As filed with the Securities and Exchange Commission on November 28, 1995
Securities Act Registration No. 33-37356
Investment Company Act Registration No. 811-5695
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No.
Post-Effective Amendment No. 9 [X]
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 15 [X]
(Check appropriate box or boxes)
--------------------
GLOBAL UTILITY FUND, INC.
(Exact name of registrant as specified in charter)
ONE SEAPORT PLAZA, NEW YORK,
NEW YORK 10292
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (212) 214-1250
S. Jane Rose, Esq.
One Seaport Plaza
New York, New York 10292
(Name and Address of Agent for Service of Process) Copy to:
Arthur J. Brown, Esq.
Kirkpatrick & Lockhart LLP
1800 M Street, N.W.
Washington, D.C. 20036
Approximate date of proposed public offering:
As soon as practicable after the effective date of the Registration Statement.
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[X] on November 29, 1995 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a), of Rule 485.
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------------------------
Proposed Maximum Proposed Maximum Amount of
Title of Securities Amount Being Offering Price Aggregate Registration
Being Registered Registered Per Share* Offering Price** Fee
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<S> <C> <C> <C> <C>
Common Stock, par value
$.001 per share Indefinite*** N/A N/A N/A
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Common Stock, par value
$.001 per share 5,712,802 $15.52 $88,662,702 $100.00
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<FN>
* Computed under Rule 457(d) on the basis of the offering price per share on the close of business on November 20, 1995.
** Registrant elects to calculate the maximum aggregate offering price pursuant to Rule 24e-2. $114,585,336 of shares
was redeemed during the fiscal year ended September 30, 1995. $26,212,634 of shares was used for reductions
pursuant to paragraph (c) of Rule 24f-2 during the fiscal year ended September 30, 1995. $88,372,702 of shares is the
amount of redeemed shares used for reduction for this amendment.
*** Pursuant to Rule 24f-2 under the Investment Company Act of 1940, Registrant has previously registered an indefinite
number of shares of Common Stock, par value $.001 per share. The Registrant filed a notice under such Rule for its
fiscal year ended September 30, 1995 on November 24, 1995.
</FN>
</TABLE>
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<PAGE>
CROSS REFERENCE SHEET
(as required by Rule 495)
<TABLE>
<CAPTION>
N-1a Item No. Location
- ------------- --------
Part A
<S> <C> <C>
Item 1. Cover Page ......................................................... Cover Page
Item 2. Synopsis ........................................................... Fund Expenses
Item 3. Condensed Financial Information .................................... Fund Expenses; Financial Highlights;
How The Fund Calculates
Performance
Item 4. General Description of Registrant .................................. Cover Page; Fund Highlights; How The
Fund Invests; General Information
Item 5. Management of the Fund ............................................. Financial Highlights; How The Fund is
Managed
Item 6. Capital Stock and Other Securities ................................. Taxes, Dividends and Distributions;
General Information
Item 7. Purchase of Securities Being Offered ............................... Shareholder Guide; How The Fund
Values its Shares
Item 8. Redemption or Repurchase ........................................... Shareholder Guide; How The Fund
Values its Shares
Item 9. Pending Legal Proceedings .......................................... Not Applicable
Part B
Item 10. Cover Page ......................................................... Cover Page
Item 11. Table of Contents .................................................. Table of Contents
Item 12. General Information and History .................................... General Information
Item 13. Investment Objectives and Policies ................................. Investment Objective and Policies;
Investment Restrictions
Item 14. Management of the Fund ............................................. Information Regarding Directors and
Officers; Manager; Subadviser;
Distributor
Item 15. Control Persons and Principal Holders of Securities ................ Not Applicable
Item 16. Investment Advisory and Other Services ............................. Manager; Distributor; Custodian,
Transfer and Dividend Disbursing
Agent and Independent Accountants
Item 17. Brokerage Allocation and Other Practices ........................... Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities ................................. Not Applicable
Item 19. Purchase, Redemption and Pricing of Securities Being Offered ....... Purchase and Redemption of Fund
Shares; Shareholder Investment
Account; Net Asset Value
Item 20. Tax Status ......................................................... Taxes
Item 21. Underwriters ....................................................... Distributor
Item 22. Calculation of Performance Data .................................... Performance Information
Item 23. Financial Statements ............................................... Financial Statements
<FN>
Part C
Information required to be included in Part C is set forth under the appropriate Item, so numbered, in Part C to this Post-
Effective Amendment to the Registration Statement.
</FN>
</TABLE>
<PAGE>
Global
Utility Fund, Inc.
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Prospectus dated November 29, 1995
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Global Utility Fund, Inc. (the Fund) is a diversified, open-end management
investment company. The Fund's investment objective is to provide total return,
without incurring undue risk, by investing primarily in income-producing
securities of domestic and foreign companies in the utility industries. Under
normal circumstances, at least 65% of the Fund's total assets will be invested
in a diversified portfolio of equity and debt securities of domestic and foreign
utility companies, principally electric, telecommunications, gas or water
companies. 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 One Seaport Plaza, New York, New York 10292, and its telephone
number is 1-800-225-1852.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. Additional information about
the Fund has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated November 29, 1995, which information
is incorporated herein by reference (is legally considered a part of this
Prospectus) and available without charge upon request to the Fund, at the
address or telephone number noted above.
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Investors are advised to read this Prospectus and retain it for future
reference.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
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FUND HIGHLIGHTS
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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.
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What is Global Utility Fund, Inc.?
Global Utility Fund, Inc. 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 to provide total return, without
incurring undue risk, by investing primarily in income-producing securities of
domestic and foreign companies in the utility industries. Under normal
circumstances, at least 65% of the Fund's total assets will be invested in a
diversified portfolio of equity and debt securities of domestic and foreign
utility companies, principally electric, telecommunications, gas or water
companies. There can be no assurance that the Fund's objective will be achieved.
See "How the Fund Invests-Investment Objective and Policies" at page 8.
Risk Factors and Special Characteristics
The Fund concentrates its investments in the securities of companies in the
utility industries. Consequently, factors specifically affecting those
industries, such as substantial government regulation, interest rate movements,
and increased competition, may have a greater affect on the value of the Fund's
shares than on those of an investment company that does not concentrate its
investments in the utility industries. In addition, as a result of the Fund's
ability to invest in companies in the utility industries around the world, the
Fund is subject to risks relating to political and economic developments abroad,
as well as those relating to the different and rapidly evolving regulatory
environments for utility companies in foreign markets. See "How the Fund
Invests-Investment Objective and Policies" at page 8. The Fund may also engage
in various hedging and income enhancement strategies, including derivatives. See
"How the Fund Invests-Hedging and Income Enhancement Strategies-Risks of Hedging
and Income Enhancement Strategies" at page 13.
Who Manages the Fund?
Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the Manager
of the Fund and is compensated for its services based on a percentage of the
Fund's average daily net assets. As of October 31, 1995, PMF served as manager
or administrator to 64 investment companies, including 37 mutual funds, with
aggregate assets of approximately $50 billion. Wellington Management Company
(Wellington Management or the Subadviser) furnishes investment advisory services
in connection with the management of the Fund under a Subadvisory Agreement with
PMF and is compensated for its services by PMF based on a percentage of the
Fund's average daily net assets. As of October 31, 1995, the Subadviser held
investment authority over approximately $102 billion of assets. See "How the
Fund is Managed-Manager" at page 15 and "How the Fund is Managed-Subadviser" at
page 15.
Who Distributes the Fund's Shares?
Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor of
the Fund's Class A shares and is paid an annual distribution and service fee
which is currently being charged at the rate of .25 of 1% of the average daily
net assets of the Class A shares.
Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Fund's Class B and Class C shares and is paid an annual
distribution and service fee at the rate of 1% of the average daily net assets
of each of the Class B and Class C shares.
See "How the Fund is Managed-Distributor" at page 16.
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2
<PAGE>
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What is the Minimum Investment?
The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares. The minimum subsequent investment is $100
for all classes. There is no minimum investment requirement for certain
retirement and employee savings plans or custodial accounts for the benefit of
minors. For purchases made through the Automatic Savings Accumulation Plan the
minimum initial and subsequent investment is $50. See "Shareholder Guide-How to
Buy Shares of the Fund" at page 22 and "Shareholder Guide-Shareholder Services"
at page 30.
How Do I Purchase Shares?
You may purchase shares of the Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund, through its transfer
agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer Agent) at the
net asset value per share (NAV) next determined after receipt of your purchase
order by the Transfer Agent or Prudential Securities plus a sales charge which
may be imposed either (i) at the time of purchase (Class A shares) or (ii) on a
deferred basis (Class B or Class C shares). See "How the Fund Values its Shares"
at page 18 and "Shareholder Guide-How to Buy Shares of the Fund" at page 22.
What Are My Purchase Alternatives?
The Fund offers three classes of shares:
<TABLE>
<S> <C>
* 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.
</TABLE>
See "Shareholder Guide-Alternative Purchase Plan" at page 22.
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 25.
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>
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FUND EXPENSES
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<TABLE>
<CAPTION>
Shareholder Transaction Expenses+ Class A Shares Class B Shares Class C Shares
<S> <C> <C> <C>
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price) ................ 5% None None
Maximum Sales Load or Deferred
Sales Load Imposed on
Reinvested Dividends ........... None None None
Deferred Sales Load (as a
percentage of original purchase
price or redemption proceeds,
whichever is lower) ............ None 5% during the first year, 1% on redemptions
decreasing by 1% annually to made within one year
1% in the fifth and sixth years of purchase
and 0% the seventh year*
Redemption Fees .................. None None None
Exchange Fees .................... None None None
Annual Fund Operating Expenses
(as a percentage of average net assets) Class A Shares Class B Shares Class C Shares
Management Fees .65% .65% .65%
12b-1 Fees .25%++ 1.00% 1.00%
Other Expenses .41% .41% .41%
Total Fund Operating Expenses 1.31% 2.06% 2.06%
</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 .............................................................. $63 $89 $118 $200
Class B .............................................................. $71 $95 $121 $211
Class C .............................................................. $31 $65 $111 $239
You would pay the following expenses on the same investment assuming
no redemption:
Class A .............................................................. $63 $89 $118 $200
Class B .............................................................. $21 $65 $111 $211
Class C .............................................................. $21 $65 $111 $239
</TABLE>
The above example is based on data for the fiscal year ended September 30, 1995.
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 Directors' and professional fees, registration fees, reports to shareholders
and transfer agency and custodian (domestic and foreign) 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 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 asset value of the Class A shares, the Distributor has agreed to limit its
distribution fees with respect to Class A shares of the Fund to not more than
.25 of 1% of the average daily net assets of the Class A shares for the fiscal
year ending September 30, 1996. Total operating expenses without such
limitation would be 1.36%. See "How the Fund is Managed-Distributor."
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(for a share of common stock outstanding throughout each period indicated)
(Class A Shares)
- --------------------------------------------------------------------------------
The following financial highlights with respect to the five years ended
September 30, 1995 have been audited by Deloitte & Touche LLP, independent
accountants, whose report was unqualified. This information should be read in
conjunction with the financial statements and the notes thereto, which appear in
the Statement of Additional Information.
The following financial highlights contain selected data for a Class A share of
common stock outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is based on data
contained in the financial statements.
<TABLE>
<CAPTION>
January 2
1990(a)
Year Ended September 30, Through
------------------------------------------------------ September 30,
1995 1994 1993 1992 1991(d) 1990(d)
-------- -------- -------- -------- -------- -------------
PER SHARE OPERATING
PERFORMANCE:
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ..... $ 13.66 $ 14.63 $ 12.96 $ 12.62 $ 10.50 $ 11.16
-------- -------- -------- -------- -------- --------
Income from investment operations
Net investment income .................... .49 .47 .44 .53 .57 .48
Net realized and unrealized gain (loss) on
investment and foreign currency
transactions ........................... 1.35 (.82) 2.46 1.01 2.23 (.67)
-------- -------- -------- -------- -------- --------
Total from investment operations ..... 1.84 (.35) 2.90 1.54 2.80 (.19)
-------- -------- -------- -------- -------- --------
Less distributions
Dividends from net investment income ..... (.48) (.42) (.47) (.53) (.62) (.41)
Distributions in excess of net investment
income ................................. - - (.01) - - -
Distributions from net realized gains (.30) (.20) (.75) (.67) (.08) -
-------- -------- -------- -------- -------- --------
Total distributions ...................... (.78) (.62) (1.23) (1.20) (.70) (.41)
-------- -------- -------- -------- -------- --------
Capital charge in respect of issuance
of shares .............................. - - - - - (.06)
Redemption fee retained by Fund .......... - - - - .02 -
Net asset value, end of period ........... $ 14.72 $ 13.66 $ 14.63 $ 12.96 $ 12.62 $ 10.50
======== ======== ======== ======== ======== ========
TOTAL RETURN(c)........................... 14.23% (2.49)% 23.87% 13.15% 27.63% (1.98)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) .......... $124,423 $126,254 $138,714 $114,654 $132,804 $161,892
Average net assets (000) ................. $122,837 $139,166 $119,001 $120,708 $151,217 $166,915
Ratios to average net assets:
Expenses, including distribution fees .. 1.31% 1.25% 1.30% 1.39% 1.49% 1.05%(b)
Expenses, excluding distribution fees .. 1.06% 1.02% 1.10% 1.19% 1.36% 1.05%(b)
Net investment income .................. 3.58% 3.39% 3.37% 4.16% 5.06% 5.97%(b)
Portfolio turnover rate .................. 15% 19% 14% 57% 135% 27%
</TABLE>
- --------------
(a)Commencement of investment operations.
(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 and includes reinvestment of dividends and
distributions. Total return for periods of less than a full year are not
annualized.
(d)Prior to Februrary 4, 1991, the Fund operated as a closed-end
investment company. Effective February 4, 1991, the Fund commenced
operations as an open-end investment company. Accordingly, historical
expenses and ratios to average net assets are not necessarily indicative
of future expenses and related ratios.
5
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(for a share of common stock outstanding throughout
each period indicated)
(Class B Shares)
- --------------------------------------------------------------------------------
The following financial highlights have been audited by Deloitte & Touche LLP,
independent accountants, whose report was unqualified. This information should
be read in conjunction with the financial statements and the notes thereto,
which appear in the Statement of Additional Information.
The following financial highlights contain selected data for a Class B share of
common stock outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is based on data
contained in the financial statements.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 18,
1991(a)
Year Ended September 30, Through
------------------------------------------- September 30,
1995 1994 1993 1992 1991
--------- -------- --------- --------- -------------
PER SHARE OPERATING PERFORMANCE:
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period .... $ 13.66 $ 14.63 $ 12.97 $ 12.63 $ 11.97
-------- -------- -------- -------- --------
Income from investment operations
Net investment income ................... .39 .37 .34 .43 .25
Net realized and unrealized gain (loss)
on investment and foreign currency
transactions .......................... 1.34 (.82) 2.45 1.01 .63
-------- -------- -------- -------- --------
Total from investment operations .... 1.73 (.45) 2.79 1.44 .88
-------- -------- -------- -------- --------
Less distributions
Dividends from net investment income .... (.38) (.32) (.37) (.43) (.22)
Distributions in excess of net investment
income ................................ - - (.01) - -
Distributions from net realized gains ... (.30) (.20) (.75) (.67) -
-------- -------- -------- -------- --------
Total distributions ..................... (.68) (.52) (1.13) (1.10) (.22)
-------- -------- -------- -------- --------
Net asset value, end of period .......... $ 14.71 $ 13.66 $ 14.63 $ 12.97 $ 12.63
======== ======== ======== ======== ========
TOTAL RETURN(c).......................... 13.32% (3.22)% 22.87% 12.23% 7.44%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) ......... $227,189 $272,673 $185,259 $ 60,432 $ 30,147
Average net assets (000) ................ $237,983 $270,466 $ 90,254 $ 45,661 $ 18,923
Ratios to average net assets:
Expenses, including distribution fees . 2.06% 2.02% 2.10% 2.19% 2.47%(b)
Expenses, excluding distribution fees . 1.06% 1.02% 1.10% 1.19% 1.47%(b)
Net investment income ................. 2.83% 2.68% 2.59% 3.43% 4.16%(b)
Portfolio turnover rate ................. 15% 19% 14% 57% 135%
</TABLE>
- ----------------
(a)Commencement of offering of Class B 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 and includes reinvestment of dividends and
distributions. Total return for periods of less than a full year are not
annualized.
6
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(for a share of common stock outstanding throughout
each period indicated)
(Class C Shares)
- --------------------------------------------------------------------------------
The following financial highlights have been audited by Deloitte & Touche LLP,
independent accountants, whose report was unqualified. This information should
be read in conjunction with the financial statements and the notes thereto,
which appear in the Statement of Additional Information.
The following financial highlights contain selected data for a Class C share of
common stock outstanding, total return, ratios to average net assets and other
supplemental data for the period indicated. The information is based on data
contained in the financial statements.
August 1,
1994(a)
Year Ended Through
September 30, September 30,
1995 1994
------------- -------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .............. $ 13.66 $ 13.93
--------- --------
Income from investment operations
Net investment income ............................. .39 .06
Net realized and unrealized gain (loss) on
investment and foreign currency transactions .... 1.34 (.24)
--------- --------
Total from investment operations .............. 1.73 (.18)
--------- --------
Less distributions
Dividends from net investment income .............. (.38) (.07)
Distributions from net realized gains ............. (.30) (.02)
--------- --------
Total distributions ............................... (.68) (.09)
--------- --------
Net asset value, end of period .................... $ 14.71 $ 13.66
========= ========
TOTAL RETURN(c).................................... 13.32% (1.32)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) ................... $ 563 $ 226
Average net assets (000) .......................... $ 410 $ 131
Ratios to average net assets:
Expenses, including distribution fees ........... 2.06% 2.06%(b)
Expenses, excluding distribution fees ........... 1.06% 1.06%(b)
Net investment income ........................... 2.83% 2.46%(b)
Portfolio turnover rate ........................... 15% 19%
- --------------
(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 and includes reinvestment of dividends and
distributions. Total return for periods of less than a full year are not
annualized.
7
<PAGE>
- --------------------------------------------------------------------------------
HOW THE FUND INVESTS
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide total return, without
incurring undue risk, by investing primarily in income-producing securities of
domestic and foreign companies in the utility industries. The Fund's total
return will consist of current income and growth of capital. The Fund seeks to
achieve its objective by investing, under normal circumstances, at least 65% of
its total assets in a diversified portfolio of common stocks, debt securities
and preferred stocks issued by domestic and foreign companies primarily engaged
in the ownership or operation of facilities used in the generation, transmission
or distribution of electricity, telecommunications, gas or water. There can be
no assurance that such objective will be achieved. See "Investment Objective and
Policies" in the Statement of Additional Information.
The Fund's investment objective is a fundamental policy and, 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 Board of Directors.
The Fund's portfolio will include issuers located in at least three
countries, one of which will be the United States, although the Subadviser
expects to invest the Fund's assets in more than three countries. Under normal
conditions, the percentage of assets invested in U.S. securities will be higher
than that invested in securities of any other single country.
Investments are selected on the basis of fundamental analysis to identify
those securities that, in the judgment of the Subadviser, provide current income
and potential for growth of income and long-term capital appreciation.
Fundamental analysis involves assessing a company and its business environment,
management, balance sheet, income statement, anticipated earnings and dividends
and other related measures of value. The Subadviser monitors and evaluates the
economic and political climate and the principal securities markets of the
country in which each company is located. The relative weightings among common
stocks, debt securities and preferred stocks will vary from time to time based
upon the Subadviser's judgment of the extent to which investments in each
category will contribute to meeting the Fund's investment objective.
The Fund normally may invest up to 35% of its total assets in debt
securities, which may include investments both in securities of issuers in the
utility industries and in securities of issuers outside of such industries. Debt
securities in which the Fund invests generally are limited to those rated
investment grade, that is, rated in one of the four highest rating categories by
Standard & Poor's (S&P) or Moody's Investors Service, Inc. (Moody's) or deemed
to be of equivalent quality in the judgment of the Subadviser. However, the Fund
may invest up to 5% of its assets in debt securities rated below investment
grade (i.e., below Baa or BBB). If the Fund holds a security that is downgraded
to a rating below Baa or BBB and, as a result of such downgrade, more than 5% of
the Fund's assets would be invested in securities rated below Baa or BBB, the
Fund would take steps to reduce its investments in such securities to 5% or less
of its assets as promptly as practical. There is no limitation on the percentage
of the Fund's net assets that may be invested in securities rated Baa or BBB.
Securities rated Baa by Moody's are described as having speculative
characteristics; securities rated below investment grade are generally described
by the rating services as speculative. Investments in lower rated securities
involve a greater possibility that adverse changes, or perceived changes, in the
business or financial condition of the issuer or in general economic conditions
may impair the ability of the issuer to make timely payment of interest and
repayment of principal. The prices of such securities tend to fluctuate more
than those of higher rated securities. To the extent that there is no
established or a relatively inactive secondary market in a particular lower
rated security, it could be difficult at times to sell or value such security.
A change in prevailing interest rates is likely to affect the Fund's net
asset value because prices of debt securities and equity securities of utility
companies tend to increase when interest rates decline and decrease when
interest rates rise.
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During periods when the Subadviser deems it necessary for temporary
defensive purposes, the Fund may invest without limit in high quality money
market instruments. These instruments may include commercial paper, adjustable
rate preferred stock, certificates of deposit, bankers' acceptances and other
bank obligations, short-term obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, and short-term obligations of
foreign issuers, denominated in U.S. dollars and traded in the United States.
Utility Industries-Description and Risk Factors
Under normal circumstances, the Fund invests at least 65% of its total
assets in common stocks, debt securities and preferred stocks of companies in
the utility industries. (The Fund considers purchased options and futures
contracts on securities in the utility industries to fall into this category;
however, no more than 5% of the Fund's total assets invested in such instruments
will be counted towards satisfaction of the Fund's 65% test.) The average
dividend yields (indicated annual dividend divided by current stock price) of
common stocks issued by domestic utility companies, in the Subadviser's opinion,
have historically exceeded those of industrial companies' common stocks, while
the prices of utility stocks have tended to be less volatile than stocks of
industrial companies. According to the Subadviser, debt securities of domestic
utility companies historically also have yielded slightly more than similar debt
securities of industrial companies, and have had higher total returns. For
certain periods, the total return of domestic utility companies' securities has
underperformed that of industrial companies' securities. There can be no
assurance that positive relative yields or total returns (i.e., yield plus price
change) on domestic utility securities will occur in the future. The markets for
securities of foreign utility companies are rapidly evolving and comparable data
on such securities are currently unavailable; however, the Subadviser believes
that there are similarities in the yield characteristics of foreign utility
companies relative to foreign industrial companies. See "Foreign Securities."
The utility companies in which the Fund invests include companies primarily
engaged in the ownership or operation of facilities used in the generation,
transmission or distribution of electricity, telecommunications, gas or water.
For these purposes, "primarily engaged" means that (1) more than 50% of the
company's assets are devoted to the ownership or operation of one or more
facilities as described above, or (2) more than 50% of the company's operating
revenues are derived from the business or combination of businesses described
above. See "Investment Objective and Policies" in the Statement of Additional
Information.
Utility companies in the United States and in foreign countries are
generally subject to substantial regulation. Such regulation is intended to
ensure appropriate standards of review and adequate capacity to meet public
demand. The nature of regulation of utility industries is evolving both in the
United States and in foreign countries. Although certain companies may develop
more profitable opportunities, others may be forced to defend their core
businesses and may be less profitable. Electric utility companies have
historically been subject to the risks associated with increases in fuel and
other operating costs, high interest costs on borrowings, costs associated with
compliance with environmental, nuclear facility and other safety regulations and
changes in the regulatory climate. Increased scrutiny of electric utilities
might result in higher costs and higher capital expenditures, with the risk that
regulators may disallow inclusion of these costs in rate authorizations.
Increasing competition due to past regulatory changes in the telephone
communications industry continues and, whereas certain companies have
benefitted, many companies may be adversely affected in the future. Gas
transmission companies and gas distribution companies continue to undergo
significant changes as well. Many companies have diversified into oil and gas
exploration and development, making returns more sensitive to energy prices.
Water supply utilities are in an industry that is highly fragmented due to local
ownership and generally the companies are more mature and are experiencing
little or no per capita volume growth. There is no assurance that favorable
developments will occur in the utility industries generally, or that business
opportunities will continue to undergo significant changes or growth. See
"Investment Objective and Policies-Utility Industries-Description and Risk
Factors" in the Statement of Additional Information.
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Foreign Securities
The Fund invests in common stocks, debt securities and preferred stocks of
companies in utility industries around the world.
The Subadviser attempts to take advantage of differences between economic
trends and the performance of securities markets in various countries. The
Subadviser believes that the Fund's portfolio benefits from the availability of
opportunities for income and growth in foreign markets and that the portfolio
achieves broader diversification from foreign investment. Global diversification
reduces the effect that events in any one country will have on overall
investment returns. Of course, losses by an investment in the United States, or
any foreign market represented in the Fund's portfolio may offset gains from
investment in another market.
Investments in securities of foreign utility companies involve many of the
same risks noted above for domestic utility companies. Foreign investment also
involves additional risks relating to political and economic developments
abroad, as well as those that result from the differences between the
regulations to which U.S. and foreign issuers are subject. These risks may
include expropriation, confiscatory taxation, limitations on the use or transfer
of Fund assets, political or social instability and foreign relations
developments. In addition, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national
product, rates of inflation, capital reinvestment, resource self-sufficiency and
balance of payments positions. Securities of many foreign issuers may be less
liquid and their prices more volatile than those of securities of comparable
U.S. issuers. Further, a change in the value of a foreign currency against the
U.S. dollar will result in a corresponding change in the U.S. dollar value of
the Fund's assets denominated in that currency. See "Investment Objective and
Policies-Foreign Securities" in the Statement of Additional Information.
Foreign securities in which the Fund may invest include American Depository
Receipts, European Depository Receipts and Global Depository Receipts (ADRs,
EDRs and GDRs, respectively). ADRs are U.S. dollar-denominated securities
deposited in a U.S. securities depository and are created for trading in the
U.S. markets. The value of an ADR will fluctuate with the value of the
underlying security, reflect any changes in exchange rates and otherwise involve
risks associated with investing in foreign securities. ADRs in which the Fund
may invest may be sponsored or unsponsored. There may be less information
available about foreign issuers of unsponsored ADRs. EDRs and GDRs are receipts
evidencing an arrangement with a non-U.S. bank similar to that for ADRs and are
designed for use in non-U.S. securities markets. EDRs and GDRs are not
necessarily quoted in the same currency as the underlying security.
Investment Outside the Utility Industries
The Fund may invest up to 35% of its assets in securities of companies that
are outside the utility industries. Such investments may include common stocks,
debt securities, preferred stocks, and money market instruments, including
repurchase agreements, and are selected to meet the Fund's investment objective
of total return. This limitation also includes investments in options and
futures contracts to the extent that they relate to securities outside the
utility industries, and in forward currency contracts. Securities outside the
utility industries in which the Fund may invest may be issued by either U.S. or
non-U.S. companies and governments. Some of these issuers may be in industries
related to utility industries and, therefore, may be subject to similar risks.
Securities that are issued by foreign companies or are denominated in foreign
currencies are subject to the risks outlined in "Foreign Securities" above, and
in "Investment Objective and Policies-Foreign Securities" in the Statement of
Additional Information.
U.S. Government Securities
The Fund is also permitted to invest in securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities (U.S. Government
Securities). Such investments may be backed by the "full faith and credit" of
the United States, including U.S. Treasury bills, notes and bonds as well as
certain agency securities and mortgage-backed securities issued by the
Government National Mortgage Association (GNMA). The guarantees on these
securities do not extend to the securities' yield or value or to the yield or
value of the Fund's shares. Other investments in agency securities are not
necessarily backed by the "full faith and credit" of the United States.
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Foreign Government Securities
The Fund may invest in securities issued or guaranteed by foreign
governments. Such securities are typically denominated in foreign currencies and
are subject to the currency fluctuation and other risks of foreign securities
investments outlined in "Foreign Securities" above, and in "Investment Objective
and Policies-Foreign Securities" in the Statement of Additional Information. The
foreign government securities in which the Fund intends to invest generally will
consist of obligations supported by national or local governments or similar
political subdivisions. Foreign government securities also include debt
obligations of supranational entities, including international organizations
designated or supported by governmental entities to promote economic
reconstruction or development and international banking institutions and related
government agencies. Examples include the International Bank for Reconstruction
and Development (the World Bank), the European Investment Bank, the Asian
Development Bank and the Inter-American Development Bank.
Foreign government securities also include debt securities of
"quasi-governmental agencies" and debt securities denominated in multinational
currency units. An example of a multinational currency unit is the European
Currency Unit. A European Currency Unit represents specified amounts of the
currencies of certain of the twelve member states of the European Economic
Community. Debt securities of quasi-governmental agencies are issued by entities
owned by either a national or local government or are obligations of a political
unit that is not backed by the national government's full faith and credit and
general taxing powers. Foreign government securities also include
mortgage-related securities issued or guaranteed by national or local
governmental instrumentalities including quasi-governmental agencies.
HEDGING AND INCOME ENHANCEMENT STRATEGIES
The Fund may also engage in various portfolio strategies, including
derivatives, to reduce certain risks of its investments and to attempt to
enhance income, but not for speculation. These strategies currently include the
use of options, forward 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-Additional Investment Policies" in the Statement of Additional
Information. New financial products and risk management techniques continue to
be developed and the Fund may use these new investments and techniques to the
extent consistent with its investment objective and policies.
Options Transactions
The Fund may purchase and write (i.e., sell) put and call options on
securities and currencies that are traded on national securities exchanges or in
the over-the-counter market to enhance income or to hedge the Fund's portfolio.
These options will be on equity and debt securities, foreign currencies, indices
of prices of equity and debt securities, and other financial indices. Options
traded over-the-counter (OTC Options) are two-party contracts involving only the
purchaser and seller and have negotiated strike prices and expiration dates.
Financial indices measure the upward or downward movements of stock and bond
markets, based upon a weighted average of the prices of the securities
comprising the index. 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 price of securities (or currencies) it intends to purchase. The Fund
may also purchase or write put and call options to offset previously written or
purchased put and call options of the same series. See "Investment Objective and
Policies-Additional Investment Policies-Options on Securities" 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 or currency subject to
the option at a specified price (the "exercise price" or "strike price").
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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 or
currency in excess of the exercise price of the option during the period that
the option is open.
A put option gives the purchaser, in return for a premium, the right, for a
specified period of time, to sell the securities or currency 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 or currency underlying the option at the
exercise price. The Fund might, therefore, be obligated to purchase the
underlying securities or currency for more than their current market price.
The Fund will write only "covered" options. An option is covered if, so long
as the Fund is obligated under the option, it owns an offsetting position in the
underlying security or currency or an option to purchase the same underlying
securities or currency having an expiration date not earlier than the expiration
date of the covered option and an exercise price equal to or less than the
exercise price of the covered option, or maintains cash, U.S. Government
securities or other liquid high-grade debt obligations with a value sufficient
at all times to cover its obligations in a segregated account. See "Investment
Objective and Policies-Additional Investment Policies" in the Statement of
Additional Information. The Fund will not write covered call options on
portfolio securities representing more than 25% of the value of its total
assets. The Fund may write covered put options only to the extent that cover for
such options does not exceed 25% of the Fund's net assets. The Fund will not
purchase an option if, as a result of such purchase, more than 20% of its total
assets would be invested in premiums for such options.
Forward Currency Exchange Contracts
The Fund may enter into forward foreign currency exchange contracts to
protect the value of its portfolio against future changes in the level of
currency exchange rates. The Fund may enter into such contracts on a spot, i.e.,
cash, basis at the rate then prevailing in the currency exchange market or on a
forward basis, by entering into a forward contract to purchase or sell currency.
A forward contract on foreign currency is an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days agreed
upon by the parties from the date of the contract at a price set on the date of
the contract.
The Fund's dealings in forward contracts will be limited to hedging
involving either specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of a forward contract with respect to specific
receivables or payables of the Fund generally arising in connection with the
purchase or sale of its portfolio securities and accruals of interest or
dividends receivable and Fund expenses. Position hedging is the sale of a
foreign currency with respect to portfolio security positions denominated or
quoted in that currency or in a currency bearing a high degree of positive
correlation to the value of the currency (cross hedge). Although there are no
limits on the number of forward contracts which the Fund may enter into, the
Fund may not position hedge with respect to a particular currency for an amount
greater than the aggregate market value (determined at the time of making any
sale of forward currency) of the securities held in its portfolio denominated or
quoted in, or currently convertible into, such currency. See "Investment
Objective and Policies-Additional Investment Policies-Special Characteristics of
Forward Currency Contracts and Associated Risks" in the Statement of Additional
Information.
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, return enhancement and risk management purposes in accordance with
regulations of the Commodity Futures Trading Commission. These futures contracts
and related options will be on equity and debt securities, foreign currencies,
indices of prices of equity and debt securities, and other
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<PAGE>
financial indices. A financial futures contract is an agreement to purchase or
sell an agreed amount of securities or currencies at a set price for delivery in
the future. 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 related options depends
upon the Subadviser's ability to predict the direction of the market and is
subject to various additional risks. The correlation between movements in the
price of a futures contract and the price of the securities or currencies being
hedged is imperfect and there is a risk that the value of the securities or
currencies being hedged may increase or decrease at a greater rate than the
related futures contract resulting in losses to the Fund. Certain futures
exchanges or boards of trade have established daily limits on the amount that
the price of a futures contract or related options 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 related options
on any particular day.
The Fund's ability to enter into options, forward contracts, futures
contracts and options thereon is limited by the requirements of the Internal
Revenue Code of 1986, as amended (the Internal Revenue Code), for qualification
as a regulated investment company. See "Taxes" in the Statement of Additional
Information.
Risks of Hedging and Income Enhancement Strategies
Participation in the options or futures markets and in currency exchange
transactions involves investment risks and transaction costs to which the Fund
would not be subject absent the use of these strategies. If the Subadviser's
prediction of movements in the direction of the securities, foreign currency and
interest rate and equity markets are inaccurate, the adverse consequences to the
Fund may leave the Fund in a worse position than if such strategies were not
used. Risks inherent in the use of options, foreign currency and futures
contracts and options on futures contracts include (1) dependence on the
Subadviser's ability to predict correctly movements in the direction of interest
rates, securities prices and currency markets; (2) imperfect correlation between
the price of options and futures contracts and options thereon and movements in
the prices of the securities or currencies being hedged; (3) the fact that
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 consequences and (6) in the
case of over-the-counter options, the risk of default by the counter party. See
"Investment Objective and Policies" and "Taxes" in the Statement of Additional
Information.
OTHER INVESTMENTS AND POLICIES
At the discretion of the Subadviser, the Fund may employ the following
strategies in pursuing its investment objective.
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 equivalent collateral or secures a
letter of credit in favor of the Fund in an amount equal to at least 100% of the
market value of the securities loaned. 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 earn additional income by
investing the collateral, or the Fund may receive an agreed-upon amount of
interest income from the borrower. In accordance with applicable regulatory
requirements, the Fund may lend up to 30% of the value of its total assets.
Repurchase Agreements
The Fund may enter into repurchase agreements whereby the seller of a
security agrees to repurchase that security from the Fund at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight
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<PAGE>
or a few days, although it may extend over a number of months. The resale price
is in excess of the purchase price, reflecting an agreed-upon rate of return
effective for the period of time the Fund's money is invested in the security.
The Fund's repurchase agreements will at all times be fully collateralized in an
amount at least equal to the purchase price, including accrued interest earned
on the underlying securities. The instruments held as collateral are valued
daily, and if the value of 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.
When-Issued and Delayed Delivery Securities
The Fund may purchase or sell securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions arise when
securities are purchased or sold by the Fund with payment and delivery taking
place as much as a month or more in the future in order to secure what is
considered to be an advantageous price and yield to the
Fund at the time of entering into the transaction. The Fund's Custodian will
maintain, in a segregated account of the Fund, cash, U.S. Government securities
or other liquid high-grade debt obligations having a value equal to or greater
than the Fund's purchase commitments; the Custodian will likewise segregate
securities sold on a delayed delivery basis. The securities so purchased are
subject to market fluctuation and no interest accrues to the purchaser during
the period between purchase and settlement. At the time of delivery of the
securities the value may be more or less than the purchase price and an increase
in the percentage of the Fund's assets committed to the purchase of securities
on a when-issued or delayed delivery basis may increase the volatility of the
Fund's net asset value.
Borrowing
The Fund may borrow an amount up to 33-1/3% of the value of its total assets
(calculated when the loan is made) from banks for temporary or emergency
purposes. The Fund may pledge up to 33-1/3% of its assets to secure such
borrowings. However, the Fund will not purchase portfolio securities if
borrowings exceed 5% of the Fund's total assets.
Illiquid Securities
The Fund may not invest more than 10% of its total 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. Securities eligible for resale in accordance with Rule
144A under the Securities Act of 1933, as amended (the Securities Act) and
privately placed commercial paper, that have legal or contractual restrictions
on resale but have a readily available market are not considered illiquid for
purposes of this limitation. The Subadviser will monitor the liquidity of such
restricted securities under the supervision of the Board of Directors.
Repurchase agreements subject to demand are deemed to have a maturity equal to
the notice period. See "Investment Objective and Policies-Illiquid Securities"
in the Statement of Additional Information.
The staff of the Securities and Exchange Commission (SEC) has taken the
position that purchased OTC Options and the assets used as "cover" for written
OTC Options are illiquid securities unless the Fund and the counterparty have
provided for the Fund, at the Fund's election, to unwind the OTC 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."
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 a Board of Directors which, in addition to overseeing the
actions of the Fund's Manager, Subadviser and Distributor, as set forth below,
decides 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 September 30, 1995, the Fund's total expenses as a
percentage of average net assets for the Fund's Class A, Class B and Class C
shares were 1.31%, 2.06% and 2.06%, respectively. See "Financial Highlights."
MANAGER
Prudential Mutual Fund Management, Inc. (PMF or the Manager), One Seaport
Plaza, New York, New York 10292, is the Manager of the Fund. It is compensated
for its services by the Fund at an annual rate of .70% of the Fund's average
daily net assets for the portion of such assets up to and including $250
million, .55% of the Fund's average daily net assets in excess of $250 million
up to and including $500 million, .50% of the Fund's average daily net assets in
excess of $500 million up to and including $1 billion and .45% of the Fund's
average daily net assets in excess of $1 billion. It was incorporated in May
1987 under the laws of the State of Delaware. PMF is a wholly-owned subsidiary
of The Prudential Insurance Company of America (Prudential), a major diversified
insurance and financial services company. For the fiscal year ended September
30, 1995, the Fund paid management fees to PMF of .65% of the Fund's average net
assets.
As of October 31, 1995, PMF served as the manager to 37 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 27 closed-end investment companies with aggregate assets of
approximately $50 billion.
Under the Management Agreement with the Fund, PMF manages the investment
operations of the Fund and also administers the Fund's corporate affairs. See
"Management of the Fund-The Manager" in the Statement of Additional Information.
SUBADVISER
Wellington Management Company, 75 State Street, Boston, Massachusetts 02109,
serves as the Fund's Subadviser under a Subadvisory Agreement among the Fund,
PMF and Wellington Management Company (Wellington Management or the Subadviser).
The Subadviser furnishes investment advisory services in connection with the
management of the Fund. It is compensated for its services by PMF, not the Fund,
at an annual rate of .50% of the Fund's average daily net assets for the portion
of such assets up to and including $250 million, .35% of the Fund's average
daily net assets in excess of $250 million up to and including $500 million,
.30% of the Fund's average daily net assets in excess of $500 million up to and
including $1 billion and .25% of the Fund's average daily net assets in excess
of $1 billion. PMF continues to have responsibility for all investment advisory
services in accordance with the Management Agreement and supervises Wellington
Management's performance of such services. For the fiscal year ended September
30, 1995, PMF paid subadvisory fees to Wellington Management of .45% of the
Fund's average net assets.
The Subadviser is a Massachusetts general partnership of which the following
persons are managing partners: Robert W. Doran, Duncan M. McFarland, and John
B. Neff. The Subadviser is a professional investment counseling firm which
provides investment services to investment companies, employee benefit plans,
endowment funds, foundations and other institutions and individuals. As of
October 31, 1995, the Subadviser held investment authority over approximately
$102 billion of assets. The Subadviser is not affiliated with the Manager or any
of its affiliates.
The current manager of the equity portion of the Fund's portfolio is William
C. S. Hicks, a Senior Vice President and Partner of Wellington Management. Mr.
Hicks has responsibility for the day-to-day management of the Fund's portfolio.
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<PAGE>
Mr. Hicks has managed the Fund's portfolio since May 1992 and has been an
investment professional with Wellington Management since 1962. Mr. Hicks also
serves as portfolio manager for a variety of corporate and public retirement
plans and was previously Wellington Management's Director of Research. Since
November 1993 the fixed income portion of the Fund's portfolio has been managed
by Catherine A. Smith, a Senior Vice President and Partner of Wellington
Management. Ms. Smith has been an investment professional with Wellington
Management since 1985.
DISTRIBUTOR
Prudential Mutual Fund Distributors, Inc. (PMFD), One Seaport Plaza, New
York, New York 10292, is a corporation organized under the laws of the State of
Delaware and serves as the distributor of the Class A shares of the Fund. It is
a wholly-owned subsidiary of PMF.
Prudential Securities Incorporated (Prudential Securities or PSI), One
Seaport Plaza, New York, New York 10292 is a corporation organized under the
laws of the State of Delaware and serves as the distributor of the Class B and
Class C shares of the Fund. It is an indirect, wholly-owned subsidiary of
Prudential.
Under separate Distribution and Service Plans (the Class A Plan, the Class B
Plan and the Class C Plan, collectively, the Plans) adopted by the Fund under
Rule 12b-1 under the Investment Company Act and separate distribution agreements
(the Distribution Agreements), PMFD and Prudential Securities (collectively, the
Distributor) incur the expenses of distributing the Fund's Class A, Class B and
Class C shares. These expenses include commissions and account servicing fees
paid to, or on account of, financial advisers of Prudential Securities and
representatives of Pruco Securities Corporation (Prusec), an affiliated
broker-dealer, commissions and account servicing fees paid to, or on account of,
other broker-dealers or financial institutions (other than national banks) which
have entered into agreements with the Distributor (Class A only), advertising
expenses, the cost of printing and mailing prospectuses to potential investors
and indirect and overhead costs of Prudential Securities and Prusec associated
with the sale of Fund shares, including lease, utility, communications and sales
promotion expenses. The State of Texas requires that shares of the Fund may be
sold in that state only by dealers or other financial institutions which are
registered there as broker-dealers.
Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
Under the Class A Plan, the Fund may pay PMFD for its distribution-related
activities with respect to Class A shares at an annual rate of up to .30 of 1%
of the average daily net assets of the Class A shares. The Class A Plan provides
that (i) up to .25 of 1% of the average daily net assets of the Class A shares
may be used to pay for personal service and/or the maintenance of shareholder
accounts (service fee) and (ii) total distribution fees (including the service
fee of .25 of 1%) may not exceed .30 of 1% of the average daily net assets of
the Class A shares. PMFD has agreed to limit its distribution-related fees
payable under the Class A Plan to .25% of the average daily net assets of the
Class A shares for the fiscal year ending September 30, 1996.
Under the Class B and Class C Plans, the Fund pays Prudential Securities for
its distribution-related activities with respect to Class B and Class C shares
at an annual rate of 1% of the average daily net assets of each of the Class B
and Class C shares. The Class B and Class C Plans provide for the payment to
Prudential Securities of (i) an asset-based sales charge of .75 of 1% of the
average daily net assets of each of the Class B and Class C shares and (ii) a
service fee of .25 of 1% of the average daily net assets of each of the Class B
and Class C shares. The service fee is used to pay for personal service and/or
the maintenance of shareholder accounts. Prudential Securities also receives
contingent deferred sales charges from certain redeeming shareholders. See
"Shareholder Guide-How to Sell Your Shares-Contingent Deferred Sales Charges."
16
<PAGE>
For the fiscal year ended September 30, 1995, the Fund paid distribution
expenses of .25%, 1% and 1% of the average net assets of the Class A, Class B
and Class C shares, respectively. The Fund records all payments made under the
Plans as expenses in the calculation of net investment income.
Distribution expenses attributable to the sale of shares of the Fund will be
allocated to each class based upon the ratio of sales of each class to the sales
of all shares of the Fund other than expenses allocable to a particular class.
The distribution fee and sales charge of one class will not be used to subsidize
the sale of another class.
Each Plan provides that it shall continue in effect from year to year
provided that a majority of the Board of Directors of the Fund, including a
majority of the Directors 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 Directors), vote annually to continue the Plan. Each Plan
may be terminated at any time by vote of a majority of the Rule 12b-1 Directors
or of a majority of the outstanding shares of the applicable class of the Fund.
The Fund will not be obligated to pay expenses incurred under any plan if it is
terminated or not continued.
In addition to distribution and service fees paid by the Fund under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers and other persons which
distribute shares of the Fund. Such payments may be calculated by reference to
the net asset value of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with SEC, state
securities regulators (with the exception of the Texas Securities Commissioner
who joined the settlement on January 18, 1994) and the NASD to resolve
allegations that from 1980 through 1990 PSI sold certain limited partnership
interests in violation of securities laws to persons for whom such securities
were not suitable and misrepresented the safety, potential returns and liquidity
of these investments. Without admitting or denying the allegations asserted
against it, PSI consented to the entry of an SEC Administrative Order which
stated that PSI's conduct violated the federal securities laws, directed PSI to
cease and desist from violating the federal securities laws, pay civil
penalties, and adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of
a $10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action.
In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
17
<PAGE>
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling 1-800-225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant for
the Fund, provided that the commissions, fees or other remuneration it receives
are fair and reasonable. See "Portfolio Transactions and Brokerage" in the
Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and, in that capacity, maintains certain financial and accounting books and
records pursuant to an agreement with the Fund. Its mailing address is P.O. Box
1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and in
those capacities maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
- --------------------------------------------------------------------------------
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
Board of Directors has fixed the specific time of day for the computation of the
Fund's net asset value to be as of 4:15 p.m., New York time.
Portfolio securities are valued according to market quotations or, if such
quotations are not readily available, at fair value as determined in good faith
under procedures established by the Fund's Board of Directors.
The Fund will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Fund or days on which changes in the
value of the Fund's portfolio securities do not materially affect the NAV. The
New York Stock Exchange is closed on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. See "Net Asset Value" in the Statement of
Additional Information.
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
NAVs and dividends. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A shares as a result of the larger
distribution-related fee to which Class B and Class C shares are subject. It is
expected, however, that the net asset value per share of the three classes will
tend to converge immediately after the recording of dividends which will differ
by approximately the amount of the distribution-related expense accrual
differential among the classes.
18
<PAGE>
- --------------------------------------------------------------------------------
HOW THE FUND CALCULATES PERFORMANCE
- --------------------------------------------------------------------------------
From time to time the Fund may advertise its total return (including
"average annual" total return and "aggregate" total return) and yield in
advertisements or sales literature. Total return and yield are calculated
separately for Class A, Class B and Class C shares. These figures are based on
historical earnings and are not intended to indicate future performance. The
"total return" shows how much an investment in the Fund would have increased
(decreased) over a specified period of time (i.e., one, five or ten years or
since inception of the Fund) assuming that all distributions and dividends by
the Fund were reinvested on the reinvestment dates during the period and less
all recurring fees. The "aggregate" total return reflects actual performance
over a stated period of time. "Average annual" total return is a hypothetical
rate of return that, if achieved annually, would have produced the same
aggregate total return if performance had been constant over the entire period.
"Average annual" total return smooths 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 that may be payable upon redemption.
The "yield" refers to the income generated by an investment in the Fund over a
one-month or 30-day period. This income is then "annualized;" that is, the
amount of income generated by the investment during that 30-day period is
assumed to be generated each 30-day period for twelve periods and is shown as a
percentage of the investment. The income earned on the investment is also
assumed to be reinvested at the end of the sixth 30-day period. The Fund also
may include comparative performance information in advertising or marketing the
Fund's shares. Such performance information may include data from Lipper
Analytical Services, Inc., Morningstar Publications, Inc., other industry
publications, business periodicals and market indices. See "Performance
Information" in the Statement of Additional Information. The Fund will include
performance data for each class of shares of the Fund in any advertisement or
information including performance data for the Fund. Further performance
information is contained in the Fund's annual and semi-annual reports to
shareholders, which may be obtained without charge. See "Shareholder
Guide-Shareholder Services-Reports to Shareholders."
- --------------------------------------------------------------------------------
TAXES, DIVIDENDS AND DISTRIBUTIONS
- --------------------------------------------------------------------------------
Taxation of the Fund
The Fund has elected to qualify and intends to remain qualified as a
regulated investment company under the Internal Revenue Code. Accordingly, the
Fund will not be subject to federal income tax on its net investment income and
capital gains, if any, that it distributes to its shareholders. See "Taxes" in
the Statement of Additional Information.
Taxation of Shareholders
Any dividends out of net investment income, together with distributions of
net short-term capital gains (i.e. the excess of net short-term capital gains
over net long-term capital losses) distributed to shareholders, will be taxable
as ordinary income to the shareholders whether or not reinvested. Certain gains
or losses from fluctuations in foreign currency exchange rates ("Section 988"
gains or losses) will affect the amount of ordinary income the Fund will be able
to pay as dividends. See "Taxes" in the Statement of Additional Information. Any
net capital gain (the excess of net long-term capital gain over net short-term
capital loss) distributed to shareholders will be taxable as long-term capital
gain to the shareholders, whether or not reinvested and regardless of the length
of time a shareholder has owned his or her shares. For corporate shareholders,
the maximum rate of tax on net capital gain is currently the same as the maximum
tax rate for ordinary income. The maximum long-term capital gains tax for
individuals is 28%.
Any gain or loss realized upon a sale or redemption (including any exchange)
of Fund shares by a shareholder who is not a dealer in securities will be
treated as a long-term capital gain or loss if the shares have been held for
more than
19
<PAGE>
one year and otherwise as a short-term capital gain or loss. Any such loss,
however, on shares that are held for six months or less, will be treated as a
long-term capital loss to the extent of any capital gain distributions received
by the shareholder.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of Class
B or Class C shares for Class A shares constitutes a taxable event for federal
income tax purposes. However, such opinions are not binding on the Internal
Revenue Service.
Shareholders are advised to consult their own tax advisers regarding
specific questions as to federal, state or local taxes.
Withholding Taxes
Under the Internal Revenue Code, the Fund is required to withhold and remit
to the U.S. Treasury 31% of dividends, capital gain distributions and redemption
proceeds payable to any individuals and certain other noncorporate shareholders
who fail to furnish correct tax identification numbers on IRS Form W-9 (or IRS
Form W-8 in the case of certain foreign shareholders). Withholding at this rate
is also required from dividends and capital gain distributions (but not
redemption proceeds) payable to shareholders who are otherwise subject to backup
withholding. Dividends from net investment income and short-term capital gains
to a foreign shareholder will generally be subject to U.S. withholding tax at
the rate of 30% (or lower treaty rate).
Dividends and Distributions
The Fund expects to pay quarterly dividends of net investment income, if
any, and make distributions at least annually of any net capital gains. To the
extent that, in a given year, distributions to shareholders exceed the Fund's
current and accumulated earnings and profits, shareholders will receive a
non-taxable return of capital. Dividends paid by the Fund with respect to each
class of shares, to the extent any dividends are paid, will be calculated in the
same manner, at the same time, on the same day and will be in the same amount
except that each class will bear its own distribution charges, generally
resulting in lower dividends for Class B and Class C shares. Distributions of
net capital gains, if any, will be paid in the same amount for each class of
shares. See "How the Fund Values its Shares."
Dividends and distributions will be paid in additional Fund shares based on
the NAV of each class on the record date, or such other date as the Board of
Directors may determine, unless the shareholder elects in writing not less than
five business days prior to the record date to receive such dividends and
distributions in cash. Such election should be submitted to Prudential Mutual
Fund Services, Inc., Attention: Account Maintenance, P.O. Box 15015, New
Brunswick, New Jersey 08906-5015. 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
hold shares through Prudential Securities, you should contact your financial
adviser to elect to receive dividends and distributions in cash.
When the Fund goes "ex-dividend," the NAV of each class is reduced by the
amount of the dividend or distribution allocable to each class. If you buy
shares just prior to the ex-dividend date, the price you pay will include the
dividend or distribution and a portion of your investment will be returned to
you as a taxable dividend or distribution. You should, therefore, consider the
timing of dividends and distributions when making your purchases.
20
<PAGE>
- --------------------------------------------------------------------------------
GENERAL INFORMATION
- --------------------------------------------------------------------------------
DESCRIPTION OF COMMON STOCK
The Fund was incorporated in Maryland on November 18, 1988 and commenced
operations as a closed-end diversified management investment company on January
2, 1990. On December 20, 1990, shareholders approved open-ending the Fund and
since February 4, 1991, the Fund has operated as an open-end fund. The Fund is
authorized to issue 2 billion shares of common stock, $.001 par value per share
divided into three classes, designated Class A, Class B and Class C common
stock, each of which consists of 666-2/3 million authorized shares. Each class
of common stock represents an interest in the same assets of the Fund and is
identical in all respects except that (i) each class bears different
distribution expenses, (ii) each class has exclusive voting rights with respect
to its distribution and service plan (except that the Fund has agreed with the
SEC in connection with the offering of a conversion feature on Class B shares to
submit any amendment of the Class A Plan to both Class A and Class B
shareholders), (iii) each class has a different exchange privilege and (iv) only
Class B shares have a conversion feature. See "How the Fund is
Managed-Distributor." The Fund has received an order from the SEC permitting the
issuance and sale of multiple classes of common stock. Currently, the Fund is
offering three classes designated Class A, Class B and Class C shares. In
accordance with the Fund's Articles of Incorporation, the Board of Directors may
authorize the creation of additional series of common stock and classes within
such series, with such preferences, privileges, limitations and voting and
dividend rights as the Board may determine.
The Board of Directors may increase or decrease the number of authorized
shares without the approval of shareholders. 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 and described under "Shareholder Guide-How to Sell Your
Shares." Each share of each class of common stock is equal as to earnings,
assets and voting privileges, except as noted above, and each class 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 common
stock of the Fund is entitled to its portion of all the Fund's assets after all
debt and expenses of the Fund have been paid. Since Class B and Class C shares
generally bear higher distribution expenses than Class A shares, the liquidation
proceeds to shareholders of those classes are likely to be lower than to Class A
shareholders. The Fund's shares do not have cumulative voting rights for the
election of directors.
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 directors 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 a vote of 10% of the
Fund's outstanding shares for the purpose of voting on removal of one or more
directors or to transact any other business.
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.
21
<PAGE>
- --------------------------------------------------------------------------------
SHAREHOLDER GUIDE
- --------------------------------------------------------------------------------
HOW TO BUY SHARES OF THE FUND
You may purchase shares of the Fund through Prudential Securities, Prusec or
directly from the Fund through its transfer agent, Prudential Mutual Fund
Services, Inc. (PMFS or the Transfer Agent), Attention: Investment Services,
P.O. Box 15020, New Brunswick, New Jersey 08906-5020. In addition, Class A
shares may be purchased through a dealer which has entered into a selected
dealer agreement with the Fund's Distributor. The minimum initial investment for
Class A and Class B shares is $1,000 per class and $5,000 for Class C shares.
The minimum subsequent investment is $100 for all classes. All minimum
investment requirements are waived for certain retirement and employee savings
plans or custodial accounts for the benefit of minors. For purchases made
through the Automatic Savings Accumulation Plan, the minimum initial and
subsequent investment is $50. The minimum initial investment requirement is
waived for purchases of Class A shares effected through an exchange of Class B
shares of The BlackRock Government Income Trust.
See "Shareholder Services" below.
The purchase price is the NAV next determined following receipt of an order
by the Transfer Agent or Prudential Securities plus a sales charge which, at the
option of the purchaser, may be imposed either (i) at the time of purchase
(Class A shares) or (ii) on a deferred basis (Class B or Class C shares). See
"Alternative Purchase Plan" below. See also "How the Fund Values its Shares."
Application forms can be obtained from PMFS, Prudential Securities, Prusec
or a selected dealer (Class A only). If a stock 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 stock certificates.
The Fund reserves the right to reject any purchase order (including any
exchange into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the fifth business day following the investment.
Transactions in Fund shares may be subject to postage and handling charges
imposed by your dealer.
Purchase by Wire. For an initial purchase of shares of the Fund by wire, you
must first telephone PMFS to receive an account number at 1-800-225-1852
(toll-free). 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,
Boston, Massachusetts, Custody and Shareholder Services Division, Attention:
Global Utility Fund, Inc., specifying on the wire the account number assigned by
PMFS and your name and identifying the sales charge alternative (Class A, Class
B or Class C shares).
If you arrange for receipt by State Street of Federal Funds prior to 4:15
P.M., New York time, on a business day, you may purchase shares of the Fund as
of that day.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Global Utility Fund, Inc.,
Class A, Class B or Class C 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.
ALTERNATIVE PURCHASE PLAN
The Fund offers three classes of shares (Class A, Class B and Class C
shares) which allows you to choose the most beneficial sales charge structure
for your individual circumstances given the amount of the purchase, the length
of time you expect to hold the shares and other relevant circumstances
(Alternative Purchase Plan).
22
<PAGE>
<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 of 5% of .30 of 1% (Currently being Initial sales charge waived or reduced
the public offering price. charged at a rate of for certain purchases
.25 of 1%)
Class B Maximum contingent deferred sales 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser of approximately seven years after
the amount invested or the redemption purchase
proceeds; declines to zero after six
years
Class C Maximum CDSC of 1% of the lesser of 1% Shares do not convert to another class
the amount invested or the redemption
proceeds on redemptions made within
one year of purchase
</TABLE>
The three classes of shares represent an interest in the same portfolio of
investments of the Fund and have the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except as
noted under the heading "General Information-Description of Common Stock"), and
(iii) only Class B shares have a conversion feature. The three classes also have
separate exchange privileges. See "How to Exchange Your Shares" below. The
income attributable to each class and the dividends payable on the shares of
each class will be reduced by the amount of the distribution fee of each class.
Class B and Class C shares bear the expenses of a higher distribution fee which
will generally cause them to have higher expense ratios and to pay lower
dividends than the Class A shares.
Financial advisers and other sales agents who sell shares of the Fund will
receive different compensation for selling Class A, Class B and Class C shares
and will generally receive more compensation initially for selling Class A and
Class B shares than for selling Class C shares.
In selecting a purchase alternative, you should consider, among other
things, (1) the length of time you expect to hold your investment, (2) the
amount of any applicable sales charge (whether imposed at the time of purchase
or redemption) and distribution-related fees, as noted above, (3) whether you
qualify for any reduction or waiver of any applicable sales charge, (4) the
various exchange privileges among the different classes of shares (see "How to
Exchange Your Shares" below) and (5) the fact that Class B shares automatically
convert to Class A shares approximately seven years after purchase (see
"Conversion Feature-Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund:
If you intend to hold your investment in the Fund for less than 7 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 5% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B shares.
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.
23
<PAGE>
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 fee on Class A
shares. This does not take into account the time value of money, which further
reduces the impact of the higher Class B or Class C distribution-related fee on
the investment, fluctuations in net asset value, the effect of the return on the
investment over this period of time or redemptions during which the CDSC is
applicable.
All purchases of $1 million or more, either as part of a single investment
or under Rights of Accumulation or Letters of Intent, must be for Class A
shares. See "Reduction and Waiver of Initial Sales Charges" below.
Class A Shares
The offering price of Class A shares is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities plus a sales
charge (expressed as a percentage of the offering price and of the amount
invested) imposed on a single transaction as shown in the following table:
Sales Charge as Sales Charge as Dealer Concession
Amount of Percentage of Percentage of as Percentage of
Purchase Offering Price Amount Invested Offering Price
- ---------------- --------------- --------------- -----------------
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
Selling dealers may be deemed to be underwriters, as that term is defined in
the Securities Act.
Reduction and Waiver of Initial Sales Charges. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares-Reduction and Waiver of Initial Sales Charges-Class A Shares" in the
Statement of Additional Information.
Benefit Plans. Class A shares may be purchased at NAV, without payment of an
initial sales charge, by pension, profit-sharing or other employee benefit plans
qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the Internal
Revenue Code (Benefit Plans), provided that the plan has existing assets of at
least $1 million invested in shares of Prudential Mutual Funds (excluding money
market funds other than those acquired pursuant to the exchange privilege) or
1,000 eligible employees or participants. In the case of Benefit Plans whose
accounts are held directly with the Transfer Agent or Prudential Securities and
for which the Transfer Agent or Prudential Securities does individual account
record keeping (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.
PruArray Plans. Class A shares may be purchased at NAV by certain retirement
and deferred compensation plans, qualified or non-qualified under the Internal
Revenue Code, including 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 and 403(b)(7) of the Code that
participate in the Transfer Agent's PruArray Program (a benefit plan record
keeping service) (hereafter referred to as a PruArray Plan); provided (i) that
the plan has at least $1 million
24
<PAGE>
in existing assets or 1,000 eligible employees or participants and (ii) that
Prudential Mutual Funds constitute at least one-half of the plan's investment
options. The term "existing assets" for this purpose includes stock issued by a
PruArray Plan sponsor and shares of non-money market Prudential Mutual Funds and
shares of certain unaffiliated non-money market mutual funds that participate in
the PruArray Program (Participating Funds). "Existing assets" also include
shares of money market funds acquired by exchange from a Participating Fund.
Special Rules Applicable to Retirement Plans. After a Benefit Plan or a
PruArray Plan qualifies to purchase Class A shares at NAV, all subsequent
purchases will be made at NAV.
Other Waivers. In addition, Class A shares may be purchased at NAV, through
Prudential Securities or the Transfer Agent, by the following persons: (a)
Directors and officers of the Fund and other Prudential Mutual Funds, (b)
employees of Prudential Securities and PMF and their subsidiaries and members of
the families of such persons who maintain an "employee related" account at
Prudential Securities or the Transfer Agent, (c) employees and special agents of
Prudential and its subsidiaries and all persons who have retired directly from
active service with Prudential or one of its subsidiaries, (d) registered
representatives and employees of dealers who have entered into a selected dealer
agreement with Prudential Securities provided that purchases at NAV are
permitted by such person's employer and (e) investors who have a business
relationship with a financial adviser who joined Prudential Securities from
another firm, provided that (i) the purchase is made within 90 days of the
commencement of the financial adviser's employment at Prudential Securities,
(ii) the purchase is made with proceeds of a redemption of shares of any
open-end, non-money market fund sponsored by the financial adviser's previous
employer (other than a fund which imposes a distribution or service fee of .25
of 1% or less) and (iii) the financial adviser served as the client's broker on
the previous purchases.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec that you are entitled to the reduction or waiver
of the sales charge. The reduction or waiver will be granted subject to
confirmation of your entitlement. No initial sales charges are imposed upon
Class A shares acquired upon the reinvestment of dividends and distributions.
See "Purchase and Redemption of Fund Shares-Reduction and Waiver of Initial
Sales Charges-Class A Shares" in the Statement of Additional Information.
Class B and Class C Shares
The offering price of Class B and Class C shares for investors choosing one
of the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares-Contingent Deferred Sales Charges."
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 from the Class B shares will be reduced by the
amount of any applicable contingent deferred sales charge, as described below.
See "Contingent Deferred Sales Charges."
If you hold shares of the Fund through Prudential Securities or through a
dealer which has entered into a selected dealer agreement with the Fund's
Distributor you must redeem your shares by contacting your financial adviser. If
you hold shares in non-certificate form, a written request for redemption signed
by you exactly as the account is registered is required. If you hold
certificates, the certificates, signed in the name(s) shown on the face of the
certificates, must be received by the Transfer Agent in order for the redemption
request to be processed. If redemption is requested by a corporation,
partnership, trust or fiduciary, written evidence of authority acceptable to the
Transfer Agent must be submitted before such request will be accepted. All
correspondence and documents concerning redemptions should be sent to the Fund
in care of its Transfer Agent, Prudential Mutual Fund Services, Inc., Attention:
Redemption Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
25
<PAGE>
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to
a person other than the record owner, (c) are to be sent to an address other
than the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power, must be guaranteed by
an "eligible guarantor institution." An "eligible guarantor institution"
includes any bank, broker, dealer or credit union. The Transfer Agent reserves
the right to request additional information from and make reasonable inquiries
of, any eligible guarantor institution. For clients of Prusec, a signature
guarantee may be obtained from the agency or office manager of most Prudential
Insurance and Financial Services or Preferred Services offices.
Payment for shares presented for redemption will be made by check within
seven days after receipt by the Transfer Agent of the certificate and/or written
request except as indicated below. If you hold shares through Prudential
Securities, payment for shares presented for redemption will be credited to your
Prudential Securities account, unless you indicate otherwise. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Fund fairly to determine
the value of its net assets, or (d) during any other period when the SEC, by
order, so permits; provided that applicable rules and regulations of the SEC
shall govern as to whether the conditions prescribed in (b), (c) or (d) exist.
Payment for redemption of recently purchased shares will be delayed until
the Fund or its Transfer Agent has been advised that the purchase check has been
honored, up to 10 calendar days from the time of receipt of the purchase check
by the Transfer Agent. Such delay may be avoided by purchasing shares by wire or
by certified or official bank check.
Redemption in Kind. If the Board of Directors determines that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price in
whole or in part by a distribution in kind of securities from the investment
portfolio of the Fund, in lieu of cash, in conformity with applicable rules of
the SEC. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How the Fund Values Its Shares." If your
shares are redeemed in kind, you would incur transaction costs in converting the
assets into cash. The Fund, however, has elected to be governed by Rule 18f-1
under the Investment Company Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90-day period for any one shareholder.
Involuntary Redemption. In order to reduce expenses of the Fund, the Board
of Directors 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 net asset
value 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 income 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, will not be allowed for federal income tax purposes.
26
<PAGE>
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.
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:
Contingent Deferred Sales Charge
Year Since Purchase As a Percentage of Dollars Invested
Payment Made or Redemption Proceeds
------------------- -----------------------------------
First ................. 5.0%
Second ................ 4.0%
Third ................. 3.0%
Fourth ................ 2.0%
Fifth ................. 1.0%
Sixth ................. 1.0%
Seventh ............... None
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 net asset value above the total amount of
payments for the purchase of Fund shares made during the preceding six years;
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 net
asset value had appreciated to $12 per share, the value of the investor's 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
27
<PAGE>
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include: (i) in the case of a
tax-deferred retirement plan, a lump-sum or other distribution after retirement;
(ii) in the case of an IRA or Section 403(b) custodial account, a lump-sum or
other distribution after attaining age 59-1/2; and (iii) a tax-free return of an
excess contribution or plan distributions following the death or disability of
the shareholder, provided that the shares were purchased prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service (i.e.,
following voluntary or involuntary termination of employment or following
retirement). Under no circumstances will the CDSC be waived on redemptions
resulting from the termination of a tax-deferred retirement plan, unless such
redemptions otherwise qualify for a waiver as described above. In the case of
Direct Account and PSI or Subsidiary Prototype Benefit Plans, the CDSC will be
waived on redemptions which represent borrowings from such plans. Shares
purchased with amounts used to repay a loan from such plans on which a CDSC was
not previously deducted will thereafter be subject to a CDSC without regard to
the time such amounts were previously invested. In the case of a 401(k) plan,
the CDSC will also be waived upon the redemption of shares purchased with
amounts used to repay loans made from the account to the participant and from
which a CDSC was previously deducted.
In addition, the CDSC will be waived on redemptions of shares held by a
Director 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.
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.
The first conversion of Class B shares occurred in February 1995, when the
conversion feature was first implemented.
Since the Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately
28
<PAGE>
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, will 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 distrbutions paid on Class A, Class B and Class C shares
will not constitute "preferential diviends" 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, including one or more specified money market
funds, subject to the minimum investment requirement of such funds. Class A,
Class B and Class C shares may be exchanged for Class A, Class B and Class C
shares, respectively, of another fund on the basis of the relative NAV. No sales
charge will be imposed at the time of the exchange. Any applicable CDSC payable
upon the redemption of shares exchanged will be calculated from the first day of
the month after the initial purchase, excluding the time shares were held in a
money market fund. For purposes of calculating the holding period applicable to
the Class B conversion feature, the time period during which Class B shares were
held in a money market fund will be excluded. See "Conversion Feature-Class B
Shares" above. An exchange will be treated as a redemption and purchase for tax
purposes. See "Shareholder Investment Account-Exchange Privilege" in the
Statement of Additional Information.
In order to exchange shares by telephone, you must authorize telephone
exchanges on your initial application form or by written notice to the Transfer
Agent and hold shares in non-certificate form. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares on weekdays, except
holidays, between the hours of 8:00 a.m. and 6:00 p.m., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. Neither
the Fund nor its agents will be liable for any loss, liability or cost which
results from acting upon instructions reasonably believed to be genuine under
the foregoing procedures. All exchanges will be made on the basis of the
relative NAV of the two funds next determined after the request is received in
good order. The Exchange Privilege is available only in states where the
exchange may legally be made.
29
<PAGE>
If you hold shares through Prudential Securities or through a dealer which
has entered into a selected dealer agreement with the Fund's Distributor, you
must exchange your shares by contacting your financial adviser.
If you hold certificates, the certificates, signed in the name(s) shown on
the face of the certificates must be returned in order for the shares to be
exchanged. See "How to Sell Your Shares" above.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
In periods of severe market or economic conditions the telephone exchange of
shares may be difficult to implement and shareholders should make exchanges by
mail by writing to Prudential Mutual Fund Services, Inc. at the address above.
Special Exchange Privilege. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV. See "Alternative
Purchase Plan-Class A Shares-Reduction and Waiver of Initial Sales Charges"
above. Under this exchange privilege, amounts representing any Class B and Class
C shares (which are not subject to a CDSC) held in such a shareholder's account
will be automatically exchanged for Class A shares on a quarterly basis, unless
the shareholder elects otherwise. Eligibility for this exchange privilege will
be calculated on the business day prior to the date of the exchange. Amounts
representing Class B or Class C shares which are not subject to a CDSC include
the following: (1) amounts representing Class B or Class C shares acquired
pursuant to the automatic reinvestment of dividends and distributions, (2)
amounts representing the increase in the net asset value above the total amount
of payments for the purchase of Class B or Class C shares and (3) amounts
representing Class B or Class C shares held beyond the applicable CDSC period.
Class B and Class C shareholders must notify the Transfer Agent either directly
or through Prudential Securities or Prusec that they are eligible for this
special exchange privilege.
The Exchange Privilege may be modified or terminated at any time on 60 days'
notice to shareholders.
SHAREHOLDER SERVICES
In addition to the exchange privilege, as a shareholder in the Fund, you can
take advantage of the following additional 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 5 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
charge 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" and "Shareholder Investment
Account-Systematic Withdrawal Plan."
30
<PAGE>
*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 report and semi-annual shareholder
report and annual prospectus per household. You may request additional copies of
such reports by calling (800) 225-1852 or by writing to the Fund at One Seaport
Plaza, New York, NY 10292. In addition, monthly unaudited financial data is
available upon request from the Fund.
*Shareholder Inquiries. Inquiries should be addressed to the Fund at One
Seaport Plaza, New York, New York 10292, or by telephone at (800) 225-1852 (toll
free) or, from outside the U.S.A., at (908) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
31
<PAGE>
- --------------------------------------------------------------------------------
THE PRUDENTIAL MUTUAL FUND FAMILY
- --------------------------------------------------------------------------------
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Fund at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
- --------------------------------------------------------------------------------
(Left Column)
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
Prudential U.S. Government Fund
The BlackRock Government Income Trust
Tax-Exempt Bond Funds
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Hawaii Income 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 Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Global Assets Portfolio
Limited Maturity Portfolio
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Global Utility Fund, Inc.
(Right Column)
Equity Funds
Prudential Allocation Fund
Balanced Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential Jennison Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
Money Market Funds
* Taxable Money Market Funds
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund
Money Market Series
Prudential MoneyMart Assets
* Tax-Free Money Market Funds
Prudential Tax-Free Money Fund
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
* Command Funds
Command Money Fund
Command Government Fund
Command Tax-Free Fund
* Institutional Money Market Funds
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
A-1
<PAGE>
(Left Column)
No dealer, sales representative or any other person has been
authorized to give any information or to make any
representations, other than those contained in this
Prospectus, in connection with the offer contained herein,
and, if given or made, such other information or
representations must not be relied upon as having been
authorized by the Fund or the Distributor. This Prospectus
does not constitute an offer by the Fund or by the
Distributor to sell or a solicitation of an 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
Page
Fund Highlights ........................................ 2
Risk Factors and Special Characteristics ............ 2
Fund Expenses .......................................... 4
FINANCIAL HIGHLIGHTS ................................... 5
How the Fund Invests ................................... 8
Investment Objective and Policies .................. 8
Hedging and Income Enhancement Strategies ........... 11
Other Investments and Policies ...................... 13
Investment Restrictions ............................. 14
How the Fund is Managed ................................ 15
Manager ............................................. 15
Subadviser .......................................... 15
Distributor ......................................... 16
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 Common Stock ......................... 21
Additional Information .............................. 21
Shareholder Guide ...................................... 22
How to Buy Shares of the Fund ....................... 22
Alternative Purchase Plan ........................... 22
How to Sell Your Shares ............................. 25
Conversion Feature-Class B Shares ................... 28
How to Exchange Your Shares ......................... 29
Shareholder Services ................................ 30
THE PRUDENTIAL MUTUAL FUND FAMILY ...................... A-1
- ------------------------------------------------------------
MF150A 4443442
- ------------------------------------------------------------
Class A: 37936G 30 3
CUSIP Nos.: Class B: 37936G 20 4
Class C: 37936G 40 2
- ------------------------------------------------------------
(Right Column)
Global Utility
Fund, Inc.
Prudential Mutual Funds
Building Your Future LOGO
On Our Strength sm
PROSPECTUS
November 29, 1995
<PAGE>
GLOBAL UTILITY FUND, INC.
Statement of Additional Information
November 29, 1995
Global Utility Fund, Inc. (the Fund) is a diversified, open-end management
investment company. The Fund's investment objective is to provide total return,
without incurring undue risk, by investing primarily in income-producing
securities of domestic and foreign companies in the utility industries. Under
normal circumstances, at least 65% of the Fund's total assets will be invested
in a diversified portfolio of equity and debt securities of domestic and foreign
utility companies, principally electric, telecommunications, gas or water
companies. There can be no assurance that the Fund's investment objective will
be achieved. See "Investment Objective and Policies."
The Fund's address is One Seaport Plaza, New York, New York 10292, and its
telephone number is 1-800-225-1852.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Fund's Prospectus, dated November 29, 1995, a copy
of which may be obtained upon request from the Fund at the address or telephone
number above.
TABLE OF CONTENTS
Cross-reference
to page in
Page Prospectus
---- --------------
General Information ..................................... B-2 21
Investment Objective and Policies ....................... B-2 8
Investment Restrictions ................................. B-15 14
Information Regarding Directors and Officers ............ B-16 15
Management of the Fund .................................. B-19 15
Portfolio Transactions and Brokerage .................... B-23 18
Purchase and Redemption of Fund Shares .................. B-24 22
Shareholder Investment Account .......................... B-27 30
Net Asset Value ......................................... B-30 18
Taxes ................................................... B-31 19
Performance Information ................................. B-33 19
Custodian, Transfer and Dividend Disbursing Agent
and Independent Accountants ........................... B-34 18
Financial Statements .................................... B-36 -
Independent Auditors' Report ............................ B-48 -
Appendix ................................................ A-1 -
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MF150B
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GENERAL INFORMATION
Global Utility Fund, Inc. (the Fund), a Maryland corporation, is a
diversified, open-end management investment company registered under the
Investment Company Act of 1940, as amended (the 1940 Act). The Fund was
incorporated under the name The Utility Income Fund, Inc. On October 20, 1989
the Fund changed its name to Global Utility Fund, Inc. The Fund operated as a
closed-end fund until February 1, 1991. Since February 4, 1991, the Fund has
operated as an open-end fund.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide total return, without
incurring undue risk, by investing primarily in income-producing securities of
domestic and foreign companies in the utility industries. The Fund's total
return will consist of current income and growth of capital. Wellington
Management Company, the Fund's subadviser (the Subadviser), will seek to achieve
the Fund's objective by investing, under normal circumstances, at least 65% of
the Fund's total assets in a diversified portfolio of common stocks, debt
securities and preferred stocks issued by domestic and foreign companies
primarily engaged in the ownership or operation of facilities used in the
generation, transmission or distribution of electricity, telecommunications, gas
or water. There can be no assurance that the Fund's investment objective will be
achieved.
Utility Industries-Description and Risk Factors
Utility companies in the United States and in foreign countries are
generally subject to regulation. In the United States, most utility companies
are regulated by state and/or federal authorities. Such regulation is intended
to ensure appropriate standards of service and adequate capacity to meet public
demand. Prices are also regulated, with the intention of protecting the public
while ensuring that the rate of return earned by utility companies is sufficient
to allow them to attract capital in order to grow and continue to provide
appropriate services. There can be no assurance that such pricing policies or
rates of return will continue in the future.
The nature of regulation of utility industries is evolving both in the
United States and in foreign countries. Changes in regulations in the United
States increasingly allow utility companies to provide services and products
outside their traditional geographic areas and lines of business, creating new
areas of competition within the industries. Furthermore, the Subadviser believes
that the emergence of competition will result in utility companies potentially
earning more than their traditional regulated rates of return. Although certain
companies may develop more profitable opportunities, others may be forced to
defend their core businesses and may be less profitable. The Subadviser seeks to
take advantage of favorable investment opportunities that are expected to arise
from these structural changes. Of course, there can be no assurance that
favorable developments will occur in the future.
Foreign utility companies are also subject to regulation, although such
regulation may or may not be comparable to that in the United States. Foreign
regulatory systems vary from country to country, and may evolve in ways
different from regulation in the United States. See "Foreign Securities" in this
Statement of Additional Information and in the Prospectus.
The Fund's investment policies are designed to enable it to capitalize on
evolving investment opportunities throughout the world. For example, the rapid
growth of certain foreign economies will necessitate expansion of capacity in
the utility industries in those countries. Although many foreign utility
companies currently are government-owned, thereby limiting current investment
opportunities for the Fund, the Subadviser believes that, in order to attract
significant capital for growth, foreign governments are likely to seek global
investors through the privatization of their utility industries. Privatization,
which refers to the trend toward investor ownership of assets rather than
government ownership, is expected to occur in newer, faster-growing economies
and also in more mature economies. In addition, the economic unification of
European markets is expected to improve economic growth, reduce costs and
increase competition in Europe, which will result in opportunities for
investment by the Fund in European utility industries. Of course, there is no
assurance that such favorable developments will occur or that investment
opportunities in foreign markets for the Fund will increase.
The revenues of domestic and foreign utility companies generally reflect the
economic growth and developments in the geographic areas in which they do
business. The Subadviser takes into account anticipated economic growth rates
and other economic developments when selecting securities of utility companies.
Further descriptions of some of the anticipated opportunities and risks of
specific segments within the global utility industries are set forth below.
Electric. The electric utility industry consists of companies that are
engaged principally in the generation, transmission and sale of electric energy,
although many such companies also provide other energy-related services.
Domestic electric utility companies in general recently have been favorably
affected by lower fuel and financing costs and the full or near completion of
major construction programs. In addition, many of these companies recently have
generated cash flows in excess of current operating expenses and construction
expenditures, permitting some degree of diversification into unregulated
businesses. Some electric utilities have also taken advantage of the right to
sell power outside of their traditional geographic areas. Electric utility
companies have historically been subject to the risks associated with increases
in fuel and other operating costs, high interest
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costs on borrowings needed for capital construction programs, costs associated
with compliance with environmental, nuclear facility and other safety
regulations and changes in the regulatory climate. For example, in the United
States, the construction and operation of nuclear power facilities is subject to
increased scrutiny by, and evolving regulations of, the Nuclear Regulatory
Commission. Increased scrutiny might result in higher operating costs and higher
capital expenditures, with the risk that regulators may disallow inclusion of
these costs in rate authorizations.
Telecommunications. The telephone communications industry is a distinct
utility industry segment that is subject to different risks and opportunities.
Companies that provide telephone services and access to the telephone networks
comprise the largest portion of this segment. The telephone industry is large
and highly concentrated. Telephone companies in the United States are still
experiencing the effects of the break-up of American Telephone & Telegraph
Company, which occurred in 1984. Since that date the number of local and
long-distance companies and the competition among such companies has increased.
In addition, since 1984, companies engaged in telephone communication services
have expanded their nonregulated activities into other businesses, including
cellular telephone services, data processing, equipment retailing and software
services. This expansion has provided significant opportunities for certain
telephone companies to increase their earnings and dividends at faster rates
than have been allowed in traditional regulated businesses. Increasing
competition and other structural changes, however, could adversely affect the
profitability of such utilities.
Gas. Gas transmission companies and gas distribution companies are also
undergoing significant changes. In the United States, interstate transmission
companies are regulated by the Federal Energy Regulatory Commission, which is
reducing its regulation of the industry. Many companies have diversified into
oil and gas exploration and development, making returns more sensitive to energy
prices. In the recent decade, gas utility companies have been adversely affected
by disruption in the oil industry and have also been affected by increased
concentration and competition. In the opinion of the Subadviser, however,
environmental considerations could improve the gas industry outlook in the
future. For example, natural gas is the cleanest of the hydrocarbon fuels and
this may result in incremental shifts in fuel consumption toward natural gas and
away from oil and coal.
Water. Water supply utilities are companies that collect, purify, distribute
and sell water. In the United States and around the world, the industry is
highly fragmented, because most of the supplies are owned by local authorities.
Companies in this industry are generally mature and are experiencing little or
no per capita volume growth. In the opinion of the Subadviser, there may be
opportunities for certain companies to acquire other water utility companies.
The Subadviser believes that favorable investment opportunities may result from
consolidation within this industry.
There can be no assurance that the positive developments noted above,
including those relating to business growth and changing regulation, will occur
or that risk factors other than those noted above will not develop in the
future.
Foreign Securities
Foreign securities in which the Fund invests generally will be denominated
in foreign currencies and will be traded on foreign markets, including foreign
stock exchanges. Foreign securities also may include securities of foreign
issuers that are traded in U.S. dollars in the United States although the
underlying security is usually denominated in a foreign currency. These
securities include, but are not limited to, securities traded in the form of
American Depository Receipts (ADRs) and securities registered in the United
States by foreign (including Canadian) governmental or private issuers, foreign
banks and foreign branches of U.S. banks. These securities also include European
Depository Receipts and Global Depository Receipts (EDRs and GDRs,
respectively).
Restrictions and controls on investment in the securities markets of some
countries may have an adverse effect on the availability and costs to the Fund
of investments in those countries. Costs may be incurred in connection with
conversions between various currencies. Moreover, there may be less publicly
available information about foreign issuers than about domestic issuers, and
foreign issuers generally are not subject to accounting, auditing and financial
reporting standards and requirements comparable to those of domestic issuers.
The value of the assets of the Fund as measured in dollars also may be
affected favorably or unfavorably by fluctuations in currency rates and exchange
control regulations. A change in the value of any such currency relative to the
U.S. dollar will result in a corresponding change in the U.S. dollar value of
the Fund's assets denominated in that currency. These changes will also affect
the Fund's return, income and distributions to shareholders. In addition,
although the Fund will receive income in such currencies, the Fund will be
required to compute and distribute its income in U.S. dollars. Therefore, if the
value of the U.S. dollar strengthens against a foreign currency after the Fund's
income has been accrued and translated into U.S. dollars, the Fund would
experience a foreign currency loss. Similarly, if the U.S. dollar value weakens
against a foreign currency between the time the Fund incurs expenses and the
time such expenses are paid, the amount of such currency required to be
converted into U.S. dollars in order to pay such expenses in U.S. dollars will
be greater than the equivalent amount of such currency at the time such expenses
were incurred. Under the Internal Revenue Code of 1986, as amended (the Code),
changes in an exchange rate which occur between the time the Fund accrues
interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and
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the time the Fund actually collects such receivables or pays such liabilities
will result in foreign exchange gains or losses that increase or decrease
investment company taxable income. Similarly, dispositions of certain debt
securities (by sale, at maturity or otherwise) at a U.S. dollar value that is
higher or lower than the Fund's original U.S. dollar cost may result in foreign
exchange gains or losses, which will increase or decrease investment company
taxable income. To the extent the Fund's currency exchange transactions do not
fully protect the Fund against adverse changes in exchange rates, decreases in
the value of the currencies of the countries in which the Fund invests relative
to the U.S. dollar will result in a corresponding decrease in the U.S. dollar
value of the Fund's assets denominated in those currencies. The exchange rates
between the U.S. dollar and other currencies can be volatile and are determined
by factors such as supply and demand in the currency exchange markets,
international balances of payments, government intervention, speculation and
other economic and political conditions.
The costs attributable to foreign investing that the Fund must bear are
higher than those attributable to domestic investing. For example, the cost of
maintaining custody of foreign securities generally exceeds custodian costs for
domestic securities, and transaction and settlement costs of foreign investing
also frequently are higher than those attributable to domestic investing.
Investment income on certain foreign securities in which the Fund may invest may
be subject to foreign withholding or other government taxes that could reduce
the return to investors on these securities. Tax treaties between the United
States and certain foreign countries, however, may reduce or eliminate the
amount of foreign tax to which the Fund would be subject. See "Taxes."
Other Investment Strategies
At the discretion of the Subadviser, the Fund may employ the following
strategies in pursuing its investment objective.
Lending of Securities and Repurchase Agreements. As described in the
Prospectus, consistent with applicable regulatory requirements, the Fund may
lend securities valued at up to 30% of its total assets to brokers, dealers,
banks or other recognized institutional borrowers of securities, 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. If the borrower fails to maintain
the requisite amount of collateral, the loan automatically terminates and the
Fund could use the collateral to replace the securities while holding the
borrower liable for any excess of the replacement cost over the value of the
collateral. As with any extension of credit, there are risks of delay in
recovery and in some cases even loss of rights in the collateral should the
borrower of the securities fail financially. 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. The Fund may pay
reasonable administrative and custodial fees in connection with loans of its
securities.
The Fund may purchase U.S. Government securities and concurrently enter into
"repurchase agreements" with the seller of the securities whereby the seller
agrees to repurchase the securities at a specified price within a specified time
(generally one business day). The Fund's repurchase agreements will at all times
be fully collateralized in an amount as least equal to the repurchase price,
including accrued interest earned on the loan. The collateral will be held by
the Fund's custodian bank, either physically or in a book-entry account. The
Fund will not enter into a repurchase agreement with a maturity of more than
seven days if, as a result, more than 10% of the value of its total assets would
be invested in such repurchase agreements and other illiquid securities,
including securities that are illiquid by virtue of the absence of a readily
available market.
The Fund will enter into securities lending and repurchase agreement
transactions only with parties that meet creditworthiness standards approved by
the Fund's Board of Directors. The Subadviser will monitor and evaluate the
creditworthiness of such parties under the general supervision of the Board of
Directors. In the event of a default or bankruptcy by a contra-party, 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 law
regarding the rights of the Fund is unsettled if the financial institution that
is the contra-party to the agreement becomes subject to a bankruptcy or other
similar proceeding. The law regarding the rights of the Fund is unsettled. As a
result, under these circumstances there may be a restriction on the Fund's
ability to sell the collateral and the Fund could suffer a loss.
When-Issued and Delayed Delivery Securities. From time to time in the
ordinary course of business, the Fund may purchase securities on a when-issued
or delayed delivery basis, i.e., delivery and payment can take place as much as
a month or more after the date of the transaction. The purchase price and other
terms of the securities are fixed on the transaction date. Such investments are
subject to market fluctuation, and no interest accrues to the Fund until
delivery and payment take place. At the time the Fund makes the commitment to
purchase securities on a when-issued or delayed delivery basis, it will record
the transaction and thereafter reflect the value of such investments in
determining its net asset value on each day that net asset value is determined.
The Fund will make commitments for such when-issued transactions only with the
intention of actually acquiring the underlying securities. To facilitate such
acquisitions, the Fund's custodian bank will maintain, in a separate account of
the Fund, cash equivalents or U.S. Government or other high quality debt
securities from its portfolio, marked to market daily and having a value equal
to or greater than such commitments. On delivery dates for such transactions,
the Fund will meet its obligations from maturities or sales of securities held
in the separate account and/or from then available cash flow. If the Fund
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chooses to dispose of the right to acquire a when-issued security prior to its
acquisition, it could, as with the disposition of other assets held in its
portfolio, incur a gain or loss due to market fluctuation.
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, commonly known as "junk bonds," 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 Subadviser considers both credit risk and market risk in making
investment decisions for the Fund. Investors should carefully consider the
relative risks of investing in high yield securities and understand that such
securities are not generally meant for short-term investing.
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 quality 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.
Additional Investment Policies
In seeking to protect against the effect of changes in interest rates or
currency exchange rates that are adverse to the present or prospective position
of the Fund and to enhance returns, the Fund may employ certain hedging, yield
enhancement and risk management techniques including the purchase and sale of
options, futures and options on futures on equity and debt securities, indices
of prices of equity and debt securities, other financial indices, foreign
currencies and forward contracts on foreign currencies. The Fund's ability to
engage in these practices may be limited by tax considerations and certain other
legal considerations. See "Taxes."
Options on Securities
The Fund may purchase put and call options and write covered put and call
options on equity and debt securities, aggregates of equity and debt securities
or indices of prices thereof, other financial indices and foreign currencies.
These may include options traded on U.S. or foreign exchanges and options traded
in U.S. or foreign over-the-counter (OTC) markets. Currently, many options on
equity securities and options on currencies are exchange-traded, whereas options
on debt securities are primarily traded on the OTC market.
When the Fund writes an option, it receives a premium which it retains
whether or not the option is exercised. The Fund's principal objective in
writing options is to realize, through the receipt of premiums, a greater return
than would be realized on the underlying securities alone.
The purchaser of a call option has 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). By writing a call option, the Fund becomes
obligated during the term of the option, upon exercise of the option, to sell,
depending upon the terms of the option contract, the underlying securities or a
specified amount of cash to the purchaser against receipt of the exercise price.
When the Fund writes a call option, the Fund loses the potential for a gain on
the underlying securities in excess of the exercise price of the option during
the period that the option is open.
Conversely, the purchaser of a put option has 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. By writing a put option, the Fund
becomes obligated during the term of the option, upon exercise of the option, to
purchase 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 may write only "covered" options. This means that so long as the
Fund is obligated as the writer of a call option, it will own the underlying
securities subject to the option or an option to purchase the same underlying
securities, having an exercise price equal to or less than the exercise price of
the "covered" option, or will establish and maintain with its Custodian for the
term of the option a segregated account consisting of cash, U.S. Government
securities or other liquid high-grade debt obligations having a value at least
equal to the fluctuating market value of the optioned securities. A put option
written by the Fund will be considered "covered" if, so long as the Fund is
obligated as the writer of the option, it owns an option to sell the underlying
securities subject to the option having an exercise price equal to or greater
than the exercise price of the "covered" option, or it deposits and maintains
with its Custodian in a segregated account cash, U.S. Government securities or
other liquid high-grade debt obligations having a value equal to or greater than
the exercise price of the option.
The Fund may also buy and write straddles (i.e., a combination of a call and
a put written on the same security at the same exercise price where the same
issue of the security is considered "cover" for both the put and the call). In
such cases, the Fund will
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also deposit in a segregated account with its Custodian cash, U.S. Government
securities or other liquid high-grade debt obligations equivalent in value to
the amount, if any, by which the put is "in-the-money," i.e., the amount by
which the exercise price of the put exceeds the current market value of the
underlying security.
The Fund may write both American style options and European style options.
An American style option is an option which may be exercised by the holder at
any time prior to its expiration. A European style option, however, may only be
exercised as of the expiration of the option. The writer of an American style
option has no control over when the underlying securities must be sold, in the
case of a call option, or purchased, in the case of a put option, since such
options may be exercised by the holder at any time prior to the expiration of
the option. Whether or not an option expires unexercised, the writer retains the
amount of the premium. This amount may be offset or exceeded, in the case of a
covered call option, by a decline and, in the case of a covered put option, by
an increase in the market value of the underlying security during the option
period. If a call option is exercised the writer must fulfill the obligation to
sell the underlying security at the exercise price, which will usually be lower
than the then market value of the underlying security. If a put option is
exercised, the writer must fulfill the obligation to purchase the underlying
security at the exercise price, which will usually exceed the then market value
of the underlying security.
The writer of an exchange-traded option that wishes to terminate its
obligation may effect a "closing purchase transaction." This is accomplished by
buying an option of the same series as the option previously written. (Options
of the same series are options with respect to the same underlying security,
having the same expiration date and the same strike price.) The effect of the
purchase is that the writer's position will be canceled by the exchange's
affiliated clearing organization. However, the writer of an option may not
effect a closing purchase transaction after being notified of the exercise of
the option. Likewise, an investor who is the holder of an option may liquidate a
position by effecting a "closing sale transaction." This is accomplished by
selling an option of the same series as the option previously purchased. There
is no guarantee that either a closing purchase or a closing sale transaction can
be effected.
An exchange-traded option position may be closed out only where there exists
a secondary market for an option of the same series. If a secondary market does
not exist, it might not be possible to effect closing transactions in a
particular option the Fund has purchased with the result that the Fund would
have to exercise the option in order to realize any profit. If the Fund is
unable to effect a closing purchase transaction in a secondary market in an
option the Fund has written, it will not be able to sell the underlying security
until the option expires or it delivers the underlying security upon exercise or
it otherwise covers its position. Reasons for the absence of a liquid secondary
market include the following: (i) there may be insufficient trading interest in
certain options; (ii) restrictions may be imposed by a securities exchange
(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 clearing organization 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 trading of options (or a particular class or series of options), in
which event the secondary market on that Exchange (or in that class or series of
options) would cease to exist, although outstanding options would continue to be
exercisable in accordance with their terms.
Exchange-traded options in the U.S. are issued by clearing organizations
affiliated with the Exchange on which the option is listed which, in effect,
give their guarantee to every exchange-traded option transaction. In contrast,
OTC options are contracts between the Fund and its contra-party with no clearing
organization guarantee. Thus when the Fund purchases an OTC option, it relies on
the dealer from which it has purchased the OTC option to make or take delivery
of the securities underlying the option. Failure by the dealer to do so would
result in the loss of the premium paid by the Fund as well as the loss of the
expected benefit of the transaction. The Board of Directors will evaluate the
creditworthiness of any dealer from which the Fund proposes to purchase options.
Exchange-traded options generally have a continuous liquid market while OTC
options may not. Consequently, the Fund will generally be able to realize the
value of an OTC option it has purchased only by exercising it or reselling it to
the dealer who issued it. Similarly, when the Fund writes an OTC option, it
generally will be able to close out the OTC option prior to its expiration only
by entering into a closing purchase transaction with the dealer to which the
Fund originally sold the OTC option. While the Fund will enter into OTC options
only with dealers which agree to, and which are expected to be capable of,
entering into closing transactions with the Fund, there can be no assurance that
the Fund will be able to liquidate an OTC option at a favorable price at any
time prior to expiration. Until the Fund is able to effect a closing purchase
transaction in a covered OTC call option the Fund has written, it will not be
able to liquidate securities used as cover until the option expires or is
exercised or different cover is substituted. In the event of insolvency of the
contra-party, the Fund may be unable to liquidate an OTC option. With respect to
options written by the Fund, inability to enter into a closing purchase
transaction may result in material losses to the Fund. For example, since the
Fund must maintain a covered position with respect to any call option on a
security it writes, the Fund may be limited in its ability to sell the
underlying security while the option is outstanding. This may impair the Fund's
ability to sell a portfolio security at a time when such a sale might be
advantageous.
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The Fund may write options in connection with buy-and-write transactions;
that is, the Fund may purchase a security and concurrently write a call option
against that security. The exercise price of the call the Fund determines to
write will depend upon the expected price movement of the underlying security.
The exercise price of a call option may be below (in-the-money), equal to
(at-the-money) or above (out-of-the-money) the current value of the underlying
security at the time the option is written. Buy-and-write transactions using
in-the-money call options may be used when it is expected that the price of the
underlying security will remain flat or decline moderately during the option
period. Buy-and-write transactions using at-the-money call options may be used
when it is expected that the price of the underlying security will remain fixed
or advance moderately during the option period. A buy-and-write transaction
using an out-of-the-money call option may be used when it is expected that the
premium received from writing the call option plus the appreciation in the
market price of the underlying security up to the exercise price will be greater
than the appreciation in the price of the underlying security alone. If the call
option is exercised in such a transaction, the Fund's maximum gain will be the
premium received by it for writing the option, adjusted upwards or downwards by
the difference between the Fund's purchase price of the security and the
exercise price of the option. If the option is not exercised and the price of
the underlying security declines, the amount of such decline will be offset in
part, or entirely, by the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received. If the market price of the underlying security declines or otherwise
is below the exercise price, the Fund may elect to close out the position or
take delivery of the underlying security at the exercise price. In that case,
the Fund's return will be the premium received from writing the put option,
minus the amount by which the market price of the security is below the exercise
price. Out-of-the-money, at-the-money and in-the-money covered put options may
be written by the Fund in the same market environments in which call options are
written in equivalent buy-and-write transactions.
The Fund may purchase a call option on a security it intends to acquire in
order to hedge against (and thereby benefit from) an anticipated market
appreciation in the price of the underlying security at limited risk and with a
limited cash outlay. If the market price does rise as anticipated, the Fund will
benefit from that rise but only to the extent that the rise exceeds the premium
paid. If the anticipated rise does not occur or if it does not exceed the
premium, the Fund will bear the expense of the option premium without gaining an
offsetting benefit.
The Fund may purchase put options on securities to hedge against a decline
in the value of its portfolio. If the market price of the Fund's portfolio
should increase, however, the profit which the Fund might otherwise have
realized will be reduced by the amount of the premium paid for the put option
and by transaction costs. The Fund may purchase call options on securities to
hedge against an anticipated rise in the price it will have to pay for
securities it intends to buy in the future. If the market price of the
securities should fall instead of rise, however, the benefit the Fund obtains
from purchasing the securities at a lower price will be reduced by both the
amount of the premium paid for the call options and transaction costs.
The Fund may purchase put options if the Fund believes that a defensive
posture is warranted for all or a portion of its portfolio. Protection is
provided during the life of the put because the put gives the Fund the right to
sell the underlying security at the put exercise price, regardless of a decline
in the underlying security's market price below the exercise price. This right
limits the Fund's losses from the security's possible decline in value below the
strike price of the option to the premium paid for the put option and related
transaction costs.
The Fund may wish to protect certain portfolio securities against a decline
in market value at a time when put options on those particular securities are
not available for purchase. The Fund may therefore purchase a put option on
other carefully selected securities, the values of which historically have a
high degree of positive correlation to the values of such portfolio securities.
If the Subadviser's judgement is correct, changes in the value of the put
options should generally offset changes in the value of the portfolio securities
being hedged. But the correlation between the two values may not be as close in
these transactions as in transactions in which the Fund purchases a put option
on an underlying security it owns. If the Subadviser's judgement is not correct,
the value of the securities underlying the put option may decrease less than the
value of the Fund's portfolio securities and therefore the put option may not
provide complete protection against a decline in the value of the Fund's
portfolio securities below the level sought to be protected by the put option.
The Fund may similarly wish to hedge against appreciation in the value of
securities that it intends to acquire at a time when call options on such
securities are not available. The Fund may, therefore, purchase call options on
other carefully selected securities, the values of which historically have a
high degree of positive correlation to values of securities that the Fund
intends to acquire. In such circumstances the Fund will be subject to risks
analogous to those summarized immediately above in the event that the
correlation between the value of call options so purchased and the value of the
securities intended to be acquired by the Fund is not as close as anticipated
and the value of the securities underlying the call options increases less than
the value of the securities to be acquired by the Fund.
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Futures Contracts
The Fund will enter into futures contracts only for certain bona fide
hedging, yield enhancement and risk management purposes. The Fund may enter into
futures contracts for the purchase or sale of equity and debt securities,
aggregates of debt securities or indices of prices thereof, aggregates of equity
securities or indices of prices thereof, and other financial indices. It may
also enter futures contracts for the purchase or sale of foreign currencies
(such as the Japanese Yen, the British Pound and the West German Deutsche Mark)
or composite foreign currencies (such as the European Currency Unit) in which
securities held or to be acquired by the Fund are denominated, or the value of
which have a high degree of positive correlation to the value of such currencies
as to constitute an appropriate vehicle for hedging. The Fund may enter into
such futures contracts both on U.S. and foreign exchanges.
A "sale" of a futures contract (or a "short" futures position) means the
assumption of a contractual obligation to deliver the securities or currency
underlying the contract at a specified price at a specified future time. A
"purchase" of a futures contract (or a "long" futures position) means the
assumption of a contractual obligation to acquire the securities or currency
underlying the contract at a specified price at a specified future time. Certain
futures contracts are settled on a net cash payment basis rather than by the
sale and delivery of the securities or currency underlying the futures
contracts. U.S. futures contracts have been designed by exchanges that have been
designated as "contract markets" by the Commodity Futures Trading Commission
(the CFTC), an agency of the U.S. Government, and must be executed through a
futures commission merchant (i.e., a brokerage firm) which is a member of the
relevant contract market. Futures contracts trade on these contract markets and
the exchange's affiliated clearing organization guarantees performance of the
contracts as between the clearing members of the exchange.
At the time a futures contract is purchased or sold, the Fund must allocate
cash or securities as a deposit payment (initial margin). It is expected that
the initial margin on U.S. exchanges will vary from 3 to 15% of the value of the
securities or the commodities underlying the contract. Under certain
circumstances, however, such as periods of high volatility, the Fund may be
required by an exchange to increase the level of its initial margin payment.
Thereafter, the futures contract is valued daily and the payment in cash of
"variation margin" may be required, a process known as "mark to market." Each
day the Fund is required to provide or is entitled to receive variation margin
in an amount equal to any decline (in the case of a long futures position) or
increase (in the case of short futures position) in the contract's value since
the preceding day.
Although futures contracts by their terms may call for the actual delivery
or acquisition of underlying securities or currency, in most cases the
contractual obligation is extinguished or offset before the expiration of the
contract without having to make or take delivery of the securities or currency.
The offsetting of a contractual obligation is accomplished by buying (to offset
an earlier sale) or selling (to offset an earlier purchase) an identical futures
contract calling for delivery in the same month. Such a transaction cancels the
obligation to make or take delivery of the underlying securities or currency. In
all transactions on a U.S. futures exchange, the Fund will incur brokerage fees
and related transaction costs when it purchases or sells futures contracts. The
Fund may also incur brokerage fees and related transaction costs when it
purchases or sells futures contracts in markets outside the United States.
The ordinary spreads between values in the cash and futures markets, due to
differences in the character of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationships between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing price distortions. Third,
from the point of view of speculators, the margin deposit requirements in the
futures market are less onerous than margin requirements in the securities
market. Increased participation by speculators in the futures market may cause
temporary price distortions. Due to the possibility of distortion, a correct
forecast of general interest rate trends by the Subadviser may still not result
in a successful transaction.
In addition, futures contracts entail risks. Although the Fund believes that
use of such contracts will benefit the Fund, if the Subadviser's judgment about
the general direction of interest rates is incorrect, the Fund's overall
performance would be poorer than if it had not entered into any such contracts.
For example, if the Fund has hedged against the possibility of an increase in
interest rates which would adversely affect the price of debt securities held in
its portfolio and interest rates decrease instead, the Fund will lose part or
all of the benefit of the increased value of its assets which it has hedged
because it will have offsetting losses in its futures positions. In addition,
particularly in such situations, if the Fund has insufficient cash, it may have
to sell assets from its portfolio to meet daily variation margin requirements.
Any such sale of assets may, but will not necessarily, be at increased prices
which reflect the rising market. Consequently, the Fund may have to sell assets
at a time when it may be disadvantageous to do so.
If the Fund seeks to hedge against a decline in the value of its portfolio
securities and sells futures contracts for that purpose on other securities
which historically have had a high degree of positive correlation to the value
of the portfolio securities, the value
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<PAGE>
of its portfolio securities might decline more rapidly than the value of a
poorly correlated futures contract rises. In that case, the hedge will be less
effective than if the correlation had been greater. In a similar but more
extreme situation, the value of the futures position might in fact decline while
the value of portfolio securities holds steady or rises. This would result in a
loss that would not have occurred but for the attempt to hedge.
Options on Futures Contracts
The Fund will also enter into options on futures contracts for certain bona
fide hedging, yield enhancement and risk management purposes. The Fund may
purchase put and call options and write (i.e., sell) "covered" put and call
options on futures contracts that are traded on U.S. and foreign futures
exchanges. An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the option exercise period. The
writer of the option is required upon exercise to assume a short futures
position (if the option is a call) or a long futures position (if the option is
a put). Upon exercise of the option, the assumption of offsetting futures
positions by the writer and holder of the option will be accompanied by delivery
of the accumulated cash balance in the writer's futures margin account which
represents the amount by which the market price of the futures contract at
exercise, exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract.
The Fund will be considered "covered" with respect to a call option it
writes on a futures contract if the Fund owns the securities or currency which
is deliverable under the futures contract or an option to purchase that futures
contract having a strike price equal to or less than the strike price of the
"covered" option and having an expiration date not earlier than the expiration
date of the "covered" option, or it segregates and maintains with its Custodian
for the term of the option cash, U.S. Government securities or other liquid
high-grade debt obligations equal to the fluctuating value of the optioned
futures. The Fund will be considered "covered" with respect to a put option it
writes on a futures contract if it owns an option to sell that futures contract
having a strike price equal to or greater than the strike price of the "covered"
option and having an expiration date not earlier than the expiration date of the
"covered" option, or if it segregates and maintains with its Custodian for the
term of the option cash, U.S. Government securities or liquid high-grade debt
obligations at all times equal in value to the exercise price of the put (less
any initial margin deposited by the Fund with its Custodian with respect to such
put option). There is no limitation on the amount of the Fund's assets which can
be placed in the segregated account.
Writing a put option on a futures contract serves as a partial hedge against
an increase in the value of securities the Fund intends to acquire. If the
futures price at expiration of the option is above the exercise price, the Fund
will retain the full amount of the option premium which provides a partial hedge
against any increase that may have occurred in the price of the securities the
Fund intends to acquire. If the market price of the underlying futures contract
when the option is exercised is below the exercise price, however, the Fund will
incur a loss, which may be wholly or partially offset by the decrease in the
value of the securities the Fund intends to acquire.
Writing a call option on a futures contract serves as a partial hedge
against a decrease in the value of the Fund's portfolio securities. If the
market price of the underlying futures contract at expiration of a written call
option is below the exercise price, the Fund will retain the full amount of the
option premium, thereby partially hedging against any decline that may have
occurred in the Fund's holdings of debt securities. If the futures price when
the option is exercised is above the exercise price, however, the Fund will
incur a loss, which may be wholly or partially offset by the increase in the
value of the securities in the Fund's portfolio which were being hedged.
The Fund will purchase put options on futures contracts to hedge its
portfolio against the risk of a decline in the value of the debt securities it
owns as a result of rising interest rates or fluctuating currency exchange
rates. The Fund will also purchase call options on futures contracts as a hedge
against an increase in the value of securities the Fund intends to acquire as a
result of declining interest rates or fluctuating currency exchange rates.
Interest Rate Futures Contracts and Options Thereon
The Fund will purchase or sell interest rate futures contracts to take
advantage of, or to protect the Fund against, fluctuations in interest rates
affecting the value of debt securities which the Fund holds or intends to
acquire. For example, if interest rates are expected to increase, the Fund might
sell futures contracts on debt securities, the values of which historically have
a high degree of positive correlation to the values of the Fund's portfolio
securities. Such a sale would have an effect similar to selling an equivalent
value of the Fund's portfolio securities. If interest rates increase, the value
of the Fund's portfolio securities will decline, but the value of the futures
contracts to the Fund will increase at approximately an equivalent rate thereby
keeping the net asset value of the Fund from declining as much as it otherwise
would have. The Fund could accomplish similar results by selling debt securities
with longer maturities and investing in debt securities with shorter maturities
when interest rates are expected to increase. However, since the futures market
may be more liquid than the cash market, the use of futures contracts as a risk
management technique allows the Fund to maintain a defensive position without
having to sell its portfolio securities.
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<PAGE>
Similarly, the Fund may purchase interest rate futures contracts when it is
expected that interest rates may decline. The purchase of futures contracts for
this purpose constitutes a hedge against increases in the price of debt
securities (caused by declining interest rates) which the Fund intends to
acquire. Since fluctuations in the value of appropriately selected futures
contracts should approximate that of the debt securities that will be purchased,
the Fund can take advantage of the anticipated rise in the cost of the debt
securities without actually buying them. Subsequently, the Fund can make the
intended purchase of the debt securities in the cash market and liquidate its
futures position. To the extent the Fund enters into futures contracts for this
purpose, it will maintain in a segregated asset account with the Fund's
Custodian assets sufficient to cover the Fund's obligations with respect to such
futures contracts, which will consist of cash, U.S. Government securities or
other liquid, high-grade debt obligations from its portfolio in an amount equal
to the difference between the fluctuating market value of such futures contracts
and the aggregate value of the initial margin deposited by the Fund with its
Custodian with respect to such futures contracts.
The purchase of a call option on a futures contract is similar in some
respects to the purchase of a call option on an individual security. Depending
on the pricing of the option compared to either the price of the futures
contract upon which it is based or the price of the underlying debt securities,
it may or may not be less risky than ownership of the futures contract or
underlying debt securities. As with the purchase of futures contracts, when the
Fund is not fully invested, it may purchase a call option on a futures contract
to hedge against a market advance due to declining interest rates.
The purchase of a put option on a futures contract is similar to the
purchase of protective put options on portfolio securities. The Fund will
purchase a put option on a futures contract to hedge the Fund's portfolio
against the risk of rising interest rates and consequent reduction in the value
of portfolio securities.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the securities which are deliverable upon
exercise of the futures contract. If the futures price at expiration of the
option is below the exercise price, the Fund will retain the full amount of the
option premium which provides a partial hedge against any decline that may have
occurred in the Fund's portfolio holdings. The writing of a put option on a
futures contract constitutes a partial hedge against increasing prices of the
securities which are deliverable upon exercise of the futures contract. If the
futures price at expiration of the option is higher than the exercise price, the
Fund will retain the full amount of the option premium which provides a partial
hedge against any increase in the price of debt securities which the Fund
intends to purchase. If a put or call option the Fund has written is exercised,
the Fund will incur a loss which will be reduced by the amount of the premium it
received. Depending on the degree of correlation between changes in the value of
its portfolio securities and changes in the value of its futures positions, the
Fund's losses from options on futures it has written may to some extent be
reduced or increased by changes in the value of its portfolio securities.
Currency Futures and Options Thereon
Generally, foreign currency futures contracts and options thereon are
similar to the interest rate futures contracts and options thereon discussed
previously. By entering into currency futures and options thereon on U.S. and
foreign exchanges, the Fund will seek to establish the rate at which it will be
entitled to exchange U.S. dollars for another currency at a future time. By
selling currency futures, the Fund will seek to establish the number of dollars
it will receive at delivery for a certain amount of a foreign currency. In this
way, whenever the Fund anticipates a decline in the value of a foreign currency
against the U.S. dollar, the Fund can attempt to "lock in" the U.S. dollar value
of some or all of the securities held in its portfolio that are denominated in
that currency. By purchasing currency futures, the Fund can establish the number
of dollars it will be required to pay for a specified amount of a foreign
currency in a future month. Thus if the Fund intends to buy securities in the
future and expects the U.S. dollar to decline against the relevant foreign
currency during the period before the purchase is effected, the Fund can attempt
to "lock in" the price in U.S. dollars of the securities it intends to acquire.
The purchase of options on currency futures will allow the Fund, for the
price of the premium and related transaction costs it must pay for the option,
to decide whether or not to buy (in the case of a call option) or to sell (in
the case of a put option) a futures contract at a specified price at any time
during the period before the option expires. If the Subadviser, in purchasing an
option, has been correct in its judgement concerning the direction in which the
price of a foreign currency would move as against the U.S. dollar, the Fund may
exercise the option and thereby take a futures position to hedge against the
risk it had correctly anticipated or close out the option position at a gain
that will offset, to some extent, currency exchange losses otherwise suffered by
the Fund. If exchange rates move in a way the Fund did not anticipate, however,
the Fund will have incurred the expense of the option without obtaining the
expected benefit; any such movement in exchange rates may also thereby reduce
rather than enhance the Fund's profits on its underlying securities
transactions.
Options on Currencies
Instead of purchasing or selling futures or forward currency exchange
contracts, the Fund may attempt to accomplish similar objectives by purchasing
put or call options on currencies either on exchanges or in OTC markets or by
writing put options
B-10
<PAGE>
or covered call options on currencies. A put option gives the Fund the right to
purchase a currency at the exercise price until the option expires. A call
option gives the Fund the right to purchase a currency at the exercise price
until the option expires. Both options serve to insure against adverse currency
price movements in the underlying portfolio assets designated in a given
currency. Currency options traded on U.S. or other exchanges may be subject to
position limits which may limit the ability of the Fund to fully hedge its
positions by purchasing such options.
As in the case of interest rate futures contracts and options thereon, the
Fund may hedge against the risk of a decrease or increase in the U.S. dollar
value of a foreign currency denominated security which the Fund owns or intends
to acquire by purchasing or selling options contracts, futures contracts or
options thereon with respect to a foreign currency other than the foreign
currency in which such security is denominated, where the values of such
different currencies (vis-a-vis the U.S. dollar) historically have a high degree
of positive correlation.
Special Characteristics of Forward Currency Contracts and Associated Risks
The Fund may use forward currency contracts to protect against uncertainty
in the level of future exchange rates. The Fund will not speculate with forward
currency contracts or foreign currency exchange rates. A forward currency
contract involves bilateral obligations of one party to purchase, and another
party to sell, a specified currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time the contract is entered into.
The Fund may enter into forward currency contracts with respect to specific
transactions. For example, 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 dividend or interest payments
on a security that 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 payment, as the case
may be, by entering into a forward contract for the purchase or sale, for a
fixed amount of U.S. dollars per unit of foreign currency, of the amount of
foreign currency involved in the underlying transaction. The Fund will thereby
be able to protect itself against a possible loss resulting from an adverse
change in the relationship between the currency exchange rates during the period
between the date on which the security is purchased or sold, or on which the
payment is declared, and the date on which such payments are made or received.
The Fund also may use forward currency contracts to "lock-in" the U.S.
dollar value of portfolio positions, to increase the Fund's exposure to foreign
currencies that the Subadviser believes may rise in value relative to the U.S.
dollar or to shift the Fund's exposure to foreign currency fluctuations from one
country to another. For example, when the Subadviser believes that the currency
of a particular foreign country may suffer a substantial decline relative to the
U.S. dollar or another currency, it may enter into a forward contract to sell
the amount of the former foreign currency approximating the value of some or all
of the Fund's portfolio securities denominated in such foreign currency. This
investment practice generally is referred to as "cross-hedging" when another
foreign currency is used. The Fund may only cross-hedge using a currency
bearing, in the Subadviser's view, a high degree of positive correlation to the
currency being hedged.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it is sold. Accordingly, it may be necessary for
the Fund to purchase additional foreign currency on the spot (i.e., cash) market
(and bear the expense of such purchase) if the market value of the security is
less than the amount of foreign currency the Fund is obligated to deliver and if
a decision is made to sell the security and make delivery of the foreign
currency. Conversely, it may be necessary to sell on the spot market some of the
foreign currency received upon the sale of the portfolio security if its market
value exceeds the amount of foreign currency the Fund is obligated to deliver.
The projection of short-term currency market movements is extremely difficult,
and the successful execution of a short-term hedging strategy is highly
uncertain. Forward contracts involve the risk that anticipated currency
movements will not be accurately predicted, causing the Fund to sustain losses
on these contracts and transaction costs. The Fund may enter into forward
contracts or maintain a net exposure on such contracts only if (1) the
consummation of the contracts would not 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 or (2) the Fund maintains cash, U.S.
government securities or liquid, high-grade debt securities in a segregated
account in an amount not less than the value of the Fund's total assets
committed to the consummation of the contract. Under normal circumstances,
consideration of the prospect for currency parities will be incorporated into
the longer term investment decisions made with regard to overall diversification
strategies. However, the Subadviser believes that it is important to have the
flexibility to enter into such forward contracts when it determines that the
best interests of the Fund will be served.
At or before the maturity of a forward contract requiring the Fund to sell a
currency, the Fund may either sell a portfolio security and use the sale
proceeds to make delivery of the currency or retain the security and offset its
contractual obligation to deliver the currency by purchasing a second contract
pursuant to which the Fund will obtain, on the same maturity date, the same
amount of the currency that it is obligated to deliver. Similarly, the Fund may
close out a forward contract requiring it to purchase a
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<PAGE>
specified currency by entering into a second contract entitling it to sell the
same amount of the same currency on the maturity date of the first contract. The
Fund would realize a gain or loss as a result of entering into such an
offsetting forward currency contract under either circumstance to the extent the
exchange rate or rates between the currencies involved moved between the
execution dates of the first contract and the offsetting contract.
The cost to the Fund of engaging in forward currency contracts varies with
factors such as the currencies involved, the length of the contract period and
the market conditions then prevailing. Because forward currency contracts are
usually entered into on a principal basis, no fees or commission are involved.
The use of forward contracts does not eliminate fluctuations in the prices of
the underlying securities the Fund owns or intends to acquire, but it does fix a
rate of exchange in advance. In addition, although forward currency contracts
limit the risk of loss due to a decline in the value of the hedged currencies,
at the same time they limit any potential gain that might result should the
value of the currencies increase.
Although the Fund values its assets daily in terms of U.S. dollars, it does
not intend to convert its holdings of foreign currencies into U.S. dollars on a
daily basis. The Fund may convert foreign currency 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 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.
Additional Risks of Options on Securities and Currencies, Futures
Contracts, Options on Futures Contracts and Forward Contracts
Options, futures contracts and options thereon and forward contracts on
securities and currencies may be traded on foreign exchanges. Such transactions
may not be regulated as effectively as similar transactions in the U.S., may not
involve a clearing mechanism and related guarantees, and are subject to the risk
of governmental actions affecting trading in, or the prices of, foreign
securities. The value of such positions also could be adversely affected by (i)
other complex foreign political, legal and economic factors, (ii) lesser
availability than in the U.S. of data on which to make trading decisions, (iii)
delays in the Fund's ability to act upon economic events occurring in the
foreign markets during non-business hours in the U.S., (iv) the imposition of
different exercise and settlement terms and procedures and margin requirements
than in the U.S., and (v) lesser trading volume.
Exchanges on which options, futures and options on futures are traded may
impose limits on the positions that the Fund may take in certain circumstances.
If so, this would limit the ability of the Fund to fully hedge against these
risks.
Options on foreign currency futures contracts may involve certain additional
risks. Trading options on foreign currency futures contracts is relatively new.
The ability to establish and close out positions in such options is subject to
the maintenance of a liquid secondary market. To mitigate this problem, the Fund
will not purchase or write options on foreign currency futures contracts unless
and until, in the Subadviser's opinion, the market for such options has
developed sufficiently that the risks in connection with such options are not
greater than the risks in connection with transactions in the underlying foreign
currency futures contracts. Compared to the purchase or sale of foreign currency
futures contracts, the purchase of call or put options thereon involves less
potential risk to the Fund because the maximum amount at risk is the premium
paid for the option (plus transaction costs). However, there may be
circumstances when the purchase of a call or put option on a foreign currency
futures contract would result in a loss, such as when there is no movement in
the price of the underlying currency or futures contract, when use of the
underlying futures contract would not.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information available is generally representative of very large transactions in
the interbank market and thus may not reflect relatively smaller transactions
(i.e., less than $1 million) where rates may be less favorable. The interbank
market in foreign currencies is a global, around-the-clock market. To the extent
that the U.S. options markets are closed while the markets for the underlying
currencies remain open, significant price and rate movements may take place in
the underlying markets that cannot be reflected in the options market until they
reopen. Because foreign currency transactions occurring in the interbank market
involve substantially larger amounts than those that may be involved in the use
of foreign currency options, investors may be disadvantaged by having to deal in
an odd lot market (generally consisting of transactions of less than $1 million)
for the underlying foreign currencies at prices that are less favorable than for
round lots.
The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the price of the
option position may vary with changes in the value of either or both currencies
and may have no relationship to the investment merits of a foreign security.
A holder of a stock index option who exercises it before the closing index
value for that day is available runs the risk that the level of the underlying
index may subsequently change. For example, in the case of a call, if such a
change causes the closing index
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<PAGE>
value to fall below the exercise price of the option on that index, the
exercising holder will be required to pay the difference between the closing
index value and the exercise price of the option.
Special Risk Considerations Relating to Futures and Options Thereon
The Fund's ability to establish and close out positions in futures contracts
and options on futures contracts will be subject to the development and
maintenance of a liquid market. Although the Fund generally will purchase or
sell only those futures contracts and options thereon for which there appears to
be a liquid market, there is no assurance that a liquid market on an exchange
will exist for any particular futures contract or option thereon at any
particular time. In the event no liquid market exists for a particular futures
contract or option thereon in which the Fund maintains a position, it will not
be possible to effect a closing transaction in that contract or to do so at a
satisfactory price and the Fund would have to either make or take delivery under
the futures contract or, in the case of a written option, wait to sell the
underlying securities until the option expires or is exercised. In the case of a
futures contract or an option on a futures contract which the Fund has written
and which the Fund is unable to close, the Fund would be required to maintain
margin deposits on the futures contract or option and to make variation margin
payments until the contract is closed.
Successful use of futures contracts and options thereon by the Fund is
subject to the ability of the Fund's Subadviser to predict correctly movements
in the direction of interest rates and currency exchange rates and other factors
affecting markets for securities. If the Subadviser's expectations are not met,
the Fund would be in a worse position than if a hedging strategy had not been
pursued. For example, if the Fund has hedged against the possibility of an
increase in interest rates which would adversely affect the price of securities
in its portfolio and the price of such securities increases instead, the Fund
will lose part or all of the benefit of the increased value of its securities
because it will have offsetting losses in its futures positions. In addition, in
such situations, if the Fund has insufficient cash to meet daily variation
margin requirements, it may have to sell securities to meet such requirements.
Such sales of securities may be, but will not necessarily be, at increased
prices which reflect the rising market. The Fund may have to sell securities at
a time when it is disadvantageous to do so.
Limitations on the Purchase and Sale of Futures Contracts and
Options on Futures Contracts
The Fund will engage in transactions in interest rate and foreign currency
futures contracts and options thereon only for bona fide hedging, yield
enhancement and risk management purposes, in each case in accordance with the
rules and regulations of the CFTC, and not for speculation. In instances
involving the purchase of futures contracts or call options thereon or the
writing of put options thereon by the Fund, an amount of cash, U.S. Government
securities or other liquid, high-grade debt obligations, equal to the market
value of the futures contracts and options thereon (less any related margin
deposits), will be deposited in a segregated account with the Fund's Custodian
to cover the position, or the Fund will own an offsetting position in
securities, currencies or other options, forward-currency contracts or futures
contracts sufficient to ensure that the use of such techniques is unleveraged.
There are no limitations on the Fund's use of futures contracts and options on
futures contracts beyond the restrictions set forth above and the economic
limitations that are implicit in the use of futures and options on futures,
within these restrictions, only for bona fide hedging, yield enhancement and
risk management purposes, in each case in accordance with rules and regulations
of the CFTC and not for speculation.
Although the Fund intends to purchase or sell futures and options on futures
only on exchanges where there appears to be an active market, there is no
guarantee that an active market will exist for any particular contract or at any
particular time. If there is not a liquid market at a particular time, it may
not be possible to close a futures position at such time, and, in the event of
adverse price movements, the Fund would continue to be required to make daily
cash payments of variation margin. However, when futures positions are used to
hedge portfolio securities, such securities will not be sold until the futures
positions can be liquidated. In such circumstances, an increase in the price of
securities, if any, may partially or completely offset losses on the futures
contracts.
Illiquid Securities
The Fund has adopted the following nonfundamental investment policy which
may be changed by the vote of the Board of Directors:
The Fund may not invest more than 10% of its total 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 or legal or contractual restrictions
on resale. Securities eligible for resale in accordance with Rule 144A under
the Securities Act of 1933, as amended (the Securities Act) and privately
placed commercial paper that have legal or contractual restrictions on
resale but have a readily available market are not considered illiquid for
purposes of this limitation. The Subadviser will monitor the liquidity of
such restricted securities under the supervision of the Board of Directors.
Repurchase agreements subject to demand are deemed to have a maturity equal
to the notice period.
B-13
<PAGE>
The staff of the Securities and Exchange Commission has taken the
position that purchased OTC options and the assets used as "cover" for
written OTC options are illiquid securities.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act, securities which are not otherwise 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 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 Subadviser anticipates that the market for
certain restricted securities such as foreign convertible securities will expand
further as a result of this new 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 Subadviser will monitor the
liquidity of restricted securities in the Fund's portfolio under the supervision
of the Board of Directors. In reaching liquidity decisions, the Subadviser will
consider, inter alia, the following factors: (1) the frequency of trades and
quotes for the security; (2) the number of dealers wishing to purchase or sell
the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the transfer). In addition, in order for commercial paper that is issued in
reliance on Section 4(2) of the Securities Act to be considered liquid, (i) it
must be rated in one of the two highest rating categories by at least two
nationally recognized statistical rating organizations (NRSRO), or if only one
NRSRO rates the securities, by that NRSRO, or, if unrated, be of comparable
quality in the view of the investment adviser; and (ii) it must not be "traded
flat" (i.e., without accrued interest) or in default as to principal or
interest. Repurchase agreements subject to demand are deemed to have a maturity
equal to the notice period.
In addition to the foregoing limitation on investment in illiquid
securities, the Fund has adopted a nonfundamental limitation that would limit
its investments in certain restricted securities to 5% of the Fund's assets. For
purposes of this limitation, restricted securities are those which are
restricted from sale to the public without registration under the Securities
Act, but excludes restricted securities eligible for resale pursuant to Rule
144A that the Board of Directors has determined to be liquid.
Borrowing
As stated in the Prospectus, the Fund may borrow an amount up to 33 1/3% of
the value of its total assets (computed at the time the loan is made) from banks
for temporary or emergency purposes. However, the Fund will not purchase
portfolio securities if borrowings exceed 5% of the Fund's total assets. Upon
the vote of the Board of Directors to change the nonfundamental policy described
above, the Fund is authorized, at the Subadviser's discretion and under the
supervision of the Board of Directors, to borrow from banks amounts up to 33
1/3% of the Fund's total assets (including the amount borrowed), less all
liabilities and indebtedness other than the specific bank borrowing, which is
equivalent to permitting such borrowing to equal 50% of the value of the Fund's
net assets.
Portfolio Turnover
The Fund has no fixed policy with respect to portfolio turnover; however, as
a result of the Fund's investment policies, the Subadviser expects the annual
portfolio turnover rate will be less than 100%. For the Fund's fiscal years
ended September 30, 1994 and 1995 its portfolio turnover was 19% and 15%,
respectively. 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
B-14
<PAGE>
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.
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) Invest 25% or more of its total assets in any nonutility industry. (The
Fund will invest 25% or more of its total assets in the utility industries as a
group. Utility industries for this purpose consist of companies primarily
engaged in the ownership or operation of facilities used in the generation,
transmission or distribution of electricity, telecommunications, gas or water.)
For this purpose "industry" does not include the U.S. Government and agencies
and instrumentalities of the U.S. Government.
(2) Invest more than 5% of its total assets in securities of companies
having a record, together with predecessors, of less than three years of
continuous operation. This restriction shall not apply to U.S. Government
agencies and instrumentalities.
(3) As to 75% of its total assets, invest more than 5% of the market or
other fair value of its total assets in the securities of any one issuer (other
than U.S. Government Securities) or purchase more than 10% of the voting
securities, or more than 10% of any class of securities, of any one issuer. For
purposes of this restriction, all outstanding debt securities of an issuer are
considered as one class, and all preferred stock of an issuer is considered as
one class.
(4) Purchase securities on margin, except such short-term credits as may be
necessary for the clearance of transactions. The Fund may make deposits of
margin in connection with futures contracts and options.
(5) Invest in securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets; provided
that the Fund may invest in securities issued by foreign investment companies to
the extent permitted by the 1940 Act.
(6) Make short sales of securities or maintain a short position, except in
connection with the use of options, futures contracts, options thereon and
forward currency contracts.
(7) Issue senior securities, as defined in the 1940 Act, except that the
Fund may borrow money from banks in an amount at the time of the borrowing not
in excess of 33 1/3% of the Fund's total assets (including the amount borrowed)
less all liabilities and indebtedness other than the borrowing. Transactions
involving options, futures contracts, options on futures contracts and forward
currency contracts as described in the Prospectus and collateral arrangements
with respect thereto are not considered by the Fund to be the issuances of
senior securities; and neither such arrangements, the purchase or sale of
securities on a when-issued or delayed delivery basis nor obligations of the
Fund to the Directors pursuant to deferred compensation arrangements, are deemed
to be the issuance of a senior security.
(8) Buy or sell commodities, commodity contracts, real estate or interests
in real estate, except that the Fund may purchase and sell futures contracts,
options on futures contracts and securities secured by real estate or interests
therein or issued by companies that invest therein. Transactions in foreign
currencies, forward currency contracts and options on foreign currencies,
futures contracts and options on futures contracts are not considered by the
Fund to be transactions in commodities or commodity contracts.
(9) Make loans, except loans of portfolio securities and repurchase
agreements, provided that for purposes of this restriction the purchase of debt
securities in accordance with the Fund's investment objective and policies are
not considered by the Fund to be "loans."
(10) Make investments for the purpose of exercising control or management
over the issuer of any security.
(11) Act as an underwriter (except to the extent the Fund may be deemed to
be an underwriter in connection with the sale of securities in the Fund's
investment portfolio).
If a percentage restriction is adhered to at the time of an investment or
transaction, later changes in percentage resulting in a change in values of
portfolio securities or amount of total assets will not be considered a
violation of any of the foregoing limitations. 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.
B-15
<PAGE>
In order to comply with certain state "blue sky" restrictions, the Fund will
not as a matter of operating policy:
1. Invest in oil, gas and mineral leases.
2. Invest in securities of any issuer if any officer or director of the Fund
or the Fund's Manager or Subadviser owns more than 1/2 of 1% of the outstanding
securities of such issuer, and such officers and directors who own more than 1/2
of 1% own in the aggregate more than 5% of the outstanding securities of such
issuer.
3. Invest in the securities of foreign open-end investment companies.
4. Purchase warrants if as a result the Fund would then have more than 5% of
its assets (determined at the time of investment) invested in warrants. Warrants
will be valued at the lower of cost or market and investment in warrants which
are not listed on the New York Stock Exchange or American Stock Exchange will be
limited to 2% of the Fund's net assets (determined at the time of investment).
For purposes of this limitation, warrants acquired in units or attached to
securities are deemed to be without value.
5. Purchase more than 10% of the voting securities of any issuer.
6. Invest more than 10% of its assets in securities which the Fund would be
restricted from selling to the public without registration under the Securities
Act, but excluding restricted securities eligible for resale pursuant to Rule
144A under the Securities Act that are determined to be liquid by the Board of
Directors, securities of unseasoned issuers including their predecessors, which
have been in operation for less than three years and equity securities of
issuers which are not readily marketable.
INFORMATION REGARDING DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
Name, Address Position(s) held Principal Occupations
and Age with the Fund During Past 5 Years
- ------------- ---------------- ---------------------
<S> <C> <C>
*Daniel S. Ahearn, PHD (70) Director President of Capital Markets Strategies Company; Consultant to
50 Congress Street Wellington Management Company (Wellington Management);
Boston, MA 02109 formerly Senior Vice President (1979-1993) and Partner
(1979-1990) of Wellington Management; Director of U.S. Smaller
Companies Investment Trust plc, First Financial Fund, Inc. and The
High Yield Plus Fund, Inc.; Trustee of Winchester Hospital; Member
of Massachusetts Financial Advisory Board; Member of PSA Treasury
Borrowing Advisory Committee; former Assistant to the
Secretary of the Treasury for Debt Management.
*Edward D. Beach (71) President and President and Director of BMC Fund, Inc., a closed-end investment
800 Golfview Park Director company; prior thereto, Vice Chairman of Broyhill Furniture
Lenoir, NC 28645 Industries, Inc.; Certified Public Accountant; Secretary and
Treasurer of Broyhill Family Foundation, Inc.; Member of the Board
of Trustees of Mars Hill College; President, Treasurer and Director of
First Financial Fund, Inc., and The High Yield Plus Fund, Inc.; Director
of The Global Total Return Fund, Inc. and The Global Government
Plus Fund, Inc.
Thomas T. Mooney (54) Director President of the Greater Rochester Metro Chamber of Commerce;
55 St. Paul Street former Rochester City Manager; Trustee of Center for
Rochester, NY 14604 Governmental Research, Inc.; Director of Blue Cross of Rochester,
Monroe County Water Authority, Rochester Jobs, Inc., Northeast-
Midwest Institute, The Business Council of New York State,
Executive Service Corps of Rochester, Monroe County Industrial
Development Corporation, First Financial Fund, Inc., The Global
Government Plus Fund, Inc., The Global Total Return Fund, Inc. and
The High Yield Plus Fund, Inc.
</TABLE>
B-16
<PAGE>
<TABLE>
<CAPTION>
Name, Address Position(s) held Principal Occupations
and Age with the Fund During Past 5 Years
- ------------- ---------------- ---------------------
<S> <C> <C>
*Richard A. Redeker (52) Director President, Chief Executive Officer and Director (since October 1993),
One Seaport Plaza of Prudential Mutual Fund Management, Inc. (PMF); Executive Vice
New York, NY 10292 President, Director and Member of the Operating Committee
(since October 1993), Prudential Securities Incorporated (Prudential
Securities); Director (since October 1993) of Prudential Securities
Group, Inc.; Executive Vice President, The Prudential Investment
Corporation (since July 1994); Director (since January 1994)
of Prudential Mutual Fund Distributors, Inc. (PMFD) and
Prudential Mutual Fund Services, Inc. (PMFS); formerly Senior
Executive Vice President and Director of Kemper Financial Services,
Inc. (September 1978-September 1993); Director of The Global
Government Plus Fund, Inc., The Global Total Return Fund, Inc. and
The High Yield Income Fund, Inc.
Sir Michael Sandberg (68) Director Chairman, Broadstreet, Inc.; Director of International Lottery and
11 St. James Square Totalizator Systems, Broadstreet, Inc., and The Global Total Return
London SW1Y4LB, Fund, Inc.; Chairman and Director of PRICOA Worldwide Investors
England Portfolio; former Chairman of Hong Kong and Shanghai Banking
Corporation and British Bank of the Middle East (1977-1986).
Robin B. Smith (56) Director President (since September 1981) and Chief Executive Officer (since
382 Channel Drive January 1988), Publishers Clearing House; Director of Bell
Port Washington, NY 11050 South Corporation, The Omnicom Group, Inc., Texaco Inc., Springs
Industries Inc., First Financial Fund, Inc., The Global Total Return
Fund, Inc., The High Yield Income Fund, Inc., and The High Yield
Plus Fund, Inc.
Nancy H. Teeters (65) Director Economist; formerly, Vice President and Chief Economist (March
c/o Prudential Mutual Fund 1986-June 1990) of International Business Machines Corporation;
Management, Inc. former Member of the Board of Governors of the Horace H.
One Seaport Plaza Rackham School of Graduate Studies of the University of Michigan;
New York, NY 10292 Director of Inland Steel Industries (since July 1991), First Financial
Fund, Inc., and The Global Total Return Fund, Inc.
Robert F. Gunia (49) Vice President Chief Administrative Officer (since July 1990), Director (since January
One Seaport Plaza 1989), Executive Vice President, Treasurer and Chief Financial
New York, NY 10292 Officer of PMF; Senior Vice President (since March 1987)
of Prudential Securities; Executive Vice President, Treasurer,
Comptroller, and Director (since March 1991) of PMFD; Director
(since June 1987) of PMFS; Vice President and Director of The Asia
Pacific Fund, Inc. (since May 1989).
Grace Torres (36) Treasurer and First Vice President (since March 1994) of PMF and Prudential
One Seaport Plaza Principal Financial Securities. Prior thereto, Vice President, Bankers Trust Company.
New York, NY 10292 and Accounting
Officer
Stephen M. Ungerman (42) Assistant First Vice President of Prudential Mutual Fund Management, Inc.
One Seaport PIaza Treasurer (since February 1993). Prior thereto, Senior Tax Manager at Price
New York, NY 10292 Waterhouse.
S. Jane Rose (49) Secretary Senior Vice President (since January 1991) and Senior Counsel
One Seaport Plaza and First Vice President (June 1987-December 1990) of
New York, NY 10292 PMF; Senior Vice President and Senior Counsel of Prudential
Securities (since July 1992); formerly Vice President and Associate
General Counsel of Prudential Securities.
</TABLE>
B-17
<PAGE>
<TABLE>
<CAPTION>
Name, Address Position(s) held Principal Occupations
and Age with the Fund During Past 5 Years
- ------------- ---------------- ---------------------
<S> <C> <C>
Ronald Amblard (37) Assistant First Vice President (since January 1994) and Associate General
One Seaport Plaza Secretary Counsel (since January 1992) of PMF; Vice President and Associate
New York, NY 10292 General Counsel of Prudential Securities (since January 1992);
formerly, Assistant General Counsel (August 1988-December 1991),
Associate Vice President (January 1989-December 1990) and Vice
President (January 1991-December 1993) of PMF.
<FN>
- -------------------
* Indicates those directors that are "interested persons" of the Fund as defined in the 1940 Act.
</FN>
</TABLE>
The Directors of the Fund, other than Mr. Ahearn, are also trustees,
directors and officers of some or all of the other investment companies
distributed by Prudential Securities or Prudential Mutual Fund Distributors,
Inc.
Sir Michael Sandberg, one of the Fund's Directors, resides outside the
United States and substantially all of his assets are located outside the United
States. It may not be possible, therefore, for investors to effect service of
process within the United States upon such director or to enforce against such
director, in United States or foreign courts, judgements obtained in United
States courts predicated upon the civil liability provisions of the United
States federal securities laws.
The officers conduct and supervise the daily business operations of the
Fund, while the directors, in addition to their functions set forth under
"Management of the Fund" below, review such actions and decide on general
policy.
The Fund pays each of its Directors who is not an affiliated person of the
Manager or the Subadviser annual compensation of $6,000 and $500 per Board
meeting attended, in addition to certain out-of-pocket expenses. Directors may
receive their Director's fees pursuant to a deferred fee agreement with the
Fund.
Ms. Smith receives her Director's fee pursuant to a deferred fee agreement
with the Fund. Under the terms of the agreement, the Fund accrues daily the
amount of such Director's fee which accrues 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 exemptive order of the Securities and
Exchange Commission (SEC), at the daily rate of return of the Fund (the Fund
rate). Payment of the interest so accrued is also deferred and accruals become
payable at the option of the Director. The Fund's obligation to make payments of
deferred Director's fees, together with interest thereon, is a general
obligation of the Fund.
The Directors have adopted a retirement policy which calls for the
retirement of Directors on December 31 of the year in which they reach the age
of 72, except that retirement is being phased in for Directors 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. In addition, Mr. Ahearn has notified
the Fund of his intention to retire on December 31, 1995.
Pursuant to the terms of the Management Agreement with the Fund, the Manager
or Subadviser, as appropriate, pays all compensation of officers and employees
of the Fund as well as the fees and expenses of all Directors of the Fund who
are affiliated persons of the Manager or Subadviser.
The following table sets forth the aggregate compensation paid by the Fund
for the fiscal year ended September 30, 1995 to the Directors who are not
affiliated with the Manager or Subadviser and the aggregate compensation paid to
such Directors for service on the Fund's board and that of all other investment
companies registered under the 1940 Act managed by Prudential Mutual Fund
Management, Inc. (Fund Complex) for the calendar year ended December 31, 1994.
Compensation Table
<TABLE>
<CAPTION>
Total
Pension or Compensation
Retirement From Fund
Aggregate Benefits Accrued Estimated Annual and Fund
Compensation As Part of Fund Benefits Upon Complex Paid
Name and Position From Fund Expenses Retirement to Directors
- ----------------- ------------ ---------------- ---------------- ------------
<S> <C> <C> <C> <C>
Edward D. Beach, Director $8,000 None N/A $159,000(20/39)**
Thomas T. Mooney, Director $8,000 None N/A $126,000(15/36)**
Sir Michael Sandberg, Director $8,000 None N/A $ 22,000(2/2)**
Robin B. Smith, Director $8,000* None N/A $ 55,000*(6/15)**
Nancy H. Teeters, Director $8,000 None N/A $ 95,000(12/28)**
</TABLE>
*All compensation for the calendar year ended December 31, 1994 represents
deferred compensation. Aggregate compensation from the Fund for the fiscal
year ended September 30, 1995, including accrued interest, amounted to
approximately
B-18
<PAGE>
$9,697, all of which represents deferred compensation. Aggregate compensation
from all of the funds in the Fund Complex for the calendar year ended December
31, 1994, including accrued interest, amounted to approximately $57,417.
**Indicates number of funds/portfolios in Fund Complex (including the Fund) to
which aggregate compensation relates.
As of November 3, 1995, the Directors and officers of the Fund as a group
owned less than 1% of the outstanding common stock of the Fund.
As of November 3, 1995, the beneficial owners, directly or indirectly, of
more than 5% of the outstanding shares of any class of beneficial interest were:
Richard L. Campbell, 1367 Vernon North Drive, Dunwoody, GA, who held 2,669 Class
C shares (7.0%); Ernie Romero, 333 Gerald Drive, Lafayette, LA, who held 1,902
Class C shares (5.0%) and Coben, Inc., 8615 Marbach Road, San Antonio, TX, which
held 3,936 Class C shares (10.3%).
As of November 3, 1995, Prudential Securities was the record holder for
other beneficial owners of 6,145,873 Class A shares (or 74% of the outstanding
Class A shares), 11,707,719 Class B shares (or 77% of the outstanding Class B
shares) and 34,214 Class C shares (or 90% of the outstanding Class C shares) of
the Fund. In the event of any meetings of shareholders, Prudential Securities
will forward, or cause the forwarding of, proxy materials to the beneficial
owners for which it is record holder.
MANAGEMENT OF THE FUND
The Manager
The manager of the Fund is Prudential Mutual Fund Management, Inc. (PMF or
the Manager), One Seaport Plaza, New York, New York 10292. PMF serves as manager
to all of the other open-end management investment companies that, together with
the Fund, comprise the Prudential Mutual Funds. See "How the Fund is
Managed-Manager" in the Prospectus. As of October 31, 1995, PMF managed and/or
administered open-end and closed-end management investment companies with assets
of approximately $50 billion. According to the Investment Company Institute, as
of September 30, 1995, the Prudential Mutual Funds were the 13th largest family
of mutual funds in the United States.
PMF is a subsidiary of Prudential Securities Incorporated (PSI) and The
Prudential Insurance Company of America (Prudential). PMF has three wholly-owned
subsidiaries: Prudential Mutual Fund Distributors, Inc., Prudential Mutual Fund
Services, Inc. (PMFS or the Transfer Agent) and Prudential Mutual Fund
Investment Management, Inc. PMFS serves as the transfer agent for the Prudential
Mutual Funds and, in addition, provides customer service, record keeping and
management and administration services to qualified plans.
Prudential 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, 1994. Its primary business is to offer a full range
of products and services in three areas: insurance, investments and home
ownership for individuals and families; health-care management and other benefit
programs for employees of companies and members of groups; and asset management
for institutional clients and their associates. Prudential (together with its
subsidiaries) employs nearly 100,000 persons world-wide, and maintains a sales
force of approximately 19,000 agents, 3,400 insurance brokers and 6,000
financial advisers. It insures or provides other financial services to more than
50 million people worldwide-to more than one of every five people in the United
States. 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. As of December 31, 1994, Prudential through
its subsidiaries provided automobile insurance for more than 1.8 million cars
and insured more than 1.5 million homes. For the year ended December 31, 1994,
The Prudential Bank, a subsidiary of Prudential, served 940,000 customers in 50
states providing credit card services and loans totaling more than $1.2 billion.
Assets held by PSI for its clients totaled approximately $150 billion at
December 31, 1994. During 1994, over 28,000 new customer accounts were opened
each month at PSI. The Prudential Real Estate Affiliates, the fourth largest
real estate brokerage network in the United States, has more than 34,000 brokers
and agents and more than 1,100 offices in the United States.
Based on data for the year ended December 31, 1994 for the Prudential Mutual
Funds, on an average day, there are approximately $80 million in common stock
transactions, over $100 million in bond transactions and over $4.1 billion in
money market transactions. In 1994, the Prudential Mutual Funds effected more
than 57,000 trades in money market securities and held on average $21 billion of
money market securities. Based on complex-wide data for the year ended December
31, 1994, on an average day, 7,168 shareholders telephoned PMFS, 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 and approximately 1.1 million fund transactions.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PMF, subject to the supervision of the Fund's Board of Directors and
in conformity with the stated objective and policies of the Fund, manages both
the investment operations of the Fund and the composition of the Fund's
portfolio, including the purchase, retention, disposition and loan of
securities. In connection therewith, PMF is obligated to keep certain books and
records of the Fund. PMF also administers the
B-19
<PAGE>
Fund's corporate 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 Fund's custodian, and Prudential Mutual Fund Services, Inc. (PMFS or the
Transfer Agent), the Fund's transfer and dividend disbursing agent. The
management services of PMF for the Fund are not exclusive under the terms of the
Management Agreement and PMF is free to, and does, render management services to
others.
For its services, PMF receives from the Fund, pursuant to the Management
Agreement, a fee at an annual rate of .70% of the average daily net assets of
the Fund up to and including $250 million, .55% of the Fund's average daily net
assets in excess of $250 million up to and including $500 million, .50% of the
Fund's average daily net assets in excess of $500 million up to and including $1
billion and .45% of the Fund's average daily net assets in excess of $1 billion.
The fee is computed daily and payable monthly. The Management Agreement also
provides that, in the event the expenses of the Fund (including the fees of PMF,
but excluding interest, taxes, brokerage commissions, distribution fees and
litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Fund's business) for any fiscal year
exceed the lowest applicable annual expense limitation established and enforced
pursuant to the statutes or regulations of any jurisdiction in which the Fund's
shares are qualified for offer and sale, the compensation due to PMF will be
reduced by the amount of such excess. Reductions in excess of the total
compensation payable to PMF will be paid by PMF to the Fund. No such reductions
were required during the fiscal year ended September 30, 1995. Currently, the
Fund believes that the most restrictive expense limitation of state securities
commissions is 2 1/2% of the Fund's average daily net assets up to $30 million,
2% of the next $70 million of such assets and 1-1/2% of such assets in excess of
$100 million.
In connection with its management of the corporate affairs of the Fund, PMF
bears the following expenses: the salaries and expenses of all of its and the
Fund's personnel except the fees and expenses of Directors who are not
affiliated persons of PMF or the Subadviser; all expenses incurred by PMF or by
the Fund in connection with managing the ordinary course of the Fund's business,
other than those assumed by the Fund as described below; and the subadvisory fee
payable to the Subadviser pursuant to the Subadvisory Agreement among the Fund,
PMF and the Subadviser (the Subadvisory Agreement), dated February 4, 1991.
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 Directors who are not affiliated persons of the Manager or
the Fund's Subadviser, (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 stock certificates representing
shares of the Fund, (i) the cost of fidelity and liability insurance, (j)
certain organizational expenses of the Fund and the fees and expenses involved
in registering and maintaining registration of the Fund and of its shares with
the SEC, registering the Fund and qualifying its shares under state securities
laws, including the preparation and printing of the Fund's registration
statements and prospectuses for such purposes, (k) allocable communications
expenses with respect to investor services and all expenses of shareholders' and
Directors' meetings and of preparing, printing and mailing reports, proxy
statements and prospectuses to shareholders in the amount necessary for
distribution to the shareholders, (l) litigation and indemnification expenses
and other extraordinary expenses not incurred in the ordinary course of the
Fund's business and (m) distribution fees.
The Management Agreement provides that PMF will not be liable for any error
of judgment or for any loss suffered by the Fund in connection with the matters
to which the Management Agreement relates, except a loss resulting from willful
misfeasance, bad faith, gross negligence or reckless disregard of duty. The
Management Agreement provides that it will terminate automatically if assigned,
and that it may be terminated without penalty by either party upon not more than
60 days' nor less than 30 days' written notice. The Management Agreement will
continue in effect for a period of more than two years from the date of
execution only so long as such continuance is specifically approved at least
annually in conformity with the 1940 Act. The Management Agreement was last
approved by the Board of Directors of the Fund, including a majority of the
Directors who are not parties to the contract or "interested persons" of any
such party, on May 4, 1995, and by shareholders of the Fund, on December
20,1990.
The Subadviser
Wellington Management Company (Wellington Management), 75 State Street,
Boston, Massachusetts 02109, serves as the Fund's Subadviser. The Subadvisory
Agreement provides that Wellington Management shall furnish investment advisory
services in connection with the management of the Fund. In connection therewith,
Wellington Management is obligated to keep certain books and records of the
Fund. PMF continues to have responsibility for all investment advisory services
pursuant to the Management Agreement and supervises Wellington Management's
performance of such services. Under the Subadvisory Agreement, PMF, not the
Fund, pays Wellington Management a fee, computed daily and payable monthly, at
an annual rate of .50%
B-20
<PAGE>
of the Fund's average daily net assets for the portion of such assets up to and
including $250 million, .35% of the Fund's average daily net assets in excess of
$250 million up to and including $500 million, .30% of the Fund's average daily
net assets in excess of $500 million up to and including $1 billion and .25% of
the Fund's average daily net assets in excess of $1 billion.
The Subadvisory Agreement provides that Wellington Management 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 Subadvisory Agreement relates, except a
loss resulting from willful misfeasance, bad faith, gross negligence or reckless
disregard of duty. The Subadvisory Agreement provides that it will terminate
automatically if assigned, and that it may be terminated without penalty by any
party upon not more than 60 days' nor less than 30 days' written notice. The
Subadvisory 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 1940 Act. The
Subadvisory Agreement was last approved by the Board of Directors of the Fund,
including all of the Directors who are not parties to the contract or
"interested persons" of any such party as defined in the Investment Company Act
on May 4, 1995, and by shareholders of the Fund, on December 30, 1991.
For the fiscal years ended September 30, 1993, 1994 and 1995, the Fund paid
$1,464,779, $2,628,090 and $2,361,766, respectively, to PMF under the Management
Agreement and PMF paid subadvisory fees of $1,046,270, $1,808,784 and
$1,639,306, respectively, to Wellington Management under the Subadvisory
Agreement.
The Distributor
Prudential Mutual Fund Distributors, Inc. (PMFD), One Seaport Plaza, New
York, New York 10292, acts as the distributor of the Class A shares of the Fund.
Prudential Securities Incorporated (Prudential Securities or PSI), One Seaport
Plaza, New York, New York 10292, acts as the distributor of the Class B and
Class C shares of the Fund.
Pursuant to separate Plans of Distribution (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 1940 Act and separate distribution agreements (the
Distribution Agreements), PMFD and Prudential Securities (collectively, the
Distributor) incur the expenses of distributing the Fund's Class A shares, Class
B shares and Class C shares. See "How the Fund is Managed-Distributor" in the
Prospectus.
Prior to February 4, 1991, the Fund operated as a closed-end fund and
offered only one class of shares (the existing Class A shares). On October 15,
1990, the Board of Directors, including a majority of the Directors 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 the Plan (the Rule 12b-1 Directors), at a meeting called for the
purpose of voting on the Class A Plan, adopted a plan of distribution for the
Class A shares of the Fund. On November 13, 1990, the Board of Directors,
including the Rule 12b-1 Directors, at a meeting called for the purpose of
voting on the Class B Plan, adopted a plan of distribution for the Class B
shares of the Fund. On February 10, 1993, the Board of Directors, including a
majority of the Rule 12b-1 Directors, at a meeting called for the purpose of
voting on each Plan, approved modifications to the Fund's Class A and Class B
Plans and Distribution Agreements to conform them to recent amendments to the
National Association of Securities Dealers, Inc. (NASD) maximum sales charge
rule described below. As 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 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 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 5, 1993, the Board of Directors, including a majority of
the Rule 12b-1 Directors, at a meeting called for the purpose of voting on each
Plan, adopted a plan of distribution for the Class C shares of the Fund and
approved further amendments to the plans of distribution for the Fund's Class A
and Class B shares changing them from reimbursement type plans to compensation
type plans. The Plans were last approved by the Board of Directors, including a
majority of the Rule 12b-1 Directors, on May 4, 1995. 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 September 30, 1995, PMFD received
payments of $307,092, under the Class A Plan. This amount was primarily expended
for payment of account servicing fees to financial advisers and other persons
who sell Class A shares. For the fiscal year ended September 30, 1995, PMFD also
received approximately $73,400 in initial sales charges.
Class B Plan. For the fiscal year ended September 30, 1994, Prudential
Securities received $2,379,836 from the Fund under the Class B Plan and spent
approximately $944,700 in distributing the Fund's Class B shares. It is
estimated that of the latter amount, $40,900 (4.3%) was spent on printing and
mailing of prospectuses to other than current shareholders; $125,600 (13.3%) on
compensation to Pruco Securities Corporation (Prusec), an affiliated
broker-dealer, for commissions to its representatives and other expenses,
including an allocation on account of overhead and other branch office
distribution-related expenses, incurred by it for distribution of Fund shares;
and $778,200 (82.4%) on the aggregate of (i) payments of commissions and account
servicing fees to financial advisers ($393,900 or 41.7%) and (ii) an allocation
on account of overhead and other
B-21
<PAGE>
branch office distribution-related expenses ($384,300 or 40.7%). The term
"overhead and other branch office distribution-related expenses" represents (a)
the expenses of operating Prudential Securities' branch offices in connection
with the sale of Fund shares, including lease costs, the salaries and employee
benefits of operations and sales support personnel, utility costs,
communications costs and the costs of stationery and supplies, (b) the costs of
client sales seminars, (c) expenses of mutual fund sales coordinators to promote
the sale of Fund shares, and (d) other incidental expenses relating to branch
promotion of Fund shares.
Prudential Securities also receives the proceeds of contingent deferred
sales charges paid by investors upon certain redemptions of Class B shares. See
"Shareholder Guide-How to Sell Your Shares-Contingent Deferred Sales Charge" in
the Prospectus. The amount of distribution expenses reimbursable by Class B
shares of the Fund is reduced by the amount of such proceeds. For the fiscal
year ended September 30, 1995, Prudential Securities received contingent
deferred sales charges of approximately $984,000.
Class C Plan. For the fiscal year ended September 30, 1995, Prudential
Securities received $4,099 under the Class C Plan and spent approximately $4,500
in distributing the Fund's Class C shares. Prudential Securities receives the
proceeds of contingent deferred sales charges paid by investors upon certain
redemptions of Class C shares. See "Shareholder Guide-How to Sell Your
Shares-Contingent Deferred Sales Charges" in the Prospectus. For the fiscal year
ended September 30, 1995, Prudential Securities received approximately $800 in
contingent deferred sales charges upon certain redemptions of 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 Board of Directors, including a majority vote of the Rule 12b-1 Directors,
cast in person at a meeting called for the purpose of voting on such
continuance. The Plans may be terminated at any time, without penalty, by the
vote of a majority of the Rule 12b-1 Directors 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 the 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 amendment to the Class A Plan) and all material amendments are required
to be approved by the Board of Directors 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 Board of Directors 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 Directors shall be committed to the Rule 12b-1 Directors.
Pursuant to each Distribution Agreement, the Fund has agreed to indemnify
PMFD and Prudential Securities to the extent permitted by applicable law against
certain liabilities under the Securities Act. The Distribution Agreement for the
Class A shares was approved by the Board of Directors, including a majority of
the Rule 12b-1 Directors, on October 15, 1990. The Distribution Agreement for
the Class B shares was similarly approved on November 13, 1990. The Distribution
Agreement for the Class C shares was similarly approved on May 5, 1993 and was
amended on May 5, 1994. Each Distribution Agreement was last approved on May 4,
1995.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators in 51 jurisdictions and the NASD to resolve
allegations that PSI sold interests in more than 700 limited partnerships (and a
limited number of other types of securities) from January 1, 1980 through
December 31, 1990, in violation of securities laws to persons for whom such
securities were not suitable in light of the individuals' financial condition or
investment objectives. It was also alleged that the safety, potential returns
and liquidity of the investments had been misrepresented. The limited
partnerships principally involved real estate, oil and gas producing properties
and aircraft leasing ventures. The SEC Order (i) included findings that PSl's
conduct violated the federal securities laws and that an order issued by the SEC
in 1986 requiring PSI to adopt, implement and maintain certain supervisory
procedures had not been complied with; (ii) directed PSI to cease and desist
from violating the federal securities laws and imposed a $10 million civil
penalty; and (iii) required PSI to adopt certain remedial measures including the
establishment of a Compliance Committee of its Board of Directors. Pursuant to
the terms of the SEC settlement, PSI established a settlement fund in the amount
of $330,000,000 and procedures, overseen by a court approved Claims
Administrator, to resolve legitimate claims for compensatory damages by
purchasers of the partnership interests. PSI has agreed to provide additional
funds, if necessary, for that purpose. PSl's settlement with the state
securities regulators included an agreement to pay a penalty of $500,000 per
jurisdiction. PSI consented to a censure and to the payment of a $5,000,000 fine
in settling the NASD action. In settling the above referenced matters, PSI
neither admitted nor denied the allegations asserted against it.
On January 18, 1994, PSI agreed to the entry of a Final Consent Order and a
Parallel Consent Order by the Texas Secunties Commissioner. The firm also
entered into a related agreement with the Texas Securities Commissioner. The
allegations were that the firm had engaged in improper sales practices and other
improper conduct resulting in pecuniary losses and other harm to
B-22
<PAGE>
investors residing in Texas with respect to purchases and sales of limited
partnership interests during the period of January 1, 1980 through December 31,
1990. Without admitting or denying the allegations, PSI consented to a
reprimand, agreed to cease and desist from future violations, and to provide
voluntary donations to the State of Texas in the aggregate amount of $1,500,000.
The firm agreed to suspend the creation of new customer accounts, the general
solicitation of new accounts, and the offer for sale of securities in or from
PSI's North Dallas office to new customers during a period of twenty consecutive
business days, and agreed that its other Texas offices would be subject to the
same restrictions for a period of five consecutive business days. PSI also
agreed to institute training programs for its securities salesmen in Texas.
On October 27, 1994, Prudential Securities Group, Inc. and PSI entered into
agreements with the United States Attorney deferring prosecution (provided PSI
complies with the terms of the agreement for three years) for any alleged
criminal activity related to the sale of certain limited partnership programs
from 1983 to 1990. In connection with these agreements, PSI agreed to add the
sum of $330,000,000 to the fund established by the SEC and executed a
stipulation providing for a reversion of such funds to the United States Postal
Inspection Service. PSI further agreed to obtain a mutually acceptable outside
director to sit on the Board of Directors of PSG and the Compliance Committee of
PSI. The new director will also serve as an independent "ombudsman" whom PSI
employees can call anonymously with complaints about ethics and compliance.
Prudential Securities shall report any allegations or instances of criminal
conduct and material improprieties to the new director. The new director will
submit compliance reports which shall identify all such allegations or instances
of criminal conduct and material improprieties every three months for a
three-year period.
NASD Maximum Sales Charge Rule. Pursuant to rules of the NASD, the
Distributor is required to limit aggregate initial sales charges, deferred sales
charges and asset-based sales charges to 6.25% of total gross sales of each
class of shares. Interest charges on unreimbursed distribution expenses equal to
the prime rate plus one percent per annum may be added to the 6.25% limitation.
Sales from the reinvestment of dividends and distributions are not included in
the calculation of the 6.25% limitation. The annual asset-based sales charge on
shares of the Fund may not exceed .75% of 1% per class. The 6.25% limitation
applies to 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
Subject to policies established by the Board of Directors of the Fund and
the oversight and review of the Manager, the Subadviser will arrange for the
execution of the Fund's portfolio transactions and the allocation of brokerage.
In executing portfolio transactions, the Subadviser seeks to obtain the best net
results for the Fund, taking into account such factors as price (including the
applicable brokerage commission or dealer spread), size of order, difficulty of
execution and operational facilities of the firm involved. The Fund may invest
in securities traded in the OTC markets and deal directly with the dealers who
make markets in the securities involved, unless a better price or execution
could be obtained by using a broker. While the Subadviser generally will seek
reasonably competitive commission rates, payment of the lowest commission or
spread is not necessarily consistent with best net results in particular
transactions. The Fund will not deal with Prudential Securities (or any
affiliate) in any transaction in which Prudential Securities acts as principal.
Purchases and sales of securities on a securities exchange are effected through
brokers who charge a negotiated commission for their services. On a foreign
securities exchange, commissions may be fixed. Orders may be directed to any
broker including, to the extent and in the manner permitted by applicable law,
Prudential Securities.
In placing orders with brokers and dealers, the Subadviser will attempt to
obtain the best net price and the most favorable execution for orders; however,
the Subadviser may, in its discretion, purchase and sell portfolio securities
through brokers and dealers who provide the Subadviser or the Fund with
research, analysis, advice and similar services. The Subadviser may, in return
for research and analysis, pay brokers a higher commission than may be charged
by other brokers, provided that the Subadviser determines in good faith that
such commission is reasonable in terms either of that particular transaction or
of the overall responsibility of the Subadviser to the Fund and its other
clients, and that the total commission paid by the Fund will be reasonable in
relation to the benefits to the Fund over the long term. Information and
research received from such brokers and dealers will be in addition to, and not
in lieu of, the services required to be performed by the Manager under its
Management Agreement with the Fund and by the Subadviser under the Subadvisory
Agreement. Commission rates are established pursuant to negotiations with the
broker based on the quality and quantity of execution services provided by the
broker in the light of generally prevailing rates. The Subadviser's policy is to
pay higher commissions to brokers or futures commission merchants other than
Prudential Securities (or any affiliate) for particular transactions than might
be charged if a different broker had been selected, on occasions when, in the
Subadviser's opinion, this policy furthers the objective of obtaining best price
and execution. The allocation of orders among brokers and the commission rates
paid are reviewed periodically by the Fund's Board of Directors. 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.
B-23
<PAGE>
Purchases and sales of securities, futures or options on futures on an
exchange (including a board of trade), and options on securities may be effected
through securities brokers or futures commission merchants that charge a
commission for their services. The Fund has no obligation to deal with any
broker or group of brokers in the execution of transactions. The Fund
contemplates that, consistent with the policy of obtaining the best net results,
the Fund may use Prudential Securities and its affiliates for brokerage
transactions. In order for Prudential Securities or its affiliates to effect any
such transaction for the Fund, the commissions, fees or other remuneration
received by Prudential Securities or its affiliates must be reasonable and fair
compared to the commissions, fees or other remuneration paid to other brokers in
connection with comparable transactions involving similar securities, futures or
options on futures being purchased or sold on an exchange during a comparable
period of time. The Fund's Board of Directors has adopted procedures designed to
ensure that all brokerage commissions, fees or other remuneration paid to such
firm or its affiliates are reasonable and fair.
Investment decisions for the Fund and for other investment accounts managed
by the Subadviser are made independently of each other in the light of differing
considerations for the various accounts. However, the same investment decision
may occasionally be made for two or more such accounts. In such cases,
simultaneous transactions are inevitable. Purchases or sales are then averaged
as to price and allocated to accounts according to a formula deemed equitable to
each account. While in some cases this practice could have a detrimental effect
upon the price or value of the security as far as the Fund is concerned, in
other cases it is believed to be beneficial to the Fund.
The Fund's brokerage transactions involving securities of companies
headquartered in countries other than the United States will be conducted
primarily on the markets and principal exchanges of such countries. Foreign
markets are generally not as developed as those located in the United States,
which may result in higher transaction costs, delayed settlement and less
liquidity for trades effected in foreign markets. Transactions on foreign
exchanges are usually subject to fixed commissions that generally are higher
than negotiated commissions on U.S. transactions. There is generally less
government supervision and regulation of exchanges and brokers in foreign
countries than in the United States.
In accordance with Section 11(a) under the Securities Exchange Act of 1934,
Prudential Securities may not retain compensation for effecting transactions on
a national securities exchange for the Fund unless the Fund has expressly
authorized the retention of such compensation. Prudential Securities must
furnish to the Fund at least annually a statement setting forth the total amount
of all compensation retained by Prudential Securities from transactions effected
for the Fund during the applicable period. Brokerage transactions with
Prudential Securities (or any affiliate) are also subject to such fiduciary
standards as may be imposed upon Prudential Securities (or any affiliate) by
applicable law.
The table presented below shows certain information regarding the payment of
commissions by the Fund, including the amount of such commissions paid to
Prudential Securities for the three-year period ended September 30, 1995.
<TABLE>
<CAPTION>
Fiscal year ended September 30,
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Total brokerage commissions paid by the Fund .......................... $258,076 $284,986 $201,807
Total brokerage commissions paid to Prudential Securities ............. $ 3,000 $ 2,400 $ 1,500
Percentage of total brokerage commissions paid to Prudential Securities 1.2% 0.8% 0.7%
</TABLE>
The Fund effected approximately 1.3% of the total dollar amounts of its
transactions involving the payment of commissions through Prudential Securities
during the fiscal year ended September 30, 1995.
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share plus a sales charge which, at the election of the
investor, may be imposed either (i) at the time of purchase (Class A shares), or
(ii) on a deferred basis (Class B or Class C shares). See "Shareholders
Guide-How to Buy Shares of the Fund" in the Prospectus.
Each class of shares represents an interest in the same portfolio of
investments of the Fund and has the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except
that the Fund has agreed with the SEC in connection with the offering of a
conversion feature on Class B shares to submit any amendment of the Class A
distribution and service plan to both Class A and Class B shareholders) and
(iii) only Class B shares have a conversion feature. See "Distributor." Each
class also has separate exchange privileges. See "Shareholder Investment
Account-Exchange Privilege."
Specimen Price Make-up
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares are sold at a maximum sales charge of 5% and Class
B* and Class C* shares are sold at net asset value.
B-24
<PAGE>
Using the Fund's net asset value at September 30, 1995, the maximum offering
price of the Fund's shares was as follows:
<TABLE>
Class A
<S> <C>
Net asset value and redemption price per share ............................... $14.72
------
Maximum Sales Charge (5% of offering price) .................................. .77
------
Offering price to public ..................................................... $15.49
======
</TABLE>
<TABLE>
Class B
<S> <C>
Net asset value, offering price, and redemption price per Class B share* ..... $14.71
======
Class C
Net asset value, offering price, and redemption price per Class C share* ..... $14.71
======
<FN>
*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.
</FN>
</TABLE>
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 corporation will be
deemed to control the corporation, 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 individualor 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 charges. All shares must be held either directly
through the Transfer Agent or through Prudential Securities. The value of
existing holdings for purposes of determining the reduced sales charge is
calculated using the maximum offering price (net asset value plus maximum sales
charge) as of the previous business day. See "How the Fund Values Its Shares" in
the Prospectus. The Distributor must be notified at the time of purchase that
the investor is entitled to a reduced sales charge. The reduced sales charges
will be granted subject to confirmation of the investor's holdings. Rights of
accumulation are not available to individual participants in any retirement or
group plans.
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
B-25
<PAGE>
shares of the Fund and shares of other Prudential Mutual Funds. All shares of
the Fund and shares of other Prudential Mutual Funds (excluding money market
funds other than those acquired pursuant to the exchange privilege) which were
previously purchased and are still owned are also included in determining the
applicable reduction. However, the value of shares held directly with the
Transfer Agent and through Prudential Securities will not be aggregated to
determine the reduced sales charges. All shares must be held either directly
through the Transfer Agent or through Prudential Securities. The Distributor
must be notified at the time of purchase that the investor is entitled to a
reduced sales charge. The reduced sales charges will be granted subject to
confirmation of the investor's holdings. Letters of Intent are not available to
individual participants in any retirement or group plans.
A Letter of Intent permits a purchaser to establish a total investment goal
to be achieved by any number of investments over a thirteen-month period. Each
investment made during the period will receive the reduced sales charge
applicable to the amount represented by the goal, as if it were a single
investment. Escrowed Class A shares totaling 5% of the dollar amount of the
Letter of Intent will be held by the Transfer Agent in escrow in the name of the
purchaser, except in the case of retirement and group plans where the employer
or plan sponsor will be responsible for paying any applicable sales charge. The
effective date of a Letter of Intent may be back-dated up to 90 days, in order
that any investments made during this 90-day period, valued at the purchaser's
cost, can be applied to the fulfillment of the Letter of Intent goal, except in
the case of retirement and group plans.
The Letter of Intent does not obligate the investor to purchase, nor the
Fund to sell, the indicated amount. In the event the Letter of Intent goal is
not achieved within the thirteen-month period, the purchaser (or the employer or
plan sponsor in the case of any retirement or group plan) is required to pay the
difference between the sales charge otherwise applicable to the purchases made
during this period and sales charges actually paid. Such payment may be made
directly to the Distributor or, if not paid, the Distributor will liquidate
sufficient escrowed shares to obtain such difference. Investors electing to
purchase Class A shares of the Fund pursuant to a Letter of Intent should
carefully read such Letter of Intent.
Waiver of the Contingent Deferred Sales Charge-Class B Shares
The Contingent Deferred Sales Charge is waived under circumstances described
in the Prospectus. See "Shareholder Guide-How to Sell Your Shares-Waiver of
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.
<TABLE>
<S> <C>
Category of Waiver Required Documentation
Death A copy of the shareholder's death certificate
or, in the case of a trust, a copy of the
grantor's death certificate, plus a copy of
the trust agreement identifying the grantor.
Disability-An individual will be A copy of the Social Security Administration
considered disabled if he or she is award letter or a letter from a physician on
unable to engage in any substantial the physician's letterhead stating that the
gainful activity by reason of any shareholder (or, in the case of a trust, the
medically determinable physical or grantor) is permanently disabled. The letter
mental impairment which can be expected must also indicate the date of disability.
to result in death or to be of
long-continued and indefinite duration.
Distribution from an IRA or 403(b) A copy of the distribution form from the
Custodial Account custodial firm indicating (i) the date of
birth of the shareholder and (ii) that the
shareholder is over age 59-1/2 and is taking
a normal distribution-signed by the
shareholder.
Distribution from Retirement Plan A letter signed by the plan
administrator/trustee indicating the reason
for the distribution.
Excess Contributions A letter from the shareholder (for an IRA) or
the plan administrator/trustee on company
letterhead indicating the amount of the
excess and whether or not taxes have been
paid.
</TABLE>
The Transfer Agent reserves the right to request such additional documents
as it may deem appropriate.
Quantity Discount-Class B Shares Purchased prior to August 1, 1994
The CDSC is reduced on redemptions of Class B shares of the Fund purchased
prior to August 1, 1994 if immediately after a purchase of such shares, the
aggregate cost of all Class B shares of the Fund owned by you in a single
account exceeded $500,000. For example, if you purchased $100,000 of Class B
shares of the Fund and the following year purchase an additional $450,000 of
Class B shares with the result that the aggregate cost of your Class B shares of
the Fund following the second purchase was $550,000, the quantity discount would
be available for the second purchase of $450,000 but not for the first purchase
of $100,000. The quantity discount will be imposed at the following rates
depending on whether the aggregate value exceeded $500,000 or $1 million:
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<PAGE>
Contingent Deferred Sales Charge
Year Since Purchase as a Percentage of Dollars Invested
Payment Made or Redemption Proceeds
------------------- -----------------------------------
$500,001 to $1 million Over $1 million
---------------------- ---------------
First 3.0% 2.0%
Second 2.0% 1.0%
Third 1.0% 0%
Fourth and thereafter 0% 0%
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to the reduced CDSC. The reduced CDSC will be granted subject to
confirmation of your holdings.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which the shares are held for the
investor by the Transfer Agent. If a stock 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 at the net asset value on
the record date. An investor may direct the Transfer Agent in writing not less
than 5 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 distribution at net asset value by returning the
check or the proceeds to the Transfer Agent within 30 days after the payment
date. Such investment will be made at the net asset value per share next
determined after receipt of the check or proceeds by the Transfer Agent.
Exchange Privilege. The Fund makes available to its shareholders the
privilege of exchanging their shares of the Fund for shares of certain other
Prudential Mutual Funds, including one or more specified money market funds,
subject in each case to the minimum investment requirements of such funds.
Shares of such other Prudential Mutual Funds may also be exchanged for shares of
the Fund. All exchanges are made on the basis of relative net asset value next
determined after receipt of an order in proper form. An exchange will be treated
as a redemption and purchase for tax purposes. Shares may be exchanged for
shares of another fund only if shares of such fund may legally be sold under
applicable state laws. For retirement and group plans having a limited menu of
Prudential Mutual Funds, the Exchange Privilege is available for those funds
eligible for investment in the particular program.
It is contemplated that the exchange privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
Class A. Shareholders of the Fund will be able to exchange their Class A
shares for Class A shares of certain Prudential Mutual Funds, shares of
Prudential Government Securities Trust (Short-Intermediate Term Series) and
shares of the money market funds specified below. No fee or sales load will be
imposed upon the exchange. Shareholders of money market funds who acquired such
shares upon exchange of Class A shares of the Fund or Class A or Class C shares
of certain other Prudential Mutual Funds 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
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 shares of certain other Prudential Mutual Funds and shares of
Prudential Special Money Market Fund, a money market fund. No CDSC will be
payable
B-27
<PAGE>
upon such exchange, but a CDSC may be payable upon the redemption of Class B and
Class C shares acquired as a result of the exchange. The applicable sales charge
will be that imposed by the Fund in which shares were initially purchased and
the purchase date will be deemed to be the first day of the month after the
initial purchase, rather than the date of the exchange.
Class B and Class C shares of the Fund may also be exchanged for shares of
Prudential Special Money Market Fund without imposition of any CDSC at the time
of exchange. Upon subsequent redemption from such money market fund or after
re-exchange into the Fund, such shares will be subject to the CDSC calculated by
excluding 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.
Additional details about the Exchange Privilege and prospectuses for each of
the Prudential Mutual Funds are available from the Fund's Transfer Agent,
Prudential Securities or Prusec. The Exchange Privilege may be modified,
terminated or suspended on 60 days' notice, and any fund, including the Fund, or
the Distributor, has the right to reject any exchange application relating to
such fund's shares.
Dollar Cost Averaging
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more shares
when the price is low and fewer shares when the price is high. The average cost
per share is lower than it would be if a constant number of shares were bought
at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $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 of 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
Period of
Monthly investments: $100,000 $150,000 $200,000 $250,000
-------------------- -------- -------- -------- --------
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
See "Automatic Savings Accumulation Plan"
- ----------
1Some 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.
2The 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.
B-28
<PAGE>
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 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. Stock certificates
are not issued to ASAP participants.
Further information about these programs and an application form can be
obtained from the Fund's Transfer Agent, Prudential Securities or Prusec.
Systematic Withdrawal Plan
A systematic withdrawal plan is available to shareholders through Prudential
Securities or the Transfer Agent. The 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
automaticially reinvested in additional full and fractional shares at net asset
value on shares held under this plan. See "Shareholder Investment
Account-Automatic Reinvestment of Dividends and/or Distributions" above.
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 plan may be terminated at any
time, and the Distributor reserves the right to initiate a fee of up to $5 per
withdrawal, upon 30 days' written notice to the shareholder.
Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must generally be recognized for federal income tax
purposes. In addition, withdrawals made concurrently with purchases of
additional shares are inadvisable because of the applicable sales charges 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 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-sheltered accounts" under
Section 403(b)(7) of the 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 comparsion 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.
B-29
<PAGE>
Tax-Deferred Compounding1
Contributions Personal
Made Over: Savings IRA
---------- -------- --------
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
- ----------
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 promoted 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 a part
of the program. Since the allocation of portfolios included in the program may
not be appropriate for all investors, investors 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.
NET ASSET VALUE
Under the 1940 Act, the Board of Directors of the Fund is responsible for
determining in good faith the fair value of securities and other assets of the
Fund. In accordance with procedures adopted by the Board of Directors, the value
of the Fund's portfolio will be determined as described below.
Net asset value per share will be determined daily as of 4:15 p.m. on each
day the New York Stock Exchange (NYSE) is open for trading by dividing the value
of the net assets of the Fund by the total number of common shares outstanding.
Net asset value is calculated separately for each class. For purposes of
determining the net asset value per share, the value of the Fund's net assets
shall be deemed to equal the value of the Fund's assets less the Fund's
liabilities (including the outstanding principal amount of borrowings, if any,
and the unpaid interest on borrowings, if any). The Fund will compute its net
asset value on each day the NYSE 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 net
asset value. In the event the NYSE closes early on any business day, the net
asset value of the Fund's shares shall be determined at a time between such
closing and 4:15 P.M., New York time.
In valuing the Fund's assets, any security for which the primary market is
an exchange is valued at the last sale price on such exchange on the day of
valuation or, if there was no sale on such day, the last bid price quoted on
such day. The value of each U.S. Government security and corporate debt security
for which quotations are available will be based on the valuation provided by an
independent pricing service. Pricing services consider such factors as security
prices, yields, maturities, call features, ratings and developments relating to
specific securities in arriving at securities valuations. Other portfolio
securities that are actively traded in the OTC market, including listed
securities for which the primary market is believed to be OTC, will be valued at
the average of the quoted bid and asked prices provided by an independent
pricing service or by principal market makers. Exchange-traded options are
valued at their last sale price as of the close of options trading on the
applicable exchange. If there is no sale on the applicable options exchange on a
given day, options are valued at the average of the quoted bid and asked prices
as of the close of the applicable exchange. The Fund may engage pricing services
to obtain such prices. Futures contracts are marked to market daily, and options
thereon are valued at their last sale price, as of the close of the applicable
commodities exchanges. Forward currency contracts will be valued at the current
cost of covering or offsetting the contract. Securities and assets for which
market quotations are not readily available (including OTC options) are valued
at fair value as determined in good faith by or under the direction of the Board
of Directors of the Fund, which determination shall be based in part on the
valuation of other securities for which market quotations are available that are
considered to be comparable in quality, interest rate and maturity.
Quotations of foreign securities in a foreign currency will be converted to
U.S. dollar equivalents at the closing rates of exchange. Foreign currency
exchange rates are generally determined prior to the close of the NYSE.
Occasionally, events affecting
B-30
<PAGE>
the value of foreign securities and such exchange rates occur between the time
at which they are determined and the close of the NYSE, which events will not be
reflected in a computation of the Fund's net asset value. If events materially
affecting the value of such securities or currency exchange rates were to occur
during such time period, the securities would be valued at their fair value as
determined in good faith by or under the direction of the Board of Directors.
Short-term investments that mature in less than 60 days are valued at
amortized cost if their term to maturity from date of purchase was less than 60
days or by amortizing their value on the 61st day prior to maturity if their
term to maturity from date of acquisition by the Fund was more than 60 days,
unless this is determined by the Board of Directors not to represent fair value.
Repurchase agreements will be valued at cost plus accrued interest.
The net asset value of Class B and Class C shares will generally be lower
than the net asset value of Class A shares as a result of the larger
distribution-related fee to which Class B and Class C shares are subject. It is
expected, however, that the net asset value per share of each class will tend to
converge immediately after the recording of dividends which will differ by
approximately the amount of the distribution expense accrual differential among
the classes.
TAXES
General. The Fund is qualified and intends to remain qualified as a
regulated investment company (RIC) under the Internal Revenue Code. As a RIC,
the Fund will not be subject to federal income tax on that part of its
investment company taxable income (consisting generally of interest and dividend
income, net short-term capital gain and net realized gains from certain foreign
currency transactions) and net capital gain (the excess of net long-term capital
gain over net short-term capital loss) that it distributes to its shareholders
if at least 90% of its investment company taxable income for the taxable year
(determined without regard to the deduction for dividends paid) is distributed
(Distribution Requirement). To qualify for treatment as a RIC, the Fund must,
among other things, (1) derive at least 90% of its gross income each taxable
year from dividends, interest, payments with respect to securities loans and
gains from the sale or other disposition of securities or foreign currencies, or
other income (including gains from options, futures or forward contracts)
derived from its business of investing in securities or such currencies (Income
Requirement); (2) derive less than 30% of its gross income each taxable year
from the sale or other disposition of any of the following that were held for
less than three months - securities, options, futures or forward contracts
(other than those on foreign currencies), or foreign currencies (or options,
futures or forward contracts thereon) that are not directly related to the
Fund's principal business of investing in securities (or options and futures
with respect to securities) (30% Limitation); and (3) diversify its holdings so
that, at the end of each quarter of its taxable year, (A) at least 50% of the
value of its total assets is represented by cash and cash items, U.S. Government
securities, securities of other RICs and other securities, with such other
securities limited, in respect of any one issuer, to an amount not greater than
5% of the Fund's total assets and to not more than 10% of the outstanding voting
securities of such issuer, and (B) not more than 25% of the value of its total
assets is invested in the securities (other than U.S. Government securities or
the securities of other RICs) of any one issuer.
Distribution Requirements. The Fund will be subject to a nondeductible 4%
excise tax to the extent it fails to distribute during each calendar year
substantially all of its ordinary income for that year (except for certain
foreign currency gains or losses from transactions after October 31 of that
year, which are treated for these purposes as arising in the following year) and
capital gain net income for the twelve-month period ending on October 31 of that
year, plus certain other amounts. The Fund intends to make distributions in
accordance with this requirement. In general, for these purposes dividends and
other distributions will be treated as paid when actually distributed, except
that distributions declared in October, November or December of any year,
payable to shareholders of record on a specified date in such a month and paid
in January of the following year will be treated as having been paid by the Fund
(and received by the shareholders) on December 31 of the year in which they were
declared.
Original Issue Discount. The Fund may purchase debt securities issued with
original issue discount. Original issue discount that accrues in a taxable year
will be treated as income earned by the Fund and therefore will be subject to
the distribution requirements described above. Because the original issue
discount earned by the Fund in a taxable year may not be represented by cash
income, the Fund may have to dispose of other securities and use the proceeds
thereof to make distributions in amounts necessary to satisfy the Distribution
Requirement. The Fund may realize capital gains or losses from such
dispositions, which would increase or decrease the Fund's investment company
taxable income and/or net capital gain. In addition, any such gains may be
realized on the disposition of securities held for less than three months.
Because of the 30% Limitation, any such gains would reduce the Fund's ability to
sell other securities (and certain options, futures, foreign currencies and
forward contracts) held for less than three months that it might wish to sell in
the ordinary course of its portfolio management.
Passive Foreign Investment Companies. A "passive foreign investment company"
(PFIC) is a foreign corporation that, in general, meets either of the following
tests: (a) at least 75% of its gross income is passive or (b) an average of at
least 50% of its assets produce, or are held for the production of, passive
income. If the Fund acquires and holds stock in a PFIC beyond the end of the
year of its acquisition, the Fund will be subject to federal income tax on a
portion of any "excess distribution" received on the stock or of any gain from
disposition of the stock (collectively, PFIC income), plus interest thereon,
even if the Fund distributes the
B-31
<PAGE>
PFIC income as a taxable dividend to its shareholders. The balance of the PFIC
income will be included in the Fund's investment company taxable income and,
accordingly, will not be taxable to it to the extent that income is distributed
to its shareholders. If the Fund elects to treat any PFIC in which it invests as
a "qualified electing fund," then in lieu of the foregoing tax and interest
obligation, the Fund will be required to include in income each year its pro
rata share of the qualified electing fund's annual ordinary earnings and net
capital gain, even if they are not distributed to the Fund; those amounts would
be subject to the distribution requirements described above. It may be very
difficult, if not impossible, to make this election because of certain
requirements thereof.
Hedging Transactions. The use of hedging strategies, such as writing and
purchasing options and futures contracts and entering into forward contracts,
involves complex rules that will determine for income tax purposes the character
and timing of recognition of certain gains and losses the Fund realizes in
connection therewith. Income from foreign currencies (except certain gains
therefrom that may be excluded by future regulations), and income from
transactions in options, futures and forward contracts derived by the Fund with
respect to its business of investing in securities or foreign currencies, will
qualify as permissible income under the Income Requirement. However, income from
the disposition of options and futures contracts (other than those on foreign
currencies) will be subject to the 30% Limitation if they are held for less than
three months. Income from the disposition of foreign currencies, and options,
futures and forward contracts on foreign currencies, that are not directly
related to the Fund's principal business of investing in securities (or options
and futures with respect to securities) also will be subject to the 30%
Limitation if they are held for less than three months.
The 30% Limitation and the asset diversification requirements described
above may limit the extent to which the Fund will be able to engage in
transactions in options, futures and forward contracts. If the Fund satisfies
certain requirements, then for purposes of determining whether the Fund
satisfies the 30% Limitation, any increase in value of a position that is part
of a "designated hedge" will be offset by any decrease in value (whether
realized or not) of the offsetting hedging position during the period of the
hedge; thus, only the net gain, if any, from the designated hedge will be
included in gross income for purposes of that limitation.
Distributions. A portion of the dividends from the Fund's investment company
taxable income may qualify for the deduction for dividends received allowable to
corporations. The eligible portion may not exceed the aggregate dividends
received by the Fund from U.S. corporations. However, dividends received by a
corporate shareholder and deducted by it pursuant to the dividends-received
deduction are subject indirectly to the alternative minimum tax. Distributions
of net capital gain, if any, will not be eligible for the dividends-received
deduction.
If the net asset value of Fund shares is reduced below a shareholder's cost
as a result of a distribution by the Fund, the distribution nevertheless will be
taxable. Investors should be careful to consider the tax implications of buying
Fund shares just prior to a distribution. Those purchasing shares at that time
will receive a distribution that nevertheless will be taxable to them.
A redemption of Fund shares may result in taxable gain or loss to the
redeeming shareholder, depending on whether the redemption proceeds are more or
less than the shareholder's adjusted basis for the redeemed shares (which
normally includes any sales charge paid). An exchange of Fund shares for shares
of any other Prudential Mutual Fund generally will have similar tax
consequences. See "Shareholder Investment Account-Exchange Privilege" above.
Special rules apply, however, when a shareholder (1) disposes of Fund shares
through a redemption or exchange within 90 days after purchase thereof and (2)
subsequently acquires shares of the Fund or any other Prudential Mutual Fund on
which a sales charge normally is imposed (load fund) without paying any sales
charge because of the exchange privilege or the repurchase privilege (see
"Shareholder Guide" in the Prospectus). In these cases, any gain on the
disposition of the original fund shares will be increased, or loss thereon
decreased, by the amount of the sales charge paid when those shares were
acquired; and that amount will increase the adjusted basis of the load fund
shares subsequently acquired. In addition, if Fund shares are purchased within
30 days before or after redeeming Fund shares (whether pursuant to the
repurchase privilege or otherwise), all or a portion of any loss on the
redemption will not be deductible and instead will increase the basis of the
newly purchased shares.
Foreign Currency Gains and Losses. Gains or losses attributable to
fluctuations in exchange rates that 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 loss.
Similarly, gains or losses on disposition 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 income or loss. This income or loss,
referred to as "section 988" gain or loss, increases or decreases the amount of
the Fund's investment company taxable income available to be distributed to its
shareholders rather than increasing or decreasing the amount of its net capital
gain. If section 988 losses exceed other investment company taxable income and
net capital gain during a taxable year, the Fund would not be able to make any
taxable distributions for that year, or distributions made during that year
before the losses were realized would be recharacterized as a return of capital
to shareholders, rather than as taxable distributions, reducing each
shareholder's basis in his or her shares.
B-32
<PAGE>
Foreign Taxes. Dividends and interest received, and gains in respect of
foreign securities realized, by the Fund may be subject to income, withholding
or other taxes imposed by foreign countries and U.S. possessions that would
reduce the yield on the Fund's securities. Tax conventions between certain
countries and the United States may reduce or eliminate these foreign taxes,
however, and many foreign countries do not impose taxes on capital gains in
respect of investments by foreign investors. If more than 50% of the value of
the Fund's total assets at the close of its taxable year consists of securities
of foreign corporations, it will be eligible to, and may, file an election with
the Internal Revenue Service that would enable Fund shareholders, in effect, to
receive the benefit of the foreign tax credit with respect to certain foreign
and U.S. possessions income taxes that may be paid by the Fund. Pursuant to the
election, the Fund would treat those taxes as dividends paid to its shareholders
and each shareholder would be required to (1) include in gross income, and treat
as paid by him, his proportionate share of those taxes, (2) treat his share of
those taxes and of any dividend paid by the Fund that represents income from
foreign or U.S. possessions sources as his own income from those sources and (3)
either deduct the taxes deemed paid by him in computing his taxable income or,
alternatively, use the foregoing information in calculating the foreign tax
credit against his federal income tax. If the Fund makes this election, it will
report to its shareholders shortly after each taxable year their respective
shares of the Fund's income from sources within, and taxes paid to, foreign
countries and U.S. possessions. The Fund was not eligible to make such an
election with respect to its fiscal year ended September 30, 1995, because the
percentage of its assets invested in securities of U.S. issuers exceeded 50% at
the end of that period.
Other Taxation
The foregoing is only a summary of some, but not all, of the important
federal tax considerations generally affecting the Fund and its shareholders. In
addition to the federal tax considerations described above, there may be other
federal, state, local or foreign tax considerations applicable to particular
investors. Prospective investors are therefore advised to consult their own
taxadvisers with respect to the tax consequences to them of an investment in the
Fund.
PERFORMANCE INFORMATION
Average Annual Total Return. The Fund may from time to time advertise its
average annual total return. Average annual total return is determined
separately for Class A, Class B and Class C shares. See "How the Fund Calculates
Performance" in the Prospectus.
Average annual total return is computed according to the following formula:
P (1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
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
$1,000 investment 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 return for Class A shares for the one-year,
five-year and since inception periods ended September 30, 1995 was 8.52%, 13.59%
and 11.28%, respectively. The average annual total return for the Class B shares
for the one-year and since inception periods ended September 30, 1995 was 8.32%
and 11.16%, respectively. The average annual total return for Class C shares for
the one year and since inception periods ended September 30, 1995 was 12.32% and
10.10%, respectively.
Aggregate Total Return. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A and Class B
shares. See "How the Fund Calculates Peformance" in the Prospectus.
Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed by 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 investment made at the beginning of the 1, 5 or 10 year
periods.
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.
The aggregate total return for Class A shares for the one-year, five-year
and since inception periods ended on September 30, 1995 was 14.23%, 99.08% and
94.36%, respectively. The aggregate total return for the Class B shares for the
one-year and since
B-33
<PAGE>
inception periods ended September 30, 1995 was 13.32% and 62.59%, respectively.
The aggregate total return for Class C shares for the one year and since
inception periods ended September 30, 1995 was 13.32% and 11.82%, 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 and Class C
shares. This 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) 6 - 1 ]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
Yield fluctuates and an annualized yield quotation is not a representation
by the Fund as to what an investment in the Fund will actually yield for any
given period.
The Fund's 30-day yields for the period ended September 30, 1995, were
2.98%, 2.40% and 2.41% for Class A shares, Class B shares and Class C shares,
respectively.
From time to time, the performance of the Fund may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long term and the rate of inflation.(1)
(CHART)
----------
(1)Source: Ibbotson Associates Stocks, Bonds, Bills and Inflation-1995
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.
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.
Prudential Mutual Fund Services, Inc. ("PMFS"), Raritan Plaza One, Edison,
New Jersey 08837, serves as the transfer and dividend disbursing agent of the
Fund. It is a wholly-owned subsidiary of the Manager. PMFS provides customary
transfer agency
B-34
<PAGE>
services to the Fund, including the handling of shareholder communications, the
processing of shareholder transactions, the maintenance of shareholder account
records, payment of dividends and distributions, and related functions. For
these services, PMFS receives an annual fee per shareholder account of $10, a
new account set-up fee of $2.00 for each manually-established account and a
monthly inactive zero balance account fee of $.20 per account. PMFS is also
reimbursed for its out-of-pocket expenses, including but not limited to postage,
stationery, printing, allocable communications expenses and other costs. For the
fiscal year ended September 30, 1995, the Fund incurred fees of approximately
$543,700 for the services of PMFS.
Deloitte & Touche LLP, Two World Financial Center, New York, New York 10281
serves as the Fund's independent accountants and in that capacity audits the
Fund's annual financial statements.
Kirkpatrick & Lockhart LLP, 1800 M Street, N.W., Washington, D.C. 20036,
serves as counsel to the Fund (except with respect to the opinions of counsel
referred to in "Taxes, Dividends and Distributions" in the Prospectus).
B-35
<PAGE>
GLOBAL UTILITY FUND, INC.
Portfolio of Investments as of September 30, 1995
- ------------------------------------------------------------
<TABLE>
<CAPTION>
US$ Value
Shares Description (Note 1)
<C> <S> <C>
------------------------------------------------------------
LONG-TERM INVESTMENTS--99.3%
COMMON STOCKS--74.2%
------------------------------------------------------------
Electric Utilities--25.3%
528,000 China Light & Power Co., Ltd.
(Hong Kong) $ 2,731,682
200,000 CMS Energy Corp. 5,250,000
100,000 Detroit Edison Co. 3,225,000
200,000 DPL, Inc. 4,625,000
187,500 DQE, Inc. 4,968,750
100,000 Empresa Nacional de Electricidad
S.A. (ADR) (Spain) 5,150,000
200,000 Espoon Sahko Oy (ADS) (Finland)* 2,584,000
150,000 Huaneng Power International, Inc.
(ADR) (China)* 2,587,500
600,000 Iberdrola S.A. (Spain) 4,545,976
75,000 Korea Electric Power Corporation
(ADR) (Korea) 1,903,125
150,000 London Electricity PLC
(United Kingdom) 2,050,476
225,000 Pacific Gas & Electric Co. 6,721,875
100,000 Pinnacle West Capital Corp. 2,625,000
140,000 Public Service Co. of Colorado 4,795,000
21,000 RWE, A.G. (Germany) 7,211,599
1,300,000 Scottish Power PLC (United Kingdom) 7,231,581
280,000 Shandong Huaneng Power Development
Ltd. (ADR) (China) 2,485,000
68,600 Southwestern Energy Co. 934,675
235,000 VEBA A.G. (Germany) 9,368,612
120,000 Western Resources, Inc. 3,915,000
150,000 Wisconsin Energy Corp. 4,237,500
-------------
89,147,351
- ------------------------------------------------------------
Gas Utilities--6.7%
618,705 Australian Gas & Light Co.
(Australia) 2,150,180
141,000 Equitable Resources, Inc. 4,159,500
21,900 MCN Corp. 432,525
84,200 National Fuel Gas Co. 2,420,750
100,000 Questar Corp. 3,212,500
330,000 TransCanada Pipelines Ltd. (Canada) $ 4,350,167
470,000 Westcoast Energy Inc. (Canada) 6,937,431
-------------
23,663,053
- ------------------------------------------------------------
Other--2.9%
100,000 Burlington Resources Inc. 3,875,000
100,000 Cross Timbers Oil Co. 1,425,000
150,000 Sonat Inc. 4,800,000
-------------
10,100,000
- ------------------------------------------------------------
Telecommunications--36.6%
106,300 AirTouch Communications, Inc.* 3,255,437
306,500 AT&T Corp. 20,152,375
190,000 BCE Inc. (Canada) 6,341,250
153,200 British Columbia Telecom, Inc.
(Canada) 2,673,747
112,800 Comsat Corp. 2,538,000
43,000 Empresas Telex (ADR) (Chile) 387,000
275,000 Ericsson (L.M.) Telephone Co.,
B-free (Sweden) 6,774,180
70,000 GTE Corp. 2,747,500
210,000 MCI Communications Corp. 5,473,125
369 Nippon Telegraph & Telephone Corp.
(ADR) (Japan) 3,191,291
150,000 Northern Telecom Ltd. (Canada) 5,343,750
160,000 NYNEX Corp. 7,640,000
106,300 Pacific Telesis Group 3,268,725
87,600 Portugal Telecom, S.A. (ADS)
(Portugal)* 1,686,300
150,000 Royal PTT Nederland NV (Netherlands) 5,321,253
180,000 SBC Communications Inc. 9,900,000
133,800 Sprint Corp. 4,683,000
2,300,000 Stet-Societa Finanziaria Telefonica
P.A. (Italy) 5,376,482
165,500 Tele Danmark (ADS) (Denmark) 4,282,312
20,000 Telecom Corporation of New Zealand
Ltd. (ADR) (New Zealand) 1,235,000
900,000 Telecom Italia (Italy) 1,489,173
900,000 Telecom Italia Mobile (Italy) 1,503,143
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-36
<PAGE>
GLOBAL UTILITY FUND, INC.
Portfolio of Investments as of September 30, 1995
- ------------------------------------------------------------
<TABLE>
<CAPTION>
US$ Value
Shares Description (Note 1
<C> <S> <C>
- -------------------------------------------------------
Telecommunications (cont'd.)
40,000 Telefonica de Argentina S.A.
(ADR) (Argentina) $ 955,000
150,000 Telefonica de Espana S.A. (ADR)
(Spain) 6,206,250
120,000 Telefonos de Mexico S.A (ADR)
(Mexico) 3,810,000
200,000 US WEST, Inc. 9,425,000
75,000 Vodafone Group PLC (ADR)
(United Kingdom) 3,075,000
-------------
128,734,293
- ------------------------------------------------------------
Water Utilities & Other--2.7%
30,968 Alcatel Alsthom Compagnie
Generale d' Electricite (France) 2,610,718
83,900 American Water Works Co., Inc. 2,569,438
400,000 Anglian Water PLC (United Kingdom) 3,596,827
11,300 Technip S.A. (France) 745,358
-------------
9,522,341
-------------
Total common stocks
(cost $219,246,948) 261,167,038
-------------
PREFERRED STOCKS--1.6%
- ------------------------------------------------------------
Telecommunications--1.6%
Philippine Long Distance Telephone
Co. (Philippines)
43,700 $3.50 Conv. Ser. III 2,622,000
80,000 $5.75 Conv. Ser. II 3,080,000
-------------
Total preferred stocks (cost
$4,185,000) 5,702,000
-------------
RIGHTS*--0.1%
- ------------------------------------------------------------
Rights
Telecommunications--0.1%
275,000 Ericsson (L.M.) Telephone Co.,
B-free expiring October 1995
(Sweden) 320,882
</TABLE>
<TABLE>
Moody's Principal
Rating Amount US$ Value
(Unaudited) (000) Description (Note 1)
<C> <C> <S> <C>
- ------------------------------------------------------------
DEBT OBLIGATIONS--23.4%
CORPORATE BONDS--21.8%
- ------------------------------------------------------------
Electric Utilities--11.9%
Alabama Power Co.,
A1 $ 1,500 6.375%, 8/1/99 $ 1,497,060
Central Illinois Light
Co.,
Aa2 1,750 8.20%, 1/15/22 1,851,850
Chubu Electric Power,
Aaa 2,000D 6.25%, 8/5/03 (Eurobonds) 1,942,500
Cincinnati Gas & Electric Co.,
Baa1 1,500 5.80%, 2/15/99 1,465,200
Consolidated Edison Co. Inc.,
A1 1,000 7.625%, 3/1/04 1,054,350
Duke Power Co.,
Aa2 2,000 5.875%, 6/1/01 1,938,880
Florida Power & Light Co.,
Aa3 500 6.00%, 7/1/03 472,915
Houston Lighting & Power Co.,
A2 1,000 6.50%, 4/21/03 991,400
Hydro-Quebec,
A2 C$ 2,000 7.00%, 6/1/04 (Canada) 1,365,912
Iowa-Illinois Gas & Electric Co.,
A2 1,000 6.95%, 10/15/25 943,150
Louisiana Power & Light Co.,
Baa2 1,000 6.00%, 3/1/00 971,830
Monongahela Power Co.,
A1 1,500 7.375%, 7/1/02 1,560,780
National Power PLC,
Aa3 1,000D 6.25%, 12/1/03 (Eurobonds) 963,125
Northern States Power Co.,
A1 1,000 5.75%, 12/1/00 964,820
Ontario Hydro,
Aa3 1,500D 7.45%, 3/31/13 (Canada) 1,537,350
Pacific Gas & Electric
Co.,
A2 1,000 5.375%, 8/1/98 972,720
Pacificorp,
A2 1,000 8.75%, 2/12/98 1,049,790
Philadelphia Electric Co.,
Baa1 2,000 7.50%, 1/15/99 2,059,860
Potomac Edison Co.,
A1 2,000 8.875%, 8/1/21 2,131,900
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-37
<PAGE>
GLOBAL UTILITY FUND, INC.
Portfolio of Investments as of September 30, 1995
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount US$ Value
(Unaudited) (000) Description (Note 1)
<C> <C> <S> <C>
- -----------------------------------------------------------
Electric Utilities (cont'd.)
Powergen PLC,
Aa3 BP 750 8.875%, 3/26/03
(Eurobonds) $ 1,197,098
Southwestern Electric Power Co.,
Aa2 $ 2,000 5.25%, 4/1/00 1,913,120
Southwestern Public Service Co.,
Aa2 1,000 7.25%, 7/15/04 1,035,030
Tampa Electric Co.,
Aa2 1,000 7.75%, 11/1/22 1,017,600
Tennessee Valley
Authority,
NR 5,000 6.125%, 7/15/03 4,872,650
Texas Utilities Electric
Co.,
Baa2 2,000 9.27%, 1/14/00 2,184,740
Tokyo Electric Power,
Aaa 2,000D 6.125%, 7/29/03
(Eurobonds) 1,926,250
Virginia Electric & Power Co.,
A2 2,000 6.625%, 4/1/03 1,994,360
-------------
41,876,240
- ------------------------------------------------------------
Gas Distribution & Other Industries--5.2%
Alcan Aluminum Ltd.,
A2 2,000D 9.625%, 7/15/19 (Canada) 2,264,520
British Gas Finance PLC,
Aa2 2,000D 8.375%, 9/8/99 (Eurobonds) 2,121,250
Consolidated Natural Gas
Co.,
A1 2,000 5.75%, 8/1/03 1,884,000
Enron Corp.,
Baa2 2,000 7.00%, 8/15/23 1,843,480
Michigan Consolidated Gas Co.,
A2 1,600 8.25%, 5/1/14 1,769,184
Northern Illinois Gas Co.,
Aa1 500 5.875%, 5/1/00 490,135
Phillips Petroleum Co.,
Baa1 1,000 8.86%, 5/15/22 1,093,170
Baa1 1,500 7.20%, 11/1/23 1,424,445
Southern California Gas
Co.,
A2 2,000 6.875%, 11/1/25 1,885,940
Transportadora De Gas,
NR $ 1,500D 7.75%, 12/23/98
(Argentina) $ 1,365,000
Union Oil Co.,
Baa2 500 8.75%, 8/15/01 548,785
YPF Sociedad Anonima,
B1 2,000D 8.00%, 2/15/04 (Argentina) 1,710,000
-------------
18,399,909
- ------------------------------------------------------------
Telecommunications, Media & Related Industries--4.7%
AT&T Corp.,
Aa3 1,500 6.75%, 4/1/04 1,513,920
BellSouth Telecommunications,
Aaa 2,000D 6.125%, 9/23/08
(Eurobonds) 1,861,250
British Telecom Finance
BV,
Aaa 2,000D 9.375%, 11/16/98
(Eurobonds) 2,166,250
Ericsson (L.M.) Telephone
Co.,
A1 1,500D 7.875%, 10/21/96
(Eurobonds) 1,524,375
Illinois Bell Telephone
Co.,
Aaa 500 7.625%, 4/1/06 508,185
Pacific Bell, Inc.,
Aa3 1,550 8.70%, 6/15/01 1,715,276
Paging Network Inc.,
B2 525 10.125%, 8/1/07 547,313
Southwestern Bell Telephone Co.,
A1 1,000 5.875%, 6/1/03 947,470
Telecom Argentina S.A.,
B1 1,500D 8.375%, 10/18/00
(Argentina) 1,350,000
Telecom Corp. New Zealand
Finance,
Aa1 BP1,000 7.50%, 7/14/03 (Eurobonds) 630,856
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-38
<PAGE>
GLOBAL UTILITY FUND, INC.
Portfolio of Investments as of September 30, 1995
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount US$ Value
(Unaudited) (000) Description (Note 1)
<C> <C> <S> <C>
- ------------------------------------------------------------
Telecommunications, Media & Related Industries (cont'd.)
Telefonica de Argentina
S.A.,
NR $ 1,000D 8.375%, 10/1/00
(Argentina) 895,000
B1 1,000D 11.875%, 11/1/04 (Argentina) $ 997,500
Turner Broadcasting Systems, Inc.,
Ba2 1,000 8.40%, 2/1/24 967,010
Videotron Ltd.,
Ba3 1,000D 10.25%, 10/15/02 (Canada) 1,045,000
-------------
16,669,405
-------------
Total corporate bonds
(cost $77,401,542) 76,945,554
-------------
CONVERTIBLE BONDS--0.7%
- ------------------------------------------------------------
Compania de Telefonos de
Chile, S.A.,
Baa2 500D 4.50%, 1/15/03 (Chile) 506,250
International Cabletel
Inc.,
NR 1,500D 7.25%, 4/15/05 (Eurobonds) 1,800,000
-------------
Total convertible bonds
(cost $2,000,000) 2,306,250
-------------
U. S. GOVERNMENT OBLIGATIONS--0.9%
- ------------------------------------------------------------
United States Treasury
Notes,
3,000 7.50%, 11/15/01
(cost $3,368,438) 3,212,820
-------------
Total debt obligations
(cost $82,769,980) 82,464,624
-------------
Total long-term
investments
(cost $306,201,928) 349,654,544
-------------
<CAPTION>
Principal
Amount US$ Value
(000) Description (Note 1)
<C> <C> <S> <C>
SHORT-TERM INVESTMENTS--0.4%
- ------------------------------------------------------------
Repurchase Agreement
$ 1,638 Morgan (J.P.) Securities
Inc.
6.40%, dated 9/29/95, due
10/2/95 in the amount of
$1,638,874 (cost
$1,638,000;
collateralized by
$1,766,000 U.S. Treasury
Bonds, 6.25%, due
8/15/23; approximate
value including accrued
interest-$1,684,556) $ 1,638,000
- ------------------------------------------------------------
Total Investments--99.7%
(cost $307,839,928; Note
4) 351,292,544
Other assets in excess of
liabilities--0.3% 882,604
-------------
Net Assets--100% $ 352,175,148
-------------
-------------
</TABLE>
- ---------------
*--Non-income producing security.
D--US$ Denominated Bonds.
ADR--American Depository Receipts.
ADS--American Depository Shares.
The Fund's current Statement of Additional Information contains a description
of Moody's ratings.
NR--Not rated by Moody's or Standard & Poor's.
- -----------------------------------------------------------------------------
See Notes to Financial Statements.
B-39
<PAGE>
Statement of Assets and Liabilities GLOBAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets September 30, 1995
Investments, at value (cost $307,839,928)................................................................... $ 351,292,544
Foreign currency, at value (cost $569)...................................................................... 581
Dividend and interest receivable............................................................................ 3,428,026
Receivable for investments sold............................................................................. 651,553
Receivable for Fund shares sold............................................................................. 41,940
Deferred expenses and other assets.......................................................................... 21,425
--------------
Total assets............................................................................................. 355,436,069
--------------
Liabilities
Bank overdraft.............................................................................................. 11,642
Payable for Fund shares reacquired.......................................................................... 1,074,760
Forward currency contracts-net amount payable to counterparties............................................. 822,296
Payable for investments purchased........................................................................... 614,126
Distribution fee payable.................................................................................... 212,094
Accrued expenses............................................................................................ 198,667
Management fee payable...................................................................................... 189,642
Withholding taxes payable................................................................................... 137,694
--------------
Total liabilities........................................................................................ 3,260,921
--------------
Net Assets.................................................................................................. $ 352,175,148
--------------
--------------
Net assets were comprised of:
Common stock, at par..................................................................................... $ 23,934
Paid-in capital in excess of par......................................................................... 302,672,556
--------------
302,696,490
Undistributed net investment income...................................................................... 67,751
Accumulated net realized gains on investments and foreign currency transactions.......................... 6,776,785
Net unrealized appreciation on investments and foreign currencies........................................ 42,634,122
--------------
Net assets, September 30, 1995.............................................................................. $ 352,175,148
--------------
--------------
Class A:
Net asset value and redemption price per share
($124,423,176 / 8,455,301 shares of common stock issued and outstanding).............................. $14.72
Maximum sales charge (5.00% of offering price)........................................................... .77
--------------
Maximum offering price to public......................................................................... $15.49
--------------
--------------
Class B:
Net asset value, offering price and redemption price per share
($227,189,455 / 15,440,821 shares of common stock issued and outstanding)............................. $14.71
--------------
--------------
Class C:
Net asset value, offering price and redemption price per share
($562,517 / 38,231 shares of common stock issued and outstanding)..................................... $14.71
--------------
--------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-40
<PAGE>
GLOBAL UTILITY FUND, INC.
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income September 30, 1995
<S> <C>
Income
Dividends (net of foreign withholding
taxes of $664,037)................. $ 10,797,681
Interest and discount earned (net of
foreign withholding taxes of
$10,858)........................... 6,858,948
------------------
Total income....................... 17,656,629
------------------
Expenses
Management fee........................ 2,361,766
Distribution fee--Class A............. 307,092
Distribution fee--Class B............. 2,379,836
Distribution fee--Class C............. 4,099
Transfer agent's fees and expenses.... 638,000
Custodian's fees and expenses......... 303,000
Reports to shareholders............... 272,000
Registration fees..................... 97,000
Audit fee............................. 40,000
Directors' fees....................... 40,000
Legal fees and expenses............... 25,000
Insurance............................. 9,000
Amortization of organization
expense............................ 2,467
Miscellaneous......................... 29,632
------------------
Total expenses..................... 6,508,892
------------------
Net investment income.................... 11,147,737
------------------
Realized and Unrealized Gain (Loss) on
Investments and Foreign Currency
Transactions
Net realized gain (loss) on:
Investment transactions............... 7,322,854
Foreign currency transactions......... (7,592)
------------------
7,315,262
------------------
Net change in unrealized
appreciation/depreciation on:
Investments........................... 26,670,048
Foreign currencies.................... (840,204)
------------------
25,829,844
------------------
Net gain on investments and foreign
currencies............................ 33,145,106
------------------
Net Increase in Net Assets
Resulting from Operations................ $ 44,292,843
------------------
------------------
</TABLE>
GLOBAL UTILITY FUND, INC.
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended September 30,
in Net Assets 1995 1994
<S> <C> <C>
Operations
Net investment income....... $ 11,147,737 $ 11,957,951
Net realized gain on
investment and foreign
currency transactions.... 7,315,262 7,713,040
Net change in unrealized
appreciation/depreciation
of investments and
foreign currencies....... 25,829,844 (33,826,608)
-------------- --------------
Net increase (decrease) in
net assets resulting from
operations............... 44,292,843 (14,155,617)
-------------- --------------
Net equalization debits........ (312,052) (35,657)
-------------- --------------
Dividends and distributions
(Note 1)
Dividends from net
investment income
Class A.................. (4,310,107) (4,127,760)
Class B.................. (6,511,221) (6,256,835)
Class C.................. (11,932) (1,066)
-------------- --------------
(10,833,260) (10,385,661)
-------------- --------------
Distributions from net
realized gains
Class A.................. (2,642,246) (1,941,947)
Class B.................. (5,681,058) (3,457,398)
Class C.................. (6,975) (277)
-------------- --------------
(8,330,279) (5,399,622)
-------------- --------------
Fund share transactions (net of
share conversions) (Note 5)
Net proceeds from shares
sold..................... 25,935,458 205,782,596
Net asset value of shares
issued in reinvestment of
dividends and
distributions............ 15,601,479 12,520,588
Cost of shares reacquired... (113,332,033) (113,146,333)
-------------- --------------
Net increase (decrease) in net
assets from Fund share
transactions................ (71,795,096) 105,156,851
-------------- --------------
Total increase (decrease)...... (46,977,844) 75,180,294
Net Assets
Beginning of year.............. 399,152,992 323,972,698
-------------- --------------
End of year.................... $ 352,175,148 $ 399,152,992
-------------- --------------
-------------- --------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-41
<PAGE>
Notes to Financial Statements GLOBAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
Global Utility Fund, Inc. (the ``Fund'') is an open-end diversified management
investment company. The Fund was organized in Maryland on November 18, 1988 as a
closed-end, diversified management investment company and on December 15, 1989,
sold 9,000 shares of common stock for $100,440 to Wellington Management Company
(``Wellington''). Investment operations commenced on January 2, 1990. On
February 1, 1991, the Fund concluded operations as a closed-end investment
company and subsequently commenced operations as an open-end, diversified
management investment company.
The Fund seeks to achieve its investment objective of obtaining a high total
return, without incurring undue risk, by investing primarily in common stocks,
debt securities and preferred stocks of domestic and foreign companies in the
utility industries. Debt securities in which the Fund invests are generally
within the four highest ratings categories by a nationally recognized
statistical rating organization or, if not rated, are of comparable quality. 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 country or
industry.
- ------------------------------------------------------------
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: In valuing the Fund's assets, quotations of foreign
securities in a foreign currency are converted to U.S. dollar equivalents at the
then current exchange rate. Any security for which the primary market is on an
exchange is valued at the last sale price on such exchange on the day of
valuation or, if there was no sale on such day, the last bid price quoted on
such day. Portfolio 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 an independent pricing service or by principal
market makers. Securities for which market quotations are not readily available
are valued at fair value as determined in good faith by or under the direction
of the Board of Directors of the Fund.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
In connection with transactions in repurchase agreements with U.S. financial
institutions, it is the Fund's policy that its custodian takes possession of the
underlying collateral securities, the value of which exceeds the principal
amount of the repurchase transaction including accrued interest. If the seller
defaults and the value of the collateral declines or if bankruptcy proceedings
are commenced with respect to the seller of the security, realization of the
collateral by the Fund may be delayed or limited.
Foreign Currency Translation: The books and records of the Fund are maintained
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on
the following basis:
(i) market value of investment securities, other assets and liabilities--at the
closing 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 fiscal year, 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 fiscal year 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 securities sold during
the fiscal year. Accordingly, realized foreign currency gains (losses) are
included in the reported net realized gain on investment transactions.
The Fund recognizes foreign currency gains and losses from the holding of
foreign currencies, the sales and maturities of short-term securities and
forward currency contracts, and the difference between the amounts of dividends,
interest and foreign taxes recorded on the Fund's books and the U.S. dollar
equivalent of amounts actually received or paid.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin as a result of,
among other factors, the possibility of political and economic instability and
the level of governmental supervision and regulation of foreign securities
markets.
Forward Currency Contracts: A forward currency contract is a commitment to
purchase or sell a foreign currency at a future date at a negotiated forward
rate. The Fund enters into forward currency contracts in order to hedge its
exposure to changes in foreign currency exchange rates on its foreign portfolio
holdings or on specific receivables and payables denominated in a foreign
currency. The contracts are valued daily at current
- --------------------------------------------------------------------------------
B-42
<PAGE>
Notes to Financial Statements GLOBAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
exchange rates and any unrealized gain or loss is included in net unrealized
appreciation or depreciation on investments. Gain or loss is realized on the
settlement date of the contract equal to the difference between the settlement
value of the original and renegotiated forward contracts. This gain or loss, if
any, is included in net realized gain (loss) on foreign currency transactions.
Risks may arise upon entering into these contracts from the potential inability
of the counterparties to meet the terms of their contracts.
Securities Transactions and Investment Income: Security transactions are
recorded on the trade date. Realized gains and losses from security and currency
transactions are calculated on the identified cost basis. Interest income is
recorded on the accrual basis and dividend income is recorded on the ex-dividend
date.
Net investment income (other than distribution fees) and unrealized and realized
gains or losses are allocated daily to each class of shares based upon the
relative proportion of net assets of each class at the beginning of the day.
Equalization: The Fund follows the accounting practice known as equalization by
which a portion of the proceeds from sales and costs of re-acquisitions of Fund
shares, equivalent on a per share basis to the amount of distributable net
investment income on the date of the transaction, is credited or charged to
undistributed net investment income. As a result, undistributed net investment
income per share is unaffected by sales or re-acquisitions of the Fund's shares.
Federal Income Taxes: It is the Fund's policy to continue to meet the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to shareholders.
Therefore, no federal income tax provision is required.
Withholding taxes on foreign dividends and interest are provided in accordance
with the Fund's understanding of the applicable country's tax rules and rates.
Dividends and Distributions: Dividends from net investment income are declared
and paid quarterly. The Fund will distribute at least annually any net capital
gains in excess of loss carryforwards. Dividends and distributions are recorded
on the ex-dividend date.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for wash
sales and foreign currency transactions.
Deferred Organization Expenses: A total of $100,000 of expenses were incurred in
connection with the organization of the Fund. These costs have been deferred and
amortized over the period ended January 1995.
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 and increase
accumulated net realized gains on investments by $7,592 relating to net
realized foreign currency losses. Net investment income, net realized gains and
net assets were not affected by this change.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual Fund Management
(``PMF''). Pursuant to this agreement, PMF has responsibility for all investment
advisory services and supervises the subadviser's performance of such services.
PMF has entered into a subadvisory agreement with Wellington; Wellington
furnishes investment advisory services in connection with the management of the
Fund. PMF pays for the cost of the subadviser's services, the compensation of
officers of the Fund, occupancy and certain clerical and bookkeeping costs of
the Fund. The Fund bears all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly at an annual
rate of .70% of the Fund's average daily net assets up to and including $250
million, .55% of the Fund's average daily net assets of the next $250 million,
.50% of the Fund's average daily net assets of the next $500 million and .45% of
the Fund's average daily net assets in excess of $1 billion. Pursuant to the
subadvisory agreement, PMF compensates Wellington for its services at an annual
rate of .50% of the Fund's average daily net assets up to and including $250
million, .35% of the Fund's average daily net assets of the next $250 million,
.30% of the Fund's average daily net assets of the next $500 million and .25% of
the Fund's average daily net assets in excess of $1 billion.
The Fund has distribution agreements with Prudential Mutual Fund Distributors,
Inc. (``PMFD''), which acts as the distributor of the Class A shares of the
Fund, and with Prudential Securities Incorporated (``PSI''), which acts as
distributor of the Class B and Class C shares of the Fund (collectively the
``Distributors''). The Fund compensates the Distributors for distributing and
servicing the Fund's Class A, Class B and Class C
- --------------------------------------------------------------------------------
B-43
<PAGE>
Notes to Financial Statements GLOBAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
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.
Pursuant to the Class A, B and C Plans, the Fund compensates the Distributors
for distribution-related activities at an annual rate of up to .30 of 1%, 1% and
1%, of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Plans were .25 of 1%, 1% and 1% of the
average daily net assets of the Class A, Class B and Class C shares for the
fiscal year ended September 30, 1995, respectively.
PMFD has advised the Fund that it has received approximately $73,400 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended September 30, 1995. From these fees, PMFD 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 fiscal year ended September 30, 1995, it
received approximately $984,000 and $800 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PMFD is a wholly-owned subsidiary of PMF; PSI and PMF are indirect, wholly-owned
subsidiaries of The Prudential Insurance Company of America.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent and during the fiscal year ended
September 30, 1995, the Fund incurred fees of approximately $543,700 for the
services of PMFS. As of September 30, 1995, approximately $41,100 of such fees
were due to PMFS. Transfer agent fees and expenses in the Statement of
Operations include certain out-of-pocket expenses paid to non-affiliates.
For the fiscal year ended September 30, 1995, PSI earned approximately $3,000 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 fiscal year ended September 30, 1995 were $53,348,051 and $130,063,782,
respectively.
At September 30, 1995, the Fund had an outstanding forward currency contract to
sell a foreign currency as follows:
<TABLE>
<CAPTION>
Value at
Foreign Currency Settlement Date Current
Sale Contract Receivable Value Depreciation
- -------------------- --------------- ----------- --------------
<S> <C> <C> <C>
Deutschemarks,
expiring
11/1/95........... $15,000,000 $15,822,296 $ (822,296)
--------------- ----------- --------------
--------------- ----------- --------------
</TABLE>
The United States federal income tax basis of the Fund's investments at
September 30, 1995 was $307,866,635 and accordingly, net unrealized appreciation
of investments, for United States federal income tax purposes was $43,425,909
(gross unrealized appreciation--$53,872,119; gross unrealized
depreciation--$10,446,210).
- ------------------------------------------------------------
Note 5. Capital
The Fund offers Class A, Class B and Class C shares. Class A shares are sold
with an initial sales charge of up to 5.00%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending upon
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. A special exchange privilege is also available for
shareholders who qualified to purchase Class A shares at net asset value.
The Fund has authorized 2 billion shares of common stock at $.001 par value per
share equally divided into Class A, B and C shares. Of the 23,934,353 shares of
common stock issued and outstanding at September 30, 1995, Wellington owned
9,000 Class A shares.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ----------------------------------- ---------- ------------
<S> <C> <C>
Year ended September 30, 1995:
Shares sold........................ 932,622 $ 12,467,912
Shares issued in reinvestment of
dividends and distributions...... 332,880 4,408,412
Shares reacquired.................. (3,154,244) (42,676,531)
---------- ------------
Net decrease in shares outstanding
before conversion................ (1,888,742) (25,800,207)
Shares issued upon conversion
and/or
exchange from Class B and Class
C................................ 1,102,435 14,545,652
---------- ------------
Net decrease in shares
outstanding...................... (786,307) $(11,254,555)
---------- ------------
---------- ------------
</TABLE>
- --------------------------------------------------------------------------------
B-44
<PAGE>
Notes to Financial Statements GLOBAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Shares Amount
- ----------------------------------- ---------- ------------
Year ended September 30, 1994:
<S> <C> <C>
Shares sold........................ 2,859,207 $ 40,670,293
Shares issued in reinvestment of
dividends and distributions...... 258,584 3,610,183
Shares reacquired.................. (3,357,016) (46,899,659)
---------- ------------
Net decrease in shares
outstanding...................... (239,225) $ (2,619,183)
---------- ------------
---------- ------------
<CAPTION>
Class B
- -----------------------------------
<S> <C> <C>
Year ended September 30, 1995:
Shares sold........................ 976,906 $ 13,147,835
Shares issued in reinvestment of
dividends and distributions...... 849,891 11,174,827
Shares reacquired.................. (5,242,255) (70,606,948)
---------- ------------
Net decrease in shares outstanding
before conversion................ (3,415,458) (46,284,286)
Shares reacquired upon conversion
and/or exchange into Class A..... (1,103,158) (14,545,349)
---------- ------------
Net decrease in shares
outstanding...................... (4,518,616) $(60,829,635)
---------- ------------
---------- ------------
Year ended September 30, 1994:
Shares sold........................ 11,406,193 $164,883,607
Shares issued in reinvestment of
dividends and distributions...... 637,874 8,909,183
Shares reacquired.................. (4,744,947) (66,246,473)
---------- ------------
Net increase in shares
outstanding...................... 7,299,120 $107,546,317
---------- ------------
---------- ------------
<CAPTION>
Class C Shares Amount
- ----------------------------------- ---------- ------------
<S> <C> <C>
Year ended September 30, 1995:
Shares sold........................ 23,879 $ 319,711
Shares issued in reinvestment of
dividends and distributions...... 1,372 18,240
Shares reacquired.................. (3,555) (48,554)
---------- ------------
Net increase in shares outstanding
before conversion................ 21,696 289,397
Shares reacquired upon exchange
into Class A..................... (23) (303)
---------- ------------
Net increase in shares
outstanding...................... 21,673 $ 289,094
---------- ------------
---------- ------------
August 1, 1994* through
September 30, 1994:
Shares sold........................ 16,482 $ 228,696
Shares issued in reinvestment of
dividends........................ 90 1,222
Shares reacquired.................. (14) (201)
---------- ------------
Net increase in shares
outstanding...................... 16,558 $ 229,717
---------- ------------
---------- ------------
</TABLE>
- ---------------
* Commencement of offering of Class C shares.
- --------------------------------------------------------------------------------
B-45
<PAGE>
Financial Highlights GLOBAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
------------------------------------------------------------
Year Ended September 30,
------------------------------------------------------------
1995 1994 1993 1992 1991(a)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 13.66 $ 14.63 $ 12.96 $ 12.62 $ 10.50
-------- -------- -------- -------- --------
Income from investment operations
Net investment income......................... .49 .47 .44 .53 .57
Net realized and unrealized gain (loss) on
investment and foreign currency
transactions............................... 1.35 (.82) 2.46 1.01 2.23
-------- -------- -------- -------- --------
Total from investment operations........... 1.84 (.35) 2.90 1.54 2.80
-------- -------- -------- -------- --------
Less distributions
Dividends from net investment income.......... (.48) (.42) (.47) (.53) (.62)
Distributions in excess of net investment
income..................................... -- -- (.01) -- --
Distributions from net realized gains......... (.30) (.20) (.75) (.67) (.08)
-------- -------- -------- -------- --------
Total distributions........................ (.78) (.62) (1.23) (1.20) (.70)
-------- -------- -------- -------- --------
Redemption fee retained by Fund............... -- -- -- -- .02
-------- -------- -------- -------- --------
Net asset value, end of year.................. $ 14.72 $ 13.66 $ 14.63 $ 12.96 $ 12.62
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN(b)............................... 14.23% (2.49)% 23.87% 13.15% 27.63%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $124,423 $126,254 $138,714 $114,654 $132,804
Average net assets (000)...................... $122,837 $139,166 $119,001 $120,708 $151,217
Ratios to average net assets:
Expenses, including distribution fees...... 1.31% 1.25% 1.30% 1.39% 1.49%
Expenses, excluding distribution fees...... 1.06% 1.02% 1.10% 1.19% 1.36%
Net investment income...................... 3.58% 3.39% 3.37% 4.16% 5.06%
Portfolio turnover rate....................... 15% 19% 14% 57% 135%
</TABLE>
- ---------------
(a) Prior to February 4, 1991, the Fund was organized as a closed-end 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 year reported and includes reinvestment of
dividends and distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-46
<PAGE>
Financial Highlights GLOBAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
---------------------------------------------------------------- -------------
March 18,
1991(b)
Year Ended September 30, through Year Ended
---------------------------------------------- September 30, September 30,
1995 1994 1993 1992 1991 1995
<S> <C> <C> <C> <C> <C> <C>
-------- -------- -------- ------- ------------- -------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 13.66 $ 14.63 $ 12.97 $ 12.63 $ 11.97 $ 13.66
-------- -------- -------- ------- ------- -------
Income from investment operations
Net investment income......................... .39 .37 .34 .43 .25 .39
Net realized and unrealized gain (loss) on
investment and foreign currency
transactions............................... 1.34 (.82) 2.45 1.01 .63 1.34
-------- -------- -------- ------- ------- -------
Total from investment operations........... 1.73 (.45) 2.79 1.44 .88 1.73
-------- -------- -------- ------- ------- -------
Less distributions
Dividends from net investment income.......... (.38) (.32) (.37) (.43) (.22) (.38)
Distributions in excess of net investment
income..................................... -- -- (.01) -- -- --
Distributions from net realized gains......... (.30) (.20) (.75) (.67) -- (.30)
-------- -------- -------- ------- ------- -------
Total distributions........................ (.68) (.52) (1.13) (1.10) (.22) (.68)
-------- -------- -------- ------- ------- -------
Net asset value, end of period................ $ 14.71 $ 13.66 $ 14.63 $ 12.97 $ 12.63 $ 14.71
-------- -------- -------- ------- ------- -------
-------- -------- -------- ------- ------- -------
TOTAL RETURN(d)............................... 13.32% (3.22)% 22.87% 12.23% 7.44% 13.32%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $227,189 $272,673 $185,259 $60,432 $30,147 $ 563
Average net assets (000)...................... $237,983 $270,466 $ 90,254 $45,661 $18,923 $ 410
Ratios to average net assets:
Expenses, including distribution fees...... 2.06% 2.02% 2.10% 2.19% 2.47%(a) 2.06%
Expenses, excluding distribution fees...... 1.06% 1.02% 1.10% 1.19% 1.47%(a) 1.06%
Net investment income...................... 2.83% 2.68% 2.59% 3.43% 4.16%(a) 2.83%
Portfolio turnover rate....................... 15% 19% 14% 57% 135% 15%
<CAPTION>
August 1,
1994(c)
through
September 30,
1994
<S> <C>
-------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 13.93
-----
Income from investment operations
Net investment income......................... .06
Net realized and unrealized gain (loss) on
investment and foreign currency
transactions............................... (.24)
-----
Total from investment operations........... (.18)
-----
Less distributions
Dividends from net investment income.......... (.07)
Distributions in excess of net investment
income..................................... --
Distributions from net realized gains......... (.02)
-----
Total distributions........................ (.09)
-----
Net asset value, end of period................ $ 13.66
-----
-----
TOTAL RETURN(d)............................... (1.32)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $ 226
Average net assets (000)...................... $ 131
Ratios to average net assets:
Expenses, including distribution fees...... 2.06%(a)
Expenses, excluding distribution fees...... 1.06%(a)
Net investment income...................... 2.46%(a)
Portfolio turnover rate....................... 19%
</TABLE>
- ---------------
(a) Annualized.
(b) Commencement of offering of Class B shares.
(c) Commencement of offering of Class C shares.
(d) Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a sale
on the last day of each period reported and includes reinvestment of
dividends and distributions. Total return for periods of less than a
full year are not annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-47
<PAGE>
Independent Auditors' Report GLOBAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
The Shareholders and Board of Directors
Global Utility Fund, Inc.
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Global Utility Fund, Inc. as of September 30,
1995, the related statements of operations for the year then ended and of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the five years in the period then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
September 30, 1995 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Global Utility Fund,
Inc. as of September 30, 1995, the results of its operations, the changes in its
net assets, and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
November 9, 1995
- --------------------------------------------------------------------------------
B-48
<PAGE>
APPENDIX A
DESCRIPTION OF BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
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 edge." 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 in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during other 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.
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.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Absence of Rating: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality of
the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated
as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgement to be formed; if a
bond is called for redemption; or for other reasons.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic ratings
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security 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 issue ranks in the lower end of its generic rating
category.
A-1
<PAGE>
STANDARD & POOR'S
AAA: Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
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 higher rated issues only in small degree.
A: Debt rated "A" has a very 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 the highest 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, CC, C: Debt rated "BB," "B," "CCC," "CC," and "C" are regarded,
on balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of this obligation.
"BB" indicates the lowest degree of speculation and "C" 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.
BB: Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
B: Debt rated "B" has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"BB" or "BB-" rating.
CCC: Debt rated "CCC" has a currently indefinable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B\'96" rating.
CC: The rating "CC" is typically applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC" rating.
C: The rating "C" is typically applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC-" debt rating. The "C" rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The rating "CI" is reserved for income bonds on which no interest is
being paid.
D: Debt rated "D" is in payment default. The "D" rating is used when
interest payments are not made on the date due even if the applicable grace
period has not expired, unless Standard & Poor's believes that such payments
will be made during such grace period. The "D" rating also will be used upon the
filing of a bankruptcy petition, if debt service payments are jeopardized.
Plus (+) or Minus (\'96): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
DESCRIPTION OF PREFERRED STOCK RATINGS
MOODY'S INVESTORS SERVICE, INC.
aaa: considered to be a top-quality preferred stock. This rating indicates
good asset protection and the least risk of dividend impairment within the
universe of preferred stocks.
aa: considered a high-grade preferred stock. This rating indicates that
there is reasonable assurance that earnings and asset protection will remain
relatively well maintained in the foreseeable future.
A-2
<PAGE>
a: considered to be an upper-medium-grade preferred stock. While risks are
judged to be somewhat greater than in the aaa and aa classifications, earnings
and asset protection are, nevertheless, expected to be maintained at adequate
levels.
baa: considered to be medium-grade, neither highly protected nor poorly
secured. Earnings and asset protection appear adequate at present but may be
questionable over any great length of time.
ba: considered to have speculative elements and its future cannot be
considered well assured. Earnings and asset protection may be very moderate and
not well safeguarded during adverse periods. Uncertainty of position
characterizes preferred stocks in this class.
b: generally lacks the characteristics of a desirable investment. Assurance
of dividend payments and maintenance of other terms of the issue over any long
period of time may be small.
caa: likely to be in arrears on dividend payments. This rating designation
does not purport to indicate the future status of payments.
ca: speculative in a high degree and is likely to be in arrears on dividends
with little likelihood of eventual payments.
c: lowest rated class of preferred or preference stock. Issues so rated can
be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification; the modifier 1 indicates that the security 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 issue ranks in the lower end of
its generic rating category.
STANDARD & POOR'S
AAA: This is the highest rating that may be assigned by Standard & Poor's to
a preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations.
AA: A preferred stock issue rated "AA" also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated "AAA."
A: An issue rated "A" is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
BBB: An issue rated "BBB" is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for preferred stock
in this category than for issues in the "A" catagory.
BB, B, CCC: Preferred stock rated "BB," "B," and "CCC" are regarded, on
balance, as predominantly speculative with regard to the issuer's capacity to
pay preferred stock obligations. "BB" indicates the lowest degree of speculation
and "CCC" the highest degree of speculation. While such issues will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposure to adverse conditions.
CC: The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments, but that is currently paying.
C: A preferred stock rated "C" is a non-paying issue.
D: A preferred stock rated "D" is a non-paying issue with the issuer in
default on debt instruments.
NR indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
Plus (+) or Minus (-): To provide more detailed indications of preferred
stock quality, the ratings from "AA" to "CCC" may be modified by the addition of
a plus or minus sign to show relative standing within the major rating
categories.
A-3
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(a) Financial Statements:
(1) The following financial statement is included in the Prospectus constituting
Part A of this Registration Statement:
Financial Highlights.
(2) Financial statements included in the Statement of Additional Information
constituting Part B of this Registration Statement: Portfolio of Investments at
September 30, 1995.
Statement of Assets and Liabilities at September 30, 1995.
Statement of Operations for the year ended September 30, 1995.
Statement of Changes in Net Assets for the years ended September 30, 1994 and
1995.
Notes to Financial Statements.
Financial Highlights.
(b) Exhibits:
1. (a) Amended and Restated Articles of Incorporation of Registrant.
Incorporated by reference to Post-Effective Amendment No. 8 to Registration
Statement on Form N-1A filed via EDGAR on January 30, 1995 (File No. 33-37356).
(b) Articles of Amendment of Registrant. Incorporated by reference to
Post-Effective Amendment No. 8 to Registration Statement on Form N-1A filed via
EDGAR on January 30, 1995 (File No. 33-37356).
2. (a) By-Laws of the Registrant. Incorporated by reference to the Registration
Statement on Form N-2, filed on November 22, 1988 (File No. 33-25553).
(b) Amended By-Laws of the Registrant. Incorporated by reference to
Post-Effective Amendment No. 2 to the Registration Statement on Form N-1A, filed
on October 30, 1991 (File No. 33-25553).
3. Not Applicable.
4. Instruments defining rights of holders of the securities being offered.
Incorporated by reference to Post-Effective Amendment No. 5 to the Registration
Statement on Form N-1A, filed via EDGAR on November 30, 1993 (File No.
33-25553).
5. (a) Management Agreement between the Registrant and Prudential Mutual Fund
Management, Inc. Incorporated by reference to Post-Effective Amendment No. 2 to
Registration Statement on Form N-1A, filed on October 30, 1991 (File No.
33-25553).
(b) Subadvisory Agreement among Registrant, Prudential Mutual Fund Management,
Inc. and Wellington Management Company. Incorporated by reference to
Post-Effective Amendment No. 4 to Registration Statement on Form N-1A, filed on
November 30, 1992.
6. (a) Distribution Agreement for Class A Shares. Incorporated by reference to
Post-Effective Amendment No. 8 to Registration Statement on Form N-1A filed via
EDGAR on January 30, 1995 (File No. 33-37356).
(b) Distribution Agreement for Class B Shares. Incorporated by reference to
Post-Effective Amendment No. 8 to Registration Statement on Form N-1A filed via
EDGAR on January 30, 1995 (File No. 33-37356).
(c) Distribution Agreement for Class C Shares. Incorporated by reference to
Post-Effective Amendment No. 8 to Registration Statement on Form N-1A filed via
EDGAR on January 30, 1995 (File No. 33-37356).
7. Not Applicable.
8. (a) Custodian Contract between the Registrant and State Street Bank and Trust
Company. Incorporated by reference to Pre-Effective Amendment No. 3 to
Registration Statement on Form N-2, filed on December 21, 1989 (File No.
33-25553).
9. Transfer Agency and Service Agreement between the Registrant and Prudential
Mutual Fund Services, Inc. Incorporated by reference to Post-Effective Amendment
No. 2 to Registration Statement on Form N-1A, filed on October 30, 1991 (File
No. 33-37356).
C-1
<PAGE>
10. Opinion and Consent of Counsel.*
11. Consent of Independent Accountants.*
12. Not Applicable.
13. Subscription Agreement between the Registrant and Wellington Management
Company. Incorporated by reference to Pre-Effective Amendment No. 3 to
Registration Statement on Form N-2, filed on December 21, 1989 (File No.
33-25553).
14. Not Applicable.
15. (a) Distribution and Service Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940 for Class A Shares. Incorporated by reference to
Post-Effective Amendment No. 8 to Registration Statement on Form N-1A filed via
EDGAR on January 30, 1995 (File No. 33-37356).
(b) Distribution and Service Plan pursuant to Rule 12b-1 under the Investment
Company Act of 1940 for Class B Shares. Incorporated by reference to
Post-Effective Amendment No. 8 to Registration Statement on Form N-1A filed via
EDGAR on January 30, 1995 (File No. 33-37356).
(c) Distribution and Service Plan pursuant to Rule 12b-1 under the Investment
Company Act of 1940 for Class C Shares. Incorporated by reference to
Post-Effective Amendment No. 8 to Registration Statement on Form N-1A filed via
EDGAR on January 30, 1995 (File No. 33-37356).
16. (a) Schedule of Computation of Performance Quotations. Incorporated by
reference to Pre-Effective Amendment No. 1 to Registration Statement on Form
N-1A, filed on January 9, 1991 (File No. 33-37356).
(b) Schedule of Computation of 30-day yield. Incorporated by reference to
Post-Effective Amendment No. 5 to Registration Statement on Form N-1A, filed via
EDGAR on November 30, 1993 (File No. 33-37356).
17. Financial Data Schedule*.
- ----------
*Filed herewith.
Item 25. Persons Controlled by or under Common Control with Registrant.
None.
Item 26. Number of Holders of Securities.
As of November 3, 1995 there were 15,768, 27,520 and 112 record holders of
Class A, Class B and Class C shares of common stock, respectively, $.001 par
value per share, of the Registrant.
Item 27. Indemnification.
As permitted by Sections 17(h) and (i) of the Investment Company Act of 1940
(the 1940 Act) and pursuant to Article VI of the Fund's Amended and Restated
Articles of Incorporation (Exhibit 1 to the Registration Statement), officers,
directors, employees and agents of the Registrant will not be liable to the
Registrant, any stockholder, officer, director, employee, agent or other person
for any action or failure to act, except for bad faith, willful misfeasance,
gross negligence or reckless disregard of duties, and those individuals may be
indemnified against liabilities in connection with the Registrant, subject to
the same exceptions. Section 2-418 of Maryland General Corporation Law permits
indemnification of directors who acted in good faith and reasonably believed
that the conduct was in the best interests of the Registrant. As permitted by
Section 17(i) of the 1940 Act, pursuant to Section 10 of each Distribution
Agreement (Exhibits 6(a) and 6(b) and 6(c) to the Registration Statement), each
Distributor of the Registrant may be indemnified against liabilities which it
may incur, except liabilities arising from bad faith, gross negligence, willful
misfeasance or reckless disregard of duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (Securities Act) may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
1940 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in connection with the successful defense of any
action, suit or proceeding) is asserted against the Registrant by such director,
officer or controlling person in connection with the shares being registered,
the Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the 1940 Act and will be governed by the final adjudication of such
issue.
C-2
<PAGE>
The Registrant has purchased an insurance policy insuring its officers and
directors against liabilities, and certain costs of defending claims against
such officers and directors, to the extent such officers and directors are not
found to have committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of indemnification
payments to officers and directors under certain circumstances.
Section 9 of the Management Agreement (Exhibit 5(b) to the Registration
Statement) and Section 5 of the Subadvisory Agreement (Exhibit 5(c) to the
Registration Statement) limit the liability of Prudential Mutual Fund
Management, Inc. (the Manager or PMF) and Wellington Management Company (the
Subadviser), respectively, to liabilities arising from willful misfeasance, bad
faith or gross negligence in the performance of their respective duties or from
reckless disregard by them of their respective obligations and duties under the
agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and each Distribution Agreement in a manner consistent
with Release No. 11330 of the Securities and Exchange Commission under the 1940
Act so long as the interpretation of Sections 17(h) and 17(i) of such Act remain
in effect and are consistently applied.
Item 28. Business and other Connections of Investment Adviser
See "How the Fund Is Managed-Manager" and "How the Fund Is
Managed-Subadviser" in both the Prospectus constituting Part A of this
Registration Statement and in the Statement of Additional Information
constituting Part B of this Registration Statement.
The business and other connections of the officers of PMF are listed in
Schedules A and D of Form ADV of PMF as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference
(File No. 801-31104, filed in March 30, 1995).
The business and other connections of PMF's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is One Seaport Plaza, New York, NY 10292.
<TABLE>
<CAPTION>
Name and Address Position with PMF Principal Occupations
- ---------------- ----------------- ---------------------
<S> <C> <C>
Brendan D. Boyle Executive Vice Executive Vice President, Director of Marketing and Director, PMF; Senior
President, Vice President, Prudential Securities Incorporated (Prudential
Director of Securities); Chairman and Director, Prudential Mutual Fund
Marketing and Distributors, Inc. (PMFD)
Director
Stephen P. Fisher Senior Vice President Senior Vice President, PMF; Senior Vice President, Prudential
Securities; Vice President, PMFD
Frank W. Giordano Executive Vice Executive Vice President, General Counsel, Secretary and Director,
President, General PMF and PMFD; Senior Vice President, Prudential Securities;
Counsel, Secretary Director, Prudential Mutual Fund Services, Inc. (PMFS)
and Director
Robert F. Gunia Executive Vice Executive Vice President, Chief Financial and Administrative Officer,
President, Chief Treasurer and Director, PMF; Senior Vice President, Prudential
Financial and Securities; Executive Vice President, Chief Financial Officer,
Administrative Treasurer and Director, PMFD; Director, PMFS
Officer, Treasurer
and Director
Theresa A. Hamacher Director Director, PMF; Vice President, Prudential; Vice President,
Prudential Investment Corporation (PIC)
Timothy J. O'Brien Director President, Chief Executive Officer, Chief Operating Officer and
Director, PMFD; Chief Executive Officer and Director, PMFS;
Director, PMF
</TABLE>
C-3
<PAGE>
<TABLE>
<CAPTION>
Name and Address Position with PMF Principal Occupations
- ---------------- ----------------- ---------------------
<S> <C> <C>
Richard A. Redeker President, Chief President, Chief Executive Officer and Director, PMF; Executive Vice
Executive Officer President, Director and Member of Operating Committee, Prudential
and Director Securities; Director, PSG; Executive Vice President, PIC; Director,
PMFD; Director, PMFS
S. Jane Rose Senior Vice Senior Vice President, Senior Counsel and Assistant Secretary, PMF;
President, Senior Senior Vice President and Senior Counsel, Prudential Securities
Counsel and
Assistant Secretary
</TABLE>
Wellington Management Company, the Subadviser, is a Massachusetts
partnership and is a registered investment adviser engaged in the investment
advisory business. Information as to the general partners of the Subadviser is
included in its Form ADV filed with the Securities and Exchange Commission (File
No. 801-15908), as most recently amended in July, 1993, and is incorporated
herein by reference thereto.
Item 29. Principal Underwriters
(a)(i) Prudential Securities Incorporated
Prudential Securities is distributor for Prudential Government Securities
Trust (Short-Intermediate Term Series), Prudential Jennison Fund, Inc., The
Target Portfolio Trust and for Class B and Class C shares of the BlackRock
Government Income Trust, Global Utility Fund, Inc., Nicholas-Applegate Fund,
Inc. (Nicholas-Applegate Growth Equity Fund), Prudential Allocation Fund,
Prudential California Municipal Fund (California Income Series and California
Series), Prudential Diversified Bond Fund, Inc., Prudential Equity Fund, Inc.,
Prudential Equity Income Fund, Prudential Europe Growth Fund, Inc., Prudential
Global Fund, Inc., Prudential Global Genesis Fund, Inc., Prudential Global
Limited Maturity Fund, Inc., Prudential Global Natural Resources Fund, Inc.,
Prudential Government Income Fund, Inc., Prudential Growth Opportunity Fund,
Inc. Prudential High Yield Fund, Inc., Prudential Intermediate Global Income
Fund, Inc., Prudential Mortgage Income Fund, Inc., Prudential Multi-Sector Fund,
Inc., Prudential Municipal Bond Fund, Prudential Municipal Series Fund (except
Connecticut Money Market Series, Massachusetts Money Market Series, New York
Money Market Series, Connecticut Money Market Series, Massachusetts Money Market
Series and New Jersey Money Market Series), Prudential National Municipals Fund,
Inc., Prudential Pacific Growth Fund, Inc., Prudential Structured Maturity Fund,
Inc., Prudential U.S. Government Fund, Prudential Utility Fund, Inc., Global
Utility Fund, Inc., Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth
Equity Fund) and The BlackRock Government Income Trust. Prudential Securities is
also a depositor for the following unit investment trusts:
Corporate Investment Trust Fund
Prudential Equity Trust Shares
National Equity Trust
Prudential Unit Trusts
Government Securities Equity Trust
National Municipal Trust
(ii) Prudential Mutual Fund Distributors, Inc.
Prudential Mutual Fund Distributors, Incorporated is distributor for Command
Government Fund, Command Money Fund, Command Tax-Free Fund, Prudential
California Municipal Fund (California Money Market Series, Prudential
Institutional Liquidity Portfolio Inc., Prudential Intermediate Global Income
Fund, Inc., Prudential-Bache Special Money Market Fund, Inc. (d/b/a Prudential
Special Money Market Fund), Prudential Structured Maturity Fund, Inc.,
Prudential Tax-Free Money Fund, Inc., and for Class A shares of Prudential
California Municipal Fund (California Income Series and California Series),
Prudential Diversified Bond Fund, Inc., Prudential Equity Fund, Inc., Prudential
Equity Income Fund, Prudential Europe Growth Fund, Inc., Prudential Global Fund,
Inc. Prudential Global Genesis Fund, Inc., Prudential Global Limited Maturity
Fund, Inc., Prudential Global Natural Resources Fund, Inc., Prudential
Government Income Fund, Inc., Prudential Government Securities Trust (Money
Market Series and U.S. Treasury Money Market Series), Prudential Growth
Opportunity Fund, Inc., Prudential High Yield Fund, Inc., Prudential
Intermediate Global Income Fund, Inc., Prudential-Bache MoneyMart Assets Inc.
(d/b/a Prudential MoneyMart Assets Fund), Prudential Mortgage Income Fund, Inc.,
Prudential Multi-Sector Fund, Inc., Prudential Municipal Bond Fund, Prudential
Municipal Series Fund (Connecticut Money Market Series, Massachusetts Money
Market Series, New York Money Market Series, and New Jersey Money Market
Series), Prudential National Municipals Fund, Inc., Prudential Pacific Growth
Fund, Inc., Prudential Structured Maturity Fund, Prudential U.S. Government
Fund, Prudential Utility Fund, Inc., Global Utility Fund, Inc.,
Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth Equity Fund) and The
BlackRock Government Income Trust.
(b)(i) Information concerning the officers and directors of Prudential
Securities Incorporated is set forth below.
C-4
<PAGE>
<TABLE>
<CAPTION>
Positions and Positions and
Offices with Offices with
Name* Underwriter the Fund
- ----- ------------- -------------
<S> <C> <C>
Robert C. Golden ........ Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Alan D. Hogan ........... Executive Vice President, None
Chief Administrative
Officer and Director
George A. Murray ........ Executive Vice President and Director None
Leland B. Paton ......... Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Vincent T. Pica, II ..... Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Richard A. Redeker ...... Executive Vice President and Director President and Director
Gregory W. Scott ........ Executive Vice President, Chief Financial Officer and Director None
Hardwick Simmons ........ Chief Executive Officer, None
President and Director
Lee B. Spencer .......... Executive Vice President, Secretary, None
General Counsel and Director
<FN>
- ----------
*The address of each person named is One Seaport Plaza, New York, NY 10292
unless otherwise indicated.
</FN>
</TABLE>
(ii) Prudential Mutual Fund Distributors, Inc.
<TABLE>
<CAPTION>
Positions and Positions and
Offices with Offices with
Name* Underwriter the Fund
- ----- ------------- -------------
<S> <C> <C>
Joanne Accurso-Soto ..... Vice President None
Dennis N. Annarumma ..... Vice President, Assistant Treasurer and None
Assistant Comptroller
Phyllis J. Berman ....... Vice President None
Brendan D. Boyle ........ Chairman and Director None
Stephen P. Fisher ....... Vice President None
Frank W. Giordano ....... Executive Vice President, General Counsel, None
Secretary and Director
Robert F. Gunia ......... Executive Vice President, Chief Financial Vice President
Officer, Treasurer and Director
Timothy J. O'Brien ...... President, Chief Executive Officer, Chief Operating
Officer and Director None
Richard A. Redeker ...... Director President and
Director
Andrew J. Varley ........ Vice President None
Anita L. Whelan ......... Vice President and Assistant Secretary None
<FN>
- ----------
(1)The address of each person named, except as otherwise indicated, is One
Seaport Plaza, New York, NY 10292.
</FN>
</TABLE>
C-5
<PAGE>
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
Item 30. Location of Accounts and Records
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder are maintained at the offices of
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts, 02171, Wellington Management Company, 75 State Street, Boston
Massachusetts 02109, the Registrant, One Seaport Plaza, New York, New York,
10292 and Prudential Mutual Fund Services, Inc., Raritan Plaza One, Edison, New
Jersey. Documents required by Rules 31a-1(b)(5), (6), (7), (9), (10) and (11)
and 31a-1(f) will be kept at 75 State Street, documents required by Rules
31a-1(b)(4) and (11) and 31a-1(d) at One Seaport Plaza and the remaining
accounts, books and other documents required by such other pertinent provisions
of Section 31(a) and the Rules promulgated thereunder will be kept by State
Street Bank and Trust Company and Prudential Mutual Fund Services, Inc.
Item 31. Management Services
Other than as set forth under the captions "How the Fund Is
Managed-Manager", "How the Fund Is Managed-Subadviser" and "How the Fund Is
Managed-Distributor" in the Prospectus and the corresponding sub-captions,
captions "The Manager", "The Subadviser" and "The Distributor" in the Statement
of Additional Information, constituting Parts A and B, respectively, of this
Registration Statement, Registrant is not a party to any management-related
service contract.
Item 32. Undertakings
The Registrant hereby undertakes to furnish each person to whom a Prospectus
is delivered with a copy of Registrant's latest annual report to shareholders
upon request and without charge.
C-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
and State of New York, on the 24th day of November, 1995.
GLOBAL UTILITY FUND, INC.
/s/ Edward D. Beach
-----------------------------------------
(Edward D. Beach, President)
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
Signature Title Date
/s/ Edward D. Beach Director and President November 24, 1995
- ---------------------------------
Edward D. Beach
/s/ Daniel S. Ahearn Director November 24, 1995
- ---------------------------------
Daniel S. Ahearn
/s/ Thomas T. Mooney Director November 24, 1995
- ---------------------------------
Thomas T. Mooney
/s/ Richard A. Redeker Director November 24, 1995
- ---------------------------------
Richard A. Redeker
/s/ Sir Michael Sandberg Director November 24, 1995
- ---------------------------------
Sir Michael Sandberg
/s/ Robin B. Smith Director November 24, 1995
- ---------------------------------
Robin B. Smith
/s/ Nancy H. Teeters Director November 24, 1995
- ---------------------------------
Nancy H. Teeters
/s/ Grace Torres Treasurer and Principal November 24, 1995
- --------------------------------- Financial and Accounting
Grace Torres Officer
<PAGE>
EXHIBIT INDEX
1. (a) Amended and Restated Articles of Incorporation of Registrant.
Incorporated by reference to Post-Effective Amendment No. 8 to Registration
Statement on Form N-1A filed via EDGAR on January 30, 1995 (File No. 33-37356).
(b) Articles of Amendment of Registrant. Incorporated by reference to
Post-Effective Amendment No. 8 to Registration Statement on Form N-1A filed via
EDGAR on January 30, 1995 (File No. 33-37356).
2. (a) By-Laws of the Registrant. Incorporated by reference to the Registration
Statement on Form N-2, filed on November 22, 1988 (File No. 33-25553).
(b) Amended By-Laws of the Registrant. Incorporated by reference to
Post-Effective Amendment No. 2 to the Registration Statement on Form N-1A, filed
on October 30, 1991 (File No. 33-25553).
3. Not Applicable.
4. Instruments defining rights of holders of the securities being offered.
Incorporated by reference to Post-Effective Amendment No. 5 to the Registration
Statement on Form N-1A, filed via EDGAR on November 30, 1993 (File No.
33-25553).
5. (a) Management Agreement between the Registrant and Prudential Mutual Fund
Management, Inc. Incorporated by reference to Post-Effective Amendment No. 2 to
Registration Statement on Form N-1A, filed on October 30, 1991 (File No.
33-25553).
(b) Subadvisory Agreement among Registrant, Prudential Mutual Fund Management,
Inc. and Wellington Management Company. Incorporated by reference to
Post-Effective Amendment No. 4 to Registration Statement on Form N-1A, filed on
November 30, 1992.
6. (a) Distribution Agreement for Class A Shares. Incorporated by reference to
Post-Effective Amendment No. 8 to Registration Statement on Form N-1A filed via
EDGAR on January 30, 1995 (File No. 33-37356).
(b) Distribution Agreement for Class B Shares. Incorporated by reference to
Post-Effective Amendment No. 8 to Registration Statement on Form N-1A filed via
EDGAR on January 30, 1995 (File No. 33-37356).
(c) Distribution Agreement for Class C Shares. Incorporated by reference to
Post-Effective Amendment No. 8 to Registration Statement on Form N-1A filed via
EDGAR on January 30, 1995 (File No. 33-37356).
7. Not Applicable.
8. (a) Custodian Contract between the Registrant and State Street Bank and Trust
Company. Incorporated by reference to Pre-Effective Amendment No. 3 to
Registration Statement on Form N-2, filed on December 21, 1989 (File No.
33-25553).
9. Transfer Agency and Service Agreement between the Registrant and Prudential
Mutual Fund Services, Inc. Incorporated by reference to Post-Effective Amendment
No. 2 to Registration Statement on Form N-1A, filed on October 30, 1991 (File
No. 33-37356).
10. Opinion and Consent of Counsel.*
11. Consent of Independent Accountants.*
12. Not Applicable.
13. Subscription Agreement between the Registrant and Wellington Management
Company. Incorporated by reference to Pre-Effective Amendment No. 3 to
Registration Statement on Form N-2, filed on December 21, 1989 (File No.
33-25553).
14. Not Applicable.
<PAGE>
15. (a) Distribution and Service Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940 for Class A Shares. Incorporated by reference to
Post-Effective Amendment No. 8 to Registration Statement on Form N-1A filed via
EDGAR on January 30, 1995 (File No. 33-37356).
(b) Distribution and Service Plan pursuant to Rule 12b-1 under the Investment
Company Act of 1940 for Class B Shares. Incorporated by reference to
Post-Effective Amendment No. 8 to Registration Statement on Form N-1A filed via
EDGAR on January 30, 1995 (File No.
33-37356).
(c) Distribution and Service Plan pursuant to Rule 12b-1 under the Investment
Company Act of 1940 for Class C Shares. Incorporated by reference to
Post-Effective Amendment No. 8 to Registration Statement on Form N-1A filed via
EDGAR on January 30, 1995 (File No.
33-37356).
16. (a) Schedule of Computation of Performance Quotations. Incorporated by
reference to Pre-Effective Amendment No. 1 to Registration Statement on Form
N-1A, filed on January 9, 1991 (File No. 33-37356).
(b) Schedule of Computation of 30-day yield. Incorporated by reference to
Post-Effective Amendment No. 5 to Registration Statement on Form N-1A, filed via
EDGAR on November 30, 1993 (File No. 33-37356).
17. Financial Data Schedule*.
- ----------
*Filed herewith.
KIRKPATRICK & LOCKHART LLP
1800 M Street, NW
South Lobby, Suite 900
Washington, DC 20036
November 24, 1995
Global Utility Fund, Inc.
One Seaport Plaza
New York, New York 10292
Dear Sir or Madam:
Global Utility Fund, Inc. ("Company") is a corporation organized under
the laws of the State of Maryland. We understand that the Company is about to
file Post-Effective Amendment No. 9 to its Registration Statement on Form N-1A
for the purpose of registering additional shares of common stock under the
Securities Act of 1933, as amended ("1933 Act"), pursuant to Section 24(e)(1) of
the Investment Company Act of 1940, as amended ("1940 Act"), as well as to
update the Company's financial statements and make certain editorial changes.
We have, as counsel, participated in various corporate and other
proceedings relating to the Company. We have examined copies, either certified
or otherwise proved to be genuine, of its Articles of Incorporation and By-Laws,
as now in effect, the minutes of meetings of its board of directors and other
documents relating to its organization and operation, and we are generally
familiar with its corporate affairs. Based on the foregoing, it is our opinion
that the 5,712,802 shares of common stock of the Company currently being
registered pursuant to Section 24(e)(1) of the 1940 Act, as reflected in
Post-Effective Amendment No. 9, may be legally and validly issued from time to
time in accordance with the Company's Articles of Incorporation and By-Laws and,
subject to compliance with the 1933 Act, the 1940 Act and various state laws
regulating the offer and sale of securities; and when so issued, these shares of
common stock will be legally issued, fully paid and non-assessable.
<PAGE>
Global Utility Fund, Inc.
November 24, 1995
Page 2
We hereby consent to the filing of this opinion in connection with
Post-Effective Amendment No. 9 to the Company's Registration Statement on Form
N-1A to be filed with the Securities and Exchange Commission.
Very truly yours,
KIRKPATRICK & LOCKHART LLP
By:
Stephanie A. Djinis
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in Post-Effective Amendment No. 9 to Registration
Statement No. 33-37356 of Global Utility Fund, Inc. of our report dated November
9, 1995, appearing in the Statement of Additional Information, which is a part
of such Registration Statement, and to the references to us under the headings
"Financial Highlights" in the Prospectus, which is a part of such Registration
Statement, and "Custodian, Transfer and Dividend Disbursing Agent and
Independent Accountants" in the Statement of Additional Information.
Deloitte & Touche LLP
New York, New York
November 27, 1995
[ARTICLE] 6
[CIK] 0000843091
[NAME] GLOBAL UTILITY FUND
[SERIES]
[NUMBER] 001
[NAME] GLOBAL UTILITY FUND (CLASS A)
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] SEP-30-1995
[PERIOD-END] SEP-30-1995
[INVESTMENTS-AT-COST] 307,839,928
[INVESTMENTS-AT-VALUE] 351,292,544
[RECEIVABLES] 4,121,519
[ASSETS-OTHER] 22,006
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 355,436,069
[PAYABLE-FOR-SECURITIES] 1,688,886
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 1,572,035
[TOTAL-LIABILITIES] 3,260,921
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 302,696,490
[SHARES-COMMON-STOCK] 23,934,353
[SHARES-COMMON-PRIOR] 29,217,603
[ACCUMULATED-NII-CURRENT] 6,776,785
[OVERDISTRIBUTION-NII] 67,751
[ACCUMULATED-NET-GAINS] 0
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 42,634,122
[NET-ASSETS] 352,175,148
[DIVIDEND-INCOME] 10,797,681
[INTEREST-INCOME] 6,858,948
[OTHER-INCOME] 0
[EXPENSES-NET] 6,508,892
[NET-INVESTMENT-INCOME] 11,147,737
[REALIZED-GAINS-CURRENT] 7,315,262
[APPREC-INCREASE-CURRENT] 25,829,844
[NET-CHANGE-FROM-OPS] 44,292,843
[EQUALIZATION] (312,052)
[DISTRIBUTIONS-OF-INCOME] (10,833,260)
[DISTRIBUTIONS-OF-GAINS] (8,330,279)
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 25,935,458
[NUMBER-OF-SHARES-REDEEMED] (113,332,033)
[SHARES-REINVESTED] 15,601,479
[NET-CHANGE-IN-ASSETS] (46,977,844)
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 7,784,210
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 2,361,766
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 6,508,892
[AVERAGE-NET-ASSETS] 122,837,000
[PER-SHARE-NAV-BEGIN] 13.66
[PER-SHARE-NII] 0.49
[PER-SHARE-GAIN-APPREC] 1.35
[PER-SHARE-DIVIDEND] (0.48)
[PER-SHARE-DISTRIBUTIONS] (0.30)
[RETURNS-OF-CAPITAL] 0.00
[PER-SHARE-NAV-END] 14.72
[EXPENSE-RATIO] 1.31
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0.00
</TABLE>
<PAGE>
[ARTICLE] 6
[CIK] 0000843091
[NAME] GLOBAL UTILITY FUND
[SERIES]
[NUMBER] 002
[NAME] GLOBAL UTILITY FUND (CLASS B)
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] SEP-30-1995
[PERIOD-END] SEP-30-1995
[INVESTMENTS-AT-COST] 307,839,928
[INVESTMENTS-AT-VALUE] 351,292,544
[RECEIVABLES] 4,121,519
[ASSETS-OTHER] 22,006
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 355,436,069
[PAYABLE-FOR-SECURITIES] 1,688,886
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 1,572,035
[TOTAL-LIABILITIES] 3,260,921
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 302,696,490
[SHARES-COMMON-STOCK] 23,934,353
[SHARES-COMMON-PRIOR] 29,217,603
[ACCUMULATED-NII-CURRENT] 6,776,785
[OVERDISTRIBUTION-NII] 67,751
[ACCUMULATED-NET-GAINS] 0
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 42,634,122
[NET-ASSETS] 352,175,148
[DIVIDEND-INCOME] 10,797,681
[INTEREST-INCOME] 6,858,948
[OTHER-INCOME] 0
[EXPENSES-NET] 6,508,892
[NET-INVESTMENT-INCOME] 11,147,737
[REALIZED-GAINS-CURRENT] 7,315,262
[APPREC-INCREASE-CURRENT] 25,829,844
[NET-CHANGE-FROM-OPS] 44,292,843
[EQUALIZATION] (312,052)
[DISTRIBUTIONS-OF-INCOME] (10,833,260)
[DISTRIBUTIONS-OF-GAINS] (8,330,279)
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 25,935,458
[NUMBER-OF-SHARES-REDEEMED] (113,332,033)
[SHARES-REINVESTED] 15,601,479
[NET-CHANGE-IN-ASSETS] (46,977,844)
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 7,784,210
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 2,361,766
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 6,508,892
[AVERAGE-NET-ASSETS] 237,983,000
[PER-SHARE-NAV-BEGIN] 13.66
[PER-SHARE-NII] 0.39
[PER-SHARE-GAIN-APPREC] 1.34
[PER-SHARE-DIVIDEND] (0.38)
[PER-SHARE-DISTRIBUTIONS] (0.30)
[RETURNS-OF-CAPITAL] 0.00
[PER-SHARE-NAV-END] 14.71
[EXPENSE-RATIO] 2.06
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0.00
</TABLE>
<PAGE>
[ARTICLE] 6
[CIK] 0000843091
[NAME] GLOBAL UTILITY FUND
[SERIES]
[NUMBER] 003
[NAME] GLOBAL UTILITY FUND (CLASS C)
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] SEP-30-1995
[PERIOD-END] SEP-30-1995
[INVESTMENTS-AT-COST] 307,839,928
[INVESTMENTS-AT-VALUE] 351,292,544
[RECEIVABLES] 4,121,519
[ASSETS-OTHER] 22,006
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 355,436,069
[PAYABLE-FOR-SECURITIES] 1,688,886
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 1,572,035
[TOTAL-LIABILITIES] 3,260,921
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 302,696,490
[SHARES-COMMON-STOCK] 23,934,353
[SHARES-COMMON-PRIOR] 29,217,603
[ACCUMULATED-NII-CURRENT] 6,776,785
[OVERDISTRIBUTION-NII] 67,751
[ACCUMULATED-NET-GAINS] 0
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 42,634,122
[NET-ASSETS] 352,175,148
[DIVIDEND-INCOME] 10,797,681
[INTEREST-INCOME] 6,858,948
[OTHER-INCOME] 0
[EXPENSES-NET] 6,508,892
[NET-INVESTMENT-INCOME] 11,147,737
[REALIZED-GAINS-CURRENT] 7,315,262
[APPREC-INCREASE-CURRENT] 25,829,844
[NET-CHANGE-FROM-OPS] 44,292,843
[EQUALIZATION] (312,052)
[DISTRIBUTIONS-OF-INCOME] (10,833,260)
[DISTRIBUTIONS-OF-GAINS] (8,330,279)
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 25,935,458
[NUMBER-OF-SHARES-REDEEMED] (113,332,033)
[SHARES-REINVESTED] 15,601,479
[NET-CHANGE-IN-ASSETS] (46,977,844)
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 7,784,210
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 2,361,766
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 6,508,892
[AVERAGE-NET-ASSETS] 410,000
[PER-SHARE-NAV-BEGIN] 13.66
[PER-SHARE-NII] 0.39
[PER-SHARE-GAIN-APPREC] 1.34
[PER-SHARE-DIVIDEND] (0.38)
[PER-SHARE-DISTRIBUTIONS] (0.30)
[RETURNS-OF-CAPITAL] 0.00
[PER-SHARE-NAV-END] 14.71
[EXPENSE-RATIO] 2.06
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0.00
</TABLE>
