secondary market. Mutual
funds do not typically hold a significant amount of these restricted or other
illiquid securities because of the potential for delays on resale and
uncertainty in valuation. Limitations on resale may have an adverse effect on
the marketability of portfolio securities and a mutual fund might be unable to
dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemptions within
seven days. A mutual fund might also have to register such restricted
securities in order to dispose of them resulting in additional expense and
delay. Adverse market conditions could impede such a public offering of
securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes.
Institutional investors depend on an efficient institutional market in which
the unregistered security can be readily resold or on an issuer's ability to
honor a demand for repayment. The fact that there are contractual or legal
restrictions on resale to the general public or to certain institutions may
not be indicative of the liquidity of such investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to
the general public. Rule 144A establishes a "safe harbor" from the
registration requirements of the Securities Act for resales of certain
securities to qualified institutional buyers. The investment adviser
anticipates that the market for certain restricted securities such as
institutional commercial paper and foreign securities will expand further as a
result of this regulation and the development of automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National
Association of Securities Dealers, Inc.
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and commercial paper for which there is a readily available
market will not be deemed to be illiquid. The investment adviser will monitor
the liquidity of such restricted securities subject to the supervision of the
Trustees. In reaching liquidity decisions, the investment adviser will
consider, inter alia, the following factors: (1) the frequency of trades and
quotes for the security; (2) the number of dealers wishing to purchase or sell
the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the transfer). In addition, in order for commercial paper that is issued in
reliance on Section 4(2) of the Securities Act to be considered liquid, (i) it
must be rated in one of the two highest rating categories by at least two
nationally recognized statistical rating organizations (NRSRO), or if only one
NRSRO rates the securities, by that NRSRO, or, if unrated, be of comparable
quality in the view of the investment adviser, and (ii) it must not be "traded
flat" (i.e., without accrued
B-7
<PAGE>
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 SEC has taken the position that purchased over-the-counter
options and the assets used as "cover" for written over-the-counter options
are illiquid securities unless the Fund and the counterparty have provided for
the Fund, at the Fund's election, to unwind the over-the-counter option. The
exercise of such an option ordinarily would involve the payment by the Fund of
an amount designed to reflect the counterparty's economic loss from an early
termination, but does allow the Fund to treat the assets used as "cover" as
"liquid."
PORTFOLIO TURNOVER
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,
1996 and 1997 were 36% 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
"Portfolio Transactions and Brokerage" and "Taxes, Dividends and
Distributions."
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.
B-8
<PAGE>
(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.
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.
TRUSTEES AND OFFICERS
<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.
Delayne Dedrick Gold Trustee Marketing and Management Consultant; Director of The
(59) High Yield Income Fund, Inc.
*Robert F. Gunia (51) Trustee Vice President, Prudential Investments (since September
1997); 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.
</TABLE>
B-9
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME, ADDRESS** AND (AGE) WITH FUND DURING PAST FIVE YEARS
------------------------- --------- ----------------------
<C> <C> <S>
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.
*Mendel A. Melzer, CFA Trustee Chief Investment Officer (since October 1996) of
(37) 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.
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, First Financial Fund,
Inc., The High Yield Income Fund, Inc, and The High
Yield Plus Fund, Inc.
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).
*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. (PSG),
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.
Robin B. Smith (58) Trustee Chairman and Chief Executive Officer (since August 1996)
of Publishers Clearing House; formerly President and
Chief Executive Officer (January 1989-August 1996) and
President and Chief Operating Officer (September 1981-
December 1988) of Publishers Clearing House; Director
of BellSouth Corporation, Texaco Inc., Spring
Industries Inc. and Kmart Corporation.
Louis A. Weil, III (56) 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.
</TABLE>
B-10
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME, ADDRESS** AND (AGE) WITH FUND DURING PAST FIVE YEARS
- ------------------------- --------- ----------------------
<S> <C> <C>
Clay T. Whitehead (59) Trustee President, National Exchange Inc. (new business
development firm) (since May 1983).
Thomas A. Early (42) Vice President Vice President and General Counsel (since March 1997) of
Prudential Mutual Funds & Annuities (PMF & A);
Executive Vice President, Secretary and General Counsel
(since December 1996) of PIFM; formerly Vice President
and General Counsel (March 1994-March 1997) of
Prudential Retirement Services and Associate General
Counsel and Chief Financial Services Officer (1988-
1994) of Frank Russell Company.
Grace C. Torres (38) Treasurer and First Vice President (since December 1996) of PIFM;
Principal First Vice President (since March 1994) 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.
Stephen M. Ungerman (44) Assistant Tax Director (since March 1996) of Prudential
Treasurer Investments and the Private Asset Group of The
Prudential Insurance Company of America (Prudential);
formerly First Vice President (February 1993-September
1996) of Prudential Mutual Fund Management, Inc. and
Senior Tax Manager (1981-January 1993) of Price
Waterhouse.
S. Jane Rose (51) Secretary Senior Vice President (since December 1996) of PIFM;
Senior Vice President and Senior Counsel (since July
1992) of Prudential Securities; formerly Senior Vice
President (January 1991-September 1996) and Senior
Counsel (June 1987-September 1996) of Prudential Mutual
Fund Management, Inc.
</TABLE>
- ---------
* "Interested" Trustee, as defined in the Investment Company Act, by reason
of his 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.
Trustees and officers of the Fund are also trustees, directors and officers
of some or all of the other investment companies distributed by Prudential
Securities.
The officers conduct and supervise the daily business operations of the
Fund, while the Trustees, in addition to their functions set forth under
"Manager" and "Distributor," review such actions and decide on general policy.
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 an SEC exemptive order, at
the daily rate of return of the Fund. Payment of the interest so accrued is
also deferred and accruals become payable at the option of the Trustee. The
Fund's obligation to make payments of deferred Trustees' fees, together with
interest thereon, is a general obligation of the Fund.
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, 1997 and the aggregate compensation paid to such Trustees
for service on the
B-11
<PAGE>
Fund's Board and the Boards of any other investment companies managed by PIFM
(Fund Complex) for the calendar year ended December 31, 1996.
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT TOTAL 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 $166,000(21/39)*
Delayne D. Gold--Trustee 4,000 None N/A $175,308(21/42)*
Robert F. Gunia--Trust-
ee+ -- None N/A --
Donald D. Lennox--Former
Trustee 4,000 None N/A $ 90,000(10/22)*
Douglas H.
McCorkindale--Trustee 4,000 None N/A $ 71,208(10/13)*
Mendel A. Melzer--Trust-
ee+ -- None N/A --
Thomas T. Mooney--
Trustee 4,000 None N/A $135,375(18/36)*
Stephen P. Munn--Trustee 4,000 None N/A $ 49,125(6/8)*
Richard A. Redeker--
Trustee+ -- None N/A --
Robin B. Smith--Trustee 4,000 None N/A $ 89,957(11/20)*
Louis A. Weil, III--
Trustee 4,000 None N/A $ 91,250(13/18)*
Clay T. Whitehead--
Trustee 4,000 None N/A $ 38,292(5/7)*
</TABLE>
- ---------
* Indicates number of Funds/portfolios in Fund Complex to which aggregate
compensation relates.
+ 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.
As of December 12, 1997, the Trustees and officers of the Fund, as a group,
owned beneficially less than 1% of the outstanding shares of beneficial
interest of the Fund.
As of December 12, 1997, each of the following entities owned more than 5%
of the outstanding voting securities of each of the classes indicated:
Prudential Trust Co., FBO PSI Cash Balanced Pension, P Benefits Dept., 33rd
Fl., One Seaport Plaza, New York, NY 10038-3526 owned 1,910,146 Class Z shares
(or approximately 38% 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 799,108 Class Z shares (or
approximately 16% of the outstanding Class Z shares).
As of December 12, 1997, Prudential Securities was record holder of
17,012,285 Class A shares (or 55.8% of the outstanding Class A shares),
41,880,706 Class B shares (or 63.6% of the outstanding Class B shares),
633,202 Class C shares (or 60.4% of the outstanding Class C shares) and
146,592 Class Z shares (or 2.9% 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.
MANAGER
The manager of the Fund is Prudential Investments Fund Management LLC (PIFM
or the Manager) (formerly, Prudential Mutual Fund Management LLC), 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, 1997, PIFM managed and/or
administered open-end and closed-end management investment companies with
assets of approximately $60 billion. According to the Investment Company
Institute, as of October 31, 1997, the Prudential Mutual Funds were the 17th
largest family of mutual funds in the United States.
PIFM is a subsidiary of Prudential Securities and 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
B-12
<PAGE>
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.
Prior to June 1, 1995, the fee was at an annual rate of .60 of 1% of the
Fund's average daily net assets up to $500 million and .50 of 1% of the Fund's
average daily net assets in excess of $500 million. The fee is computed daily
and payable monthly. The Management Agreement also provides that, in the event
the expenses of the Fund (including the fees of 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 SEC, 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.
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. The Management Agreement was last approved by the Trustees of the
Fund, including a majority of the Trustees who are not parties to the contract
or interested persons of any such parties as defined in the Investment Company
Act, on May 21, 1997 and by shareholders of the Fund on January 14, 1988. On
May 3, 1995, the Trustees approved an amendment to the Management Agreement
which reduced the fees payable thereunder on assets in excess of $1 billion,
effective June 1, 1995.
For the fiscal years ended October 31, 1997, 1996 and 1995, PIFM received
management fees of $8,306,148, $6,851,420, and $6,235,010, respectively.
B-13
<PAGE>
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 was last approved by the Trustees, including a
majority of the Trustees who are not parties to the contract or interested
persons of any such party as defined in the Investment Company Act, on May 21,
1997, and by shareholders of the Fund on January 14, 1988.
The Subadvisory Agreement provides that it will terminate in the event of
its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. The Subadvisory Agreement may be
terminated by the Fund, 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.
DISTRIBUTOR
Prudential Securities Incorporated (Prudential Securities, PSI or the
Distributor), One Seaport Plaza, New York, New York 10292, acts as the
distributor of the shares of the Fund.
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), Prudential Securities incurs the
expenses of distributing the Fund's Class A, Class B and Class C shares.
Prudential Securities 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.
Prior to January 22, 1990, the Fund offered only one class of shares (the
then existing Class B shares). On October 11, 1989, the Trustees, including a
majority of the Trustees who are not interested persons of the Fund and who
have no direct or indirect financial interest in the operation of the Class A
or Class B Plan or in any agreement related to either Plan (the Rule 12b-1
Trustees), at a meeting called for the purpose of voting on each Plan, adopted
a new plan of distribution for the Class A shares of the Fund (the Class A
Plan) and approved an amended and restated plan of distribution with respect
to the Class B shares of the Fund (the Class B Plan). On February 9, 1993, the
Trustees, including a majority of the Rule 12b-1 Trustees, at a meeting called
for the purpose of voting on each Plan, approved the continuance of the Plans
and Distribution Agreements and approved modifications of the Fund's Class A
and Class B Plans and Distribution Agreements to conform them with recent
amendments to the National Association of Securities Dealers, Inc. (NASD)
maximum sales charge rule described below. As so modified, the Class A Plan
provides that (i) up to .25 of 1% of the average daily net assets of the Class
A shares may be used to pay for personal service and/or the maintenance of
shareholder accounts (service fee) and (ii) total distribution fees (including
the service fee of .25 of 1%) may not exceed .30 of 1%. As so modified, the
Class B Plan provides that (i) up to .25 of 1% of the average daily net assets
of the Class B shares may be paid as a service fee and (ii) up to .75 of 1%
(not including the service fee) of the average daily net assets of the Class B
shares (asset-based sales charge) may be used as reimbursement for
distribution-related expenses with respect to the Class B shares. On May 4,
1993, the Trustees, including a majority of the Rule 12b-1 Trustees, at a
meeting called for the purpose of voting on each Plan, adopted a plan of
distribution for the Class C shares of the Fund and approved further
amendments to the plans of distribution for the Fund's Class A and Class B
shares changing them from reimbursement type plans to compensation type plans.
The Class C Plan provides that (i) up to .25 of 1% of the average daily net
assets of the Class C shares may be paid for providing personal service and/or
maintaining shareholder accounts and (ii) 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 Plans were last approved by the Trustees,
including a majority of the Rule 12-1 Trustees, on May 21, 1997. The Class A
Plan, as amended, was approved by Class A and Class B shareholders, and the
Class B Plan, as amended, was approved by Class B shareholders, on July 19,
1994. The Class C Plan was approved by the sole shareholder of Class C shares
on August 1, 1994.
CLASS A PLAN. For the fiscal year ended October 31, 1997, the Distributor
received payments of $1,137,230 under the Class A Plan. This amount was
primarily expended for payments of account servicing fees to financial
advisers and other persons who sell Class A shares. For the fiscal year ended
October 31, 1997, the Distributor also received approximately $794,000 in
initial sales charges.
B-14
<PAGE>
CLASS B PLAN. For the fiscal year ended October 31, 1997, the Distributor
received $10,721,183 from the Fund under the Class B Plan and spent
approximately $6,627,000 in distributing the Fund's Class B shares. It is
estimated that of the latter amount, approximately 0.4% ($27,000) was spent on
printing and mailing of prospectuses to other than current shareholders; 28.3%
($1,855,100) on compensation to Pruco Securities Corporation (an affiliated
broker-dealer) (Prusec) for commissions to its representatives and other
expenses, including an allocation of overhead and other branch office
distribution-related expenses, incurred by it for distribution of Fund shares;
and 71.3% ($4,744,900) on the aggregate of (i) payments of commissions and
account servicing fees to financial advisers (37.7% or $2,506,700) and (ii) an
allocation of overhead and other branch office distribution-related expenses
for payments of related expenses (33.6% or $2,238,200). The term "overhead and
other branch office distribution-related expenses" represents (a) the expenses
of operating Prudential Securities' and 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 also receives the proceeds of contingent deferred sales
charges paid by investors upon certain redemptions of Class B shares. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales
Charges" in the Prospectus. For the fiscal year ended October 31, 1997,
Prudential Securities received approximately $1,538,000 in contingent deferred
sales charges attributable to Class B shares.
CLASS C PLAN. For the fiscal year ended October 31, 1997, the Distributor
received $114,317 under the Class C Plan and spent approximately $149,500 in
distributing Class C shares. It is estimated that of the latter amount,
approximately 0.7% ($1,100) was spent on printing and mailing of prospectuses
to other than current shareholders; 14.1% ($21,100) on compensation to Prusec
for commissions to its representatives and other expenses, including an
allocation of overhead and other branch office distribution-related expenses,
incurred by it for distribution of Fund shares; and 85.2% ($127,300) on the
aggregate of (i) payments of commissions and account servicing fees to
financial advisers (59.9% or $89,500) and (ii) an allocation of overhead and
other branch office distribution-related expenses for payments of related
expenses (25.3% or $37,800). Prudential Securities also receives the proceeds
of contingent deferred sales charges paid by investors upon certain
redemptions of Class C shares. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus. For the fiscal
year ended October 31, 1997, Prudential Securities received approximately
$8,400 in contingent deferred sales charges attributable to Class C shares.
The Class A, Class B and Class C Plans continue in effect from year to year,
provided that each such continuance is approved at least annually by a vote of
the Trustees, including a majority vote of the Rule 12b-1 Trustees, cast in
person at a meeting called for the purpose of voting on such continuance. The
Plans may each be terminated at any time, without penalty, by the vote of a
majority of the Rule 12b-1 Trustees or by the vote of the holders of a
majority of the outstanding shares of the applicable class on not more than 30
days' written notice to any other party to the Plans. The Plans may not be
amended to increase materially the amounts to be spent for the services
described therein without approval by the shareholders of the applicable class
(by both Class A and Class B shareholders, voting separately, in the case of
material amendments to the Class A Plan), and all material amendments are
required to be approved by the Trustees in the manner described above. Each
Plan will automatically terminate in the event of its assignment. The Fund
will not be contractually obligated to pay expenses incurred under any Plan if
it is terminated or not continued.
Pursuant to each Plan, the Trustees will review at least quarterly a written
report of the distribution expenses incurred on behalf of each class of shares
of the Fund by the Distributor. The report includes an itemization of the
distribution expenses and the purposes of such expenditures. In addition, as
long as the Plans remain in effect, the selection and nomination of the
Rule 12b-1 Trustees shall be committed to the Rule 12b-1 Trustees.
Pursuant to the Distribution Agreement, the Fund has agreed to indemnify
Prudential Securities to the extent permitted by applicable law against
certain liabilities under federal securities laws. The Distribution Agreement
was last approved by the Trustees, including a majority of the Rule 12b-1
Trustees, on May 21, 1997.
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.
B-15
<PAGE>
The annual asset-based sales charge on shares of the Fund may not exceed .75
of 1% per class. The 6.25% limitation applies to each class of the Fund rather
than on a per shareholder basis. If aggregate sales charges were to exceed
6.25% of total gross sales of any class, all sales charges on shares of that
class would be suspended.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for decisions to buy and sell securities, futures
and options on securities and futures for the Fund, the selection of brokers,
dealers and futures commission merchants to effect the transactions and the
negotiation of brokerage commissions, if any. For purposes of this section,
the term "Manager" includes the Subadviser. Broker-dealers may receive
brokerage commissions on Fund portfolio transactions, including options and
the purchase and sale of underlying securities upon the exercise of options.
Orders may be directed to any broker or futures commission merchant including,
to the extent and in the manner permitted by applicable law, Prudential
Securities and its affiliates. Brokerage commissions on United States
securities, options and futures exchanges or boards of trade are subject to
negotiation between the Manager and the broker or futures commission merchant.
In the over-the-counter market, securities are generally traded on a "net"
basis with dealers acting as principal for their own accounts without a stated
commission, although the price of the security usually includes a profit to
the dealer. In underwritten offerings, securities are purchased at a fixed
price which includes an amount of compensation to the underwriter, generally
referred to as the underwriter's concession or discount. On occasion, certain
money market instruments and U.S. Government agency securities may be
purchased directly from the issuer, in which case no commissions or discounts
are paid. The Fund will not deal with Prudential Securities in any transaction
in which Prudential Securities (or any affiliate) acts as principal. Thus, it
will not deal with Prudential Securities acting as market maker, and it will
not execute a negotiated trade with Prudential Securities if execution
involves Prudential Securities' acting as principal with respect to any part
of the Fund's order.
In placing orders for portfolio securities of the Fund, the Manager is
required to give primary consideration to obtaining the most favorable price
and efficient execution. Within the framework of this policy, the Manager will
consider the research and investment services provided by brokers, dealers or
futures commission merchants who effect or are parties to portfolio
transactions of the Fund, the Manager or the Manager's other clients. Such
research and investment services are those which brokerage houses customarily
provide to institutional investors and include statistical and economic data
and research reports on particular companies and industries. Such services are
used by the Manager in connection with all of its investment activities, and
some of such services obtained in connection with the execution of
transactions for the Fund may be used in managing other investment accounts.
Conversely, brokers, dealers or futures commission merchants furnishing such
services may be selected for the execution of transactions of such other
accounts, whose aggregate assets are far larger than those of the Fund, and
the services furnished by such brokers, dealers or futures commission
merchants may be used by the Manager in providing investment management for
the Fund. Commission rates are established pursuant to negotiations with the
broker, dealer or futures commission merchant based on the quality and
quantity of execution services provided by the broker, dealer or futures
commission merchant in the light of generally prevailing rates. The Manager's
policy is to pay higher commissions to brokers, other than Prudential
Securities, for particular transactions than might be charged if a different
broker had been selected, on occasions when, in the opinion of the Manager,
this policy furthers the objective of obtaining best price and execution. In
addition, the Manager is authorized to pay higher commissions on brokerage
transactions for the Fund to brokers other than Prudential Securities in order
to secure research and investment services described above, subject to review
by the Fund's Trustees from time to time as to the extent and continuation of
this practice. The allocation of orders among brokers and the commission rates
paid are reviewed periodically by the Fund's Trustees. Portfolio securities
may not be purchased from any underwriting or selling syndicate of which
Prudential Securities (or any affiliate), during the existence of the
syndicate, is a principal underwriter (as defined in the Investment Company
Act), except in accordance with rules of the SEC. This limitation, in the
opinion of the Fund, will not significantly affect the Fund's ability to
pursue its present investment objective. However, in the future in other
circumstances, the Fund may be at a disadvantage because of this limitation in
comparison to other funds with similar objectives but not subject to such
limitations.
Subject to the above considerations, Prudential Securities may act as a
securities broker or futures commission merchant for the Fund. In order for
Prudential Securities (or any affiliate) to effect any portfolio transactions
for the Fund, the commissions, fees or other remuneration received by
Prudential Securities (or any affiliate) must be reasonable and fair compared
to the commissions, fees or other remuneration paid to other brokers or
futures commission merchants in connection with comparable transactions
involving similar securities or futures being purchased or sold on an exchange
or board of trade during a comparable period of time. This standard would
allow Prudential Securities (or any affiliate) to receive no more than the
remuneration which would be expected to be received by an unaffiliated broker
or futures commission merchant in a commensurate arm's-length transaction.
Furthermore, the Trustees of the Fund, including a majority of the non-
interested Trustees, have adopted procedures which are reasonably designed to
provide that any commissions, fees or other remuneration paid to Prudential
Securities (or any affiliate) are
B-16
<PAGE>
consistent with the foregoing standard. In accordance with Section 11(a) of
the Securities Exchange Act of 1934, Prudential Securities may not retain
compensation for effecting transactions on a national securities exchange for
the Fund unless the Fund has expressly authorized the retention of such
compensation. Prudential Securities must furnish to the Fund at least annually
a statement setting forth the total amount of all compensation retained by
Prudential Securities from transactions effected for the Fund during the
applicable period. Brokerage and futures transactions with Prudential
Securities (or any affiliate) are also subject to such fiduciary standards as
may be imposed upon Prudential Securities (or such affiliate) by applicable
law.
The table below sets forth information concerning the payment of commissions
by the Fund, including the commissions paid to Prudential Securities, for the
three years ended October 31, 1997.
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, 1997 OCTOBER 31, 1996 OCTOBER 31, 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Total brokerage commissions
paid by the Fund........... $1,978,946 $1,359,109 $2,431,778
Total brokerage commissions
paid to Prudential
Securities................. $ 197,650 $ 55,600 $ 183,700
Percentage of total
brokerage commissions paid
to Prudential Securities... 10.0% 4.1% 7.6%
</TABLE>
The Fund effected approximately 10.0% of the total dollar amount of its
transactions involving the payment of commissions to Prudential Securities
during the year ended October 31, 1997. Of the total brokerage commissions
paid during that period, $1,480,927 (or 74.8%) 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.
PURCHASE AND REDEMPTION 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
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. See "Shareholder Guide--How to Buy Shares of the Fund" in
the Prospectus.
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."
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, and (c) have a value that is readily ascertainable via
listing on or trading in a recognized United States or international exchange
or market.
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares of the Fund are sold at a maximum sales charge of
5% and Class B*, Class C* and Class Z shares of the Fund are sold at NAV.
Using the NAV at October 31, 1997, 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.................. $21.00
Maximum sales charge (5% of offering price)............................. 1.11
------
Maximum offering price to public........................................ $22.11
======
CLASS B
Net asset value, redemption price and offering price per Class B share*. $20.93
======
CLASS C
Net asset value, redemption price and offering price per Class C share*. $20.93
======
CLASS Z
Net asset value, redemption price and offering price per Class Z share.. $21.00
======
</TABLE>
- ---------
*Class B and Class C shares are subject to a contingent deferred sales charge
on certain redemptions. See "Shareholder Guide--How to Sell Your Shares--
Contingent Deferred Sales Charges" in the Prospectus.
B-17
<PAGE>
REDUCTION AND WAIVER OF INITIAL SALES CHARGES--CLASS A SHARES
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other Prudential Mutual Funds, the
purchases may be combined to take advantage of the reduced sales charges
applicable to larger purchases. See the table of breakpoints under
"Shareholder Guide--Alternative Purchase Plan" in the Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's and spouse's Individual Retirement Account (IRA);
(d) any company controlled by the individual (a person, entity or group
that holds 25% or more of the outstanding voting securities of a
company will be deemed to control the company, and a partnership
will be deemed to be controlled by each of its general partners);
(e) a trust created by the individual, the beneficiaries of which are
the individual, his or her spouse, parents or children;
(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act
account created by the individual or the individual's spouse; and
(g) one or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that
employer).
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charges will be
granted subject to confirmation of the investor's holdings. The Combined
Purchase and Cumulative Purchase Privilege does not apply to individual
participants in any retirement or group plans.
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of
related investors, as described above under "Combined Purchase and Cumulative
Purchase Privilege," may aggregate the value of their existing holdings of
shares of the Fund and shares of other Prudential Mutual Funds (excluding
money market funds other than those acquired pursuant to the exchange
privilege) to determine the reduced sales charge. However, the value of shares
held directly with the Transfer Agent and through Prudential Securities will
not be aggregated to determine the reduced sales charge. All shares must be
held either directly with the Transfer Agent or through Prudential Securities.
The value of existing holdings for purposes of determining the reduced sales
charge is calculated using the maximum offering price (NAV plus maximum sales
charge) as of the previous business day. See "How the Fund Values its Shares"
in the Prospectus. The Distributor must be notified at the time of purchase
that the investor is entitled to a reduced sales charge. The reduced sales
charges will be granted subject to confirmation of the investor's holdings.
Rights of Accumulation are not available to individual participants in any
retirement or group plans.
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
and through Prudential Securities will not be aggregated to determine the
reduced sales charge. All shares must be held either directly with the
Transfer Agent or through Prudential Securities.
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
B-18
<PAGE>
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.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
The contingent deferred sales charge (CDSC) is waived under circumstances
described in the Prospectus. See "Shareholder Guide--How to Sell Your Shares--
Waiver of the Contingent Deferred Sales Charges--Class B Shares" in the
Prospectus. In connection with these waivers, the Transfer Agent will require
you to submit the supporting documentation set forth below.
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
Death A copy of the shareholder's death
certificate or, in the case of a
trust, a copy of the grantor's death
certificate, plus a copy of the trust
agreement identifying the grantor.
Disability--An individual will be A copy of the Social Security
considered disabled if he or she Administration award letter or a
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.
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.
B-19
<PAGE>
The quantity discount will be imposed at the following rates depending on
whether the aggregate value exceeded $500,000 or $1 million:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF DOLLARS INVESTED
OR REDEMPTION PROCEEDS
--------------------------------------
YEAR SINCE PURCHASE
PAYMENT MADE $500,001 TO $1 MILLION OVER $1 MILLION
------------------- ---------------------- ---------------
<S> <C> <C>
First.......................... 3.0% 2.0%
Second......................... 2.0% 1.0%
Third.......................... 1.0% 0%
Fourth and thereafter.......... 0% 0%
</TABLE>
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to the reduced CDSC. The reduced CDSC will be granted subject to
confirmation of your holdings.
CLASS Z SHARES
Class Z shares of the Fund may 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
(i) the plan purchases shares of the Fund pursuant to an investment management
agreement with The Prudential Insurance Company of America or its affiliates,
(ii) the Fund is an available investment option under the agreement and (iii)
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.
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 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.
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
B-20
<PAGE>
shares upon exchange of Class A shares may use the Exchange Privilege only to
acquire Class A shares of the Prudential Mutual Funds participating in the
Exchange Privilege.
The following money market funds participate in the Class A Exchange
Privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets, Inc. (Class A shares)
Prudential Tax-Free Money Fund, Inc.
CLASS B AND CLASS C. Shareholders of the Fund may exchange their Class B and
Class C shares for Class B and Class C shares, respectively, of certain other
Prudential Mutual Funds and shares of Prudential Special Money Market Fund,
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.
Additional details about the Exchange Privilege and prospectuses for each of
the Prudential Mutual Funds are available from the Fund's Transfer Agent,
Prudential Securities or Prusec. The Exchange Privilege may be modified,
terminated or suspended on 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.
DOLLAR COST AVERAGING
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more
shares when the price is low and fewer shares when the price is high. The
average cost per share is lower than it would be if a constant number of
shares were bought at set intervals.
B-21
<PAGE>
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class beginning in 2011, the cost of four years at
a private college could reach $210,000 and over $90,000 at a public
university./1/
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals./2/
<TABLE>
<CAPTION>
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
-------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
25 Years............................. $ 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 SAVINGS ACCUMULATION PLAN (ASAP)
Under ASAP, an investor may arrange to have a fixed amount automatically
invested in shares of the Fund monthly by authorizing his or her bank account
or Prudential Securities account (including a Command Account) to be debited
to invest specified dollar amounts in shares of the Fund. The investor's bank
must be a member of the Automatic Clearing House System. Share certificates
are not issued to ASAP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, Prudential Securities or Prusec.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders through Prudential
Securities or the Transfer Agent. Such withdrawal plan provides for monthly or
quarterly checks in any amount, except as provided below, up to the value of
the shares in the shareholder's account. Withdrawals of Class B or Class C
shares may be subject to a CDSC. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus.
In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account value applies, (ii) withdrawals may not be for less than $100 and
(iii) the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at NAV on
shares held under this plan. See "Shareholder Investment Account--Automatic
Reinvestment of Dividends and/or Distributions."
Prudential Securities and the Transfer Agent act as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may
be terminated at any time, and the Distributor reserves the right to initiate
a fee of up to $5 per withdrawal, upon 30 days' written notice to the
shareholder.
Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
B-22
<PAGE>
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must generally be recognized for federal income tax
purposes. In addition, withdrawals made concurrently with purchases of
additional shares are inadvisable because of the sales charges applicable to
(i) the purchase of Class A shares and (ii) the withdrawal of Class B and
Class C shares. Each shareholder should consult his or her own tax adviser
with regard to the tax consequences of the systematic withdrawal plan,
particularly if used in connection with a retirement plan.
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.
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 Prudential
Securities Financial Advisor or Prudential/Pruco Securities Representative
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-23
<PAGE>
NET ASSET VALUE
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 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, as provided by a pricing
service or principal market marker. Corporate bonds (other than convertible
debt securities) and U.S. Government securities that are actively traded in
the over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, are valued on the basis of
valuations provided by a pricing service which uses information with respect
to transactions in bonds, quotations from bond dealers, agency ratings, market
transactions in comparable securities and various relationships between
securities in determining value. Convertible debt securities that are actively
traded in the over-the-counter market, including listed securities for which
the primary market is believed to be over-the-counter, are valued at the mean
between the 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. 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. 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.
NAV is calculated separately for each class. 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.
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 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
B-24
<PAGE>
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.
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.
B-25
<PAGE>
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. See "How the Fund
Calculates Performance" in the Prospectus.
Average annual total return is computed according to the following formula:
P(1 + T) to the power of n = ERV
Where: P = hypothetical initial payment of $1000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value at the end of the 1, 5 or 10 year
periods (or fractional portion thereof) of a hypothetical $1000
payment made at the beginning of the 1, 5 or 10 year periods.
Average annual total return takes into account any applicable initial or
contingent deferred sales charges but does not take into account any federal
or state income taxes that may be payable upon redemption.
The average annual total returns for Class A shares for the one year, five
year and since inception (January 22, 1990) periods ended October 31, 1997
were 45.68%, 19.79% and 16.46%, respectively. The average annual total returns
for Class B shares for the one year, five year and ten year periods ended
October 31, 1997 were 44.60%, 18.89% and 15.67%, respectively. The average
annual total returns for Class C shares for the one year and since inception
(August 1, 1994) periods ended October 31, 1997 were 44.60% and 20.72%,
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, 1997
were 46.12% and 28.94%, 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. See "How the Fund Calculates Performance" in the
Prospectus.
Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed according to the following formula:
ERV - P
-------
P
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.
B-26
<PAGE>
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, 1997 were 45.68%, 146.64% and
226.79%, respectively. The aggregate total returns for Class B shares for the
one year, five year and ten year periods ended on October 31, 1997 were
44.60%, 137.50% and 328.50%, respectively. The aggregate total returns for
Class C shares for the one year and since inception periods ended October 31,
1997 were 44.60% and 84.40%, respectively. The aggregate total returns for the
Class Z shares for the one year and since inception periods ended October 31,
1997 were 46.12% and 52.77%, 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 power of 6 - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements). the
average daily number of shares outstanding during the period
that were entitled to receive
c = dividends.
d = the maximum offering price per share on the last day of the
period.
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, 1997 were 1.97%,
1.30%, 1.31% and 2.33% for the Class A, Class B, Class C and Class Z shares,
respectively.
From time to time, the performance of the Fund may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long-term and the rate of
inflation./1/
[CHART]
Performance Comparison
of Different Types
of Investments Over
the Long-Term (1/1926-9/1997)
------------------------------
Common Stocks: 11.0%
Long-Term Govt. Bonds: 5.1%
Inflation: 3.1%
/1/ Source: Ibbotson Associates, "Stocks, Bonds, Bills and Inflation--1997
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-27
<PAGE>
ORGANIZATION AND CAPITALIZATION
The Declaration of Trust and the By-Laws of the Fund are designed to make
the Fund similar in certain respects to a Massachusetts business corporation.
The principal distinction between a Massachusetts business trust and a
Massachusetts business corporation relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, in certain
circumstances, be held personally liable as partners for the obligations of
the Fund, which is not the case with a corporation. The Fund believes that
this risk is not material. The Declaration of Trust of the Fund provides that
shareholders shall not be subject to any personal liability for the acts or
obligations of the Fund and that every written obligation, contract,
instrument or undertaking made by the Fund shall contain a provision to the
effect that the shareholders are not individually bound thereunder.
Massachusetts counsel for the Fund have advised the Fund that no personal
liability with respect to contract obligations will attach to the shareholders
under any undertaking containing such provisions when adequate notice of such
provision is given, except possibly in a few jurisdictions. With respect to
all types of claims in the latter jurisdictions and with respect to tort
claims, contract claims when the provision referred to is omitted from the
undertaking, claims for taxes and certain statutory liabilities, a shareholder
may be held personally liable to the extent that claims are not satisfied by
the Fund. However, upon payment of any such liability, the shareholder will be
entitled to reimbursement from the general assets of the Fund. The Trustees
intend to conduct the operations of the Fund in such a way as to avoid, to the
extent possible, ultimate liability of the shareholders for liabilities of the
Fund.
The Declaration of Trust further provides that no Trustee, officer, employee
or agent of the Fund is liable to the Fund or to a shareholder, nor is any
Trustee, officer, employee or agent liable to any third persons in connection
with the affairs of the Fund, except as such liability may arise from his or
her own bad faith, willful misfeasance, gross negligence or reckless disregard
of his or her duties. It also provides that all third parties shall look
solely to the Fund property for satisfaction of claims arising in connection
with the affairs of the Fund. With the exceptions stated, the Declaration of
Trust permits the Trustees to provide for the indemnification of Trustees,
officers, employees or agents of the Fund against all liability in connection
with the affairs of the Fund.
The Fund does not intend to hold annual meetings of shareholders.
The Fund shall continue without limitation of time subject to the provisions
in the Declaration of Trust concerning termination by action of the
shareholders or by the Trustees by written notice to the shareholders.
The authorized capital of the Fund consists of an unlimited number of shares
of beneficial interest, $.01 par value, initially all of one series. All
shares of the Fund issued and outstanding are fully paid and non-assessable by
the Fund. Each share of the Fund represents an equal proportionate interest
with each other share of the Fund. Shares of the Fund entitle their holders to
one vote per share.
Pursuant to the Declaration of Trust, the Trustees may authorize the
creation of additional series of shares (the proceeds of which would be
invested in separate, independently managed portfolios with distinct
investment objectives and policies and share purchase, redemption and net
asset value procedures) with such preferences, privileges, limitations and
voting and dividend rights as the Trustees may determine. All consideration
received by the Fund for shares of any additional series, and all assets in
which such consideration is invested, would belong to that series (subject
only to the rights of creditors of that series) and would be subject to the
liabilities related thereto. Pursuant to the Investment Company Act,
shareholders of any additional series of shares would normally have to approve
the adoption of any advisory contract relating to such series and of any
changes in the investment policies related thereto. The Trustees have no
intention of authorizing additional series at the present time.
The Trustees have the power to alter the number and the terms of office of
the Trustees and they may at any time lengthen their own terms or make their
terms of unlimited duration and appoint their own successors, provided that
always at least a majority of the Trustees have been elected by the
shareholders of the Fund. The voting rights of shareholders are not
cumulative, so that holders of more than 50 percent of the shares voting can,
if they choose, elect all Trustees being selected, while the holders of the
remaining shares would be unable to elect any Trustees.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT AND INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities
and cash and, in that capacity, maintains certain financial and accounting
books and records pursuant to an agreement with the Fund. Subcustodians
provide custodial services for the Fund's foreign assets held outside the
United States. See "How the Fund is Managed--Custodian and Transfer and
Dividend Disbursing Agent" in the Prospectus.
B-28
<PAGE>
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 per
shareholder account, a new account set-up fee for each manually established
account and a monthly inactive zero balance account fee per shareholder
account. PMFS is also reimbursed for its out-of-pocket expenses, including but
not limited to postage, stationery, printing, allocable communication expenses
and other costs. For the fiscal year ended October 31, 1997, the Fund incurred
fees of approximately $1,645,000 for the services of PMFS.
Price Waterhouse LLP, 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.
B-29
<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-30
<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-31
<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-32
<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-33
<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-34
<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-35
<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-36
<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-37
<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-38
<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-39
<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-40
<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-41
<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-42
<PAGE>
Report of Independent Accountants PRUDENTIAL EQUITY INCOME FUND
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
Prudential Equity Income Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Equity Income Fund (the
"Fund") at October 31, 1997, and the results of its operations, the changes in
its net assets and the financial highlights for the year then ended, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audit. We
conducted our audit of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included confirmation of securities at October 31, 1997 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmations from brokers were not received, provides
a reasonable basis for the opinion expressed above. The accompanying statement
of changes in net assets for the year ended October 31, 1996 and the financial
highlights for the periods other than the year ended October 31, 1997 were
audited by other independent accountants, whose opinion dated December 5, 1996
was unqualified.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
December 19, 1997
- --------------------------------------------------------------------------------
B-43
<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.
Deloitte & Touche LLP
New York, New York
December 5, 1996
B-44
<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-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations.
STANDARD & POOR'S RATINGS GROUP
DEBT RATINGS
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A-1
<PAGE>
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB, B, CCC AND CC: Debt rated BB, B, CCC and CC is regarded, on balance, as
having predominantly speculative characteristics with respect to capacity to
pay interest and repay principal. BB indicates the least degree of speculation
and CC the highest degree of speculation. While such debt will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
COMMERCIAL PAPER RATINGS
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-1: This highest category 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.
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.
EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY
<TABLE>
<S> <C>
SMALL STOCKS $4,495.99
COMMON STOCKS $1,370.95
LONG-TERM BONDS $ 33.73
TREASURY BILLS $ 13.54
INFLATION $ 8.87
</TABLE>
Source: Stocks, Bonds, Bills, and Inflation 1997 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 1996. 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>
'87 '88 '89 '90 '91 '92 '93 '94 '95 '96
- -------------------------------------------------------------------------------------------------------------------
<S> <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%
- -------------------------------------------------------------------------------------------------------------------
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%
- -------------------------------------------------------------------------------------------------------------------
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%
- -------------------------------------------------------------------------------------------------------------------
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%
- -------------------------------------------------------------------------------------------------------------------
WORLD
GOVERNMENT
BONDS(5) 35.2% 2.3% (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1%
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
DIFFERENCE BETWEEN HIGHEST
AND LOWEST RETURN PERCENT 33.2% 10.2% 18.8% 24.9% 30.9% 11.0% 10.3% 9.9% 5.5% 8.7%
</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 illustrates the This chart shows the growth of a
performance of major world stock hypothetical $10,000 investment made
markets for the period from 1986 in the stocks representing the S&P
through September 30, 1997. It 500 stock index with and without
does not represent the performance reinvested dividends.
of any Prudential Mutual Fund.
[CHART]
Capital Appreciation and
Reinvesting Dividends $ 228,266
Capital Appreciation Only $ 80,535
Average Annual Total Returns of
Major World Stock Markets
12/31/86-9/30/97 (in U.S. Dollars)
[CHART] Source: Stocks, Bonds, Bills, and
Inflation 1997 Yearbook, Ibbotson
Associates, Chicago (annually
updates work by Roger G. Ibbotson
Hong Kong 23.7% and Rex A. Sinquefield). Used with
Sweden 22.0% permission. All rights reserved.
Netherlands 21.3% This chart is used for illustrative
Spain 21.0% purposes only and is not intended to
Belgium 19.7% represent the past, present or
Switzerland 17.5% future performance of any Prudential
USA 17.1% Mutual Fund. Common stock total
UK 17.0% return is based on the Standard &
France 16.1% Poor's 500 Stock Index, a market-
Germany 12.3% value-weighted index made up of 500
Austria 10.0% of the largest stocks in the U.S.
Japan 8.8% based upon their stock market value.
Investors cannot invest directly in
indices.
Source: Morgan Stanley Capital
International (MSCI) and Lipper
Analytical Services, Inc. Used
with permission. 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: $12.7 Trillion
[CHART]
U.S. 34.6%
Pacific Basin 20.1%
Europe 42.6%
Canada 2.7%
Source: Morgan Stanley Capital
International, September 30, 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 (1926-1996)
- ---------------------------------------
Source: Stocks, Bonds, Bills, and Inflation 1997 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 1926-1996.
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]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
THE RANGE OF ANNUAL TOTAL RETURNS FOR MAJOR STOCK & BOND
<TABLE>
<CAPTION>
INDICES OVER THE PAST 20 YEARS
(12/31/76-12/31/96)*
<S> <C> <C>
S&P 500 37.6% -7.2%
EAFE 69.9% -23.2%
Lehman Aggregate 32.6% -2.9%
BEST RETURNS ZONE
WITH A DIVERSIFIED BLEND
1/3 S&P 500 INDEX
1/3 EAFE INDEX
1/3 LEHMAN AGGREGATE INDEX
</TABLE>
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* 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.
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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, 1995 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, 1996. 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
92,000 persons worldwide, and maintains a sales force of approximately 13,000
agents and 5,600 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 50 million people
worldwide--one of every five people in the United States. Long one of the
largest issuers of individual life insurance, the Prudential has 22 million
life insurance policies in force today with a face value of $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 1.6 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, 1996, Prudential had more than $322 billion in
assets under management. Prudential Investments, a business group of
Prudential (of which Prudential Mutual Funds is a key part) manages over $190
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 across the United States./2/
Healthcare. Over two decades ago, the Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, approximately 4.6
million Americans receive healthcare from a Prudential managed care
membership.
Financial Services. The Prudential Bank, 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 June 30, 1997 Prudential Investments Fund Management is the fifteenth
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.
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/1/ Prudential Investments 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 the subadviser to Prudential Jennison Series
Fund, Inc. and Prudential Active Balanced Fund, a portfolio of Prudential
Dryden Fund, Mercator Asset Management LP as the subadviser to
International Stock Series, a portfolio of Prudential World Fund, Inc. and
BlackRock Financial Management, Inc. as the subadviser to The BlackRock
Government Income Trust. There are multiple subadvisers for The Target
Portfolio Trust.
/2/ As of December 31, 1996.
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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 Capital Corp., 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 the 167
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, Inc., 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.
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/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.
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INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 5,600 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1995, assets held by Prudential Securities for
its clients approximated $168 billion. During 1994, over 28,000 new customer
accounts were opened each month at PSI./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.
Prudential Securities is the only Wall Street firm to have its own in-house
Certified Financial Planner (CFP) program. In the December 1995 issue of
Registered Rep, an industry publication, Prudential Securities Financial
Advisor training programs received a grade of A- (compared to an industry
average of B+).
In 1995, Prudential Securities' equity research team ranked 8th in
Institutional Investor magazine's 1995 "All America Research Team" survey.
Five 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.
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/7/As of December 31, 1994.
/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.
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