As filed with the Securities and Exchange Commission on December 1, 1997
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. 11 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 17 /X/
(Check appropriate box or boxes)
GLOBAL UTILITY FUND, INC.
(Exact name of registrant as specified in charter)
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973) 367-7530
S. JANE ROSE, ESQ.
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(NAME AND ADDRESS OF AGENT FOR SERVICE OF PROCESS) COPY TO:
ARTHUR J. BROWN, ESQ.
KIRKPATRICK & LOCKHART LLP
1800 MASSACHUSETTS AVENUE, 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):
[x] immediately upon filing pursuant to paragraph (b)
[ ] on (date) 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.
Title of Securities Being Registered: Common Stock, par value $.001 per share.
<PAGE>
<TABLE>
<CAPTION>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
N-1A ITEM NO. LOCATION
----------
<S> <C> <C>
PART A
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 5A. Management's Discussion of Fund Performance ................. Financial Highlights
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
</TABLE>
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.
<PAGE>
GLOBAL UTILITY FUND, INC.
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PROSPECTUS DATED DECEMBER 2, 1997
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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 Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077, 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 December 2, 1997, 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.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE 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 9.
WHAT ARE THE FUND'S 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 effect 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. As with an investment in any mutual fund, an investment in this Fund
can decrease in value and you can lose money. See "How the Fund Invests --
Investment Objective and Policies" at page 9. The Fund may also engage in
various hedging and return enhancement strategies, including derivatives. See
"How the Fund Invests--Hedging and Return Enhancement Strategies -- Risks of
Hedging and Return Enhancement Strategies" at page 14.
WHO MANAGES THE FUND?
Prudential Investments Fund Management LLC (PIFM or the Manager) is the
Manager of the Fund and is compensated for its services at an annual rate of
.67% of the Fund's average daily net assets. As of October 31, 1997, PIFM
served as manager or administrator to 83 investment companies, including 61
mutual funds, with aggregate assets of approximately $59.4 billion.
Wellington Management Company, LLP (Wellington Management or the Subadviser)
furnishes investment advisory services in connection with the management of
the Fund under a Subadvisory Agreement with PIFM and is compensated for its
services by PIFM based on a percentage of the Fund's average daily net
assets. As of September 30, 1997, the Subadviser held investment authority
over approximately $169 billion of assets. See "How the Fund is
Managed--Manager" at page 16 and "How the Fund is Managed -- Subadviser" at
page 16.
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Securities Incorporated (Prudential Securities or PSI or the
Distributor), a major securities underwriter and securities and commodities
broker, acts as the Distributor of the Fund's Class A, Class B, Class C and
Class Z shares. PSI is paid a distribution and service fee with respect to
Class A shares that is currently being charged at the annual rate of .25 of
1% of the average daily net assets of the Class A shares, and 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. Prudential Securities
incurs the expense of distributing the Fund's Class Z shares under a
Distribution Agreement with the Fund, none of which is paid for or reimbursed
by the Fund.
See "How the Fund is Managed--Distributor" at page 17.
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2
<PAGE>
- --------------------------------------------------------------------------------
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000 for Class A and Class B shares
and $5,000 for Class C shares. The minimum subsequent investment is $100 for
Class A, Class B and Class C shares. Class Z shares are not subject to any
minimum investment requirements. There is no minimum investment requirement
for certain retirement and employee savings plans or custodial accounts for
the benefit of minors. For purchases made through the Automatic Savings
Accumulation Plan the minimum initial and subsequent investment is $50. See
"Shareholder Guide -- How to Buy Shares of the Fund" at page 22 and
"Shareholder Guide--Shareholder Services" at page 33.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through Prudential Securities,
Pruco Securities Corporation (Prusec) or directly from the Fund, through its
transfer agent, Prudential Mutual Fund Services LLC. (PMFS or the Transfer
Agent) at the net asset value per share (NAV) next determined after receipt
of your purchase order by the Transfer Agent or Prudential Securities plus a
sales charge which may be imposed either (i) at the time of purchase (Class A
shares) or (ii) on a deferred basis (Class B or Class C shares). Class Z
shares are offered to a limited group of investors at net asset value without
any sales charge. See "How the Fund Values its Shares" at page 19 and
"Shareholder Guide--How to Buy Shares of the Fund" at page 22.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers four classes of shares:
o Class A Shares: Sold with an initial sales charge of up to 5% of
the offering price.
o 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.
o 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.
o Class Z shares: Sold without either an initial or contingent
deferred sales charge to a limited group of
investors. Class Z shares are not subject to any
ongoing service or distribution expenses.
See "Shareholder Guide--Alternative Purchase Plan" at page 24.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order.
However, the proceeds of redemptions of Class B and Class C shares may be
subject to a CDSC. See "Shareholder Guide--How to Sell Your Shares" at page
28.
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 20.
- --------------------------------------------------------------------------------
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 CLASS Z SHARES
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price) 5% None None None
Maximum Sales Load Imposed on
Reinvested Dividends None None None None
Maximum Deferred Sales Load
(as a percentage of original
purchase price or redemption None 5% during the first year, 1% on None
proceeds, whichever is lower) decreasing by 1% annually to redemptions
1% in the fifth and sixth years made within
and 0% the seventh year* one year of
purchase
Redemption Fees None None None None
Exchange Fees None None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of
average net assets) CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- -------------- -------------- --------------
Management Fees .67% .67% .67% .67%
12b-1 Fees (after reduction) .25%++ 1.00% 1.00% None
Other Expenses .29% .29% .29% .29%
----- ---- ----- -----
Total Fund Operating Expenses
(after reduction) 1.21% 1.96% 1.96% .96%
===== ==== ===== =====
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------- ------ ------- ------- --------
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 ................................................ $62 $86 $113 $189
Class B ................................................ $70 $92 $116 $200
Class C ................................................ $30 $62 $106 $229
Class Z ................................................ $10 $31 $ 53 $118
You would pay the following expenses on the same investment
assuming no redemption:
Class A ................................................ $62 $86 $113 $189
Class B ................................................ $20 $62 $106 $200
Class C ................................................ $20 $62 $106 $229
Class Z ................................................ $10 $31 $ 53 $118
</TABLE>
The above example is based on data for the fiscal year ended September 30,
1997. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist investors in understanding the various
costs and expenses that an investor in the Fund will bear, whether directly
or indirectly. For more complete descriptions of the various costs and
expenses, see "How the Fund is Managed." "Other Expenses" includes operating
expenses of the Fund, such as 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 each class of the Fund rather than on a per shareholder basis.
Therefore, long-term shareholders of the Fund may pay more in total sales
charges than the economic equivalent of 6.25% of such shareholders'
investment in such shares. See "How the Fund is Managed--Distributor."
++Although the Class A Distribution and Service Plan provides that the Fund
may pay a distribution fee of up to .30 of 1% per annum of the average
daily net asset value of the Class A shares, PSI 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, 1998. Total operating expenses
without such limitation would be 1.26%. See "How the Fund is
Managed--Distributor."
- --------------------------------------------------------------------------------
4
<PAGE>
The following financial highlights, for the fiscal year ended September 30,
1997, have been audited by Price Waterhouse LLP, independent accountants, and
for the six years ended September 30, 1996 and the period from January 2, 1990,
through September 30,1990, have been audited by Deloitte & Touche LLP,
independent accountants, whose reports thereon were 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
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. Further performance information is contained in the
annual report, which may be obtained without charge. See "Shareholder Services
- -- Reports to Shareholders."
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
JANUARY 2,1990
YEAR ENDED SEPTEMBER 30, THROUGH
-----------------------------------------------------------------------------SEPTEMBER 30,
1997 1996 1995 1994 1993 1992 1991(d) 1990(d)
--------- -------- ---------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of period .. $ 15.03 $ 14.72 $ 13.66 $ 14.63 $ 12.96 $ 12.62 $ 10.50 $ 11.16
--------- -------- ---------- --------- --------- --------- --------- ----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income ................. .49 .51 .49 .47 .44 .53 .57 .48
Net realized and unrealized gain (loss)
on investment and foreign currency
transactions ........................ 3.34 .73 1.35 (.82) 2.46 1.01 2.23 (.67)
--------- -------- ---------- --------- --------- --------- --------- ----------
Total from investment operations .. 3.83 1.24 1.84 (.35) 2.90 1.54 2.80 (.19)
--------- -------- ---------- --------- --------- --------- --------- ----------
LESS DISTRIBUTIONS
Dividends from net investment income .. (.49) (.51) (.48) (.42) (.47) (.53) (.62) (.41)
Distributions in excess of net invest-
ment income ......................... (.02) -- -- -- (.01) -- -- --
Distributions from net realized gains
on investment and foreign currency
transactions ........................ (.83) (.42) (.30) (.20) (.75) (.67) (.08) --
--------- -------- ---------- --------- --------- --------- --------- ----------
Total distributions ................... (1.34) (.93) (.78) (.62) (1.23) (1.20) (.70) (.41)
--------- -------- ---------- --------- --------- --------- --------- ----------
Capital charge in respect of issuance
of shares ........................... -- -- -- -- -- -- -- --
Redemption fee retained by Fund ....... -- -- -- -- -- -- .02 (.06)
--------- -------- ---------- --------- --------- --------- --------- ----------
Net asset value, end of period ........ $ 17.52 $ 15.03 $ 14.72 $ 13.66 $ 14.63 $ 12.96 $ 12.62 $ 10.50
========= ======== ========== ========= ========= ========= ========= ==========
TOTAL RETURN(c) ....................... 26.90% 8.65% 14.23% (2.49%) 23.87% 13.15% 27.63% (1.98%)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) ....... $ 120,825 $112,800 $ 124,423 $ 126,254 $ 138,714 $ 114,654 $ 132,804 $ 161,892
Average net assets (000) .............. $ 116,303 $120,122 $ 122,837 $ 139,166 $ 119,001 $ 120,708 $ 151,217 $ 166,915
Ratios to average net assets:
Expenses, including distribution
fees .............................. 1.21% 1.30% 1.31% 1.25% 1.30% 1.39% 1.49% 1.05%(b)
Expenses, excluding distribution
fees ................................ .96% 1.05% 1.06% 1.02% 1.10% 1.19% 1.36% 1.05%(b)
Net investment income ............... 3.00% 3.38% 3.58% 3.39% 3.37% 4.16% 5.06% 5.97%(b)
Portfolio turnover rate ............... 13% 13% 15% 19% 14% 57% 135% 27%
Average commission rate per share ..... $ .0529 $ .0542 -- -- -- -- -- --
- ----------
(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 February 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.
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</TABLE>
5
<PAGE>
The following financial highlights, for the fiscal year ended September 30,
1997, have been audited by Price Waterhouse LLP, independent accountants, and
for the five years ended September 30, 1996 and the period from March 18, 1991,
through September 30, 1991, have been audited by Deloitte & Touche LLP,
independent accountants, whose reports thereon were 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. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
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MARCH 18, 1991(a)
YEAR ENDED SEPTEMBER 30, THROUGH
----------------------------------------------------------- SEPTEMBER 30,
1997 1996 1995 1994 1993 1992 1991
--------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning
of period ..................... $ 15.03 $ 14.71 $ 13.66 $ 14.63 $ 12.97 $ 12.63 $ 11.97
-------- ------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income .......... .37 .40 .39 .37 .34 .43 .25
Net realized and unrealized
gain (loss) on investment
and foreign currency
transactions ................. 3.34 .74 1.34 (.82) 2.45 1.01 .63
-------- -------- -------- -------- -------- -------- --------
Total from investment
operations ................ 3.71 1.14 1.73 (.45) 2.79 1.44 .88
-------- -------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net
investment income ............ (.37) (.40) (.38) (.32) (.37) (.43) (.22)
Distributions in excess of net
investment income ............ (.02) -- -- -- (.01) -- --
Distributions from net
realized gains on investment
and foreign currency
transactions ................. (.83) (.42) (.30) (.20) (.75) (.67) --
-------- -------- -------- -------- -------- -------- --------
Total distributions ............ (1.22) (.82) (.68) (.52) (1.13) (1.10) (.22)
-------- -------- -------- -------- -------- -------- --------
Net asset value, end of period . $ 17.52 $ 15.03 $ 14.71 $ 13.66 $ 14.63 $ 12.97 $ 12.63
======== ======== ======== ======== ======== ======== ========
TOTAL RETURN(c) ................ 25.96% 7.90% 13.32% (3.22)% 22.87% 12.23% 7.44%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000). $179,270 $187,557 $227,189 $272,673 $185,259 $ 60,432 $ 30,147
Average net assets (000) ....... $185,693 $210,305 $237,983 $270,466 $ 90,254 $ 45,661 $ 18,923
Ratios to average net assets:
Expenses, including
distribution fees .......... 1.96% 2.05% 2.06% 2.02% 2.10% 2.19% 2.47%(b)
Expenses, excluding
distribution fees .......... .96% 1.05% 1.06% 1.02% 1.10% 1.19% 1.47%(b)
Net investment income ........ 2.25% 2.62% 2.83% 2.68% 2.59% 3.43% 4.16%(b)
Portfolio turnover rate ........ 13% 13% 15% 19% 14% 57% 135%
Average commission
rate per share ............... $ .0529 $.0542 -- -- -- -- --
- ----------
(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
</TABLE>
<PAGE>
The following financial highlights, for the fiscal year ended September 30,
1997, have been audited by Price Waterhouse LLP, independent accountants, and
for each of the two years ended September 30, 1996 and the period from August 1,
1994, through September 30, 1994, have been audited by Deloitte & Touche LLP,
independent accountants, whose reports thereon were 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. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30, AUGUST 1, 1994(a)
---------------------------------- THROUGH
1997 1996 1995 SEPTEMBER 30, 1994
------------ ------------ ---------- ------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .. $ 15.03 $ 14.71 $ 13.66 $ 13.93
------------ ------------ ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income ................. .37 .40 .39 .06
Net realized and unrealized gain
loss) on investment and
foreign currency transactions ....... 3.34 .74 1.34 (.24)
------------ ------------ ---------- ----------
Total from investment operations .. 3.71 1.14 1.73 (.18)
------------ ------------ ---------- ----------
LESS DISTRIBUTIONS
Dividends from net investment income .. (.37) (.40) (.38) (.07)
Distributions in excess of net
investment income ................... (.02) -- -- --
Distributions from net realized
gains on investment and
foreign currency transactions ....... (.83) (.42) (.30) (.02)
------------ ------------ ---------- ----------
Total distributions ................... (1.22) (.82) (.68) (.09)
------------ ------------ ---------- ----------
Net asset value, end of period ........ $ 17.52 $ 15.03 $ 14.71 $ 13.66
============ ============ ========== ==========
TOTAL RETURN(c) ....................... 25.96% 7.90% 13.32% (1.32)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) ....... $ 760 $ 661 $ 563 $ 226
Average net assets (000) .............. $ 727 $ 608 $ 410 $ 131
Ratios to average net assets:
Expenses, including distribution fees 1.96% 2.05% 2.06% 2.06%(b)
Expenses, excluding distribution fees .96% 1.05% 1.06% 1.06%(b)
Net investment income ............... 2.25% 2.66% 2.83% 2.46%(b)
Portfolio turnover rate ............... 13% 13% 15% 19%
Average commission rate per share ..... $ .0529 $ .0542 -- --
- ----------------
(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
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(for a share of common stock outstanding throughout each period indicated)
(Class Z Shares)
- --------------------------------------------------------------------------------
The following financial highlights, for the fiscal period ended September 30,
1997, have been audited by Price Waterhouse 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 Z 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. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Services--Reports to Shareholders."
- --------------------------------------------------------------------------------
DECEMBER 16, 1996(a)
THROUGH
SEPTEMBER 30, 1997
------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ..................... $ 15.02
-------
INCOME FROM INVESTMENT OPERATIONS
Net investment income .................................... .34
Net realized and unrealized gain (loss) on investment
and foreign currency transactions ...................... 2.59
-------
Total from investment operations ..................... 2.93
-------
LESS DISTRIBUTIONS
Dividends from net investment income ..................... (.34)
Distributions in excess of net investment income ......... (.07)
-------
Distributions from net realized gains on investment
and foreign currency transactions ...................... --
-------
Total distributions ...................................... (.41)
-------
Net asset value, end of period ........................... $ 17.54
=======
TOTAL RETURN(c) .......................................... 19.70%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) .......................... $ 53
Average net assets (000) ................................. $ 16
Ratios to average net assets:
Expenses, including distribution fees .................. 96%(b)
Expenses, excluding distribution fees .................. 96%(b)
Net investment income .................................. 3.25%(b)
Portfolio turnover rate .................................. 13%
Average commission rate per share ........................ $ .0529
- ----------
(a)Commencement of offering of Class Z 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.
- --------------------------------------------------------------------------------
8
<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.
9
<PAGE>
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.
10
<PAGE>
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. There is no limit to the percentage of the Fund's
assets that may be invested in foreign securities.
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.
11
<PAGE>
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 RETURN ENHANCEMENT STRATEGIES
THE FUND MAY ALSO ENGAGE IN VARIOUS PORTFOLIO STRATEGIES, INCLUDING THE
USE OF DERIVATIVES, TO REDUCE CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO
ENHANCE RETURN, BUT NOT FOR SPECULATION. These strategies currently include the
use of options, forward currency exchange contracts and futures contracts and
options thereon. The Fund, and thus the investor, may lose money through any
unsuccessful use of these strategies. 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 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").
12
<PAGE>
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. A written option is covered
if, as long as the Fund is obligated under the option (i) it owns an offsetting
position in the underlying security or (ii) maintains in a segregated account,
cash or other liquid assets in an amount equal to or greater than its obligation
under the option. There is no limitation on the amount of call options the Fund
may write. When the Fund writes a "covered" option, its losses are limited to
the current value of the offsetting position of the underlying security. When
the Fund otherwise writes an option, its losses are potentially unlimited. See
"Investment Objective and Policies -- Additional Investment Policies -- Options
on Securities" in the Statement of Additional Information.
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. THE FUND, AND
THUS THE INVESTOR, MAY LOSE MONEY THROUGH ANY UNSUCCESSFUL USE OF THESE
STRATEGIES. 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 AND RISK MANAGEMENT PURPOSES AND TO ATTEMPT TO ENHANCE RETURN IN
ACCORDANCE WITH REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION. THE
FUND, AND THUS THE INVESTOR, MAY LOSE MONEY THROUGH ANY UNSUCCESSFUL USE OF
THESE STRATEGIES. 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 financial indices. A financial futures contract is an
agreement to purchase or sell an agreed amount of securities or
13
<PAGE>
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, Dividends & Distributions" in the
Statement of Additional Information.
RISKS OF HEDGING AND RETURN ENHANCEMENT STRATEGIES
Participation in the options or futures markets and in currency exchange
transactions involves investment risks and transaction costs to which the Fund
would not be subject absent the use of these strategies. The Fund, and thus the
investor, may lose money through any unsuccessful 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) the possible inability of the Fund to purchase
or sell a portfolio security at a time that otherwise would be favorable for it
to do so, or the possible need for the Fund to sell a portfolio security at a
disadvantageous time, due to the need for the Fund to maintain "cover" or to
segregate securities in connection with hedging transactions. See "Investment
Objective and Policies" and "Taxes, Dividends &Distributions" 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 liquid securities in an amount
equivalent to 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.
14
<PAGE>
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 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 resale price. 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, or other liquid assets having a value
equal to or greater than the Fund's purchase commitments. The securities so
purchased are subject to market fluctuation and no interest accrues to the
purchaser during the period between purchase and settlement. At the time of
delivery of the securities the value may be more or less than the purchase price
and an increase in the percentage of the Fund's assets committed to the purchase
of securities on a when-issued or delayed delivery basis may increase the
volatility of the Fund's net asset value.
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. If the Fund borrows to invest
in securities, any investment gains made on the securities in excess of interest
paid on the borrowing will cause the net asset value of the shares to rise
faster than would otherwise be the case. On the other hand, if the investment
performance of the additional securities purchased fails to cover their cost
(including any interest paid on the money borrowed) to the Fund, the net asset
value of the Fund's shares will decrease faster than would otherwise be the
case. This is the speculative factor known as "leverage." See "Investment
Restrictions" in the Statement of Additional Information.
ILLIQUID SECURITIES
The Fund may hold up to 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. The Fund's
investment in Rule 144A securities could have the effect of increasing
illiquidity to the extent that qualified institutional buyers become, for a
limited time, uninterested in purchasing Rule 144A securities. Repurchase
agreements subject to demand are deemed to have a maturity equal to the 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
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<PAGE>
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.
- --------------------------------------------------------------------------------
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, 1997, the Fund's total expenses as
a percentage of average net assets for the Fund's Class A, Class B, Class C and
Class Z shares were 1.21%, 1.96%, 1.96% and .96%, respectively. See "Financial
Highlights."
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS THE MANAGER
OF THE FUND. 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.
PIFM is organized as a limited liability company. It is the successor to
Prudential Mutual Fund Management, Inc., which transferred its assets to
Prudential Mutual Fund Management LLC in September 1996. Prudential Mutual Fund
Management LLC subsequently changed its name to Prudential Investments Fund
Management LLC. PIFM 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, 1997, the Fund paid
management fees to PIFM of .20% of the Fund's average net assets.
As of October 31, 1997, PIFM served as the manager to 61 open-end
investment companies, constituting all of the Prudential Mutual Funds, and as
manager or administrator to 22 closed-end investment companies with aggregate
assets of approximately $59.4 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PIFM 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, LLP, 75 STATE STREET, BOSTON, MASSACHUSETTS
02109, SERVES AS THE FUND'S SUBADVISER UNDER A SUBADVISORY AGREEMENT AMONG THE
FUND, PIFM AND WELLINGTON MANAGEMENT COMPANY, LLP (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 PIFM, not
the Fund, at an annual rate of .50% of
16
<PAGE>
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. PIFM 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, 1997, PIFM paid subadvisory
fees to Wellington Management of .47% 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 R. Ryan. 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 September 30, 1997, the Subadviser held investment authority over
approximately $169 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. 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. The fixed-income portion of the Fund's portfolio is managed by Earl E.
McEvoy, a Senior Vice President and Partner of Wellington Management. Mr. McEvoy
has been an investment professional with Wellington Management since 1978 and
currently manages significant assets for a variety of the firm's institutional
and mutual fund clients.
DISTRIBUTOR
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES, PSI OR THE
DISTRIBUTOR), ONE SEAPORT PLAZA, NEW YORK, NEW YORK 10292 IS A CORPORATION
ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR
OF THE CLASS A, CLASS B, CLASS C AND CLASS Z SHARES OF THE FUND. IT IS AN
INDIRECT, WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS
B PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), PRUDENTIAL SECURITIES INCURS THE EXPENSE OF
DISTRIBUTING THE FUND'S CLASS A, CLASS B AND CLASS C SHARES. PRUDENTIAL
SECURITIES ALSO INCURS THE EXPENSE OF DISTRIBUTING THE FUND'S CLASS Z SHARES
UNDER THE DISTRIBUTION AGREEMENT, NONE OF WHICH IS PAID FOR OR REIMBURSED BY THE
FUND. These expenses include commissions and account servicing fees paid to, or
on account of, financial advisers of Prudential Securities and representatives
of Pruco Securities Corporation (Prusec), an affiliated broker-dealer,
commissions and account servicing fees paid to, or on account of, other
broker-dealers or financial institutions (other than national banks) which have
entered into agreements with PSI, advertising expenses, the cost of printing and
mailing prospectuses to potential investors and indirect and overhead costs of
Prudential Securities and Prusec associated with the sale of Fund shares,
including lease, utility, communications and sales promotion expenses.
Under the Plans, the Fund is obligated to pay distribution and/or service
fees to PSI as compensation for its distribution and service activities, not as
reimbursement for specific expenses incurred. If PSI's expenses exceed its
distribution and service fees, the Fund will not be obligated to pay any
additional expenses. If PSI'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 PSI 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. PSI 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, 1998.
17
<PAGE>
UNDER THE CLASS B AND CLASS C PLANS, THE FUND PAYS PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C
SHARES AT AN ANNUAL RATE OF 1% OF THE AVERAGE DAILY NET ASSETS OF EACH OF THE
CLASS B AND CLASS C SHARES. The Class B and Class C Plans provide for the
payment to Prudential Securities of (i) an asset-based sales charge of .75 of 1%
of the average daily net assets of each of the Class B and Class C shares and
(ii) a service fee of .25 of 1% of the average daily net assets of each of the
Class B and Class C shares. The service fee is used to pay for personal service
and/or the maintenance of shareholder accounts. Prudential Securities also
receives contingent deferred sales charges from certain redeeming shareholders.
See "Shareholder Guide -- How to Sell Your Shares -- Contingent Deferred Sales
Charges."
For the fiscal year ended September 30, 1997, 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. See "Distributor"
in the Statement of Additional Information.
Distribution expenses attributable to the sale of Class A, Class B or
Class C shares of the Fund will be allocated to each 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
pay a finder's fee out of its own resources to dealers (including PSI) and other
persons who distribute shares of the Fund (including Class Z shares). Such
payments may be calculated by reference to the net asset value of shares sold by
such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
FEE WAIVERS
PSIhas agreed to limit its distribution fees for the ClassA shares as
described under "Distributor" above. Fee waivers will increase total return. See
"Performance Information" in the Statement of Additional Information and "Fund
Expenses."
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.
18
<PAGE>
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and, in that capacity, maintains certain financial and accounting books and
records pursuant to an agreement with the Fund. Its mailing address is P.O. Box
1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and in
those capacities maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PIFM. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
- --------------------------------------------------------------------------------
HOW THE FUND VALUES ITS SHARES
- --------------------------------------------------------------------------------
THE FUND'S NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING
ITS LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
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. For valuation
purposes, quotations of foreign securities in a foreign currency are converted
to U.S. dollar equivalents. See "Net Asset Value" in the Statement of Additional
Information.
The Fund will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Fund or days on which changes in the
value of the Fund's portfolio securities do not materially affect the NAV.
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
NAVs and dividends. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A shares as a result of the larger
distribution-related fee to which Class B and Class C shares are subject. The
NAV of Class Z shares will generally be higher than the NAV of the other three
classes because Class Z shares are not subject to any distribution or service
fees. It is expected, however, that the net asset value per share of the four
classes will tend to converge immediately after the recording of dividends which
will differ by approximately the amount of the distribution or service fee
expense accrual differential among the classes.
- --------------------------------------------------------------------------------
HOW THE FUND CALCULATES PERFORMANCE
- --------------------------------------------------------------------------------
FROM TIME TO TIME THE FUND MAY ADVERTISE ITS TOTAL RETURN (INCLUDING
AVERAGE ANNUAL TOTAL RETURN AND AGGREGATE TOTAL RETURN) AND YIELD IN
ADVERTISEMENTS OR SALES LITERATURE. TOTAL RETURN AND YIELD ARE CALCULATED
SEPARATELY FOR CLASS A, CLASS B, CLASS C AND CLASS Z SHARES. THESE FIGURES ARE
BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE
PERFORMANCE. The total return shows how much an investment in the Fund would
have increased (decreased) over a specified period of time (I.E., one, five or
ten years or since inception of the Fund) assuming that all distributions and
dividends by the Fund were reinvested on the reinvestment dates during the
period and less all recurring fees. The aggregate total return reflects actual
performance over a stated period of time. Average annual total return is a
hypothetical rate of return that, if achieved annually, would have produced the
same aggregate total return if performance had been constant over the entire
period. Average annual total return smooths out variations in performance and
takes into account any applicable initial or contingent deferred sales charges.
Neither average annual total return nor aggregate
19
<PAGE>
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. 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,
Dividends and Distributions" in the Statement of Additional Information.
TAXATION OF SHAREHOLDERS
Any dividends out of net investment income, together with distributions of
net short-term 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, Dividends and Distributions" in the Statement
of Additional Information. Any net capital gains (I.E., the excess of net
capital gains from the sale of assets held for more than 12 months over net
short-term capital losses) distributed to shareholders will be taxable as
capital gains to the shareholders, whether or not reinvested and regardless of
the length of time a shareholder has owned his or her shares. The maximum
capital gains rate for individuals is 28% with respect to assets held for more
than 12 months, but not more than 18 months, and 20% with respect to assets held
for more than 18 months. The maximum capital gains rate for corporate
shareholders currently is the same as the maximum tax rate for ordinary income.
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 capital gain or loss. In the case of any individual, any such
capital gain will be treated as short-term capital loss if the shares were held
for not more than 12 months, mid-term gain, taxable at the maximum rate of 28%,
if such shares were held for more than 12, but not more than 18 months, and
long-term capital gain, taxable at the maximum rate of 20%, if such shares were
held for more than 18 months. In the case of a corporation, any such capital
gain will be treated as long-term capital gain, taxable at the same rates as
ordinary income, if such shares were held for more than 12 months. Any such
capital loss will be treated as long-term capital loss if the shares have been
held more than one year and otherwise as a short-term capital gain or loss. Any
such loss on shares that are held for six months or less, however, 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 (i) the
conversion of Class B shares into Class A
20
<PAGE>
shares or (ii) the exchange of any class of the Fund's shares for any other
class of its shares does not constitute a taxable event for federal income tax
purposes. However, such opinions are not binding on the Internal Revenue
Service.
Shareholders should consult their own tax advisers regarding specific
questions as to federal, state or local taxes.
WITHHOLDING TAXES
Under the Internal Revenue Code, the Fund is required to withhold and
remit to the U.S. Treasury 31% of dividends, capital gain income and redemption
proceeds on the accounts of certain 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) with the required certifications regarding the
shareholder's status under the federal income tax laws. 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 (other than Class Z) will bear its own distribution
charges. This generally will result in lower dividends for Class B and Class C
shares in relation to Class A and Class Z shares and lower dividends for Class A
shares in relation to Class Z shares. Distributions of net capital gains, if
any, will be paid in the same amount 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, LLC, 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.
IF YOU BUY SHARES ON OR PRIOR TO THE RECORD DATE (THE DATE THAT DETERMINES
WHO RECEIVES THE DIVIDEND), YOU WILL RECEIVE A PORTION OF THE MONEY YOU INVESTED
AS A TAXABLE DIVIDEND. THEREFORE, YOU SHOULD CONSIDER THE TIMING OF DIVIDENDS
WHEN BUYING SHARES OF THE FUND.
- --------------------------------------------------------------------------------
GENERAL INFORMATION
- --------------------------------------------------------------------------------
DESCRIPTION OF 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
21
<PAGE>
AUTHORIZED TO ISSUE 2 BILLION SHARES OF $.001 PAR VALUE PER SHARE DIVIDED INTO
FOUR CLASSES, DESIGNATED CLASS A, CLASS B, CLASS C AND CLASS Z SHARES, EACH OF
WHICH CONSISTS OF 500 MILLION AUTHORIZED SHARES. The four classes of shares
represent an interest in the same portfolio of investments of the Fund and have
the same rights, except that (i) each class is subject to different sales
charges and distribution or service fees, except for Class Z shares, (which are
not subject to any sales charges and distribution or service fees), which may
affect performance, (ii) each class has exclusive voting rights on any matter
submitted to shareholders that relates solely to its distribution arrangement
and has separate voting rights on any matter submitted to shareholders in which
the interests of one class differ from the interests of any other class, (iii)
each class has a different exchange privilege, (iv) only Class B shares have a
conversion feature and (v) Class Z shares are offered exclusively for sale to a
limited group of investors. See "How the Fund is Managed -- Distributor." 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 (with the
exception of Class Z shares, which are not subject to any distribution or
service fees) bears the expenses related to the distribution of its shares.
Except for the conversion feature applicable to the Class B shares, there are no
conversion, preemptive or other subscription rights. In the event of
liquidation, each share of 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 and to Class Z shareholders,
whose shares are not subject to any distribution or service fees. 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.
- --------------------------------------------------------------------------------
SHAREHOLDER GUIDE
- --------------------------------------------------------------------------------
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, PRUSEC
OR DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES LLC (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT
22
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SERVICES, P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. PARTICIPANTS IN
PROGRAMS SPONSORED BY PRUDENTIAL RETIREMENT SERVICES SHOULD CONTACT THEIR CLIENT
REPRESENTATIVE FOR MORE INFORMATION ABOUT CLASS Z SHARES. The purchase price is
the NAV next determined following receipt of an order in proper form by the
Transfer Agent or Prudential Securities plus a sales charge which, at your
option, may be imposed either (i) at the time of purchase (Class A shares) or
(ii) on a deferred basis (Class B or Class C shares). Class Z shares are offered
to a limited group of investors at net asset value without any sales charge. See
"Alternative Purchase Plan" below. See also "How the Fund Values its Shares."
The minimum initial investment is $1,000 for Class A and Class B shares
and $5,000 for Class C shares, except that the minimum initial investment for
Class C shares may be waived from time to time. There is no minimum investment
requirement for Class Z shares.The minimum subsequent investment is $100 for all
classes, except for Class Z shares, for which there is no such minimum. All
minimum investment requirements are waived for certain retirement and employee
savings plans or custodial accounts for the benefit of minors. For purchases
made through the Automatic Savings Accumulation Plan, the minimum initial and
subsequent investment is $50. See "Shareholder Services" below.
Application forms can be obtained from PMFS, Prudential Securities, 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 third business day following the
investment.
Transactions in Fund shares may be subject to postage and handling charges
imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire,
you must first telephone PMFS to receive an account number at (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 class in which you are eligible to invest
(Class A, Class B, Class C or Class Z shares).
If you arrange for receipt by State Street of Federal Funds prior to 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, Class C or Class Z and your name and individual account
number. It is not necessary to call PMFS to make subsequent purchase orders
utilizing Federal Funds. The minimum amount which may be invested by wire is
$1,000.
23
<PAGE>
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS FOUR CLASSES OF SHARES (CLASS A, CLASS B, CLASS C AND
CLASS Z SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE
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).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE
SALES CHARGE DAILY NET ASSETS) OTHER INFORMATION
------------------------------------- -------------------- ------------------------------------
<S> <C> <C>
CLASS A Maximum initial sales charge of 5% of .30 of 1% (Currently Initial sales charge waived or
the public offering price. being charged at a reduced for certain purchases
rate of .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
CLASS Z None None Sold to a limited group of investors
</TABLE>
The four classes of shares represent an interest in the same portfolio of
investments of the Fund and have the same rights, except that (i) each class
(with the exception of the Class Z shares, which are not subject to any
distribution or service fees) bears the separate expenses of its Rule 12b-1
distribution and service plan, (ii) each class has exclusive voting rights on
any matter submitted to shareholders that relates solely to its arrangement and
has separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interest of any other class, and (iii)
only Class B shares have a conversion feature. The four classes also have
separate exchange privileges. See "How to Exchange Your Shares" below. The
income attributable to each class and the dividends payable on the shares of
each class will be reduced by the amount of the distribution fee (if any) of
each class. Class B and Class C shares bear the expenses of a higher
distribution fee which will generally cause them to have higher expense ratios
and to pay lower dividends than the Class A and Class Z shares.
Financial advisers and other sales agents who sell shares of the Fund will
receive different compensation for selling Class A, Class B, Class C and Class Z
shares and will generally receive more compensation initially for selling Class
A and Class B shares than for selling Class C or Class Z shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER
THINGS, (1) the length of time you expect to hold your investment, (2) the
amount of any applicable sales charge (whether imposed at the time of purchase
or redemption) and distribution-related fees, as noted above, (3) whether you
qualify for any reduction or waiver of any applicable sales charge, (4) the
various exchange privileges among the different classes of shares (see "How to
Exchange Your Shares" below) and (5) the fact that Class B shares automatically
convert to Class A shares approximately seven years after purchase (see
"Conversion Feature -- Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund:
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
24
<PAGE>
either Class A or Class B shares.
If you intend to hold your investment for 7 years or more and do not
qualify for a reduced sales charge on Class A shares, since Class B shares
convert to Class A shares approximately 7 years after purchase and because all
of your money would be invested initially in the case of Class B shares, you
should consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be
more advantageous for you to purchase Class A shares over either Class B or
Class C shares regardless of how long you intend to hold your investment.
However, unlike Class B and Class C shares, you would not have all of your money
invested initially because the sales charge on Class A shares is deducted at the
time of purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B shares and Class C shares for the
higher cumulative annual distribution-related fee on those shares to exceed the
initial sales charge plus cumulative annual distribution-related 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 when the CDSC is applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT
OR UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A
SHARES, UNLESS THE PURCHASER IS ELIGIBLE TO PURCHASE CLASS Z SHARES. SEE
"REDUCTION AND WAIVER OF INITIAL SALES CHARGES" AND "CLASS Z SHARES" BELOW.
CLASS A SHARES
The offering price of Class A shares 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:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
AMOUNT OF PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ---------------- -------------- --------------- ------------------
<S> <C> <C> <C>
Less than $25,000 5.00% 5.26% 4.75%
$25,000 to $49,999 4.50 4.71 4.25
$50,000 to $99,999 4.00 4.17 3.75
$100,000 to $249,999 3.25 3.36 3.00
$250,000 to $499,999 2.50 2.56 2.40
$500,000 to $999,999 2.00 2.04 1.90
$1,000,000 and above None None None
</TABLE>
The Distributor may reallow the entire initial sales charge to dealers.
Selling dealers may be deemed to be underwriters, as that term is defined in the
Securities Act.
In connection with the sale of Class A shares at NAV (without an initial
sales charge), the Manager, the Distributor or one of their affiliates may pay
dealers, financial advisers and other persons which distribute shares a finder's
fee from its own resources based on a percentage of the net asset value of
shares sold by such persons.
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.
25
<PAGE>
BENEFIT PLANS. Class A shares may be purchased at NAV, without payment of
an initial sales charge, by pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the Internal
Revenue Code (collectively, Benefit Plans), provided that the Benefit Plan has
existing assets of at least $1 million invested in shares of Prudential Mutual
Funds (excluding money market funds other than those acquired pursuant to the
exchange privilege) or 250 eligible employees or participants. In the case of
Benefit Plans whose accounts are held directly with the Transfer Agent or
Prudential Securities and for which the Transfer Agent or Prudential Securities
does individual account 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.
PRUDENTIAL RETIREMENT PROGRAMS. Class A shares may be purchased at NAV by
certain savings, retirement and deferred compensation plans, qualified or
non-qualified under the Internal Revenue Code, for which Prudential serves as
the plan administrator or recordkeeper, provided that (i) the plan has at least
$1 million in existing assets or 250 eligible employees and (ii) the Fund is an
available investment option. These plans include pension, profit-sharing,
stock-bonus or other employee benefit plans under Section 401 of the Internal
Revenue Code, deferred compensation and annuity plans under Sections 457 or
403(b)(7) of the Internal Revenue Code and plans that participate in the
Transfer Agent's PruArray and SmartPath Programs (benefit plan recordkeeping
services) (hereinafter referred to as a PruArray or SmartPath Plan). All plans
of a company for which Prudential serves as plan administrator or recordkeeper
are aggregated in meeting the $1 million threshold. The term "existing assets"
as used herein includes stock issued by a plan sponsor, shares of Prudential
Mutual Funds and shares of certain unaffiliated mutual funds that participate in
the PruArray or SmartPath Program (Participating Funds). "Existing assets" also
include monies invested in The Guaranteed Interest Account (GIA), a group
annuity insurance product issued by Prudential, and units of The Stable Value
Fund (SVF), an unaffiliated bank collective fund. Class A shares may also be
purchased at NAV by plans that have monies invested in GIA and SVF, provided (i)
the purchase is made with the proceeds of a redemption from either GIA or SVF
and (ii) Class A shares are an investment option of the plan.
PRUARRAY ASSOCIATION BENEFIT PLANS. Class A shares are also offered at net
asset value to Benefit Plans or non-qualified plans sponsored by employers which
are members of a common trade, professional or membership association
(Association) that participate in the PruArray Program provided that the
Association enters into a written agreement with Prudential. Such Benefit Plans
or non-qualified plans may purchase Class A shares at net asset value without
regard to the assets or number of participants in the individual employer's
qualified plan(s) or non-qualified plans so long as the employers in the
Association (i) have retirement plan assets in the aggregate of at least $1
million or 250 participants in the aggregate and (ii) maintain their accounts
with the Fund's Transfer Agent.
PRUARRAY SAVINGS PROGRAM. Class A shares are also offered at net asset
value to employees of companies that enter into a written agreement with
Prudential Retirement Services to participate in the PruArray Savings Program.
Under this Program, a limited number of Prudential Mutual Funds are available
for purchase at net asset value by Individual Retirement Accounts and Savings
Accumulation Plans of the company's employees. The Program is available only to
(i) employees who open an IRA or Savings Accumulation Plan account with the
Fund's transfer agent and (ii) spouses of employees who open an IRA account with
the Fund's transfer agent. The program is offered to companies that have at
least 250 eligible employees.
SPECIAL RULES APPLICABLE TO RETIREMENT PLANS. After a Benefit Plan or
PruArray or SmartPath Plan qualifies to purchase Class A shares at NAV, all
subsequent purchases will be made at NAV.
OTHER WAIVERS. In addition, Class A shares may be purchased at NAV,
through Prudential Securities or the Transfer Agent, by the following persons:
(a) current and former Directors/Trustees and current officers of the Prudential
Mutual Funds (including the Fund), (b) employees of Prudential Securities and
PIFM and their subsidiaries and members of the families of such persons who
maintain an "employee related" account at Prudential Securities or the Transfer
Agent, (c) employees of subadvisers of the Prudential Mutual Funds provided that
purchases at NAV are permitted by such person's
26
<PAGE>
employer, (d) Prudential, employees and special agents of Prudential and its
subsidiaries and all persons who have retired directly from active service with
Prudential or one of its subsidiaries, (e) registered representatives and
employees of dealers who have entered into a selected dealer agreement with
Prudential Securities provided that purchases at NAV are permitted by such
person's employer, (f) investors who have a business relationship with a
financial adviser who joined Prudential Securities from another firm, provided
that (i) the purchase is made within 180 days of the commencement of the
financial adviser's employment at Prudential Securities, or within one year in
the case of Benefit Plans, (ii) the purchase is made with proceeds of a
redemption of shares of any open-end non-money market fund sponsored by the
financial adviser's previous employer (other than a fund which imposes a
distribution or service fee of .25 of 1% or less) and (iii) the financial
adviser served as the client's broker on the previous purchases, and (g)
investors in Individual Retirement Accounts, provided the purchase is made with
the proceeds from a tax-free rollover of assets from a Benefit Plan for which
Prudential Investments serves as the recordkeeper or administrator.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions. See "Purchase and
Redemption of Fund Shares -- Reduction and Waiver of Initial Sales Charges --
Class A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing
one of the deferred sales charge alternatives is the NAV next determined
following receipt of an order by the Transfer Agent or Prudential Securities.
Although there is no sales charge imposed at the time of purchase, redemptions
of Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares -- Contingent Deferred Sales Charges." The Distributor will pay from its
own resources sales commissions at the time of sale of up to 4% of the purchase
price of Class B shares to dealers, financial advisers and other persons who
sell Class B shares at the time of sale. This facilitates the ability of the
Fund to sell the Class B shares without an initial sales charge being deducted
at the time of purchase. The Distributor anticipates that it will recoup its
advancement of sales commissions from the combination of the CDSC and the
distribution fee. See "How the Fund is Managed--Distributor," above. In
connection with the sale of Class C shares, the Distributor will pay, from its
own resources, dealers, financial advisers and other persons which distribute
Class C shares a sales commission of up to 1% of the purchase price at the time
of the sale.
CLASS Z SHARES
Class Z shares are currently available for purchase by the following
categories of investors: (i) pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code, deferred
compensation plans and annuity plans under Sections 457 and 403(b)(7) of the
Internal Revenue Code, and non-qualified plans for which the Fund is an
available option (collectively, Benefit Plans), provided that such Benefit Plans
(in combination with other plans sponsored by the same employer or group of
related employers) have at least $50 million in defined contribution assets;
(ii) participants in any fee-based program or trust program sponsored by
Prudential Securities Incorporated (Prudential Securities), The Prudential
Savings Bank, F.S.B., or any affiliate, which includes mutual funds as
investment options and for which the Fund is an available option; (iii) certain
participants in the MEDLEY Program (group variable annuity contracts) sponsored
by The Prudential Insurance Company of America (Prudential) for whom Class Z
shares of the Prudential Mutual Funds are an available investment option; (iv)
Benefit Plans for which Prudential Retirement Services serves as record keeper
and as of September 20, 1996, (a) were Class Z shareholders of the Prudential
Mutual Funds, or (b) executed a letter of intent to purchase Class Z shares of
the Prudential Mutual Funds; (v) current and former Directors/Trustees of the
Prudential Mutual Funds (including the Fund); and (vi) employees of Prudential
and/or Prudential Securities who participate in a Prudential-sponsored employee
savings plan.
In connection with the sale of Class Z shares, the Manager, the
Distributor or one of their affiliates may pay dealers,
27
<PAGE>
financial advisers and other persons which distribute shares a finders' fee from
its own resources based on a percentage of the net asset value of shares sold by
such persons.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES AT ANY TIME FOR CASH AT THE NAV NEXT DETERMINED
AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE TRANSFER AGENT OR
PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES." In certain cases,
however, redemption proceeds 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, YOU MUST
REDEEM YOUR SHARES THROUGH PRUDENTIAL SECURITIES. PLEASE CONTACT YOUR PRUDENTIAL
SECURITIES FINANCIAL ADVISER
IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR
REDEMPTION SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF
YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE
OF THE CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE
REDEMPTION REQUEST TO BE PROCESSED. IF THE CERTIFICATES, MUST BE RECEIVED BY THE
TRANSFER AGENT IN ORDER FOR THE REDEMPTION REQUEST TO BE PROCESSED. IF
REDEMPTION IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR FIDUCIARY,
WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST BE SUBMITTED
BEFORE SUCH REQUEST WILL BE ACCEPTED. All correspondence and documents
concerning redemptions should be sent to the Fund in care of its Transfer Agent,
Prudential Mutual Fund Services LLC, Attention: Redemption Services, P.O. Box
15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid
to a person other than the record owner, (c) are to be sent to an address other
than the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power, must be guaranteed by
an "eligible guarantor institution." An "eligible guarantor institution"
includes any bank, broker, dealer or credit union. The Transfer Agent reserves
the right to request additional information from and make reasonable inquiries
of, any eligible guarantor institution. For clients of Prusec, a signature
guarantee may be obtained from the agency or office manager of most Prudential
Insurance and Financial Services or Preferred Services offices. In the case of
redemptions from a PruArray or Smartpath Plan, if the proceeds of the redemption
are invested in another option of the Plan, in the name of the record holder and
at the same address as reflected in the Transfer Agent's records, a signature
guarantee is not required.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN
SEVEN DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Fund fairly to determine
the value of its net assets, or (d) during any other period when the SEC, by
order, so permits; provided that applicable rules and regulations of the SEC
shall govern as to whether the conditions prescribed in (b), (c) or (d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL
THE FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR CASHIER'S CHECK.
REDEMPTION IN KIND. If the 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
28
<PAGE>
conformity with applicable rules of the SEC. Securities will be readily
marketable and will be valued in the same manner as 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 has,
however, 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, may not be allowed for federal income tax purposes. See "Taxes,
Dividends and Distributions" in the Statement of Additional Information.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred
sales charge or CDSC declining from 5% to zero over a six-year period. Class C
shares redeemed within one year of purchase will be subject to a 1% CDSC. The
CDSC will be deducted from the redemption proceeds and reduce the amount paid to
you. The CDSC will be imposed on any redemption by you which reduces the current
value of your Class B or Class C shares to an amount which is lower than the
amount of all payments by you for shares during the preceding six years, in the
case of Class B shares, and one year, in the case of Class C shares. A CDSC will
be applied on the lesser of the original purchase price or the current value of
the shares being redeemed. Increases in the value of your shares or shares
acquired through reinvestment of dividends or distributions are not subject to a
CDSC. The amount of any CDSC will be paid to and retained by the Distributor.
See "How the Fund is Managed -- Distributor" and "Waiver of the Contingent
Deferred Sales Charges -- Class B Shares" below.
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" below.
29
<PAGE>
The following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
YEAR SINCE PURCHASE AS A PERCENTAGE OF DOLLARS INVESTED
PAYMENT MADE OR REDEMPTION PROCEEDS
------------------ --------------------------------
<S> <C>
First .................... 5.0%
Second ................... 4.0%
Third .................... 3.0%
Fourth ................... 2.0%
Fifth .................... 1.0%
Sixth .................... 1.0%
Seventh .................. None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the
calculation will be made in a manner that results in the lowest possible rate.
It will be assumed that the redemption is made first of amounts representing
shares acquired pursuant to the reinvestment of dividends and distributions;
then of amounts representing the increase in 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 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 591/2; 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
30
<PAGE>
purchased with amounts used to repay a loan from such plans on which a CDSC was
not previously deducted will thereafter be subject to a CDSC without regard to
the time such amounts were previously invested. In the case of a 401(k) plan,
the CDSC will also be waived upon the redemption of shares purchased with
amounts used to repay loans made from the account to the participant and from
which a CDSC was previously deducted.
SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on
certain redemptions from a Systematic Withdrawal Plan. On an annual basis, up to
12% of the total dollar amount subject to the CDSC may be redeemed without
charge. The Transfer Agent will calculate the total amount available for this
waiver annually on the anniversary date of your purchase or, for shares
purchased prior to March 1, 1997, on March 1 of the current year. The CDSC will
be waived (or reduced) on redemptions until this threshold 12% amount is
reached.
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.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS C SHARES
PRUARRAY OR SMARTPATH PLANS. The CDSC will be waived on redemptions from
qualified and non-qualified retirement and deferred compensation plans that
participate in the Transfer Agent's PruArray and SmartPath Programs.
CONVERSION FEATURE -- CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (I.E., $1,000
divided by $2,100 (47.62%) multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share net asset value of the Class A shares may be
higher than that of the Class B shares at the time of conversion. Thus, although
the
31
<PAGE>
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 distributions paid on Class A, Class B, Class C and Class Z
shares will not constitute "preferential dividends" under the Internal Revenue
Code and (ii) that the conversion of shares does not constitute a taxable event.
The conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Fund will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
As a shareholder of the Fund, you have an exchange privilege with certain
other Prudential Mutual Funds (the Exchange Privilege), including one or more
specified money market funds, subject to the minimum investment requirement of
such funds. Class A, Class B, Class C and Class Z shares may be exchanged for
Class A, Class B, Class C and Class Z shares, respectively, of another fund on
the basis of the relative NAV. No sales charge will be imposed at the time of
the exchange. Any applicable CDSC payable upon the redemption of shares
exchanged will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. Class B
and Class C shares may not be exchanged into money market funds other than
Prudential Special Money Market Fund, Inc. For purposes of calculating the
holding period applicable to the Class B conversion feature, the time period
during which Class B shares were held in a money market fund will be excluded.
See "Conversion Feature -- Class B Shares" above. An exchange will be treated as
a redemption and purchase for tax purposes. See "Shareholder Investment Account
- -- Exchange Privilege" in the Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares on weekdays, except
holidays, between the hours of 8:00 a.m. and 6:00 p.m., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds next determined after the request is received in
good order. The Exchange Privilege is available only in states where the
exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES 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.
32
<PAGE>
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE
OF SHARES MAY BE DIFFICULT TO IMPLEMENT AND SHAREHOLDERS SHOULD MAKE EXCHANGES
BY MAIL BY WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC 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) and for shareholders who qualify to purchase Class Z shares (see
"Alternative Purchase Plan -- Class Z Shares" above). Under this exchange
privilege, amounts representing any Class B and Class C shares (which are not
subject to a CDSC) held in such a shareholder's account will be automatically
exchanged for Class A shares for shareholders who qualify to purchase Class A
shares at NAV on a quarterly basis, unless the shareholder elects otherwise.
Similarly, shareholders who qualify to purchase Class Z shares will have their
Class B and Class C shares (which are not subject to a CDSC) and their Class A
shares exchanged for Class Z shares on a quarterly basis. Eligibility for this
exchange privilege will be calculated on the business day prior to the date of
the exchange. Amounts representing Class B or Class C shares which are not
subject to a CDSC include the following: (1) amounts representing Class B or
Class C shares acquired pursuant to the automatic reinvestment of dividends and
distributions, (2) amounts representing the increase in the net asset value
above the total amount of payments for the purchase of Class B or Class C shares
and (3) amounts representing Class B or Class C shares held beyond the
applicable CDSC period. Class B and Class C shareholders must notify the
Transfer Agent either directly or through Prudential Securities or Prusec that
they are eligible for this special exchange privilege.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares when
they elect to have those assets become a part of the fee-based program. Upon
leaving the program (whether voluntarily or not), such Class Z shares (and, to
the extent provided for in the program, Class Z shares acquired through
participation in the program) will be exchanged for Class A shares at net asset
value.
The Exchange Privilege is not a right and may be suspended, modified or
terminated on 60 day's notice to shareholders.
The Fund and other Prudential Mutual Funds are not intended to serve as
vehicles for frequent trading in response to short-term fluctuations in the
market. Due to the disruptive effect that market timing investment strategies
and excessive trading can have on efficient portfolio management, each
Prudential Mutual Fund and the Fund reserves the right to refuse purchase orders
and exchanges by any person, group or commonly controlled accounts, if, in the
Manager's sole judgement, such person, group or accounts were following a market
timing strategy or were otherwise engaged in excessive trading ("Market
Timers").
To implement this authority to protect the Fund and its shareholders from
excessive trading, the Fund will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Fund or its affiliates pursuant to which the Market Timer has agreed to
abide by certain procedures, which include a daily dollar limit on trading.The
Fund may notify the Market Timer of rejection of an exchange or purchase order
subsequent to the day on which the order was placed.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder in the Fund, you
can take advantage of the following additional services and privileges:
o 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
33
<PAGE>
subsequent dividends and/or distributions sent in cash rather than reinvested.
If you hold shares through Prudential Securities, you should contact your
financial adviser.
o 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.
o 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.
o 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."
o 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 Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. In addition,
monthly unaudited financial data is available upon request from the Fund.
o SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, or by
telephone at (800) 225-1852 (toll free) or, from outside the U.S.A., at (908)
417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
34
<PAGE>
- --------------------------------------------------------------------------------
THE PRUDENTIAL MUTUAL FUND FAMILY
- --------------------------------------------------------------------------------
PRUDENTIAL INVESTMENTS 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.
- --------------------------------------------------------------------------------
TAXABLE BOND FUNDS
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Prudential Global Series
International Stock Series
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Balanced Fund
Prudential Distressed Securities Fund, Inc.
Prudential Dryden Fund
Prudential Active Balanced Fund
Prudential Bond Market Index Fund
Prudential Europe Index Fund
Prudential Pacific Index Fund
Prudential Small-Cap Index Fund
Prudential Stock Index Fund
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Jennison Fund, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Multi-Sector Fund, Inc.
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
<PAGE>
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
o TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
o TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
o COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
o INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
- --------------------------------------------------------------------------------
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a 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
What are the Fund's Risk Factors and Special
Characteristics? ............................ 2
FUND EXPENSES ................................... 4
FINANCIAL HIGHLIGHTS ............................ 5
HOW THE FUND INVESTS ............................ 9
Investment Objective and Policies ............. 9
Hedging and Return Enhancement Strategies ..... 12
Other Investments and Policies ................ 14
Investment Restrictions ....................... 16
HOW THE FUND IS MANAGED ......................... 16
Manager ....................................... 16
Subadviser .................................... 16
Distributor ................................... 17
Fee Waivers 18
Portfolio Transactions ........................ 18
Custodian and Transfer and
Dividend Disbursing Agent ................... 19
HOW THE FUND VALUES ITS SHARES .................. 19
HOW THE FUND CALCULATES PERFORMANCE ............. 19
TAXES, DIVIDENDS AND DISTRIBUTIONS .............. 20
GENERAL INFORMATION ............................. 21
Description of Common Stock ................... 21
Additional Information ........................ 22
SHAREHOLDER GUIDE ............................... 22
How to Buy Shares of the Fund ................. 22
Alternative Purchase Plan ..................... 24
How to Sell Your Shares ....................... 28
Conversion Feature--Class B Shares ............ 31
How to Exchange Your Shares ................... 32
Shareholder Services .......................... 33
THE PRUDENTIAL MUTUAL FUND FAMILY ............... A-1
================================================================================
MF150A
- --------------------------------------------------------------------------------
CUSIP Nos.: Class A: 37936G 30 3
Class B: 37936G 20 4
Class C: 37936G 40 2
Class Z: 37936G 50 1
- --------------------------------------------------------------------------------
GLOBAL
UTILITY FUND, INC.
----------------------
PROSPECTUS
DECEMBER 2, 1997
WWW.PRUDENTIAL.COM
----------------------
[GRAPHIC LOGO]
PRUDENTIAL
INVESTMENTS
<PAGE>
GLOBAL UTILITY FUND, INC.
Statement of Additional Information
dated December 2, 1997
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 Gateway Center Three, 100 Mulberry Street, Newark,
New Jersey 07102-4077, and its telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Fund's Prospectus, dated December 2, 1997, a copy
of which may be obtained upon request from the Fund at the address or telephone
number above.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
CROSS-REFERENCE
TO PAGE IN
PAGE PROSPECTUS
---- ----------
<S> <C> <C>
General Information B-2 21
Investment Objective and Policies B-2 9
Investment Restrictions B-15 16
Information Regarding Directors and Officers B-16 16
Management of the Fund B-18 16
Portfolio Transactions and Brokerage B-21 18
Purchase and Redemption of Fund Shares B-23 22
Shareholder Investment Account B-25 30
Net Asset Value B-29 19
Taxes, Dividends and Distributions B-29 20
Performance Information B-31 19
Custodian, Transfer and Dividend Disbursing Agent
and Independent Accountants B-34 19
Financial Statements B-35 --
Report of Independent Accountants B-48 --
Independent Auditors' Report B-49 --
Appendix I-General Investment Information --
Appendix II-Historical Performance Data --
Appendix III-Information Relating to The Prudential --
===================================================================================
MF150B
</TABLE>
<PAGE>
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 costs on borrowings needed for
capital
B-2
<PAGE>
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 the time the Fund
B-3
<PAGE>
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.
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 or other liquid assets 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 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.
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<PAGE>
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 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 or options for which it
establishes and maintains with its Custodian for the term of the option a
segregated account consisting of cash, U.S. Government securities, equity
securities or other liquid, unencumbered assets, marked-to-market daily, having
a value at least equal to the fluctuating market value of the optioned
securities. An option is covered so long as the Fund is obligated as the writer
of a call option, to 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. 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; otherwise the Fund will deposit
and maintain with its Custodian in a segregated account cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily, 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
B-5
<PAGE>
also deposit in a segregated account with its Custodian cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily, 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.
B-6
<PAGE>
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.
B-7
<PAGE>
FUTURES CONTRACTS
The Fund will enter into futures contracts only for certain bona fide
hedging, return 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 German 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.
The Fund may have to sell assets at a time when it may be advantageous or
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 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.
B-8
<PAGE>
OPTIONS ON FUTURES CONTRACTS
The Fund will also enter into options on futures contracts for certain bona
fide hedging, return enhancement and risk management purposes. The Fund may
purchase put and call options and write (i.e., sell) 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; otherwise, it will segregate and maintain with its
Custodian for the term of the option cash, U.S. Government securities, equity
securities or other liquid, unencumbered assets, marked-to-market daily, 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; otherwise, it
will segregate and maintain with its Custodian for the term of the option cash
or other liquid assets 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.
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
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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 or other liquid assets, 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 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.
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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, equity securities or other liquid, unencumbered assets,
marked-to-market daily, 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 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.
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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 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
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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, return
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, equity securities or other liquid, unencumbered assets,
marked-to-market daily, 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 may not hold more than 15% of its net assets in repurchase
agreements which have a maturity of longer than seven days or in other illiquid
securities, including securities that are illiquid by virtue of the absence of a
readily available market (either within or outside of the United States) or
legal or contractual restrictions on resale. 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.
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.
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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.
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 OTCOption. 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."
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.
SEGREGATED ACCOUNTS
When the Fund is required to segregate assets in connection with certain
hedging transactions, it will maintain cash or liquid assets in a segregated
account with the Fund's Custodian. "Liquid assets" mean cash, U.S. Government
securities, equity securities (including foreign securities), debt obligations
or other liquid, unencumbered assets, marked-to-market daily.
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, 1996 and 1997 its portfolio turnover was 13% and 13%,
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 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.
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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 331/3% 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>
<TABLE>
<CAPTION>
INFORMATION REGARDING DIRECTORS AND OFFICERS
NAME, ADDRESS+ POSITION(S) HELD PRINCIPAL OCCUPATIONS
AND AGE WITH THE FUND DURING PAST 5 YEARS
- ----------------------- ----------- -----------------
<S> <C> <C> <C>
Eugene C. Dorsey (70) Director Retired President, Chief Executive Officer and Trustee of
the Gannett Foundation (now Freedom Forum); former
Publisher of four Gannett Newspapers and Vice President
of Gannett Company; past Chairman, Independent Sector,
Washington, D.C. (largest national coalition of
philanthropic organizations) (since October 1989); former
Chairman of the American Council for the Arts; Director
of the Advisory Board of Chase Manhattan Bank of
Rochester, First Financial Fund, Inc., The High Yield
Plus Fund, Inc. and The High Yield Income Fund, Inc.
Douglas H. McCorkindale (58) Director President (since September 1997) and Vice Chairman, (since
March 1984); Director of Continental Airlines, Inc.,
Gannett Co. Inc., and Frontier Corporation; Director and
President of First Financial Fund, Inc. and The High
Yield Plus Fund,Inc.
Thomas T. Mooney (56) Director President of the Greater Rochester Metro Chamber of
55 St. Paul Street Commerce; former Rochester City Manager; Trustee of
Rochester, NY 14604 Center for Governmental Research, Inc.; Director of
Blue Cross of Rochester, The Business Council of New York
State, Executive Service Corps of Rochester, Monroe
County Water Authority, Rochester Jobs, Inc.,
Northeast-Midwest Institute, Monroe County Industrial
Development Corporation, First Financial Fund, Inc., The
High Yield Plus Fund, Inc. and The High Yield Income
Fund, Inc.
*Richard A. Redeker (54) President Employee of Prudential Investments; formerly President,
751 Broad Street and Director Chief Executive Officer and Director (October 1993-September
Newark, NJ 07102 1996) of Prudential Mutual Fund Management, Inc.;
Executive Vice President, Director and Member of the
Operating Committee (October 1993-September 1996),
Prudential Securities Incorporated (Prudential
Securities); Director (October 1993-September 1996) of
Prudential Securities Group, Inc.; Executive Vice
President (January 1994-September 1996) The Prudential
Investment Corporation (PIC); Director (January
1994-September 1996) of Prudential Mutual Fund
Distributors, Inc. (PMFD) and Prudential Mutual Fund
Services, Inc. (PMFS); formerly Senior Executive Vice
President and Director (September 1978-September 1993) of
Kemper Financial Services, Inc.; President and Director
of The High Yield Income Fund, Inc.
Thomas A. Early (42) Vice President Vice President and General Counsel (since March 1997),
Prudential Mutual Funds and Annuities; Executive Vice
President, Secretary and General Counsel (since December
1996) of Prudential Investments Fund Management LLC
(PIFM); formerly Vice President and General Counsel (May
1994-March 1997) of Prudential Retirement Services and
Associate General Counsel and Chief Financial Services
Officer (1988-1994), Frank Russell Company.
S. Jane Rose (51) Secretary Senior Vice President (since December 1996) of PIFM;
Senior Vice President and Senior Counsel (since July
1992) of Prudential Securities; formerly Senior Vice
President (January 1991-September 1996) and Senior
Counsel (June 1987-September 1996) of Prudential Mutual
Fund Management, Inc.; and Vice President and Associate
General Counsel of Prudential Securities.
</TABLE>
B-16
<PAGE>
<TABLE>
<CAPTION>
INFORMATION REGARDING DIRECTORS AND OFFICERS
NAME, ADDRESS+ POSITION(S) HELD PRINCIPAL OCCUPATIONS
AND AGE WITH THE FUND DURING PAST 5 YEARS
- ----------------------- ----------- -----------------
<S> <C> <C> <C>
Grace C. Torres (38) Treasurer First Vice President (since December 1996) of PIFM; First
and Principal Vice President (since March 1994) of Prudential Securities;
Financial and formerly First Vice President (March 1994-September
Accounting Officer 1996) of Prudential Mutual Fund Management, Inc.; and,
Vice President of Bankers Trust Corporation.
Stephen M. Ungerman (44) Assistant Tax Director (since March 1996) of Prudential Investments
Treasurer and the Private Asset Group of The Prudential Insurance
Company of America (Prudential); formerly First Vice
President of Prudential Mutual Fund Management, Inc.
(February 1993-September 1996); prior thereto, Senior Tax
Manager of Price Waterhouse LLP (1981-January 1993).
</TABLE>
- ---------------
* Indicates those directors that are "interested persons" of the Fund as
defined in the 1940 Act.
+ Unless otherwise indicated, the address is c/o Prudential Investments Fund
Management LLC, Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077.
The Directors of the Fund are also trustees, directors and officers of some
or all of the other investment companies distributed by Prudential Securities.
The officers conduct and supervise the daily business operations of the
Fund, while the directors, in addition to their functions set forth under
"Management of the Fund" below, review such actions and decide on general
policy.
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.
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 employed by the Manager or Subadviser. The Fund pays each of its
Directors who is not employed by the Manager or the Subadviser annual
compensation of $5,000, in addition to certain out-of-pocket expenses. The
amount of annual compensation paid to each Director may change as a result of
the introduction of additional funds on the boards of which the Director will be
asked to serve.
Directors may receive their Director's fees pursuant to a deferred fee
agreement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of Director's fees in installments which accrue interest at a
rate equivalent to the prevailing rate applicable to 90-day U.S. Treasury Bills
at the beginning of each calendar quarter or, pursuant to an SEC exemptive
order, at the daily rate of return of the Fund. Payment of the interest so
accrued is also deferred and accruals become payable at the option of the
Director. The Fund's obligation to make payments of deferred Directors' fees,
together with interest thereon, is a general obligation of the Fund. As of
December 31, 1996, Mr. Dorsey and Ms. Robin Smith, a former Fund Director,
elected to reduce their Directors' fees pursuant to the deferred fee agreement.
The following table sets forth the aggregate compensation paid by the Fund
for the fiscal year ended September 30, 1997 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 the Boards of any other
investment companies managed by PIFM (Fund Complex) for the calendar year ended
December 31, 1996. In October, 1996, shareholders elected a new Board of
Directors. Below are listed all Directors who have served on the Board of the
Fund during its most recent fiscal year, as well as the new Directors who took
office after the shareholder meeting in October.
B-17
<PAGE>
<TABLE>
<CAPTION>
COMPENSATION TABLE
------------------
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, Former Director $2,000 None N/A $166,000 (21/39)**
Eugene C. Dorsey* $5,750 None N/A $98,583 (12/36)**
Thomas T. Mooney* $5,750 None N/A $135,375 (18/36)**
Douglas H. McCorkindale* $5,750 None N/A $71,208 (10/13)**
Richard A. Redeker+ None None N/A --
Sir Michael Sandberg, Former Director $2,000 None N/A $26,500 (2/2)**
Robin B. Smith*, Former Director $2,000 None N/A $89,957(11/20)**
Nancy H. Teeters, Former Director $2,000 None N/A $103,583 (11/28)**
</TABLE>
- ----------
* Total compensation from all of the Funds in the Fund Complex for the
calendar year ended December 31, 1996, includes amounts deferred at the
election of Directors under the Fund's deferred compensation plan.
Including accrued interest, total compensation amounted to approximately
$111,535, $71,034, $139,869 and $109,294 for Mr. Dorsey, Mr. McCorkindale,
Mr. Mooney and Ms. Smith, respectively.
** Indicates number of funds/portfolios in Fund Complex (including the Fund)
to which aggregate compensation relates.
+ Daniel S. Ahearn, who was an interested Director, did not receive, and
Richard A. Redeker, who is an interested Director, does not receive
compensation from the Fund or any fund in the Fund Complex.
As of November 7, 1997, 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 7, 1997 the beneficial owners, directly or indirectly, of
more than 5% of the outstanding shares of any class of beneficial interest were:
Robert Shyer and HenryShyer, CO-TTEES, Zyloware Corp PSPlan DTD 11/30/67, 1136
46th Road, Long Island City, NY, who held 570 Class Z shares (15%); Wilsandra
Construction Inc., William Truckenbrod, President, 300Camden Avenue,Buffalo, NY,
who held 565 Class Z shares (15%); Prudential Securities C/F,Richard Taylor,IRA
DTD 06/04/96, 607 CherryLn., Phoenixville,PA, who held 428 Class Z shares (11%);
Prudential Securities C/F,Dean D. Gould, IRADTD 10/23/91, 3059 Woodhams,
Kalamazoo, MI, who held 1,090 Class Z shares (28%); First Church of Christ
Scientist, Attn: Delsie Carden, 1800 Roxboro Rd., Durham,NC, who held 370 Class
Z shares (10%); C. Lee Jones and George C. Jones, CO-TTEES, The Stookey Liv.
Tr., UA DTD 08/16/90, POBox 81444, Austin,TX, who held 823 Class Z shares (21%).
As of November 7, 1997, Prudential Securities was the record holder for
other beneficial owners of 6,965 Class A shares (or 0.1% of the outstanding
Class A shares), 6,904,751 Class B shares (or 69% of the outstanding Class B
shares) 31,605 Class C shares (or 70% of the outstanding Class C shares) and
3,877 Class Z shares (or 99.6% of the outstanding Class Z shares) of the Fund.
In the event of any meetings of shareholders, Prudential Securities will
forward, or cause the forwarding of, proxy materials to the beneficial owners
for which it is record holder.
MANAGEMENT OF THE FUND
THE MANAGER
The manager of the Fund is Prudential Investments Fund Management LLC
(formerly Prudential Mutual Fund Management LLC), as successor to Prudential
Mutual Fund Management, Inc. (PIFM or the Manager), Gateway Center Three, 100
Mulberry Street, Newark, New Jersey 07102-4077. PIFM 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, 1997, PIFM managed and/or administered
open-end and closed-end management investment companies with assets of
approximately $59.4 billion. According to the Investment Company Institute, as
of December 31, 1996, the Prudential Mutual Funds was the 15th largest family of
mutual funds in the United States.
PIFM is a subsidiary of Prudential Securities and Prudential. Prudential
Mutual Fund Services LLC (PMFS or the Transfer Agent) 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.
B-18
<PAGE>
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PIFM, 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, PIFM is obligated to keep certain books and
records of the Fund. PIFM also administers the 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 PMFS, the
Fund's transfer and dividend disbursing agent. The management services of PIFM
for the Fund are not exclusive under the terms of the Management Agreement and
PIFM is free to, and does, render management services to others.
For its services, PIFM receives 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
PIFM, but excluding interest, taxes, brokerage commissions, distribution fees
and litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Fund's business) for any fiscal year
exceed the lowest applicable annual expense limitation established and enforced
pursuant to the statutes or regulations of any jurisdiction in which the Fund's
shares are qualified for offer and sale, the compensation due to PIFM will be
reduced by the amount of such excess. Reductions in excess of the total
compensation payable to PIFM will be paid by PIFM to the Fund. No such
reductions were required during the fiscal year ended September 30, 1997. No
jurisdiction currently limits the Fund's expenses.
In connection with its management of the corporate affairs of the Fund,
PIFM bears the following expenses: (a) the salaries and expenses of all of its
and the Fund's personnel except the fees and expenses of Directors who are not
affiliated persons of PIFM or the Subadviser; (b) all expenses incurred by PIFM
or by the Fund in connection with managing the ordinary course of the Fund's
business, other than those assumed by the Fund as described below; and (c) the
subadvisory fee payable to the Subadviser pursuant to the Subadvisory Agreement
among the Fund, PIFM 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, including the preparation and printing of the Fund's registration
statements and prospectuses for such purposes, and paying the fees and expenses
of notice filings made in accordance with state securities laws, (k) allocable
communications expenses with respect to investor services and all expenses of
shareholders' and 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 PIFM will not be liable for any
error of judgment or for any loss suffered by the Fund in connection with the
matters to which the Management Agreement relates, except a loss resulting from
willful misfeasance, bad faith, gross negligence or reckless disregard of duty.
The Management Agreement provides that it will terminate automatically if
assigned, and that it may be terminated without penalty by either party upon not
more than 60 days' nor less than 30 days' written notice. The Management
Agreement will continue in effect for a period of more than two years from the
date of execution only so long as such continuance is specifically approved at
least annually in conformity with the 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 28, 1997, and by shareholders of the Fund, on December
20,1990.
THE SUBADVISER
Wellington Management Company, LLP (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
B-19
<PAGE>
certain books and records of the Fund. PIFM 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, PIFM, not the Fund, pays Wellington Management a fee,
computed daily and payable monthly, 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.
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 28, 1997, and by shareholders of the Fund, on December 30, 1991.
For the fiscal years ended September 30, 1995, 1996 and 1997, the Fund paid
$2,361,766, $2,195,690 and $2,040,052, respectively, to PIFM under the
Management Agreement and PIFM paid subadvisory fees of $1,639,306, $1,533,621
and $1,434,579, respectively, to Wellington Management under the Subadvisory
Agreement.
THE DISTRIBUTOR
Prudential Securities Incorporated (Prudential Securities, PSIor the
Distributor), One Seaport Plaza, New York, New York 10292, acts as the
distributor of the 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 a distribution agreement (the Distribution
Agreement), Prudential Securities incurs the expenses of distributing the Fund's
Class A shares, Class B shares and Class C shares. Prudential Securities also
incurs the expense of distributing the Fund's Class Z shares under the
Distribution Agreement, none of which is paid or reimbursed by the Fund. 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 Plans or in any agreement related to the Plans
(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 28, 1997. The Class A Plan, as amended, was
approved by Class A and Class B shareholders, and the Class B Plan, as amended,
was approved by Class B shareholders on July 19, 1994. The Class C Plan was
approved by the sole shareholder of Class C shares on August 1, 1994.
CLASS A PLAN. For the fiscal year ended September 30, 1997, PSI received
payments of $290,758, 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, 1997, PSI also
received approximately $43,000 in initial sales charges.
CLASS B PLAN. For the fiscal year ended September 30, 1997, Prudential
Securities received $1,856,933 from the Fund under the Class B Plan and spent
approximately $391,400 in distributing the Fund's Class B shares. It is
estimated that of the latter amount,
B-20
<PAGE>
$500 (.15%) was spent on printing and mailing of prospectuses to other than
current shareholders; $67,500 (20.84%) 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 $323,400 (99.85%) on the aggregate of (i)
payments of commissions and account servicing fees to financial advisers
($288,800 or 89.16%) and (ii) an allocation on account of overhead and other
branch office distribution-related expenses ($34,600 or 10.68%). 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, 1997, Prudential Securities received contingent
deferred sales charges of approximately $368,500.
CLASS C PLAN. For the fiscal year ended September 30, 1997, Prudential
Securities received $7,270 under the Class C Plan and spent approximately $5,778
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, 1997, Prudential Securities received approximately $200
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 the Distribution Agreement, the Fund has agreed to indemnify
Prudential Securities to the extent permitted by applicable law against certain
liabilities under federal securities laws. The restated Distribution Agreement
was last approved by the Board of Directors, including a majority of the Rule
12b-1 Directors, on May 28, 1997, which provides for PSI to serve as distributor
of each class of shares.
NASD MAXIMUM SALES CHARGE RULE. Pursuant to rules of the NASD, the
Distributor is required to limit aggregate initial sales charges, deferred sales
charges and asset-based sales charges to 6.25% of total gross sales of each
class of shares. Interest charges on unreimbursed distribution expenses equal to
the prime rate plus one percent per annum may be added to the 6.25% limitation.
Sales from the reinvestment of dividends and distributions are not included in
the calculation of the 6.25% limitation. The annual asset-based sales charge on
shares of the Fund may not exceed .75% of 1% per class. The 6.25% limitation
applies to each class of the Fund rather than on a per shareholder basis. If
aggregate sales charges were to exceed 6.25% of total gross sales of any class,
all sales charges on shares of that class would be suspended.
PORTFOLIO TRANSACTIONS AND BROKERAGE
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
B-21
<PAGE>
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.
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.
B-22
<PAGE>
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, 1997.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
-------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Total brokerage commissions paid by the Fund ............... $174,648 $140,846 $258,076
Total brokerage commissions paid to Prudential Securities .. -- -- $ 3,000
Percentage of total brokerage commissions paid to
Prudential Securities .................................... -- -- 1.2%
</TABLE>
The Fund effected no transactions that involved the payment of commissions
through Prudential Securities during the fiscal year ended September 30, 1997.
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). Class Z shares are offered
to a limited group of investors at net asset value without any sales charge. See
"Shareholder Guide--How to Buy Shares of the Fund" in the Prospectus.
Each class of shares represents an interest in the same assets of the Fund
and is identical in all respects except that (i) each class is subject to
different sales charges and distribution and/or service fees (except for Class Z
shares, which are not subject to any sales charges and distribution and/or
service fees), which may affect performance, (ii) each class has exclusive
voting rights with respect to any matter submitted to shareholders that relates
solely to its arrangement and has separate voting rights on any matter submitted
to shareholders in which the interests of one class differ from the interests of
any other class, (iii) each class has a different exchange privilege, (iv) only
Class B shares have a conversion feature and (v) Class Z shares are offered
exclusively for sale to a limited group of investors. See "Management of the
Fund--Distributor" and "Shareholder Investment Account--Exchange Privilege" in
this Statement of Additional Information and "Shareholders Guide--How to Buy
Shares of the Fund" in the Prospectus.
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*, Class C* and Class Z shares are sold at net asset value.
Using the Fund's net asset value at September 30, 1997, the maximum
offering price of the Fund's shares was as follows:
<TABLE>
<CAPTION>
<S> <C>
CLASS A
Net asset value and redemption price per share ............................... $17.52
Maximum Sales Charge (5% of offering price) .................................. .92
----------
Offering price to public ..................................................... $18.44
==========
CLASS B
Net asset value, offering price, and redemption price per Class B share* ..... $17.52
==========
CLASS C
Net asset value, offering price, and redemption price per Class C share* ..... $17.52
==========
CLASS Z
Net asset value, offering price, and redemption price per Class Z share ...... $17.54
==========
</TABLE>
- ----------
* Class B and Class C shares are subject to a contingent deferred sales charge
on certain redemptions. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES--CLASS A SHARES
Combined Purchase and Cumulative Purchase Privilege. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other Prudential Mutual Funds, the purchases
may be combined to take advantage of the reduced sales charges applicable to
larger purchases. See the table of breakpoints under "Shareholder
Guide--Alternative Purchase Plan" in the Prospectus.
B-23
<PAGE>
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 individual or the individual's spouse; and
(g)one or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that employer).
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charges will be granted
subject to confirmation of the investor's holdings. The Combined Purchase and
Cumulative Purchase Privilege does not apply to individual participants in any
retirement or group plans.
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of related
investors, as described above under "Combined Purchase and Cumulative Purchase
Privilege," may aggregate the value of their existing holdings of shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) to determine the
reduced sales charge. However, the value of shares held directly with the
Transfer Agent and through Prudential Securities will not be aggregated to
determine the reduced sales 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 shares of the Fund and shares of other
Prudential Mutual Funds (Investment Letter of Intent). Retirement and group
plans may also qualify to purchase Class A shares at net asset value by entering
into a Letter of Intent whereby they agree to enroll, within a thirteen-month
period, a specified number of eligible employees or participants (Participant
Letter of Intent).
For purposes of the Investment Letter of Intent, shares of the Fund and
shares of other Prudential Mutual Funds (excluding money market funds other than
those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent
and through Prudential Securities will not be aggregated to determine the
reduced sales charge. All shares must be held either directly through the
Transfer Agent or through Prudential Securities.
A Letter of Intent permits the purchaser, in the case of an Investment
Letter of Intent, to establish a total investment goal to be achieved by any
number of investments over a thirteen-month period and, in the case of a
Participant Letter of Intent, to establish minimum eligible employee or
participant goals over a thirteen-month period. Each investment made during the
period, in the case of an Investment Letter of Intent, will receive the reduced
sales charge applicable to the amount represented by the goal, as if it were a
single investment. In the case of a Participant Letter of Intent, each
investment made during the period will be made at net asset value. Escrowed
Class A shares totaling 5% of the dollar amount of the Letter of Intent will be
held by the Transfer Agent in 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 an
Investment Letter of Intent (except in the case of retirement and group plans)
may be back-dated up to 90 days, in order that any investments made during this
90-day period, valued at the purchaser's cost, can be applied to the fulfillment
of the Letter of Intent goal.
The Investment Letter of Intent does not obligate the investor to purchase,
nor the Fund to sell, the indicated amount. Similarly, the Participant Letter of
Intent does not obligate the retirement or group plan to enroll the indicated
number of eligible employees or participants. In the event the Letter of Intent
goal is not achieved within the thirteen-month period, the purchaser (or the
employer or plan sponsor in the case of any retirement or group plan) is
required to pay the difference between the sales charge otherwise applicable to
the purchases made during this period and 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.
B-24
<PAGE>
Prudential Securities must be notified at the time of purchase that the
investor is entitled to receive a reduced sales charge. The reduced sales charge
will, in the case of an Investment Letter of Intent, be granted subject to
confirmation of the investor's holdings, or in the case of a Participant Letter
of Intent, subject to confirmation of the number of eligible employees or
participants in the retirement or group plan. Letters of Intent are not
available to individual participants in any retirement or group plans.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
The Contingent Deferred Sales Charge 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>
<CAPTION>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
<S> <C>
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 considered disabled if he or she is unable to A copy of the Social Security Administration
engage in any substantial gainful activity by reason of any medically award letter or a letter from a physician on
determinable physical or mental impairment which can be expected to result in the physician's letterhead stating that the
death or to be of long-continued and indefinite duration. shareholder (or, in the case of a trust, the
grantor) is permanently disabled. The letter
must also indicate the date of disability.
Distribution from an IRA or 403(b) Custodial Account A copy of the distribution form from the
custodial firm indicating (i) the date of birth
of the shareholder and (ii) that the
shareholder is over age 59-1/2 and is taking a
normal distribution-signed by the shareholder.
Distribution from Retirement Plan A letter signed by the plan
administrator/trustee indicating the reason for
the distribution.
Excess Contributions A letter from the shareholder (for an IRA) or
the plan administrator/trustee on company
letterhead indicating the amount of the excess
and whether or not taxes have been paid.
</TABLE>
The Transfer Agent reserves the right to request such additional documents as it
may deem appropriate.
QUANTITY DISCOUNT--CLASS B SHARES PURCHASED PRIOR TO AUGUST 1, 1994
The CDSC is reduced on redemptions of Class B shares of the Fund purchased
prior to August 1, 1994 if immediately after a purchase of such shares, the
aggregate cost of all Class B shares of the Fund owned by you in a single
account exceeded $500,000. For example, if you purchased $100,000 of Class B
shares of the Fund and the following year purchase an additional $450,000 of
Class B shares with the result that the aggregate cost of your Class B shares of
the Fund following the second purchase was $550,000, the quantity discount would
be available for the second purchase of $450,000 but not for the first purchase
of $100,000. The quantity discount will be imposed at the following rates
depending on whether the aggregate value exceeded $500,000 or $1 million:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF DOLLARS INVEST
OR REDEMPTION PROCEEDS
YEAR SINCE PURCHASE --------------------------------------
PAYMENT MADE $500,001 TO $1 MILLION OVER $1 MILLION
------------ ---------------------- ---------------
<S> <C> <C>
First 3.0% 2.0%
Second 2.0% 1.0%
Third 1.0% 0%
Fourth and thereafter 0% 0%
</TABLE>
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to the reduced CDSC. The reduced CDSC will be granted subject to
confirmation of your holdings.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which the shares are held for the
investor by the Transfer Agent. If a stock certificate is desired, it must be
requested in writing for each
B-25
<PAGE>
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, Inc. (Class A Shares)
Prudential Tax-Free Money Fund, Inc.
CLASS B AND CLASS C. Shareholders of the Fund may exchange their Class B
and Class C shares for Class B and Class C shares of certain other Prudential
Mutual Funds and shares of Prudential Special Money Market Fund, Inc., a money
market fund. No CDSC will be payable upon such exchange, but a CDSC may be
payable upon the redemption of 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,
B-26
<PAGE>
without subjecting such shares to any CDSC. Shares of any Fund participating in
the Class B or Class C exchange privilege that were acquired through
reinvestment of dividends or distributions may be exchanged for Class B or Class
C shares of other funds, respectively, without being subject to any CDSC.
CLASS Z. Class Z shares may be exchanged for Class Z shares of other Prudential
Mutual Funds.
Additional details about the Exchange Privilege and prospectuses for each
of the Prudential Mutual Funds are available from the Transfer Agent, Prudential
Securities or Prusec. The Exchange Privilege is not a right and may be modified,
suspended or terminated upon 60 day's notice to shareholders, and any fund,
including the Fund or Prudential Securities has the right to reject any exchange
application relating to such 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
<TABLE>
<CAPTION>
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
25 years ........................ $ 110 $ 165 $ 220 $ 275
20 years ........................ 176 264 352 440
15 years ........................ 296 444 592 740
10 years ........................ 555 833 1,110 1,388
5 years ......................... 1,371 2,057 2,742 3,428
</TABLE>
See "Automatic Savings Accumulation Plan"
- ----------
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.
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
automatically reinvested in additional full and fractional shares at net asset
value on shares held under this plan. See "Shareholder Investment
Account--Automatic Reinvestment of Dividends and/or Distributions" above.
B-27
<PAGE>
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 comparison of the
earnings in a personal savings account with those in an IRA, assuming a $2,000
annual contribution, an 8% rate of return and a 39.6% federal income tax bracket
and shows how much more retirement income can accumulate within an IRA as
opposed to a taxable individual savings account.
<TABLE>
<CAPTION>
TAX-DEFERRED COMPOUNDING(1)
--------------------------------------------------------------------------------
CONTRIBUTIONS
MADE OVER: PERSONAL SAVINGS IRA
----------- --------------- -------
<S> <C> <C> <C>
10 years $26,165 $31,291
15 years 44,675 58,649
20 years 68,109 98,846
25 years 97,780 157,909
30 years 135,346 244,692
</TABLE>
- ----------
1The 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.
Contributions to an IRA may be tax deductible; earnings in the IRA account may
be subject to tax when withdrawn from the IRA (unless the IRA is a "RothIRA" and
certain conditions are satisfied).
MUTUAL FUND PROGRAMS
From time to time, the Fund may be included in a mutual fund program with
other Prudential Mutual Funds. Under such a program, a group of portfolios will
be selected and thereafter marketed collectively. Typically, these programs are
created with an investment theme, e.g., to seek greater diversification,
protection from interest rate movements or access to different management
styles. In the event such a program is instituted, there may be a minimum
investment requirement for the program as a whole. The Fund may waive or reduce
the minimum initial investment requirements in connection with such a program.
The mutual funds in the program may be purchased individually or as part of
a program. Since the allocation of portfolios included in the program may not be
appropriate for all investors, 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.
B-28
<PAGE>
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. The NYSE is closed on the following
holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
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 or other assets for which reliable market quotations are not
readily available, are valued by the Valuation Committee or Board of Directors
inconsultation with the Manager and Subadviser.
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 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.
Net asset value (NAV) is calculated separately for each class. The NAV of
Class B and Class C shares will generally be lower than the NAV of Class A
shares as a result of the larger distribution-related fee to which Class B and
Class C shares are subject.The NAV of Class Z shares will generally be higher
than the NAV of Class A, Class B or Class C shares as a result of the fact that
Class Z shares are not subject to any distribution or service fee. It is
expected, however, that the NAV per share of each class will tend to converge
immediately after the recording of dividends, if any, which will differ by
approximately the amount of the distribution or service fee expense accrual
differential among the classes.
TAXES, DIVIDENDS AND DISTRIBUTIONS
General. The Fund is qualified and intends to remain qualified as a
regulated investment company (RIC) under the 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
B-29
<PAGE>
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) 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;
and (3) satisfy the Distribution Requirement in each year.
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.
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 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.
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
B-30
<PAGE>
(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.
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, 1997, 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 tax
advisers 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, Class C and Class Z shares. See "How the Fund
Calculates Performance" in the Prospectus.
Average annual total return is computed according to the following formula:
P (1 + T)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.
B-31
<PAGE>
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, 1997 was 20.57%,
12.58% and 12.83%, respectively. The average annual total return for the Class B
shares for the one-year, five-year and since inception periods ended September
30, 1997 was 20.96%, 12.76% and 12.89%, respectively. The average annual total
return for Class C shares for the one year and since inception periods ended
September 30, 1997 was 24.96% and 14.14%, respectively.
AGGREGATE TOTAL RETURN. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B,
Class C and Class Z shares. See "How the Fund Calculates Performance" in the
Prospectus.
Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed 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, 1997 was 26.90%, 90.38% and
168.01%, respectively. The aggregate total return for the Class B shares for the
one-year, five-year and since inception periods ended September 30, 1997 was
25.96%, 83.27% and 120.99%, respectively. The aggregate total return for Class C
shares for the one year and since inception periods ended September 30, 1997 was
25.96% and 51.98%, respectively. The aggregate total return for Class Z shares
since inception (November 29, 1996) for the period ended September 30, 1997, was
19.70%.
YIELD. The Fund may from time to time advertise its yield as calculated
over a 30-day period. Yield is calculated separately for Class A, Class B, Class
C and Class Z shares. 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, 1997, were
2.44%, 1.85%, 1.84% and 2.82% for Class A shares, Class B shares, Class C shares
and Class Z shares, respectively.
B-32
<PAGE>
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-1997
Yearbook (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. All rights reserved. Common stock
returns are based on the Standard & Poor's 500 Stock Index, a
market-weighted, unmanaged index of 500 common stocks in a variety of
industry sectors. It is a commonly used indicator of broad stock price
movements. This chart is for illustrative purposes only and is not intended
to represent the performance of any particular investment or fund.
Investors cannot invest directly in an index. Past performance is not a
guarantee of future results.
B-33
<PAGE>
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT,
INDEPENDENT ACCOUNTANTS AND COUNSEL
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 LLC ("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 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, 1997, the Fund incurred
fees of approximately $394,000 for the services of PMFS.
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York 10036
served as the Fund's independent accountants for the fiscal year ended September
30, 1997, and in that capacity audited the Fund's annual financial statements.
Kirkpatrick & Lockhart LLP, 1800 Massachusetts Avenue, N.W., Washington,
D.C. 20036, serves as counsel to the Fund (except with respect to the opinions
of counsel referred to in "Taxes, Dividends and Distributions" in the
Prospectus).
B-34
<PAGE>
Portfolio of Investments as of September 30, 1997 GLOBAL UTILITY FUND, INC.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
US$ Value
Shares Description (Note 1)
<C> <S> <C>
------------------------------------------------------------
LONG-TERM INVESTMENTS--97.2%
COMMON STOCKS--74.0%
------------------------------------------------------------
Electrical Utilities--22.8%
175,000 CMS Energy Corp. $ 6,475,000
150,000 COPEL (ADR-Preferred B Shares)
(Brazil) 2,587,500
200,000 DPL, Inc. 4,900,000
162,500 DQE, Inc. 5,484,375
100,000 DTE Energy Co. 3,043,750
200,000 Empresa Nacional de Electricidad,
S.A. (ADR) (Spain) 4,300,000
190,000 Espoon Sahko (ADR) (Finland) 5,141,400
150,000 Huaneng Power International, Inc.*
(ADR) (China) 3,637,500
120,000 Korea Electric Power Corp. (ADR)
(South Korea) 1,650,000
80,000 New Century Energies, Inc. 3,325,000
100,000 Pinnacle West Capital Corp. 3,362,500
1,300,000 Scottish Power PLC (United Kingdom) 10,069,253
277,300 Shandong Huaneng Power Co. Ltd.
(ADR) (China) 2,721,006
150,000 Texas Utilities Co. 5,400,000
110,000 VEBA AG (Germany) 6,432,293
-------------
68,529,577
- ------------------------------------------------------------
Gas Utilities--8.9%
500,000 Australian Gas Light Co. (Australia) 3,398,140
120,000 Equitable Resources, Inc. 3,780,000
330,000 TransCanada Pipelines Ltd. (Canada) 6,387,713
470,000 Westcoast Energy, Inc. (Canada) 9,760,845
90,000 YPF Sociedad Anonima (ADR-Class D
Shares) (Argentina) 3,318,750
-------------
26,645,448
- ------------------------------------------------------------
Telecommunications--35.6%
106,300 AirTouch Communications, Inc.* 3,767,006
150,000 AT&T Corp. 6,646,875
153,200 BC Telecom, Inc. (Canada) 3,957,625
260,000 BCE, Inc. (Canada) 7,767,500
96,000 Bell Atlantic Corp. $ 7,722,000
75,000 Comsat Corp. 1,785,938
43,000 Empresas Telex-Chile S.A. (ADR)
(Chile) 198,875
50,000 GTE Corp. 2,268,750
100,000 Hellenic Telecom Org. (Greece) 2,505,107
110,000 MCI Communications Corp. 3,227,812
87,600 Portugal Telecom, S.A. (ADS)
(Portugal) 3,805,125
60,000 Koninklijke PTT Nederland NV
(Netherlands) 2,359,390
200,000 SBC Communications Inc. 12,275,000
70,000 Sprint Corp. 3,500,000
40,000 Telecom Corp. of New Zealand Ltd.
(ADR) (New Zealand) 1,620,000
900,000 Telecom Italia Mobile S.p.A. (Italy) 3,571,842
500,000 Telecom Italia S.p.A. (Italy) 3,331,402
2,300,000 Telecom Italia S.p.A. Risp
(Nonconvertible) (Italy) 8,948,146
40,000 Telefonica de Argentina S.A.
(ADR-Class B Shares) (Argentina) 1,465,000
50,000 Telefonica de Espana, S.A. (ADR)
(Spain) 4,706,250
130,000 Telefonos de Mexico, S.A. (ADR-Class
L Shares) (Mexico) 6,727,500
200,000 US West Communications Group 7,700,000
200,000 Videsh Sanchar Nigam Ltd. (GDR)
(India) 3,375,000
75,000 Vodafone Group PLC (ADR) (United
Kingdom) 4,031,250
-------------
107,263,393
- ------------------------------------------------------------
Water Utilities & Other--6.7%
30,968 Alcatel Alsthom (France) 4,120,293
167,800 American Water Works Co., Inc. 3,712,575
400,000 Anglian Water PLC (United Kingdom) 5,284,233
41,000 ENI S.p.A. (ADR) (Italy) 2,575,313
35,000 Lucent Technologies, Inc. 2,848,125
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-35
<PAGE>
Portfolio of Investments as of September 30, 1997 GLOBAL UTILITY FUND, INC.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
US$ Value
Shares Description (Note 1)
<C> <S> <C>
------------------------------------------------------------
Water Utilities & Other (cont'd.)
2,300,000 Seat S.p.A. Risp (Italy)* $ 562,341
10,000 Suez Lyonnaise Eaux S.A. (France) 1,116,339
-------------
20,219,219
Total common stocks
(cost $143,712,011) 222,657,637
-------------
------------------------------------------------------------
PREFERRED STOCKS--1.6%
Philippine Long Distance Telephone
Co., (The Philippines)
43,700 $3.50 Conv. Ser. III (GDS) 2,283,325
80,000 5.75% Conv. Ser. II (GDS) 2,500,000
-------------
Total preferred stocks
(cost $4,185,000) 4,783,325
-------------
------------------------------------------------------------
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000)
<C> <C> <S> <C>
DEBT OBLIGATIONS--21.6%
CORPORATE BONDS--20.1%
- ------------------------------------------------------------
Electrical Utilities--13.4%
Ba1 $ 1,000 AES Corp.,
8.375%, 8/15/07 1,005,000
Ba2 1,500 CalEnergy Co., Inc.,
9.50%, 9/15/06 1,620,000
Aa2 1,750 Central Illinois Light
Co.,
8.20%, 1/15/22 1,867,932
Baa1 1,000D CEZ Finance,
7.125%, 7/15/07
(Czech Republic) 986,000
Baa1 1,000D Chilgener, S.A.,
6.50%, 1/15/06 (Chile) 974,620
Aaa 2,000D Chubu Electric Power Co.
Inc., (Japan)
6.25%, 8/5/03
(Eurobonds) 1,995,000
Ba3 1,000 CMS Energy Corp.,
8.125%, 5/15/02 1,024,940
A1 1,000 Consolidated Edison Co.
of NY, Inc.,
7.625%, 3/1/04 1,051,520
<CAPTION>
Moody's Principal
Rating Amount US$ Value
(Unaudited) (000) Description (Note 1)
<C> <C> <S> <C>
- -------------------------------------------------------
Aa3 $ 1,000 Duke Energy Corp.,
5.875%, 6/1/01 $ 983,790
Baa1 1,000D Eastern Energy Limited,
6.75%, 12/1/06
(Australia) 993,610
Ba3 1,000 El Paso Electric Co.,
8.25%, 2/1/03, Ser. C 1,047,680
Baa1 1,000D Empresa Electric Pehuenche S.A.,
7.30%, 5/1/03 (Chile) 1,020,760
Baa3 1,000D Empresa Electrica del
Norte Grande S.A.,
7.75%, 3/15/06 (Chile) 1,002,320
Baa1 1,000D Enersis S.A.,
7.40%, 12/1/16 (Chile) 1,004,650
Aa3 500 Florida Power Corp.,
6.00%, 7/1/03 489,775
Baa3 1,000 Gulf States Utilities
Co.,
8.25%, 4/1/04 1,068,960
Ba1** 1,000D Inversora Electrica
Buenos Aires S.A.,
9.00%, 9/16/04
(Argentina) 995,000
Baa2 1,000 Louisiana Power & Light
Co.,
6.00%, 3/1/00 989,530
A1 1,500 Monongahela Power Co.,
7.375%, 7/1/02 1,556,385
Aa3 1,000 Northern States Power
Co.,
5.75%, 12/1/00 983,840
Baa3 1,000 NRG Energy, Inc.,
7.50%, 6/15/07 1,025,000
A1 2,000 Potomac Edison Co.,
8.875%, 8/1/21 2,116,400
A2 1,000D Quebec Hydro,
7.50%, 4/1/16 (Canada) 1,042,240
Aa3 2,000 Southwestern Elec. Power
Co.,
5.25%, 4/1/00 1,955,300
Aa2 1,000 Southwestern Public
Serv. Co.,
7.25%, 7/15/04 1,034,100
Baa3 1,000 System Energy Resources,
Inc.,
7.71%, 8/1/01 1,031,090
Baa2 1,000D CSW Investments,
7.45%, 8/1/06
(United Kingdom) 1,036,370
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-36
<PAGE>
Portfolio of Investments as of September 30, 1997 GLOBAL UTILITY FUND, INC.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount US$ Value
(Unaudited) (000) Description (Note 1)
<C> <C> <S> <C>
- --------------------------------------------------------------
Electrical Utilities (cont'd.)
Baa1 $ 1,000D Southern Investments UK
PLC,
6.80%, 12/1/06
(United Kingdom) $ 996,300
Aa2 1,000 Tampa Electric Co.,
7.75%, 11/1/22 1,028,500
Ba3 1,000 Texas-New Mexico Power
Co.,
10.75%, 9/15/03 1,077,500
Baa1 2,000 Texas Utilities Electric
Co.,
9.27%, 1/14/00 2,127,640
A2 2,000 Virginia Electric &
Power Co.,
6.625%, 4/1/03 2,017,720
Baa3 1,000 W3A Funding Corp.,
8.09%, 1/2/17 1,030,010
-------------
40,179,482
- ------------------------------------------------------------
Gas Distribution & Other Related Industries--2.7%
Baa2 1,000 El Paso Natural Gas Co.,
7.50%, 11/15/26 1,034,230
Baa2 1,000 Enron Corp.,
7.00%, 8/15/23 953,520
B1 1,000D Metrogas, S.A.,
10.875%, 5/15/01, Ser.
B (Argentina) 1,101,250
A2 1,600 Michigan Consolidated
Gas Co.,
8.25%, 5/1/14 1,804,464
Northern Illinois Gas
Co.,
Aa1 500 5.875%, 5/1/00 495,295
Aa1 1,000 7.26%, 10/15/25 997,910
Southern California Gas
Co.,
A1 2,000 6.875%, 11/1/25 1,862,680
-------------
8,249,349
- ------------------------------------------------------------
Telecommunications, Media & Related Industries--4.0%
Aaa 2,000 BellSouth
Telecommunications,
6.125%, 9/23/08
(Eurobonds) 1,947,500
NR $ 1,000D Comtel Brasileira Ltd.,
10.75%, 9/26/04
(Brazil) $ 1,060,000
A3 1,000 GTE Corp.,
8.75%, 11/1/21 1,186,250
A2 1,000 GTE Florida, Inc.,
7.25%, 10/15/25 984,060
A1 1,000D Korea Telecom,
7.625%, 4/15/07
(South Korea) 1,004,100
A1 1,550 Pacific Bell,
8.70%, 6/15/01 1,670,823
Ba2 1,000D Philippine Long Distance
Telephone Co.,
9.25%, 6/30/06
(The Philippines) 1,035,000
Aa3 1,000 Southwestern Bell Telephone Co.,
5.875%, 6/1/03 969,980
B1 1,000D Telefonica de Argentina,
S.A.,
11.875%, 11/1/04
(Argentina) 1,212,500
Ba1 1,000 WorldCom, Inc.,
7.75%, 4/1/07 1,048,340
-------------
12,118,553
-------------
Total corporate bonds
(cost $59,414,523) 60,547,384
-------------
- ------------------------------------------------------------
CONVERTIBLE BONDS--0.8%
Baa2 500D Compania de Telefonos de
Chile, S.A.,
4.50%, 1/15/03 (Chile) 840,625
Caa 1,500 International Cabletel,
Inc.,
7.25%, 4/15/05 1,650,000
-------------
Total convertible bonds
(cost $2,000,000) 2,490,625
-------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-37
<PAGE>
GLOBAL UTILITY FUND, INC.
Portfolio of Investments as of September 30, 1997
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount US$ Value
(000) Description (Note 1)
<C> <S> <C>
- --------------------------------------------------------------
U.S. GOVERNMENT SECURITIES--0.7%
United States Treasury Notes,
$1,000 6.125%, 7/31/00 $ 1,006,090
1,000 7.50%, 11/15/01 1,053,910
-------------
Total U.S. Government Securities
(cost $2,128,281) 2,060,000
-------------
Total debt obligations
(cost $63,542,804) 65,098,009
-------------
Total long-term investments
(cost $211,439,815) 292,538,971
-------------
- ------------------------------------------------------------
SHORT-TERM INVESTMENTS--2.4%
REPURCHASE AGREEMENT
7,135 Paribas Finance, 6.05%, due 10/1/97
in the amount of $7,136,199 (cost
$7,135,000; value of collateral
including accrued
interest-$7,234,658) 7,135,000
- ------------------------------------------------------------
Total Investments--99.6%
(cost $218,574,815; Note 4) 299,673,971
Other assets in excess of
liabilities--0.4% 1,233,786
-------------
Net Assets--100% $ 300,907,757
-------------
-------------
</TABLE>
- ---------------
*--Non-income-producing security.
**--Moody's Equivalent to S&P Rating.
D--US$ Denominated Bonds.
ADR--American Depository Receipts.
ADS--American Depository Shares.
GDR--Global Depository Receipts.
GDS--Global Depository Shares.
NR--Not rated by Moody's or Standard & Poor's.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-38
<PAGE>
Statement of Assets and Liabilities GLOBAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, 1997
<S> <C>
Assets
Investments, at value (cost $218,574,815).............................................................. $ 299,673,971
Foreign currency, at value (cost $89,716).............................................................. 89,712
Cash................................................................................................... 1,067
Dividends and interest receivable...................................................................... 2,398,227
Receivable for Fund shares sold........................................................................ 41,337
Other assets........................................................................................... 7,809
------------------
Total assets........................................................................................ 302,212,123
------------------
Liabilities
Payable for Fund shares reacquired..................................................................... 670,119
Accrued expenses....................................................................................... 209,752
Management fee payable................................................................................. 164,830
Distribution fee payable............................................................................... 170,628
Withholding taxes payable.............................................................................. 85,239
Deferred director's fee................................................................................ 3,798
------------------
Total liabilities................................................................................... 1,304,366
------------------
Net Assets............................................................................................. $ 300,907,757
------------------
------------------
Net assets were comprised of:
Common stock, at par................................................................................ $ 17,177
Paid-in capital in excess of par.................................................................... 196,932,191
------------------
196,949,368
Undistributed net investment income................................................................. 127,164
Accumulated net realized gains on investments and foreign currency transactions..................... 22,731,558
Net unrealized appreciation on investments and foreign currencies................................... 81,099,667
------------------
Net assets, September 30, 1997......................................................................... $ 300,907,757
------------------
------------------
Class A:
Net asset value and redemption price per share
($120,824,984 / 6,896,814 shares of common stock issued and outstanding)......................... $17.52
Maximum sales charge (5.00% of offering price)...................................................... .92
Maximum offering price to public.................................................................... $18.44
------------------
------------------
Class B:
Net asset value, offering price and redemption price per share
($179,269,694 / 10,233,508 shares of common stock issued and outstanding)........................ $17.52
------------------
------------------
Class C:
Net asset value, offering price and redemption price per share
($759,664 / 43,367 shares of common stock issued and outstanding)................................ $17.52
------------------
------------------
Class Z:
Net asset value, offering price and redemption price per share
($53,415 / 3,045 shares of common stock issued and outstanding).................................. $17.54
------------------
------------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-39
<PAGE>
GLOBAL UTILITY FUND, INC.
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income September 30, 1997
<S> <C>
Income
Dividends (net of foreign withholding
taxes of $545,062).................... $ 7,400,211
Interest and discount earned............. 5,354,880
------------------
Total income.......................... 12,755,091
------------------
Expenses
Management fee........................... 2,040,052
Distribution fee--Class A................ 290,758
Distribution fee--Class B................ 1,856,933
Distribution fee--Class C................ 7,270
Transfer agent's fees and expenses....... 469,000
Custodian's fees and expenses............ 205,000
Registration fees........................ 36,000
Reports to shareholders.................. 70,000
Audit fee................................ 33,000
Legal fees and expenses.................. 30,000
Directors' fees and expenses............. 19,000
Insurance................................ 8,000
Miscellaneous............................ 7,761
------------------
Total expenses........................ 5,072,774
------------------
Net investment income....................... 7,682,317
------------------
Realized and Unrealized Gain (Loss)
on Investments and Foreign Currency
Transactions
Net realized gain (loss) on:
Investment transactions.................. 23,455,159
Foreign currency transactions............ (2,900)
------------------
23,452,259
------------------
Net change in unrealized appreciation
(depreciation) on:
Investments.............................. 39,646,396
Foreign currencies....................... (3,971)
------------------
39,642,425
------------------
Net gain on investments and foreign
currencies............................... 63,094,684
------------------
Net Increase in Net Assets
Resulting from Operations................... $ 70,777,001
------------------
------------------
</TABLE>
GLOBAL UTILITY FUND, INC.
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended September 30,
in Net Assets 1997 1996
<S> <C> <C>
Operations
Net investment income....... $ 7,682,317 $ 9,586,911
Net realized gain on
investment and foreign
currency transactions.... 23,452,259 18,126,265
Net change in unrealized
appreciation
(depreciation) of
investments and foreign
currencies............... 39,642,425 (1,176,880)
------------------ ------------
Net increase in net assets
resulting from
operations............... 70,777,001 26,536,296
------------------ ------------
Dividends and distributions
(Note 1)
Dividends from net
investment income
Class A.................. (3,467,695) (4,066,553)
Class B.................. (4,197,429) (5,504,314)
Class C.................. (16,595) (16,044)
Class Z.................. (598) --
------------------ ------------
(7,682,317) (9,586,911)
------------------ ------------
Distributions in excess of
net investment income
Class A.................. (156,217) (8,056)
Class B.................. (189,092) (10,902)
Class C.................. (748) (32)
Class Z.................. (27) --
------------------ ------------
(346,084) (18,990)
------------------ ------------
Distributions from net
realized gains
Class A.................. (6,007,763) (3,456,002)
Class B.................. (9,775,323) (6,126,168)
Class C.................. (37,783) (16,333)
------------------ ------------
(15,820,869) (9,598,503)
------------------ ------------
Fund share transactions (net of
share conversions) (Note 5)
Net proceeds from shares
sold..................... 40,299,964 28,413,113
Net asset value of shares
issued in reinvestment of
dividends and
distributions............ 19,609,298 15,648,910
Cost of shares reacquired... (106,947,379) (102,550,920)
------------------ ------------
Net decrease in net assets from
Fund share transactions..... (47,038,117) (58,488,897)
------------------ ------------
Total decrease................. (110,386) (51,157,005)
Net Assets
Beginning of year.............. 301,018,143 352,175,148
------------------ ------------
End of year.................... $300,907,757 $301,018,143
------------------ ------------
------------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-40
<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,
LLP ('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 take possession of the
underlying collateral securities, the value of which exceeds the principal
amount of the repurchase transaction including accrued interest. If the seller
defaults and the value of the collateral declines or if bankruptcy proceedings
are commenced with respect to the seller of the security, realization of the
collateral by the Fund may be delayed or limited.
Foreign Currency Translation: The books and records of the Fund are maintained
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on
the following basis:
(i) market value of investment securities, other assets and liabilities--at the
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 period, the Fund does not isolate
that portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of the securities held at fiscal period end. Similarly, the Fund does not
isolate the effect of changes in foreign exchange rates from the fluctuations
arising from changes in the market prices of long-term securities sold during
the fiscal period. 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.
Securities Transactions and Net 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. Dividend income is
recorded on the ex-dividend date and interest income is recorded on the accrual
basis. The Fund amortizes discounts on purchases of debt securities as
adjustments to interest income. Expenses are recorded on the accrual basis which
may require the use of certain estimates by management.
- --------------------------------------------------------------------------------
B-41
<PAGE>
Notes to Financial Statements GLOBAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
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.
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.
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 increase undistributed net investment income and decrease
accumulated net realized gains on investments by $125,581 relating to net
realized foreign currency gains. 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 Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM has entered into a subadvisory agreement with Wellington;
Wellington furnishes investment advisory services in connection with the
management of the Fund. PIFM pays for the cost of the subadviser's services, the
compensation of officers of the Fund, occupancy and certain clerical and
bookkeeping costs of the Fund. The Fund bears all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly at an annual
rate of .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, PIFM 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 a distribution agreement with Prudential Securities Incorporated
('PSI'), which acts as the distributor of the Class A, Class B, Class C and
Class Z shares of the Fund. The Fund compensates PSI for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution (the 'Class A, Class B and Class C Plans'), regardless of expenses
actually incurred by them. The distribution fees are accrued daily and payable
monthly. No distributions or service fees are paid to PSI as distributor of the
Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%,
of the average daily net assets of the Class A, B and C shares, respectively.
Such expenses under the Plans were .25 of 1%, 1% and 1%, of the average daily
net assets of the Class A, B and C shares, respectively, for the fiscal year
ended September 30, 1997.
PSI has advised the Fund that it has received approximately $43,000 in front-end
sales charges resulting from sales of Class A shares during the fiscal year
ended September 30, 1997. From these fees, PSI paid such sales charges to
affiliated broker-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, 1997, it
received approximately $368,500 and $200 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PSI and PIFM are indirect, wholly-owned subsidiaries of The Prudential Insurance
Company of America.
The Fund, along with other affiliated registered investment companies (the
'Funds'), entered into a credit agreement (the 'Agreement') on December 31, 1996
with an unaffiliated lender. The maximum commitment under the Agreement is
$200,000,000. The Agreement expires on December 30, 1997. Interest on any such
borrowings outstanding will be
- --------------------------------------------------------------------------------
B-42
<PAGE>
Notes to Financial Statements GLOBAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
at market rates. The purpose of the Agreement is to serve as an alternative
source of funding for capital share redemptions. The Fund has not borrowed any
amounts pursuant to the Agreement as of September 31, 1997. The Funds pay a
commitment fee at an annual rate of .055 of 1% on the unused portion of the
credit facility. The commitment fee is accrued and paid quarterly on a pro-rata
basis by the Funds.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly-owned subsidiary of PIFM,
serves as the Fund's transfer agent and during the fiscal year ended September
30, 1997, the Fund incurred fees of approximately $394,000 for the services of
PMFS. As of September 30, 1997, approximately $29,500 of such fees were due to
PMFS. Transfer agent fees and expenses in the Statement of Operations include
certain out-of-pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the fiscal year ended September 30, 1997 were $37,726,616 and $101,769,983,
respectively.
The United States federal income tax basis of the Fund's investments at
September 30, 1997 was $218,601,522 and, accordingly, net unrealized
appreciation of investments was $81,072,449 (gross unrealized
appreciation--$84,781,928; gross unrealized depreciation--$3,709,479).
- ------------------------------------------------------------
Note 5. Capital
The Fund offers Class A, Class B, Class C and Class Z 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 qualify to purchase Class A shares at net asset value.
Effective December 16, 1996, the Fund commenced offering Class Z shares. Class Z
shares are not subject to any sales or redemption charge and are offered
exclusively for sale to a limited group of investors.
The Fund has authorized 2 billion shares of common stock at $.001 par value per
share equally divided into Class A, B, C and Z shares. Of the 17,176,734 shares
of common stock issued and outstanding at September 30, 1997, 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, 1997:
Shares sold........................ 2,086,998 $ 33,076,632
Shares issued in reinvestment of
dividends and distributions...... 435,125 6,684,084
Shares reacquired.................. (3,491,626) (55,793,270)
---------- ------------
Net decrease in shares outstanding
before conversion................ (969,503) (16,032,554)
Shares issued upon conversion from
Class B.......................... 361,364 5,915,705
---------- ------------
Net decrease in shares
outstanding...................... (608,139) $(10,116,849)
---------- ------------
---------- ------------
Year ended September 30, 1996:
Shares sold........................ 1,266,739 $ 18,863,411
Shares issued in reinvestment of
dividends and distributions...... 339,649 5,017,345
Shares reacquired.................. (2,883,880) (43,010,724)
---------- ------------
Net decrease in shares outstanding
before conversion................ (1,277,492) (19,129,968)
Shares issued upon conversion from
Class B.......................... 327,144 4,874,396
---------- ------------
Net decrease in shares
outstanding...................... (950,348) $(14,255,572)
---------- ------------
---------- ------------
<CAPTION>
Class B
- -----------------------------------
Year ended September 30, 1997:
Shares sold........................ 420,178 $ 6,760,201
Shares issued in reinvestment of
dividends and distributions...... 841,794 12,870,440
Shares reacquired.................. (3,146,002) (50,674,248)
---------- ------------
Net decrease in shares outstanding
before conversion................ (1,884,030) (31,043,607)
Shares reacquired upon conversion
into Class A..................... (361,305) (5,915,705)
---------- ------------
Net decrease in shares
outstanding...................... (2,245,335) $(36,959,312)
---------- ------------
---------- ------------
</TABLE>
- --------------------------------------------------------------------------------
B-43
<PAGE>
Notes to Financial Statements GLOBAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Shares Amount
- ----------------------------------- ---------- ------------
<S> <C> <C>
Year ended September 30, 1996:
Shares sold........................ 623,845 $ 9,314,099
Shares issued in reinvestment of
dividends and distributions...... 718,862 10,600,234
Shares reacquired.................. (3,977,624) (59,359,780)
---------- ------------
Net decrease in shares outstanding
before conversion................ (2,634,917) (39,445,447)
Shares reacquired upon conversion
into Class A..................... (327,061) (4,874,396)
---------- ------------
Net decrease in shares
outstanding...................... (2,961,978) $(44,319,843)
---------- ------------
---------- ------------
<CAPTION>
Class C
- -----------------------------------
Year ended September 30, 1997:
Shares sold........................ 14,373 $ 229,180
Shares issued in reinvestment of
dividends and distributions...... 3,544 54,192
Shares reacquired.................. (18,532) (297,270)
---------- ------------
Net increase in shares
outstanding...................... (615) $ (13,898)
---------- ------------
---------- ------------
<CAPTION>
Class C
- -----------------------------------
Year ended September 30, 1996:
Shares sold........................ 15,751 $ 235,603
Shares issued in reinvestment of
dividends and distributions...... 2,124 31,331
Shares reacquired.................. (12,124) (180,416)
---------- ------------
Net increase in shares
outstanding...................... 5,751 $ 86,518
---------- ------------
---------- ------------
<CAPTION>
Class Z
- -----------------------------------
December 16, 1996(a) through
September 30, 1997:
Shares sold........................ 13,848 $ 233,951
Shares issued in reinvestment of
dividends and distributions...... 35 582
Shares reacquired.................. (10,838) (182,591)
---------- ------------
Net increase in shares
outstanding...................... 3,045 $ 51,942
---------- ------------
---------- ------------
</TABLE>
- ---------------
(a) Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------
B-44
<PAGE>
Financial Highlights GLOBAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
-----------------------------------------------------------------
Year Ended September 30,
------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year..................... $ 15.03 $ 14.72 $ 13.66 $ 14.63 $ 12.96
-------- -------- -------- -------- --------
Income from investment operations
Net investment income.................................. .49 .51 .49 .47 .44
Net realized and unrealized gain (loss) on investment
and foreign currency transactions................... 3.34 .73 1.35 (.82) 2.46
-------- -------- -------- -------- --------
Total from investment operations.................... 3.83 1.24 1.84 (.35) 2.90
-------- -------- -------- -------- --------
Less distributions
Dividends from net investment income................... (.49) (.51) (.48) (.42) (.47)
Distributions in excess of net investment income....... (.02) -- -- -- (.01)
Distributions from net realized gains.................. (.83) (.42) (.30) (.20) (.75)
-------- -------- -------- -------- --------
Total distributions................................. (1.34) (.93) (.78) (.62) (1.23)
-------- -------- -------- -------- --------
Net asset value, end of year........................... $ 17.52 $ 15.03 $ 14.72 $ 13.66 $ 14.63
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN(a)........................................ 26.90% 8.65% 14.23% (2.49)% 23.87%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000).......................... $120,825 $112,800 $124,423 $126,254 $138,714
Average net assets (000)............................... $116,303 $120,122 $122,837 $139,166 $119,001
Ratios to average net assets:
Expenses, including distribution fees............... 1.21% 1.30% 1.31% 1.25% 1.30%
Expenses, excluding distribution fees............... .96% 1.05% 1.06% 1.02% 1.10%
Net investment income............................... 3.00% 3.38% 3.58% 3.39% 3.37%
For Class A, B, C and Z shares:
Portfolio turnover rate............................. 13% 13% 15% 19% 14%
Average commission rate paid per share.............. $ 0.0529 $ 0.0542 -- -- --
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-45
<PAGE>
Financial Highlights GLOBAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
-----------------------------------------------------------------
Year Ended September 30,
------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year..................... $ 15.03 $ 14.71 $ 13.66 $ 14.63 $ 12.97
-------- -------- -------- -------- --------
Income from investment operations
Net investment income.................................. .37 .40 .39 .37 .34
Net realized and unrealized gain (loss) on investment
and foreign currency transactions................... 3.34 .74 1.34 (.82) 2.45
-------- -------- -------- -------- --------
Total from investment operations.................... 3.71 1.14 1.73 (.45) 2.79
-------- -------- -------- -------- --------
Less distributions
Dividends from net investment income................... (.37) (.40) (.38) (.32) (.37)
Distributions in excess of net investment income....... (.02) -- -- -- (.01)
Distributions from net realized gains.................. (.83) (.42) (.30) (.20) (.75)
-------- -------- -------- -------- --------
Total distributions................................. (1.22) (.82) (.68) (.52) (1.13)
-------- -------- -------- -------- --------
Net asset value, end of year........................... $ 17.52 $ 15.03 $ 14.71 $ 13.66 $ 14.63
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN(a)........................................ 25.96% 7.90% 13.32% (3.22)% 22.87%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000).......................... $179,270 $187,557 $227,189 $272,673 $185,259
Average net assets (000)............................... $185,693 $210,305 $237,983 $270,466 $ 90,254
Ratios to average net assets:
Expenses, including distribution fees............... 1.96% 2.05% 2.06% 2.02% 2.10%
Expenses, excluding distribution fees............... .96% 1.05% 1.06% 1.02% 1.10%
Net investment income............................... 2.25% 2.62% 2.83% 2.68% 2.59%
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each 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 C Class Z
---------------------------------------------------- -------------
August 1, December 16,
1994(c) 1996(d)
Year Ended September 30, through through
---------------------------------- September 30, September 30,
1997 1996 1995 1994 1997
-------- -------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................... $ 15.03 $ 14.71 $ 13.66 $ 13.93 $ 15.02
-------- -------- -------- ------------- -----
Income from investment operations
Net investment income.................................. .37 .40 .39 .06 .34
Net realized and unrealized gain (loss) on investment
and foreign currency transactions................... 3.34 .74 1.34 (.24) 2.59
-------- -------- -------- ------------- -----
Total from investment operations.................... 3.71 1.14 1.73 (.18) 2.93
-------- -------- -------- ------------- -----
Less distributions
Dividends from net investment income................... (.37) (.40) (.38) (.07) (.34)
Distributions in excess of net investment income....... (.02) -- -- -- (.07)
Distributions from net realized gains.................. (.83) (.42) (.30) (.02) --
-------- -------- -------- ------------- -----
Total distributions................................. (1.22) (.82) (.68) (.09) (.41)
-------- -------- -------- ------------- -----
Net asset value, end of period......................... $ 17.52 $ 15.03 $ 14.71 $ 13.66 $ 17.54
-------- -------- -------- ------------- -----
-------- -------- -------- ------------- -----
TOTAL RETURN(a)........................................ 25.96% 7.90% 13.32% (1.32)% 19.70%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........................ $ 760 $ 661 $ 563 $ 226 $ 53
Average net assets (000)............................... $ 727 $ 608 $ 410 $ 131 $ 16
Ratios to average net assets:
Expenses, including distribution fees............... 1.96% 2.05% 2.06% 2.06%(b) .96%(b)
Expenses, excluding distribution fees............... .96% 1.05% 1.06% 1.06%(b) .96%(b)
Net investment income............................... 2.25% 2.66% 2.83% 2.46%(b) 3.25%(b)
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total return for periods of less than a full year are not
annualized.
(b) Annualized.
(c) Commencement of offering of Class C shares.
(d) Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-47
<PAGE>
Report of Independent Accountants GLOBAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Global Utility Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Global Utility Fund, Inc. (the
'Fund') at September 30, 1997, and the results of its operations, the changes in
its net assets and the financial highlights for the year then ended, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as 'financial
statements') are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audit. We
conducted our audit of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included confirmation of securities at September 30, 1997 by
correspondence with the custodian and broker, provides a reasonable basis for
the opinion expressed above. The accompanying statement of changes in net assets
for the year ended September 30, 1996 and the financial highlights for the
periods other than the year ended September 30, 1997 were audited by other
independent accountants, whose opinion dated November 14, 1996 was unqualified.
PRICE WATERHOUSE LLP
1177 Avenue of Americas
New York, New York
November 19, 1997
- --------------------------------------------------------------------------------
B-48
<PAGE>
INDEPENDENT AUDITOR'S REPORT GLOBAL UTILITY FUND, INC.
================================================================================
The Shareholders and Board of Directors
Global Utility Fund, Inc.
We have audited the accompanying statements of assets and liabilities, including
the portfolio of investments, of Global Utility Fund, Inc. as of September 30,
1996, 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, 1996 by correspondence with the custodian and brokers. 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 Utiltity
Fund, Inc. as of September 30, 1996, the results of its operations, the changes
in its net asssets, and its financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.
B-49
<PAGE>
CHANGE OF AUDITORS GLOBAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
Effective March 1, 1997, Deloitte & Touche LLP was terminated as the Fund's
auditors. For the years ended September 30, 1993 through September 30, 1996,
Deloitte & Touche LLP expressed an unqualified opinion on the Fund's financial
statements. There were no disagreements between Fund management and Deloitte &
Touche LLP prior to their termination. The Board of Directors approved the
termination of Deloitte & Touche LLP and at the appointment of Price Waterhouse
LLP as the Fund's independent accountants.
FEDERAL INCOME TAX INFORMATION GLOBAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
We are required by the Internal Revenue Code to advise you within 60 days of the
Fund's fiscal year end (September 30, 1997) as to the federal tax status of
dividends paid by the Fund during such fiscal year. Accordingly, we are advising
you that during the fiscal year, the Fund paid distributions for Class A shares
totaling $1.338 per share, comprised of $0.943 per share ordinary income and
short-term capital gains which are taxable as ordinary income and $0.395 per
share long-term capital gains which are taxable as such. The Fund paid
distributions for Class B and Class C shares totaling $1.215 per share,
comprised of $0.820 per share ordinary income and short-term capital gains which
are taxable as ordinary income and $0.395 per share long-term capital gains
which are taxable as such. The Fund paid distributions for Class Z shares
totaling $0.4085 per share of ordinary income which is taxable as such. Further,
we wish to advise you that 35% of the ordinary income dividends paid in 1997
qualified for the corporate dividend received deduction available to corporate
taxpayers.
In January 1998, you will be advised on IRS Form 1099 DIV or substitute 1099 DIV
as to the federal tax status of the distributions received by you in calendar
year 1997.
- --------------------------------------------------------------------------------
B-50
<PAGE>
APPENDIX I--GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk and providing balance.
Asset allocation among different types of securities within an overall
investment portfolio helps to reduce risk and to potentially provide stable
returns, while enabling investors to work toward their financial goal(s). Asset
allocation is also a strategy to gain exposure to better performing asset
classes while maintaining investment in other asset classes.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable returns.
Owning a portfolio of securities mitigates the individual risks (and returns) of
any one security. Additionally, diversification among types of securities
reduces the risks (and general returns) of any one type of security.
DURATION
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to changes
in interest rates. When interest rates fall, bond prices generally rise.
Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, I.E., principal and interest
rate payments. Duration is expressed as a measure of time in years--the longer
the duration of a bond (or a bond portfolio), the greater the impact of interest
rate changes on the bond's (or the bond portfolio's) price. Duration differs
from effective maturity in that duration takes into account call provisions,
coupon rates and other factors. Duration measures interest rate risk only and
not other risks, such as credit risk and, in the case of non-U.S. dollar
denominated securities, currency risk. Effective maturity measures the final
maturity dates of a bond (or a bond portfolio).
MARKET TIMING
Market timing--buying securities when prices are low and selling them when
prices are relatively higher--may not work for many investors because it is
impossible to predict with certainty how the price of a security will fluctuate.
However, owning a security for a long period of time may help investors off-set
short-term price volatility and realize positive returns.
POWER OF COMPOUNDING
Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth of
assets. The long-term investment results of compounding may be greater than that
of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.
I-1
<PAGE>
APPENDIX II--HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
This following chart shows the long-term performance of various asset
classes and the rate of inflation.
EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY
[CHART]
Source: Stocks, Bonds, Bills and Inflation 1996 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. This chart is for illustrative
purposes only and is not indicative of the past, present, or future performance
of any asset class or any Prudential Mutual Fund.
Generally, stock returns are due to capital appreciation and reinvesting any
gains. Bond returns are due mainly to reinvesting interest. Also, stock prices
usually are more volatile than bond prices over the long-term. Small stock
returns for 1926-1980 are those of stocks comprising the 5th quintile of the New
York Stock Exchange. Thereafter, returns are those of the Dimensional Fund
Advisors (DFA) Small Company Fund. Common stock returns are based on the S&P
Composite Index, a market-weighted, unmanaged index of 500 stocks (currently) in
a variety of industries. It is often used as a broad measure of stock market
performance.
Long-term government bond returns are measured using a constant one-bond
portfolio with a maturity of roughly 20 years. Treasury bill returns are for a
one-month bill. Treasuries are guaranteed by the government as to the timely
payment of principal and interest; equities are not. Inflation is measured by
the consumer price index (CPI).
II-1
<PAGE>
Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1987
through 1996. The total returns of the indices include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Fund or of any sector in which the
Fund invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees of
a mutual fund. See "Fund Expenses" in the prospectus. The net effect of the
deduction of the operating expenses of a mutual fund on these historical total
returns, including the compounded effect over time, could be substantial.
<TABLE>
<CAPTION>
HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
- --------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT
TREASURY
BONDS (1) 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 18.4% 2.7%
- --------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT
MORTGAGE
SECURITIES (2) 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8% 5.4%
- --------------------------------------------------------------------------------------------------------------
U.S. INVESTMENT GRADE
CORPORATE
BONDS (3) 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3% 3.3%
- --------------------------------------------------------------------------------------------------------------
U.S.
HIGH YIELD
CORPORATE
BONDS (4) 5.0% 12.5% 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2% 11.4%
- --------------------------------------------------------------------------------------------------------------
WORLD
GOVERNMENT
BONDS (5) 35.2% 2.3% (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1%
==============================================================================================================
DIFFERENCE BETWEEN
HIGHEST AND LOWEST
RETURN PERCENT 33.2% 10.2% 18.8% 24.9% 30.9% 11.0% 10.3% 9.9% 5.5% 8.7%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1)LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over 150
public issues of the U.S. Treasury having maturities of at least one year.
(2)LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15-and 30-year fixed-rate mortgage-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
(3)LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year.
(4)LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by S&P or Fitch Investors
Service). All bonds in the index have maturities of at least one year.
(5)SALOMON BROTHERS WORLD GOVERNMENT INDEX (NON U.S.) includes over 800 bonds
issued by various foreign governments or agencies, excluding those in the U.S.,
but including those in Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.
II-2
<PAGE>
This chart illustrates the performance of major world stock markets for the
period from 1986 through 1997. It does not represent the performance of any
Prudential Mutual Fund.
[CHART]
Source: Morgan Stanley Capital International (MSCI) and Lipper Analytical
Services, Inc. Used with permission. Morgan Stanley Country indices are
unmanaged indices which include those stocks making up the largest two-thirds of
each country's total stock market capitalization. Returns reflect the
reinvestment of all distributions. This chart is for illustrative purposes only
and is not indicative of the past, present or future performance of any specific
investment. Investors cannot invest directly in stock indices.
This chart shows the growth of a hypothetical $10,000 investment made in the
stocks representing the S&P 500 stock index with and without reinvested
dividends.
[CHART]
Source: Stocks, Bonds, Bills, and Inflation 1997 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. This chart is used for illustrative
purposes only and is not intended to represent the past, present or future
performance of any Prudential Mutual Fund. Common stock total return is based on
the Standard & Poor's 500 Stock Index, a market-value-weighted index made up of
500 of the largest stocks in the U.S. based upon their stock market value.
Investors cannot invest directly in indices.
[CHART]
Source: Morgan Stanley Capital International, September 30, 1997. Used with
permission. This chart represents the capitalization of major world stock
markets as measured by the Morgan Stanley Capital International (MSCI) World
Index. The total market capitalization is based on the value of approximately
1579 companies in 22 countries (representing approximately 60% of the aggregate
market value of the stock exchanges). This chart is for illustrative purposes
only and does not represent the allocation of any Prudential Mutual Fund.
II-3
<PAGE>
This chart below shows the historical volatility of general interest rates as
measured by the long U.S. Treasury Bond.
[CHART]
Source: Stocks, Bonds, Bills, and Inflation 1997 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. This chart illustrates the historical
yield of the long-term U.S. Treasury Bond from 1926-1996. Yields represent that
of an annually renewed one-bond portfolio with a remaining maturity of
approximately 20 years. This chart is for illustrative purposes only and should
not be construed to represent the yields of any Prudential Mutual Fund.
The following chart, although not relevant to share ownership in the Fund,
may provide useful information about the effects of a hypothetical investment
diversified over different asset portfolios. The chart shows the range of annual
total returns for major stock and bond indices for the period from December 31,
1976 through December 31, 1996. The horizontal "Best Returns Zone" band shows
that a hypothetical blended portfolio constructed of one-third U.S. stock (S&P
500), one third foreign stock (EAFE Index), and one-third U.S. bonds (Lehman
Index) would have eliminated the "highest highs" and "lowest lows" of any single
asset class.
[CHART]
* Source: Prudential Investment Corporation based on data from Lipper Analytical
New Application (LANA). Past performance is not indicative of future results.
The S&P 500 Index is a weighted, unmanaged index comprised of 500 stocks which
provides a broad indication of stock price movements. The Morgan Stanley EAFE
Index is an unmanaged index comprised of 20 overseas stock markets in Europe,
Australia, New Zealand and the Far East. The Lehman Aggregate Index includes all
publicly-issued investment grade debt with maturities over one year, including
U.S. government and agency issues, 15 and 30 year fixed-rate government agency
mortgage securities, dollar denominated SEC registered corporate and government
securities, as well as asset-backed securities. Investors cannot invest directly
in stock or bond market indices.
II-4
<PAGE>
APPENDIX III--INFORMATION RELATING TO THE PRUDENTIAL
Set forth below is information relating to The Prudential Insurance
Company of America (Prudential) and its subsidiaries as well as information
relating to the Prudential Mutual Funds. See "Management of the Fund--Manager"
in the Prospectus. The data will be used in sales materials relating to the
Prudential Mutual Funds. Unless otherwise indicated, the information is as of
December 31, 1995 and is subject to change thereafter. All information relies on
data provided by The Prudential Investment Corporation (PIC) or from other
sources believed by the Manager to be reliable. Such information has not been
verified by the Fund.
INFORMATION ABOUT PRUDENTIAL
The Manager and PIC1 are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December 31,
1995. 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 more
than 92,000 persons worldwide, and maintains a sales force of approximately
13,000 agents and 5,600 financial advisors. Prudential is a major issuer of
annuities, including variable annuities. Prudential seeks to develop innovative
products and services to meet consumer needs in each of its business areas.
Prudential uses the Rock of Gibraltar as its symbol. The Prudential rock is a
recognized brand name throughout the world.
INSURANCE. Prudential has been engaged in the insurance business since
1875. It insures or provides financial services to more than 50 million people
worldwide--one of every five people in the United States. Long one of the
largest issuers of individual life insurance, the Prudential has 19 million life
insurance policies in force today with a face value of $1 trillion. Prudential
has the largest capital base ($11.4 billion) of any life insurance company in
the United States. Prudential provides auto insurance for more than 1.7 million
cars and insures more than 1.4 million homes.
MONEY MANAGEMENT. The Prudential is one of the largest pension fund
managers in the country, providing pension services to 1 in 3 Fortune 500 firms.
It manages $36 billion of individual retirement plan assets, such as 401(k)
plans. In July 1996, INSTITUTIONAL INVESTOR ranked Prudential the fifth largest
institutional money manager of the 300 largest money management organizations in
the United States as of December 31, 1995. As of December 31, 1995, Prudential
had more than $314 billion in assets under management. Prudential Investments, a
business group of Prudential (of which Prudential Mutual Funds is a key part),
manages over $190 billion in assets of institutions and individuals.
REAL ESTATE. 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.2
HEALTHCARE. Over two decades ago, the Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, almost 5 million
Americans receive healthcare from a Prudential managed care membership.
FINANCIAL SERVICES. The Prudential Bank, a wholly-owned subsidiary of
Prudential, has nearly $3 billion in assets and serves nearly 1.5 million
customers across 50 states.
- ----------
1Prudential Investments, a business group of PIC, serves as the Subadviser to
substantially all of the Prudential Mutual Funds. Wellington Management Company
serves as the subadviser to Global Utility Fund, Inc., Nicholas-Applegate
Capital Management as subadviser to Nicholas-Applegate Fund, Inc., Jennison
Associates Capital Corp. as the subadviser to Prudential Jennison Fund, Inc. and
Prudential Active Balanced Fund, a portfolio of Prudential Dryden Fund, Mercator
Asset Management LPas the Subadviser to International Stock Series, a portfolio
of Prudential World Fund, Inc. and BlackRock Financial Management, Inc. as
subadviser to The BlackRock Government Income Trust. There are multiple
subadvisers for The Target Portfolio Trust.
2As of December 31, 1994.
III-1
<PAGE>
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
Prudential Mutual Fund Management is one of the fifteen largest mutual
fund companies in the country, with over 2.5 million shareholders invested in
more than 50 mutual fund portfolios and variable annuities with more than 3.7
million shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers who manage
over $55 billion in mutual fund and variable annuity assets. Some of
Prudential's portfolio managers have over 20 years of experience managing
investment portfolios.
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser in
national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
THE WALL STREET JOURNAL, THE NEW YORK TIMES, BARRON'S and USA TODAY.
EQUITY FUNDS. Forbes magazine listed Prudential Equity Fund among twenty
mutual funds on its Honor Roll in its mutual fund issue of August 28, 1995.
Honorees are chosen annually among mutual funds (excluding sector funds) which
are open to new investors and have had the same management for at least five
years. Forbes considers, among other criteria, the total return of a mutual fund
in both bull and bear markets as well as a fund's risk profile. Prudential
Equity Fund is managed with a "value" investment style by PIC. In 1995,
Prudential Securities introduced Prudential Jennison Fund, a growth-style equity
fund managed by Jennison Associates Capital Corp., a premier institutional
equity manager and a subsidiary of Prudential.
HIGH YIELD FUNDS. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor the 167
issues held in the Prudential High Yield Fund (currently the largest fund of its
kind in the country) along with 100 or so other high yield bonds, which may be
considered for purchase.3 Non-investment grade bonds, also known as junk bonds
or high yield bonds, are subject to a greater risk of loss of principal and
interest including default risk than higher-rated bonds. Prudential high yield
portfolio managers and analysts meet face-to-face with almost every bond issuer
in the High Yield Fund's portfolio annually, and have additional telephone
contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets--from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services
from almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from PULP AND PAPER FORECASTER to WOMEN'S
WEAR DAILY--to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to
collect detailed information on which to trade. From natural gas prices in the
Rocky Mountains to the results of local municipal elections, a Prudential
portfolio manager or trader is able to monitor it if it's important to a
Prudential mutual fund.
Prudential Mutual Funds trade approximately $31 billion in U.S. and
foreign government securities a year. PIC seeks information from government
policy makers. In 1995, Prudential's portfolio managers met with several senior
U.S. and foreign government officials, on issues ranging from economic
conditions in foreign countries to the viability of index-linked securities in
the United States.
Prudential Mutual Funds' portfolio managers and analysts met with over
1,200 companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.
- ----------
3As of December 31, 1995. The number of bonds and the size of the Fund are
subject to change.
III-2
<PAGE>
Prudential Mutual Fund global equity managers conducted many of their
visits overseas, often holding private meetings with a company in a foreign
language (our global equity managers speak 7 different languages, including
Mandarin Chinese).
TRADING DATA.4 On an average day, Prudential Mutual Funds' U.S. and
foreign equity trading desks traded $77 million in securities representing over
3.8 million shares with nearly 200 different firms. Prudential Mutual Funds'
bond trading desks traded $157 million in government and corporate bonds on an
average day. That represents more in daily trading than most bond funds tracked
by Lipper even have in assets.5 Prudential Mutual Funds' money market desk
traded $3.2 billion in money market securities on an average day, or over $800
billion a year. They made a trade every 3 minutes of every trading day. In 1994,
the Prudential Mutual Funds effected more than 40,000 trades in money market
securities and held on average $20 billion of money market securities.6
Based on complex-wide data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Services LLC., the Transfer Agent of the
Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free number. On an
annual basis, that represents approximately 1.8 million telephone calls
answered.
INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 5,600 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1995, assets held by Prudential Securities for its
clients approximated $168 billion. During 1994, over 28,000 new customer
accounts were opened each month at PSI.7
Prudential Securities has a two-year Financial Advisor training program
plus advanced education programs, including Prudential Securities "university,"
which provides advanced education in a wide array of investment areas.
Prudential Securities is the only Wall Street Firm to have its own in-house
Certified Financial Planner (CFP) program. In the December 1995 issue of
REGISTERED REP, an industry publication, Prudential Securities' Financial
Advisor training programs received a grade of A- (compared to an industry
average of B+).
In 1995, Prudential Securities' equity research team ranked 8th in
INSTITUTIONAL INVESTOR magazine's 1995 "All America Research Team" survey. Five
Prudential Securities' analysts were ranked as first-team finishers.8
In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial Architect(SM), a state-of-the-art asset allocation software program
which helps Financial Advisors to evaluate a client's objectives and overall
financial plan, and a comprehensive mutual fund information and analysis system
that compares different mutual funds.
For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
advisor or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
- ----------
4Trading data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PIC serves as the subadviser, portfolios of
the Prudential Series Fund and institutional and non-US accounts managed by
Prudential Mutual Fund Investment Management, a division of PIC, for the year
ended December 31, 1995.
5Based on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate U.S.
Government, Short Investment Grade Debt, Intermediate Investment Grade Debt,
General U.S. Treasury, General U.S. Government and Mortgage Funds.
6As of December 31, 1994.
7As of December 31, 1994.
8On an annual basis, Institutional Investor magazine surveys more than 700
institutional money managers, chief investment officers and research directors,
asking them to evaluate analysts in 76 industry sectors. Scores are produced by
taking the number of votes awarded to an individual analyst and weighting them
based on the size of the voting institution. In total, the magazine sends its
survey to approximately 2,000 institutions and a group of European and Asian
institutions.
III-3
<PAGE>
PART C
OTHER INFORMATION
ITEM 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, 1997.
Statement of Assets and Liabilities at September 30, 1997.
Statement of Operations for the year ended September 30, 1997.
Statement of Changes in Net Assets for the years ended
September 30,1996 and 1997.
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).
(c) Articles of Amendment of Registrant. Incorporated by
reference to Post-Effective Amendment No. 10 to Registration
Statement on Form N-1A filed via EDGAR on December 2, 1996
(File No. 33-3756).
2. By-Laws of the Registrant.*
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.*
(b) Subadvisory Agreement among Registrant, Prudential Mutual
Fund Management, Inc. and Wellington Management Company.*
6. Restated Distribution Agreement. Incorporated by reference to
Post-Effective Amendment No. 10 to Registration Statement on
Form N-1A filed via EDGAR on December 2, 1996 (File No.
33-3756).
7. Not Applicable.
8. Custodian Contract between the Registrant and State Street Bank
and Trust Company.*
9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc. *
10. Opinion and Consent of Counsel. Incorporated by reference to
Post-Effective Amendment No. 10 to Registration Statement on
Form N-1A filed via EDGAR on December 2, 1996 (File No.
33-3756).
11. (a) Consent of Price Waterhouse LLP, Independent Accountants.*
(b) Consent of Deloitte & Touche LLP, Independent Auditors.*
12. Not Applicable.
13. Not Applicable.
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-1
<PAGE>
(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.*
(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).
18. Rule 18f-3 Plan.*
27. 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 7, 1997 there were 12,601; 18,756; 159 and 9 record holders
of Class A, Class B, Class C and Class Z 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 as amended (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 the Distribution Agreement (Exhibit 6 to the Registration Statement), the
Distributor of the Registrant may be indemnified against liabilities which it
may incur, except liabilities arising from bad faith, gross negligence, willful
misfeasance or reckless disregard of duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 as amended (Securities Act) may be permitted to 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.
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 Investments Fund
Management LLC (the Manager or PIFM) 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 the Distribution Agreement in a manner consistent
with Release No. 11330 of the Securities and Exchange Commission under the 1940
Act so long as the interpretation of Sections 17(h) and 17(i) of such Act remain
in effect and are consistently applied.
C-2
<PAGE>
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 PIFM are listed in
Schedules A and D of Form ADV of PIFM as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference
(File No. 801-31104).
The business and other connections of PIFM's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATIONS
- ---------------- --------------- ------------------
<S> <C> <C>
Brian Storms Officer-in-Charge President, Prudential Mutual Funds &Annuities (PMF&A);
Chief Executive Officer Officer-in-Charge,President, Chief Executive Officer and
Chief Operating Officer Chief Operating Officer, PIFM
Thomas A. Early Executive Vice President, Vice President and General Counsel, PMF&A; Executive Vice
Secretary and General President, Secretary and General Counsel, PIFM
Counsel
Robert F. Gunia Executive Vice President Comptroller, Prudential Investments; Executive Vice President
and Treasurer and Treasurer,PIFM; Senior Vice President, Prudential
Securities
Neil A. McGuinness Executive Vice President Executive Vice President and Director of Marketing, PMF&A;
Executive Vice President, PIFM
Robert J.Sullivan Executive Vice President Executive Vice President, PMF&A; Executive Vice President,
PIFM
</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 UNDERWRITER
(a) Prudential Securities Incorporated
Prudential Securities is distributor for The BlackRock Government Income
Trust, The Global Total Return Fund, Inc., Global Utility Fund, Inc.,
Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth Equity Fund),
Prudential Balanced Fund, Prudential California Municipal Fund (California
Income Series and California Series), Prudential Distressed Securities Fund,
Inc., Prudential Diversified Bond Fund, Inc., Prudential Dryden Fund, Prudential
Emerging Growth Fund, Inc., Prudential Equity Fund, Inc., Prudential Equity
Income Fund, Prudential Europe Growth Fund, Inc., Prudential Global Genesis
Fund, Inc., Prudential Global Limited Maturity Fund, Inc., Prudential Government
Income Fund, Inc., Prudential Government Securities Trust, Prudential High Yield
Fund, Inc., Prudential Institutional Liquidity Portfolio, Inc., Prudential
Intermediate Global Income Fund, Inc., Prudential International Bond Fund,Inc.,
Prudential Jennison Series Fund, Inc., Prudential MoneyMart Assets, Inc.,
Prudential Mortgage Income Fund, Inc., Prudential Multi-Sector Fund, Inc.,
Prudential Municipal Bond Fund, Prudential Municipal Series Fund, Prudential
National Municipals Fund, Inc., Prudential Natural Resources Fund, Inc.,
Prudential Pacific Growth Fund, Inc., Prudential Small Company Value Fund, Inc.,
Prudential Small-Cap Quantum Fund, Inc., Prudential Special Money Market Fund,
Inc., Prudential Structured Maturity Fund, Inc., Prudential Tax-Free Money Fund,
Inc., Prudential Utility Fund, Inc., Prudential World Fund, Inc. and The Target
Portfolio 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
(b)(i) Information concerning the officers and directors of Prudential
Securities Incorporated is set forth below.
C-3
<PAGE>
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME* UNDERWRITER THE FUND
- ------ ----------- -----------
<S> <C> <C>
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
Martin Pfinsgraff .................... Senior Vice President, Chief Financial Officer None
and Director
Vincent T. Pica, II Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Hardwick Simmons ..................... Chief Executive Officer, None
President and Director
Lee B. Spencer ....................... Executive Vice President, Secretary, None
General Counsel and Director
Brian Storms Director None
Gateway Center Three
100 MulberryStreet
Newark, NJ 07102-4077
</TABLE>
- ----------
*The address of each person named is One Seaport Plaza, New York, NY 10292
unless otherwise indicated.
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act and the Rules thereunder are maintained at the
offices of State Street Bank and Trust Company, One Heritage Drive, North
Quincy, Massachusetts, 02171, Wellington Management Company, 75 State Street,
Boston Massachusetts 02109, the Registrant, Gateway Center Three, Newark, New
Jersey 07102-4077 and Prudential Mutual Fund Services, LLC, 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 Gateway Center Three, 100 Mulberry
Street, Newark, New Jersey 07102-4077 and the remaining accounts, books and
other documents required by such other pertinent provisions of Section 31(a) and
the Rules promulgated thereunder will be kept by State Street Bank and Trust
Company and Prudential Mutual Fund Services, 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-4
<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 Newark, and
State of New Jersey, on the 1st day of December, 1997.
GLOBAL UTILITY FUND, INC.
/s/ Richard A. Redeker
-----------------------------------
(RICHARD A. REDEKER, PRESIDENT)
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ------- ----
<S> <C> <C>
/s/ Eugene C. Dorsey Director December 1, 1997
- ---------------------------------------
EUGENE C. DORSEY
/s/ Douglas H. McCorkindale Director December 1, 1997
- ---------------------------------------
DOUGLAS H. MCCORKINDALE
/s/ Thomas T. Mooney Director December 1, 1997
- ---------------------------------------
THOMAS T. MOONEY
/s/ Richard A. Redeker Director December 1, 1997
- ---------------------------------------
RICHARD A. REDEKER
/s/ Grace Torres Treasurer and Principal December 1, 1997
- --------------------------------------- Financial and Accounting
GRACE TORRES Officer
</TABLE>
<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).
(c) Articles of Amendment of Registrant. Incorporated by reference to
Post-Effective Amendment No. 10 to Registration Statement on Form N-1A
filed via EDGAR on December 2, 1996 (File No. 33-3756).
2. By-Laws of the Registrant.*
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.*
(b) Subadvisory Agreement among Registrant, Prudential Mutual Fund
Management, Inc. and Wellington Management Company.*
6. (a) Restated Distribution Agreement. Incorporated by reference to
Post-Effective Amendment No. 10 to Registration Statement on Form N-1A
filed via EDGAR on December 2, 1996 (File No. 33-3756).
7. Not Applicable.
8. Custodian Contract between the Registrant and State Street Bank and Trust
Company.*
9. Transfer Agency and Service Agreement between the Registrant and Prudential
Mutual Fund Services, Inc.*
10. Opinion and Consent of Counsel. Incorporated by reference to Post-Effective
Amendment No. 10 to Registration Statement on Form N-1A filed via EDGAR on
December 2, 1996 (File No. 33-3756).
11. (a) Consent of Price Waterhouse LLP, Independent Accountants.*
(b) Consent of Deloitte & Touche, Indpendent Auditors.*
12. Not Applicable.
13. Not Applicable.
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.*
(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).
18. Rule 18f-3 Plan.*
27. Financial Data Schedule.*
- ----------
*Filed herewith.
BYLAWS
OF
GLOBAL UTILITY FUND, INC.
ARTICLE I
STOCKHOLDERS
Section 1. Place of Meeting. All meetings of the stockholders shall be held
at such place within the United States as may, from time to time, be designated
by the Board of Directors and stated in the notice of such meeting.
Section 2. Annual Meetings. The annual meeting of the stockholders of the
Corporation shall be held on a date and at such hour as may from time to time be
designated by the Board of Directors and stated in the notice of such meeting,
with the month ending four months after the end of the Corporation's fiscal
year, for the transaction of such business as may properly be brought before the
meeting; provided, however, that an annual meeting shall not be required to be
held in any year in which the election of directors is not required to be acted
on by stockholders under the Investment Company Act.
Section 3. Special Meetings. Special meetings of stockholders may be called
at any time by the President or a majority of the Board of Directors and shall
be held at such time and place as may be stated in the notice of the meeting.
<PAGE>
Special meetings of the stockholders shall be called by the Secretary upon
receipt of the written request of the holders of shares entitled to cast not
less than 10% of all the votes at such meeting, provided that such request shall
state the purposes of such meeting and the matters proposed to be acted on. No
special meeting shall be called upon the request of stockholders to consider any
matter which is substantially the same as a matter voted upon at any special
meeting of the stockholders held during the preceding 12 months, unless
requested by the holders of a majority of all shares entitled to be voted at
such meeting.
Section 4. Notice of Meetings. The Secretary shall cause written or printed
notice of the place, date and hour, and, in the case of a special meeting, the
purpose or purposes for which the meeting is called, to be given, not less than
10 and not more than 90 days before the date of the meeting, to each stockholder
entitled to vote at, or entitled to notice of, such meeting by leaving the same
with such stockholder or at such stockholder's residence or usual place of
business or by mailing it, postage prepaid, and addressed to such stockholder at
his address as it appears on the records of the Corporation at the time of such
mailing. If mailed, notice shall be deemed to be given when deposited in the
United States mail addressed to the stockholder as aforesaid. Notice of any
stockholders' meeting need not be given to any stockholder who shall sign a
written waiver of such notice either before or after the time of such
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meeting, which waiver shall be filed with the records of such meeting, or to any
stockholder who is present at such meeting in person or by proxy. Notice of
adjournment of a stockholders' meeting to another time or place need not be
given if such time and place are announced at the meeting. Irregularities in the
notice of any meeting to, or the non-receipt of any such notice by, any of the
stockholders shall not invalidate any action otherwise properly taken by or at
any such meeting.
Section 5. Quorum and Adjournment of Meetings. The presence at any
stockholders' meeting, in person or by proxy, of stockholders entitled to cast
one-third of the votes entitled to be cast shall constitute a quorum for the
transaction of business. Whether or not a quorum is present, the holders of a
majority of shares entitled to vote at the meeting and present in person or by
proxy, may, without further notice adjourn the meeting to a date not more than
120 days after the original record date. Any business that might have been
transacted at the meeting originally called may be transacted at any such
adjourned meeting at which a quorum is present.
Section 6. Voting and Inspectors. At each stockholders' meeting, each
stockholder entitled to vote thereat shall be entitled to one vote for each
share of stock of the Corporation validly issued and outstanding and standing in
his name on the books of the Corporation on the record date fixed in
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accordance with Section 6 of Article V hereof, either in person or by proxy
appointed by instrument in writing subscribed by such stockholder or his duly
authorized attorney. Except as otherwise specifically provided in the charter of
the Corporation or as required by provision of the Investment Company Act, all
matters shall be decided by a vote of the majority of the votes validly cast at
a meeting at which a quorum is present except that a plurality of all the votes
cast at a meeting at which a quorum is present is sufficient to elect a
Director.
At any election of Directors, the Chairman of the meeting may, and upon the
request of the holders of 10% of the shares entitled to vote at such election
shall, take the vote by ballot and, upon like demand or order, appoint two
inspectors of election who shall first subscribe an oath or affirmation to
execute faithfully the duties of inspectors at such election with strict
impartiality and according to the best of their ability, and shall, after the
election, make a certificate of the result of the vote taken. No candidate for
the office of Director shall be appointed such Inspector.
Section 7. Validity of Proxies and Ballots. The right to vote by proxy
shall exist only if the instrument authorizing such proxy to act shall have been
signed by the stockholder or by his duly authorized attorney. Unless a proxy
provides otherwise, it shall not be valid more than eleven months after its
date. At
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every meeting of the stockholders, all proxies shall be received and taken in
charge of and all ballots shall be received and canvassed by the Secretary of
the Corporation or the person acting as Secretary of the meeting before being
voted, who shall decide all questions touching the qualifications of voters, the
validity of the proxies and the acceptance or rejection of votes, unless
inspectors of election shall have been appointed by the Chairman of the meeting
in which event such inspectors of election shall decide all such questions.
Section 8. Conduct of Stockholders' Meetings. The meetings of the
stockholders shall be presided over by the President, or if he is not present,
by a Vice President, or if none of them is present, by a Chairman to be elected
at the meeting. The Secretary of the Corporation, if present, shall act as a
Secretary of such meeting, or if he is not present, an Assistant Secretary shall
so act; if neither the Secretary nor the Assistant Secretary is present, then
the meeting shall elect its Secretary.
Section 9. Action Without Meeting. Any action to be taken by stockholders
may be taken without a meeting if (1) all stockholders entitled to vote on the
matter consent to the action in writing, (2) all stockholders entitled to notice
of the meeting but not entitled to vote at it sign a written waiver of any right
to dissent and (3) such consents and waivers are filed
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with the records of the meetings of stockholders. Such consent shall be treated
for all purposes as a vote at the meeting.
ARTICLE II
BOARD OF DIRECTORS
Section 1. Powers. Except as otherwise provided by law, by the charter of
the Corporation or by these Bylaws, the business and affairs of the Corporation
shall be managed under the direction of, and all powers of the Corporation
exercised by or under authority of, its Board of Directors.
Section 2. Number and Term of Directors. The Board of Directors shall
consist of not fewer than three nor more than fourteen Directors, as specified
by a resolution of a majority of the entire Board of Directors, provided that
except for the initial Board of Directors, at least forty percent of the entire
Board of Directors shall be persons who are not interested persons of the
Corporation, as defined in the Investment Company Act. The Board of Directors
may elect, but shall not be required to elect, a Chairman of the Board.
Directors need not be stockholders. Each Director (whenever selected) shall hold
office until his successor is elected and qualified or until his earlier death,
resignation or removal.
Section 3. Election. At the first meeting of the stockholders, Directors
shall be elected by vote of the
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stockholders of the Corporation. A plurality of all the votes cast at a meeting
at which a quorum is present is sufficient to elect a director.
Section 4. Vacancies and Board Composition. If any vacancies shall occur on
the Board of Directors by reason of death, resignation, removal or otherwise, or
if the authorized number of Directors shall be increased, the Directors then in
office shall continue to act, and such vacancies (if not previously filled by
the stockholders) may be filled by vote of the stockholders or by a majority of
the Directors then in office, although less than a quorum, except that a vacancy
created by an increase in the number of directors may be filled only by the
stockholders or by a majority vote of the entire Board of Directors. A Director
elected by the Board of Directors to fill a vacancy serves until the next
meeting of stockholders and until his successor is elected and qualified.
Immediately after filling any such vacancy, at least two-thirds (2/3) of the
Directors then holding office shall have been elected to such office by the
stockholders of the Corporation. In the event that at any time, other than the
time preceding the first stockholders' meeting, less than a majority of the
Directors of the Corporation holding office at that time were elected by the
stockholders, a meeting of the stockholders shall be held promptly and in any
event within 60 days for the purpose of electing Directors to fill any existing
vacancies in the Board of
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Directors unless the Securities and Exchange Commission shall by order extend
such period.
Section 5. Place of Meeting. The Directors may hold their meetings, have
one or more offices, and keep the books of the Corporation, outside the State of
Maryland, and within or without the United States of America, at any office or
offices of the Corporation or at any other place as they may from time to time
by resolution determine, or in the case of meetings, as they may from time to
time by resolution determine or as shall be specified or fixed in the respective
notices or waivers of notice thereof.
Section 6. Annual and Regular Meetings. The annual meeting of the Board of
Directors for choosing officers and transacting other proper business shall be
held at such time and place as the Board may determine. The Board of Directors,
from time to time, may provide by resolution for the holding of regular meetings
and fix their time and place as the Board of Directors may determine. Notice of
such annual and regular meetings need not be in writing, provided that notice of
any change in the time or place of such meetings shall be communicated promptly
to each Director not present at the meeting at which such change was made, in
the manner provided in Section 8 of this Article II for notice of special
meetings. Except as otherwise provided under the Investment Company Act, members
of
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the Board of Directors or any committee designated thereby may participate in a
meeting of such Board or committee and in any action taken therein by means of a
conference telephone or similar communications equipment that allows all persons
participating in the meeting to hear each other at the same time.
Section 7. Special Meetings. Special meetings of the Board of Directors may
be held at any time or place and for any purpose when called by the President,
the Secretary or two or more of the Directors. Notice of special meetings,
stating the time and place, shall be communicated to each Director personally by
telephone or transmitted to him by telegraph, telefax, telex, cable or wireless
at least one day before the meeting.
Section 8. Waiver of Notice. No notice of any meeting of the Board of
Directors or a committee of the Board need be given to any Director who is
present at the meeting or who waives notice of such meeting in writing (which
waiver shall be filed with the records of such meeting), either before or after
the time of the meeting.
Section 9. Quorum and Voting. At all meetings of the Board of Directors,
the presence of one-third of the number of Directors then in office shall
constitute a quorum for the transaction of business; provided that a quorum
shall in no case be less than two directors. In the absence of a quorum, a
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majority of the Directors present may adjourn the meeting, from time to time,
until a quorum shall be present. The action of a majority of the Directors
present at a meeting at which a quorum is present shall be the action of the
Board of Directors, unless the concurrence of a greater proportion is required
for such action by law, by the charter of the Corporation or by these Bylaws.
Section 10. Action Without a Meeting. Except as otherwise provided under
the Investment Company Act, any action required or permitted to be taken at any
meeting of the Board of Directors or any committee thereof may be taken without
a meeting if a written consent to such action is signed by all members of the
Board or of such committee, as the case may be, and such written consent is
filed with the minutes of the proceedings of the Board or such committee.
Section 11. Compensation of Directors. Directors shall be entitled to
receive such compensation from the Corporation for their services as may, from
time to time, be determined by resolution of the Board of Directors.
ARTICLE III
COMMITTEES
Section 1. Organization. By resolution adopted by the Board of Directors,
the Board may designate one or more
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committees, including an Executive Committee, each composed of two or more
Directors. The Chairman of such committees shall be elected by the Board of
Directors. The Board of Directors shall have the power at any time to change the
members of such committees and to fill vacancies in the committees. The Board
may delegate to these committees any of its powers, except the power to
authorize the issuance of stock, declare a dividend or distribution of stock,
recommend to stockholders any action requiring stockholder approval, amend these
Bylaws or approve any merger or share exchange which does not require
stockholders approval or approve or terminate any contract with an investment
adviser or principal underwriter, as such terms are defined in the Investment
Company Act, or to take any other action required to be taken by the Board of
Directors by the Investment Company Act.
Section 2. Proceedings and Quorum. At all committee meetings, the presence
of one-third of the number of committee members shall constitute a quorum for
the transaction of business. The action of a majority of the committee members
present when a quorum is present shall be the action of the committee. In the
event any member of any committee is absent from any meeting, the members
thereof present at the meeting, whether or not they constitute a quorum, may
appoint a member of the Board of Directors to act in the place of such absent
member.
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ARTICLE IV
OFFICERS
Section 1. General. The officers of the Corporation shall be a President
(who shall be a Director), a Secretary and a Treasurer, and may include one or
more Vice Presidents, Assistant Secretaries or Assistant Treasurers, and such
other officers as may be appointed in accordance with the provisions of Section
8 of this Article IV. Any two of the aforesaid offices, except those of a
President and Vice President may be held by the same person, but no officer
shall execute, acknowledge or verify any instrument in more than one capacity
when such instrument is required by law to be executed, acknowledged or verified
by any two or more officers.
Section 2. Election. Tenure and qualifications. The officers of the
Corporation, except those appointed as provided in Section 9 of this Article IV,
shall be elected by the Board of Directors. Except as otherwise provided in this
Article IV, each officer chosen by the Board of Directors shall hold office
until the next annual meeting of the Board of Directors and until his successor
shall have been elected and qualified.
Section 3. Vacancies and Newly Created Officers. If any vacancy shall occur
in any office by reason of death, resignation, removal, disqualification or
other cause, or if any new office shall be created, such vacancies or newly
created
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offices may be filled by the Board of Directors at any regular or special
meeting or, in the case of any office created pursuant to Section 9 hereof, by
any officer upon whom such power shall have been conferred by the Board of
Directors.
Section 4. Removal and Resignation. The Board of Directors (or, as to any
assistant or subordinate officer, any committee or officer authorized by the
Board) may remove an officer at any time, and in a like manner, the vacancy may
be filled for the unexpired portion of the term. The removal of an officer does
not prejudice any of his contract rights. Any officer may resign his office at
any time by delivering a written resignation to the Board of Directors, the
President, the Secretary or any Assistant Secretary. Unless otherwise specified
therein, such resignation shall take effect upon delivery.
Section 5. President. The President shall be the chief executive officer of
the Corporation and he shall preside at all stockholders' meetings. Subject to
the supervision of the Board of Directors, he shall have general charge of the
business, affairs and property of the Corporation and general supervision over
its officers, employees and agents. Except as the Board of Directors may
otherwise order, he may sign in the name and on behalf of the Corporation all
deeds, bonds, contracts or agreements. He shall examine such other powers and
perform such
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other duties as, from time to tome, may be assigned to him by the Board of
Directors.
Section 6. Vice President. The Board of Directors may, from time to time,
elect one or more Vice Presidents who shall have such powers and perform such
duties as, from time to time, may be assigned to them by the Board of Directors
or the President. At the request or in the absence or disability of the
President, the Vice President (or, if there are two or more Vice Presidents,
then the senior of the Vice Presidents present and able to act) may perform all
the duties of the President and, when so acting, shall have all the powers of
and be subject to all the restrictions upon the President.
Section 7. Treasurer and Assistant Treasurers. The Treasurer shall be the
principal financial and accounting officer of the Corporation and shall have
general charge of the finances and books of account of the Corporation. Except
as otherwise provided by the Board of Directors, he shall have general
supervision of the funds and property of the Corporation and of the performance
by the Custodian of its duties with respect thereto. He shall render to the
Board of Directors, wherever directed by the Board, an account of the financial
condition of the Corporation and of all his transactions as Treasurer; and as
soon as possible after the close of each fiscal year he shall make and submit to
the Board of Directors a like report for such
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fiscal year. He shall perform all acts incidental to the office of Treasurer,
subject to the control of the Board of Directors.
Any Assistant Treasurer may perform such duties of the Treasurer as the
Treasurer or the Board of Directors may assign, and, in the absence of the
Treasurer, he may perform all the duties of the Treasurer.
Section 8. Secretary and Assistant Secretaries. The Secretary shall attend
to the giving and serving of all notices of the Corporation and shall record all
proceedings of the meetings of the stockholders and Directors in books to be
kept for that purpose. He shall keep in safe custody the seal of the
Corporation, and shall have charge of the records of the Corporation, including
the stock books and such other books and papers as the Board of Directors may
direct and such books, reports, certificates and other documents required by law
to be kept, all of which shall at all reasonable times be open to inspection by
any Director. He shall perform such other duties as pertain to his office or as
may be required by the Board of Directors.
Any Assistant Secretary may perform such duties of the Secretary as the
Secretary or the Board of Directors may assign, and, in the absence of the
Secretary, he may perform all the duties of the Secretary.
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Section 9. Subordinate Officers. The Board of Directors from time to time
may appoint such other officers or agents as it may deem advisable, each of whom
shall have such title, hold office for such period, have such authority and
perform such duties as the Board of Directors may determine. The Board of
Directors from time to time may delegate to one or more officers or agents the
power to appoint any such subordinate officers or agents and to prescribe their
respective rights, terms of office, authorities and duties.
Section 10. Remuneration. The salaries or other compensation of the
officers of the Corporation shall be fixed from time to time by resolution of
the Board of Directors, except that the Board of Directors may be resolution
delegate to any person or group of persons the power to fix the salaries or
other compensation of any subordinate officers or agents appointed in accordance
with the provisions of Section 9 of this Article IV.
Section 11. Surety Bonds. The Board of Directors may require any officer or
agent of the Corporation to execute a bond (including, without limitation, any
bond required by the Investment Company Act, and the rules and regulations of
the Securities and Exchange Commission promulgated thereunder) to the
Corporation in such sum and with such surety or sureties as the Board of
Directors may determine, conditioned upon the faithful performance of his duties
to the Corporation, including
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responsibility for negligence and for the accounting of any of the Corporation's
property, funds or securities that may come into his hands.
ARTICLE V
CAPITAL STOCK
Section 1. Certificates of Stock. The interest of each stockholder of the
Corporation shall be evidenced by certificates for shares of stock in such form,
not inconsistent with law, as the Board of Directors or any officer or officers
designated for such purpose by resolution of the Board of Directors may, from
time to time, prescribe. No certificate shall be valid unless it is signed by
the President or a Vice President and countersigned by the Secretary or an
Assistant Secretary or the Treasurer or an Assistant Treasurer of the
Corporation and sealed with its seal, or bears the facsimile signatures of such
officers and a facsimile of such seal.
Section 2. Transfer of Shares. Shares of the Corporation shall be
transferable on the books of the Corporation by the holder thereof in person or
by his duly authorized attorney or legal representative upon surrender and
cancellation of a certificate or certificates for the same number of shares of
the same class, duly endorsed or accompanied by proper instruments of assignment
and transfer, with such proof of the authenticity of the signature as the
Corporation or its agent may
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reasonably require. The Board of Directors may, from time to time, adopt rules
and regulations with reference to the method of transfer of the shares of stock
of the Corporation.
Section 3. Registered Holder. The Corporation shall be entitled to treat
the holder of record of any share or shares of stock as the holder in fact
thereof and, accordingly, shall not be bound to recognize any equitable or other
claim, to or interest in, such share or shares on the part of any other person
whether or not it shall have express or other notice thereof, except as
expressly provided by statute.
Section 4. Stock Ledgers. The stock ledgers of the Corporation, containing
the names and addresses of the stockholders and the number of shares held by
them respectively, shall be kept at the principal offices of the Corporation or,
if the Corporation employs a transfer agent, at the offices of the transfer
agent of the Corporation.
Section 5. Transfer Agents and Registrars. The Board of Directors may, from
time to time, appoint or remove transfer agents and/or registrars of transfer of
shares of stock of the Corporation, and it may appoint the same person as both
transfer agent and registrar. Upon any such appointment being made all
certificates representing shares of capital stock thereafter issued shall be
countersigned by one of such transfer agents or
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by one of such registrars or transfer or by both and shall not be valid unless
so countersigned. If the same person shall be both transfer agent and registrar,
only one countersignature by such person shall be required.
Section 6. Fixing of Record Date. The Board of Directors may fix in advance
a date as a record for the determination of the stockholders entitled to notice
of or to vote at any stockholders' meeting or any adjournment thereof, or to
express consent to corporate action in writing without a meeting, or to receive
payment of any dividend or other distribution or to be allotted any other rights
or for the purpose of any other lawful action, provided that (1) such record
date shall not exceed 90 days preceding the date on which the particular action
requiring such determination will be taken; (2) the transfer books shall remain
open regardless of the fixing of a record date; (3) in the case of a meeting of
stockholders, the record date shall be at least 10 days before the date of the
meeting; and (4) in the event a dividend or other distribution is declared, the
record date for stockholders entitled to a dividend or distribution shall be at
least 10 days after the date on which the dividend is declared (declaration
date).
Section 7. Lost. Stolen or Destroyed Certificates. Before issuing a new
certificate for stock of the Corporation alleged to have been lost, stolen or
destroyed, the Board of
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Directors or any officer authorized by the Board may, in its discretion, require
the owner of the lost, stolen or destroyed certificate (or his legal
representative) to give the Corporation a bond or other indemnity, in such form
and in such amount as the Board or any such officer may direct and with such
surety or sureties as may be satisfactory to the Board or any such officer,
sufficient to indemnify the Corporation against any claim that may be made
against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate.
ARTICLE VI
FINANCE
Section 1. Fiscal Year. The fiscal year of the Corporation shall, unless
otherwise ordered by the Board of Directors, be twelve calendar months ending on
September 30 of each year.
Section 2. Accountant.
A. The Corporation shall employ an independent public accountant or a firm
of independent public accountants as its Accountants to examine the accounts of
the Corporation and to sign and certify financial statements filed by the
Corporation. The employment of the Accountant shall be conditioned upon the
right of the Corporation to terminate the employment forthwith
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without any penalty by vote of a majority of the outstanding voting securities
at any stockholders' meeting called for that purpose.
B. A majority of the members of the Board of Directors who are not
interested persons (as defined in the Investment Company Act) of the corporation
shall select the Accountant at any meeting held within thirty days before or
after the beginning of the fiscal year of the Corporation or before the annual
stockholders' meeting in that year; provided, however, that the Corporation may
instead select the Accountant within the time period permitted under any rule or
regulation of the Securities and Exchange Commission. The selection shall be
submitted for ratification or rejection at the next succeeding stockholders'
meeting. If the selection is rejected at that meeting, the Accountant shall be
selected by majority vote of the Corporation's outstanding voting securities,
either at the meeting at which the rejection occurred or at a subsequent meeting
of stockholders called for the purpose of selecting an Accountant.
Section 3. Annual Statement of Affairs. The President, or such other
officer directed by the President, shall prepare annually a full and correct
statement of the affairs of the Corporation, to include a balance sheet and a
financial statement of operations for the preceding fiscal year.
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ARTICLE VII
CUSTODY OF SECURITIES
Section 1. Employment of a Custodian. The Corporation shall place and at
all times maintain in the custody of a Custodian (including any sub-custodian
for the Custodian) all funds, securities and similar investments owned by the
Corporation. The Custodian (and any sub-custodian) shall be a bank or trust
company of good standing having a capital, surplus and undivided profits
aggregating not less than fifty million dollars ($50,000,000) or such other
financial institution shall be permitted by rule or order of the Securities and
Exchange Commission. The Custodian shall be appointed from time to time by the
Board of Directors, which shall fix its remuneration.
Section 2. Termination of Custodian Agreement. Upon termination of the
agreement for services with the Custodian or inability of the Custodian to
continue to serve, the Board of Directors shall promptly appoint a successor
Custodian, but in the event that no successor Custodian can be found who has the
required qualifications and is willing to serve, the Board of Directors shall
call as promptly as possible a special meeting of the stockholders to determine
whether the Corporation shall function without a Custodian or shall be
liquidated. If so directed by resolution of the Board of Directors or by vote of
the holders of a majority of the outstanding shares of stock of the
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Corporation, the Custodian shall deliver and pay over all property of the
Corporation held by it as specified in such vote.
Section 3. Other Arrangements. The Corporation may make such other
arrangements for the custody of its assets (including deposit arrangements) as
may be required by any applicable law, rule or regulation.
ARTICLE VIII
AMENDMENTS
Section 1. General. All Bylaws of the Corporation, whether adopted by the
Board of Directors or the stockholders shall be subject to amendment, alteration
or repeal in a manner not inconsistent with the charter of the Corporation, and
new Bylaws, not inconsistent with such charter, may be made by the affirmative
vote of either: (1) the holders of record of a majority of the outstanding
shares of stock of the Corporation entitled to vote, at any meeting, the notice
or waiver of which shall have specified or summarized the proposed amendment,
alteration, repeal or new Bylaw; or (2) a majority of the Directors, at any
regular or special meeting.
ARTICLE IX
MISCELLANEOUS
Section 1. Principal Offices. The principal office of the Corporation in
the State of Maryland shall be located in
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Baltimore, Maryland. The Corporation may, in addition, establish and maintain
such other offices and places of business as the Board of Directors may, from
time to time, determine.
Section 2. Seal. The corporate seal of the Corporation shall be circular in
form and shall bear the name of the Corporation, the year of its incorporation,
and the word "Maryland". Any officer or Director of the Corporation authorized
to execute any document requiring the corporate seal shall have authority to
affix the corporate seal of the Corporation to such document.
Section 3. Gender. All pronouns used in these Bylaws shall be deemed to
refer to the masculine, feminine or neuter, singular or plural, as the identity
of the person or persons may require.
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GLOBAL UTILITY FUND, INC.
MANAGEMENT AGREEMENT
Agreement made as of this 4th day of February, 1991 between Global Utility
Fund, Inc., a Maryland corporation (the "Fund"), and Prudential Mutual Fund
Management, Inc., a Delaware corporation (the "Manager").
W I T N E S S E T H
WHEREAS, the Fund is a diversified, open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"); and
WHEREAS, the Fund desires to retain the Manager to render or contract to
obtain as hereinafter provided investment advisory services to the Fund and the
Fund also desires to avail itself of the facilities available to the Manager
with respect to the administration of its day-to-day corporate affairs, and the
Manager is willing to render such investment advisory and administrative
services; and
WHEREAS, the Fund desires to retain Wellington Management Company (the
"Subadviser") as the Subadviser to the Fund and the
<PAGE>
parties to this Agreement have entered into a Subadvisory Agreement with the
Subadviser dated the date hereof.
NOW, THEREFORE, the parties agree as follows:
1. The Fund hereby appoints the Manager to act as manager of the Fund and
administrator of its corporate affairs for the period and on the terms set forth
in this Agreement. The Manager accepts such appointment and agrees to render the
services herein described, for the compensation herein provided. The Manager
will enter into an agreement, dated the date hereof, with the Subadviser
pursuant to which the Subadviser shall furnish to the Fund the investment
advisory services specified therein in connection with the management of the
Fund. Such agreement in the form attached as Exhibit A is hereinafter referred
to as the "Subadvisory Agreement." The Manager will continue to have
responsibility for all investment advisory services furnished pursuant to the
Subadvisory Agreement.
2. Subject to the supervision of the Board of Directors of the Fund, the
Manager shall administer the Fund's corporate affairs and, in connection
therewith, shall furnish the Fund with office facilities and with clerical,
bookkeeping and recordkeeping services at such office facilities. Subject to
Section 1 hereof and the Subadvisory Agreement, the Manager shall manage the
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investment operations of the Fund and the composition of the Fund's portfolio,
including the purchase, retention and disposition thereof, in accordance with
the Fund's investment objectives, policies and restrictions as stated in the
Prospectus (hereinafter defined) and subject to the following understandings:
(a) The Manager shall provide supervision of the Fund's investments
and determine from time to time what investments or securities will be
purchased, retained, sold or loaned by the Fund, and what portion of the
assets will be invested or held uninvested as cash.
(b) The Manager, in the performance of its duties and obligations
under this Agreement, shall act in conformity with the Articles of
Incorporation, By-Laws and Prospectus (hereinafter defined) of the Fund
and with the instructions and directions of the Board of Directors of the
Fund and will conform to and comply with the requirements of the 1940 Act
and all other applicable federal and state laws and regulations.
(c) The Manager shall determine the securities and futures contracts
to be purchased or sold by the Fund and will place orders pursuant to its
determinations with or through such persons, brokers, dealers or futures
commission merchants (including but not limited to Prudential-Bache
Securities
- 3 -
<PAGE>
Inc.) in conformity with the policy with respect to brokerage as set forth
in the Fund's Registration Statement and Prospectus (hereinafter defined)
or as the Board of Directors may direct from time to time, in conformity
with federal securities laws. In providing the Fund with investment
supervision, it is recognized that the Manager will give primary
consideration to securing the most favorable price and efficient execution.
Consistent with this policy, the Manager may consider the financial
responsibility, research and investment information and other services
provided by brokers, dealers or futures commission merchants who may effect
or be a party to any such transaction or other transactions to which other
clients of the Manager may be a party. It is understood that
Prudential-Bache Securities Inc. may be used as principal broker for
securities transactions but that no formula has been adopted for allocation
of the Fund's investment transaction business. It is also understood that
it is desirable for the Fund that the Manager have access to supplemental
investment and market research and security and economic analysis provided
by brokers or futures commission merchants and that such brokers may
execute brokerage transactions at a higher cost to the Fund than may result
when allocating brokerage to other brokers or futures commission merchants
on the basis of seeking the most favorable price and efficient execution.
Therefore, the Manager is authorized to pay higher brokerage commissions
for the purchase and sale of
- 4 -
<PAGE>
securities and futures contracts for the Fund to brokers or futures
commission merchants who provide such research and analysis, subject to
review by the Fund's Board of Directors from time to time with respect to
the extent and continuation of this practice. It is understood that the
services provided by such broker or futures commission merchant may be
useful to the Manager in connection with its services to other clients.
On occasions when the Manager deems the purchase or sale of a security
or a futures contract to be in the best interest of the Fund as well as
other clients of the Manager or the Subadviser, the Manager, to the extent
permitted by applicable laws and regulations, may, but shall be under no
obligation to, aggregate the securities or futures contracts to be so sold
or purchased in order to obtain the most favorable price or lower brokerage
commissions and efficient execution. In such event, allocation of the
securities or futures contracts so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Manager in the
manner it considers to be the most equitable and consistent with its
fiduciary obligations to the Fund and to such other clients.
(d) The Manager shall maintain all books and records with respect to
the Fund's portfolio transactions and shall render to the Fund's Board of
Directors such periodic and special reports as the Board may reasonably
request.
- 5 -
<PAGE>
(e) The Manager shall be responsible for the financial and accounting
records to be maintained by the Fund (including those being maintained by
the Fund's Custodian).
(f) The Manager shall provide the Fund's Custodian on each business
day with information relating to all transactions concerning the Fund's
assets.
(g) The investment management services of the Manager to the Fund
under this Agreement are not to be deemed exclusive, and the Manager shall
be free to render similar services to others.
3. The Manager shall authorize and permit any of its directors, officers
and employees who may be elected as directors or officers of the Fund to serve
in the capacities in which they are elected. All services to be furnished by the
Manager under this Agreement may be furnished through the medium of any such
directors, officers or employees of the Manager.
4. The Fund has delivered to the Manager copies of each of the following
documents and will deliver to it all future amendments and supplements, if any:
(a) Articles of Incorporation of the Fund, as filed with the Secretary
of State of Maryland (such Articles of
- 6 -
<PAGE>
Incorporation, as in effect on the date hereof and as amended from time to
time, are herein called the "Articles of Incorporation");
(b) By-Laws of the Fund (such By-Laws, as in effect on the date hereof
and as amended from time to time, are herein called the "By-Laws");
(c) Certified resolutions of the Board of Directors of the Fund
authorizing the appointment of the Manager and approving the form of this
agreement;
(d) Registration Statement under the 1940 Act and the Securities Act
of 1933, as amended, on Form N-lA (the "Registration Statement"), as filed
with the Securities and Exchange Commission (the "Commission") relating to
the Fund and shares of the Fund's Common Stock and all amendments thereto;
(e) Notification of Registration of the Fund under the 1940 Act on
Form N-8A as filed with the Commission and all amendments thereto; and
(f) Prospectus of the Fund (such Prospectus and Statement of
Additional Information, as currently in effect
- 7 -
<PAGE>
and as amended or supplemented from time to time, being herein called the
"Prospectus").
5. The Manager shall keep the Fund's books and records required to be
maintained by it pursuant to paragraph 2 hereof, including all books and records
prescribed by Rule 31a-l under the 1940 Act other than those books and records
kept by the Fund or agents of the Fund. The Manager agrees that all records
which it maintains for the Fund are the property of the Fund and it will
surrender promptly to the Fund any such records upon the Fund's request;
provided, however, that the Manager may retain a copy of such records. The
Manager further agrees to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act any such records as are required to be maintained by the
Manager pursuant to paragraph 2 hereof.
6. During the term of this Agreement, the Manager shall pay the following
expenses:
(i) the salaries and expenses of all personnel of the Fund and the
Manager except the fees and expenses of directors who are not affiliated
persons of the Manager or the Subadviser,
- 8 -
<PAGE>
(ii) all expenses incurred by the Manager or by the Fund in connection
with managing the ordinary course of the Fund's business other than those
assumed by the Fund herein, and
(iii) the fees and other expenses payable to the Subadviser pursuant
to the Subadvisory Agreement.
The Fund assumes and will pay the expenses described below:
(a) the fees and expenses incurred by the Fund in connection with the
management of the investment and reinvestment of the Fund's assets,
(b) the fees and expenses of directors who are not affiliated persons
of the Manager or the Subadviser,
(c) the fees and expenses of the Custodian that relate to (i) the
custodial function and the recordkeeping connected therewith, (ii)
preparing and maintaining the general accounting records of the Fund and
the providing of any such records to the Manager useful to the Manager in
connection with the Manager's responsibility for the accounting records of
the Fund pursuant to Section 31 of the 1940 Act and the rules promulgated
thereunder, (iii) the pricing of the shares of the Fund, including the cost
of any pricing service or services which may be retained pursuant to the
authorization
- 9 -
<PAGE>
of the Board of Directors of the Fund, and (iv) for both mail and wire
orders, the cashiering function in connection with the issuance and
redemption of the Fund's securities,
(d) the fees and expenses of the Fund's Transfer and Dividend
Disbursing Agent, which may be the Custodian, that relate to the
maintenance of each shareholder account,
(e) the charges and expenses of legal counsel and independent
accountants for the Fund,
(f) brokers' commissions and any issue or transfer taxes chargeable to
the Fund in connection with its securities and futures transactions,
(g) all taxes and corporate fees payable by the Fund to federal, state
or other governmental agencies,
(h) the fees of any trade associations of which the Fund may be a
member,
(i) the cost of stock certificates representing, and/or
non-negotiable share deposit receipts evidencing, shares of the Fund,
- 10 -
<PAGE>
(j) the cost of fidelity, directors and officers and errors and
omissions insurance,
(k) the fees and expenses involved in registering and maintaining
registration of the Fund and of its shares with the Securities and Exchange
Commission, registering the Fund as a broker or dealer and qualifying its
shares under state securities laws, including the preparation and printing
of the Fund's registration statements, prospectuses and statements of
additional information for filing under federal and state securities laws
for such purposes,
(1) allocable communications expenses with respect to investor
services and all expenses of shareholders' and directors' meetings and of
preparing, printing and mailing reports to shareholders in the amount
necessary for distribution to the shareholders,
(m) litigation and indemnification expenses and other extraordinary
expenses not incurred in the ordinary course of the Fund's business, and
(n) any expenses assumed by the Fund pursuant to a Plan of
Distribution adopted in conformity with Rule 12b-l under the 1940 Act.
- 11 -
<PAGE>
7. In the event the expenses of the Fund for any fiscal year (including the
fees payable to the Manager 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) exceed the lowest applicable annual expense limitation established and
enforced pursuant to the statute or regulations of any jurisdictions in which
shares of the Fund are then qualified for offer and sale, the compensation due
the Manager will be reduced by the amount of such excess, or, if such reduction
exceeds the compensation payable to the Manager, the Manager will pay to the
Fund the amount of such reduction which exceeds the amount of such compensation.
8. For the services provided and the expenses assumed pursuant to this
Agreement, the Fund will pay to the Manager as full compensation therefor a fee
at an annual rate of 0.70% of the Fund's average daily net assets for the
portion of such assets up to and including $250 million; 0.55% of the Fund's
average daily net assets in excess of $250 million up to and including $500
million; 0.50% of the Fund's average daily net assets in excess of $500 million
up to and including $1 billion; and 0.45% of the Fund's average daily net assets
in excess of $1 billion. This fee will be computed daily and will be paid to the
Manager monthly. Any reduction in the fee payable and any payment by the Manager
to
- 12 -
<PAGE>
the Fund pursuant to paragraph 7 shall be made monthly. Any such reductions or
payments are subject to readjustment during the year.
9. The Manager shall not be liable for any error of judgment or for any
loss suffered by the Fund in connection with the matters to which this Agreement
relates, except a loss resulting from a breach of fiduciary duty with respect to
the receipt of compensation for services (in which case any award of damages
shall be limited to the period and the amount set forth in Section 36(b) (3) of
the 1940 Act) or loss resulting from willful misfeasance, bad faith or gross
negligence on its part in the performance of its duties or from reckless
disregard by it of its obligations and duties under this Agreement.
10. This Agreement shall continue in effect for a period of more than two
years from the date hereof only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940 Act;
provided, however, that this Agreement may be terminated by the Fund at any
time, without the payment of any penalty, by the Board of Directors of the Fund
or by vote of a majority of the outstanding voting securities (as defined in the
1940 Act) of the Fund, or by the Manager at any time, without the payment of any
penalty, on not more than 60 days' nor less than 30 days' written notice to the
other party. This Agreement shall terminate automatically in the event of its
assignment (as defined in the 1940 Act).
- 13 -
<PAGE>
11. Nothing in this Agreement shall limit or restrict the right of any
director, officer or employee of the Manager who may also be a director, officer
or employee of the Fund to engage in any other business or to devote his or her
time and attention in part to the management or other aspects of any business,
whether of a similar or dissimilar nature, nor limit or restrict the right of
the Manager to engage in any other business or to render services of any kind to
any other corporation, firm, individual or association.
12. Except as otherwise provided herein or authorized by the Board of
Directors of the Fund from time to time, the Manager shall for all purposes
herein be deemed to be an independent contractor and shall have no authority to
act for or represent the Fund in any way or otherwise be deemed an agent of the
Fund.
13. During the term of this Agreement, the Fund agrees to furnish the
Manager at its principal office all prospectuses, proxy statements, reports to
shareholders, sales literature, or other material prepared for distribution to
shareholders of the Fund or the public, which refer in any way to the Manager,
prior to use thereof and not to use such material if the Manager reasonably
objects in writing within five business days (or such other time as may be
mutually agreed) after receipt thereof. In the event of termination of this
Agreement, the Fund will continue to furnish to the Manager copies of any of the
above-mentioned materials which
- 14 -
<PAGE>
refer in any way to the Manager. Sales literature may be furnished to the
Manager hereunder by first-class or overnight mail, facsimile transmission
equipment or hand delivery. The Fund shall furnish or otherwise make available
to the Manager such other information relating to the business affairs of the
Fund as the Manager at any time, or from time to time, reasonably requests in
order to discharge its obligations hereunder.
14. This Agreement may be amended by mutual consent, but the consent of the
Fund must be obtained in conformity with the requirements of the 1940 Act.
15. Any notice or other communication required to be given pursuant to this
Agreement shall be deemed duly given if delivered or mailed by registered mail,
postage prepaid, (1) to the Manager at One Seaport Plaza, New York, N.Y. 10292,
Attention: Secretary; or (2) to the Fund at One Seaport Plaza, New York, N.Y.
10292, Attention: President.
16. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
17. This Agreement embodies the entire agreement and understanding between
the parties hereto, and supersedes all prior agreements and understandings
relating to the subject matter hereof.
- 15 -
<PAGE>
18. Should any part of this Agreement be held invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors.
19. Where the effect of a requirement of the 1940 Act reflected in any
provision of this Agreement is altered by a rule, regulation or order of the
Securities and Exchange Commission, whether of special or general application,
such provision shall be deemed to incorporate the effect of such rule,
regulation or order.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
GLOBAL UTILITY FUND, INC.
By /s/ Edward D. Beach
---------------------------------
President
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC.
By /s/ ILLEGIBLE
---------------------------------
Chairman
- 16 -
GLOBAL UTILITY FUND, INC.
SUBADVISORY AGREEMENT
Agreement made as of the 4th day of February, 1991 and amended as of the
1st day of February, 1993 among Prudential Mutual Fund Management, Inc., a
Delaware corporation (the "Manager"), Wellington Management Company, a
Massachusetts general partnership (the "Subadviser") and Global Utility Fund,
Inc. (the "Fund"), a Maryland corporation and a diversified open-end
management investment company registered under the Investment Company Act of
1940 (the "1940 Act").
W I T N E S S E T H
WHEREAS, the Manager has entered into a Management Agreement, dated
February 4, 1991 (the "Management Agreement"), with the Fund, pursuant to which
Prudential Mutual Fund Management, Inc. will act as Manager of the Fund; and
WHEREAS, the Manager and the Fund each desire to retain the Subadviser to
provide investment advisory services to the Fund in connection with the
management of the Fund and the Subadviser is willing to render such investment
advisory services;
NOW, THEREFORE, the parties agree as follows:
<PAGE>
1. (a) Subject to the supervision of the Manager and of the Board of Directors
of the Fund, the Subadviser shall manage the investment operations of the Fund
and the composition of the Fund's portfolio, including the purchase, retention
and disposition thereof, in accordance with the Fund's investment objectives,
policies and restrictions as stated in the Prospectus (such Prospectus and
Statement of Additional Information as currently in effect and as amended or
supplemented from time to time, being herein called the "Prospectus"), and
subject to the following understandings:
(i) The Subadviser shall provide supervision of the Fund's
investments and determine from time to time what investments and securities
will be purchased, retained, sold or loaned by the Fund, and what portion
of the assets will be invested or held uninvested as cash.
(ii) In the performance of its duties and obligations under this
Agreement, the Subadviser shall act in conformity with the Articles of
Incorporation, By-Laws and Prospectus of the Fund and with the instructions
and directions of the Manager and of the Board of Directors of the Fund and
will conform to and comply with the requirements of the 1940 Act, the
Internal Revenue Code of 1986 and all other applicable federal and state
laws and regulations.
- 2 -
<PAGE>
(iii) The Subadviser shall determine the securities and futures
contracts to be purchased or sold by the Fund and will place orders with or
through such persons, brokers, dealers or futures commission merchants
(including but not limited to Prudential-Bache Securities Inc.) to carry
out the policy with respect to brokerage as set forth in the Fund's
Registration Statement and Prospectus or as the Board of Directors may
direct from time to time, in conformity with federal securities laws. In
providing the Fund with investment supervision, it is recognized that the
Subadviser will give primary consideration to securing the most favorable
price and efficient execution. Within the framework of this policy, the
Subadviser may consider the financial responsibility, research and
investment information and other services provided by brokers, dealers or
futures commission merchants who may effect or be a party to any such
transaction or other transactions to which the Subadviser's other clients
may be a party. It is understood that Prudential-Bache Securities Inc. may
be used as principal broker for securities transactions but that no formula
has been adopted for allocation of the Fund's investment transaction
business. It is also understood that it is desirable for the Fund that the
Subadviser have access to supplemental investment and market research and
security and economic analysis provided by brokers or futures commission
merchants who may execute brokerage transactions
- 3 -
<PAGE>
at a higher cost to the Fund than may result when allocating brokerage to
other brokers on the basis of seeking the most favorable price and
efficient execution. Therefore, the Subadviser is authorized to place
orders for the purchase and sale of securities and futures contracts for
the Fund with such brokers or futures commission merchants, subject to
review by the Fund's Board of Directors from time to time with respect to
the extent and continuation of this practice. It is understood that the
services provided by such brokers or futures commission merchants may be
useful to the Subadviser in connection with the Subadviser's services to
other clients.
On occasions when the Subadviser deems the purchase or sale of a
security or futures contract to be in the best interest of the Fund as well
as other clients of the Subadviser, the Subadviser, to the extent permitted
by applicable laws and regulations may, but shall be under no obligation
to, aggregate the securities or futures contracts to be sold or purchased
in order to obtain the most favorable price or lower brokerage commissions
and efficient execution. In such event, allocation of the securities or
futures contracts so purchased or sold, as well as the expenses incurred in
the transaction, will be made by the Subadviser in the manner the
Subadviser considers to be the
- 4 -
<PAGE>
most equitable and consistent with its fiduciary obligations to the Fund
and to such other clients.
(iv) The Subadviser shall maintain all books and records with respect
to the Fund's portfolio transactions required by subparagraphs (b) (5),
(6), (7), (9), (10) and (11) and paragraph (f) of Rule 31a-1 under the
1940 Act and shall render to the Fund's Board of Directors such periodic
and special reports as the Board of Directors of the Fund may reasonably
request.
(v) The Subadviser shall provide the Fund's Custodian on each business
day with information relating to all transactions concerning the Fund's
assets and shall provide the Manager with such information upon request of
the Manager.
(vi) The investment management services provided by the Subadviser
hereunder are not to be deemed exclusive, and the Subadviser shall be free
to render similar services to others.
(b) The Subadviser shall authorize and permit any of its partners, officers and
employees who may be elected as directors or officers of the Fund to serve in
the capacities in which they are elected. Services to be furnished by the
Subadviser under
- 5 -
<PAGE>
this Agreement may be furnished through the medium of any of such partners,
officers or employees.
(c) The Subadviser shall keep the Fund's books and records required to be
maintained by the Subadviser pursuant to paragraph 1(a) hereof and shall
timely furnish to the Manager all information relating to the Subadviser's
services hereunder needed by the Manager to keep the other books and records of
the Fund required by Rule 31a-l under the 1940 Act. The Subadviser agrees that
all records which it maintains for the Fund are the property of the Fund and the
Subadviser will surrender promptly to the Fund any of such records upon the
Fund's request; provided, however, that the Subadviser may retain a copy of such
records. The Subadviser further agrees to preserve for the periods prescribed
by Rule 31a-2 under the 1940 Act any such records as are required to be
maintained by it pursuant to paragraph 1(a) hereof.
2. The Manager shall continue to have responsibility for all services to be
provided to the Fund pursuant to the Management Agreement and shall oversee and
review the Subadviser's performance of its duties under this Agreement.
3. The Manager has delivered to the Subadviser copies of each of the following
documents and will deliver to it all future amendments and supplements, if any:
- 6 -
<PAGE>
(a) Articles of Incorporation of the Fund, as filed with the Secretary
of State of Maryland (such Articles of Incorporation, as in effect on the
date hereof and as amended from time to time, are herein called the
"Articles of Incorporation");
(b) By-Laws of the Fund (such By-Laws, as in effect on the date
hereof and as amended from time to time, are herein called the "By-Laws");
(c) Certified resolutions of the Board of Directors of the Fund
authorizing the appointment of the Manager and the Subadviser and approving
the form of this agreement;
(d) Registration Statement under the 1940 Act and the Securities Act
of 1933, as amended, on Form N-lA (the "Registration Statement"), as filed
with the Securities and Exchange Commission (the "Commission") relating to
the Fund and shares of the Fund's Common Stock and all amendments thereto;
(e) Notification of Registration of the Fund under the 1940 Act on
Form N-8A as filed with the Commission and all amendments thereto; and
(f) Prospectus of the Fund (such Prospectus and Statement of
Additional Information, as currently in effect and as amended
- 7 -
<PAGE>
or supplemented from time to time, being herein called the "Prospectus")
4. For the services provided in this Agreement, the Manager will pay to the
Subadviser as full compensation therefor a fee at an annual rate of 0.50% of the
Fund's average daily net assets for the portion of such assets up to and
including $250 million; 0.35% of the Fund's average daily net assets in excess
of $250 million up to and including $500 million; 0.30% of the Fund's average
daily net assets in excess of $500 million up to and including $1 billion; and
0.25% of the Fund's average daily net assets in excess of $1 billion. This fee
will be computed daily and paid to the Subadviser monthly.
5. The Subadviser shall not be liable for any error of judgment or for any loss
suffered by the Fund or the Manager in connection with the matters to which this
Agreement relates, except a loss resulting from a breach of fiduciary duty with
respect to the receipt of compensation for services (in which case any award of
damages shall be limited to the period and the amount set forth in Section
36(b)(3) of the 1940 Act) or a loss resulting from willful misfeasance, bad
faith or gross negligence on the Subadviser's part in the performance of its
duties or from its reckless disregard of its obligations and duties under this
Agreement.
- 8 -
<PAGE>
6. This Agreement shall continue in effect for a period of more than two years
from the date hereof only so long as such continuance is specifically approved
at least annually in conformity with the requirements of the 1940 Act; provided,
however, that this Agreement may be terminated by the Fund at any time, without
the payment of any penalty, by the Board of Directors of the Fund or by vote of
a majority of the outstanding voting securities (as defined in the 1940 Act) of
the Fund, or by the Manager or the Subadviser at any time, without the payment
of any penalty, on not more than 60 days' nor less than 30 days' written notice
to the other parties. This Agreement shall terminate automatically in the event
of its assignment (as defined in the 1940 Act) or upon the termination of the
Management Agreement.
7. Nothing in this Agreement shall limit or restrict the right of any of the
Subadviser's partners, officers or employees who may also be a director, officer
or employee of the Fund to engage in any other business or to devote his or her
time and attention in part to the management or other aspects of any business,
whether of a similar or a dissimilar nature, nor limit or restrict the
Subadviser's right to engage in any other business or to render services of any
kind to any other corporation, firm, individual or association.
- 9 -
<PAGE>
8. During the term of this Agreement, the Manager agrees to furnish the
Subadviser at its principal office all prospectuses, proxy statements, reports
to stockholders, sales literature or other material prepared for distribution to
stockholders of the Fund or the public, which refer to the Subadviser or its
clients in any way, prior to use thereof and not to use material if the
Subadviser reasonably objects in writing five business days (or such other time
as may be mutually agreed) after receipt thereof. The Manager agrees to use its
best efforts to ensure that materials prepared by employees or agents of the
Manager or its affiliates which refer to the Subadviser or its clients in any
way are consistent with those materials previously approved by the Subadviser as
referenced in the preceding sentence. Sales literature may be furnished to the
Subadviser hereunder by first-class or overnight mail, facsimile transmission
equipment or hand delivery.
9. This Agreement may be amended by mutual consent, but the consent of the Fund
must be obtained in conformity with the requirements of the 1940 Act.
10. This Agreement shall be governed by the laws of the State of New York.
11. This Agreement embodies the entire agreement and understanding between the
parties hereto, and supersedes all prior
- 10 -
<PAGE>
agreements and understandings relating to the subject matter hereof.
12. Should any part of this Agreement be held invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors.
13. Where the effect of a requirement of the 1940 Act reflected in any provision
of this Agreement is altered by a rule, regulation or order of the Securities
and Exchange Commission, whether of special or general application, such
provision shall be deemed to incorporate the effect of such rule, regulation or
order.
- 11 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
PRUDENTIAL MUTUAL FUND
MANAGEMENT, INC.
By /s/ Robert F. Gunia
------------------------------
Robert F. Gunia
Executive Vice President
WELLINGTON MANAGEMENT COMPANY
By /s/ Duncan M. McFarland
------------------------------
Duncan M. McFarland
Managing Partner
GLOBAL UTILITY FUND, INC.
By /s/ Edward D. Beach
------------------------------
Edward D. Beach
President
- 12 -
GLOBAL UTILITY FUND, INC.
CUSTODIAN AGREEMENT
<PAGE>
TABLE OF CONTENTS
Page
----
1. Employment of Custodian and Property to be
Held By It ........................................................... 1
2. Duties of the Custodian with Respect to Property of
the Fund Held by the Custodian in the United States .................. 2
2.1 Holding Securities ........................................... 2
2.2 Delivery of Securities ....................................... 3
2.3 Registration of Securities ................................... 7
2.4 Bank Accounts ................................................ 8
2.5 Availability of Federal Funds ................................ 9
2.6 Collection of Income ......................................... 9
2.7 Payment of Fund Monies ....................................... 10
2.8 Liability for Payment in Advance of
Receipt of Securities Purchased .............................. 13
2.9 Appointment of Agents ........................................ 13
2.10 Deposit of Securities in Securities System ................... 13
2.1OA Fund Assets Held in the Custodians'
Direct Paper System .......................................... 16
2.11 Segregated Account ........................................... 18
2.12 Ownership Certificates for Tax Purposes ...................... 19
2.14 Communications Relating to Fund
Portfolio Securities ......................................... 20
2.15 Reports to Fund by Independent Public
Accountants .................................................. 21
3. Duties of the Custodian with Respect to Property of
the Fund Held Outside of the United States ........................... 21
3.1 Appointment of Foreign Sub-Custodians ........................ 21
3.2 Assets to be Held ............................................ 22
3.3 Foreign Securities Depositories .............................. 22
3.4 Segregation of Securities .................................... 22
3.5 Agreements with Foreign Banking Institutions ................. 23
3.6 Access of Independent Accountants of the Fund ................ 24
3.7 Reports by Custodian ......................................... 24
3.8 Transactions in Foreign Custody Account ...................... 24
3.9 Liability of Foreign Sub-Custodians .......................... 25
3.10 Liability of Custodian ....................................... 26
3.11 Reimbursement of Advances .................................... 27
3.12 Monitoring Responsibilities .................................. 27
3.13 Branches of U.S. Banks ....................................... 28
4. Proper Instructions .................................................. 29
5. Actions Permitted Without Express Authority .......................... 30
6. Evidence of Authority ................................................ 30
7. Duties of Custodian with Respect to the Books of
Account and Calculations of Net Asset Value and
Net Income ........................................................... 31
<PAGE>
8. Records .............................................................. 31
9. Opinion of Fund's Independent Accountant ............................. 32
10. Compensation of Custodian ............................................ 32
11. Responsibility of Custodian .......................................... 32
12. Effective Period, Termination and Amendment .......................... 34
13. Successor Custodian .................................................. 36
14. Interpretive and Additional Provisions ............................... 37
15. Massachusetts Law to Apply ........................................... 38
16. Prior Contracts ...................................................... 38
17. Additional Funds ..................................................... 38
18. Notices .............................................................. 38
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CUSTODIAN CONTRACT
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This Contract between Global Utility Fund, Inc., a corporation organized
and existing under the laws of Maryland, having its principal place of business
at One Seaport Plaza, New York, New York, 10292, hereinafter called the "Fund",
and Stare Street Bank and Trust Company, a Massachusetts trust company, having
its principal place of business at 225 Franklin Street, Boston, Massachusetts,
02110, hereinafter called the "Custodian",
WITNESSETH: That in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of its assets,
including securities it desires to be held in places within the United States
("domestic securities) and securities it desires to be held outside the United
States ("foreign securities") pursuant to the provisions of the Articles of
Incorporation. The Fund agrees to deliver to the Custodian all securities and
cash owned by it, and all payments of income, payments of principal or capital
distributions received by it with respect to all securities owned by the Fund
from time to time, and the cash consideration received by it for such new or
treasury shares of capital stock, $.01 par value, ("Shares") of the Fund as may
be issued or sold from time to time. The Custodian shall not be responsible for
any property of the Fund held or received by the Fund and not delivered to the
Custodian.
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Upon receipt of "Proper Instructions" (within the meaning of Article 4),
the Custodian shall from time to time employ one or more sub-custodians located
in the United States, but only in accordance with an applicable vote by the
Board of Directors of the Fund, and provided that the Custodian shall have no
more or less responsibility or liability to the Fund on account of any actions
or omissions of any sub-custodian so employed than any such sub-custodian has to
the Custodian. The Custodian may employ as sub-custodians for the Fund's
securities and other assets the foreign banking institutions and foreign
securities depositories designated in Schedule "A" hereto but only in accordance
with the provisions of Article 3.
2. Duties of the Custodian with Respect to Property of the Fund Held By the
Custodian in the United States
2.1 Holding Securities. The Custodian shall hold and physically segregate for
the account of the Fund all non-cash property, to be held by it in the
United States, including all domestic securities owned by the Fund, other
than (a) securities which are maintained pursuant to Section 2.10 in a
clearing agency which acts as a securities depository or in a book-entry
system authorized by the U.S. Department of the Treasury, collectively
referred to herein as "Securities System and (b) commercial paper of an
issuer for which State Street Bank and Trust Company acts as issuing and
paying agent ("Direct Paper") which is deposited and/or maintained in the
Direct Paper System of the Custodian pursuant to Section 2.l0A.
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2.2 Delivery of Securities. The Custodian shall release and deliver domestic
securities owned by the Fund held by the Custodian or in a Securities
System account of the Custodian or in the Custodian's Direct Paper book
entry system account ("Direct Paper Account") only upon receipt of Proper
Instructions, which may be continuing instructions when deemed
appropriate by the parties, and only in the following cases:
1) Upon sale of such securities for the account of the Fund and
receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Fund;
3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 2.10 hereof;
4) To the depository agent in connection with tender or other similar
offers for portfolio securities of the Fund;
5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable; provided
that, in any such case, the cash or other consideration is to be
delivered to the Custodian;
6) To the issue, thereof, or its agent, for transfer into the name of
the Fund or into
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the name of any nominee or nominees of the Custodian or into the
name or nominee name of any agent appointed pursuant to Section
2.9 or into the name or nominee name of any sub-custodian
appointed pursuant to Article 1; or for exchange for a different
number of bonds, certificates or other evidence representing the
same aggregate face amount or number of units; provided that, in
any such case, the new securities are to be delivered to the
Custodian;
7) Upon the sale of such securities for the account of the Fund, to
the broker or its clearing agent, against a receipt, for
examination in accordance with "street delivery" custom; provided
that in any such case, the Custodian shall have no responsibility
or liability for any loss arising from the delivery of such
securities prior to receiving payment for such securities except
as may arise from the Custodian's own negligence or willful
misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of
the securities of the issuer
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of such securities, or pursuant to provisions for conversion
contained in such securities, or pursuant to any deposit
agreement; provided that, in any such case, the new securities and
cash, if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities; provided that, in
any such case, the new securities and cash, if any, are to be
delivered to the Custodian;
10) For delivery in connection with any loans of securities made by
the Fund, but only against receipt of adequate collateral as
agreed upon from time to time by the Custodian and the Fund, which
may be in the form of cash or obligations issued by the United
States government, its agencies or instrumentalities, except that
in connection with any loans for which collateral is to be
credited to the Custodian's account in the book-entry system
authorized by the U.S. Department of the Treasury, the Custodian
will not be held liable or responsible for
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the delivery of securities owned by the Fund prior to the receipt
of such collateral;
11) For delivery as security in connection with any borrowings by the
Fund requiring a pledge of assets by the Fund, but only against
receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any agreement
among the Fund, the Custodian and a broker--dealer registered
under the Securities Exchange Act of 1934 (the "Exchange Act") and
a member of The National Association of Securities Dealers, Inc.
(NASD"), relating to compliance with the rules of The Options
Clearing Corporation and of any registered national securities
exchange, or of any similar organization or organizations,
regarding escrow or other arrangements in connection with
transactions by the Fund;
13) For delivery in accordance with the provisions of any agreement
among the Fund, the Custodian, and a Futures Commission Merchant
registered under the Commodity Exchange Act, relating to
compliance with the rules of the Commodity Futures Trading
Commission and/or any Contract Market, or any similar organization
or organizations,
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regarding account deposits in connection with transactions by the
Fund;
14) For any other proper corporate purpose, but only upon receipt of,
in addition to Proper Instructions, a certified copy of a
resolution of the Board of Directors or of the Executive Committee
signed by an officer of the Fund and certified by the Secretary or
an Assistant Secretary, specifying the securities to be delivered,
setting forth the purpose for which such delivery is to be made,
declaring such purpose to be a proper corporate purpose, and
naming the person or persons to whom delivery of such securities
shall be made.
2.3 Registration of Securities. Domestic securities held by the Custodian
(other than bearer securities) shall be registered in the name of the
Fund or in the name of any nominee of the Fund or of any nominee of the
Custodian which nominee shall be assigned exclusively to the Fund, unless
the Fund has authorized in writing the appointment of a nominee to be
used in common with other registered investment companies having the same
investment adviser as the Fund, or in the name or nominee name of any
agent appointed pursuant to Section 2.9 or in the name or nominee name of
any sub-custodian appointed pursuant to Article 1. All securities
accepted by the Custodian on
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behalf of the Fund under the terms of this Contract shall be in "street
name" or other good delivery form. If, however, the Fund directs the
Custodian to maintain securities in "street name", the Custodian shall
utilize its best efforts only to timely collect income due the Fund on
such securities and to notify the Fund on a best efforts basis only of
relevant corporate actions including, without limitation, pendency of
calls, maturities, tender or exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the United States in the name of the Fund, subject
only to draft or order by the Custodian acting pursuant to the terms of
this Contract, and shall hold in such account or accounts, subject to the
provisions hereof, all cash received by it from or for the account of the
Fund, other than cash maintained by the Fund in a bank account
established and used in accordance with Rule 17f-3 under the Investment
Company Act of 1940. Funds held by the Custodian for the Fund may be
deposited by it to its credit as Custodian in the Banking Department of
the Custodian or in such other banks or trust companies as it may in its
discretion deem necessary or desirable; provided, however, that every
such bank or trust company shall be qualified to act as a custodian under
the Investment Company Act of 1940 and that each such bank or trust
company and the funds to be deposited with each such bank or trust
company shall be
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approved by vote of a majority of the Board of Directors of the Fund.
Such funds shall be deposited by the Custodian in its capacity as
Custodian and shall be withdrawable by the Custodian only in that
capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between the Fund and
the Custodian, the Custodian shall, upon the receipt of Proper
Instructions, make federal funds available to the Fund as of specified
times agreed upon from time to time by the Fund and the Custodian in the
amount of checks received in payment for Shares of the Fund which are
deposited into the Fund's account.
2.6 Collection of Income. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other payments
with respect to United States registered securities held hereunder to
which the Fund shall be entitled either by law or pursuant to custom in
the securities business, and shall collect on a timely basis all income
and other payments with respect to United States bearer securities if, on
the date of payment by the issuer, such securities are held by the
Custodian or its agent thereof and shall credit such income, as
collected, to the Fund's custodian account. Without limiting the
generality of the foregoing, the Custodian shall detach and present for
payment all coupons and other income items requiring presentation as and
when they become due and shall collect interest when due on securities
held hereunder.
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Income due the Fund on United States securities loaned pursuant to the
provisions of Section 2.2 (10) shall, be the responsibility of the Fund.
The Custodian will have no duty or responsibility in connection
therewith, other than to provide the Fund with such information or data
as may be necessary to assist the Fund in arranging for the timely
delivery to the Custodian of the income to which the Fund is properly
entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions, which may be
continuing instructions when deemed appropriate by the parties, the
Custodian shall pay out monies of the Fund in the following cases only:
1) Upon the purchase of domestic securities, options, futures
contracts or options on futures contracts for the account of the
Fund but only (a) against the delivery of such securities or
evidence of title to such options, futures contracts or options on
futures contracts to the Custodian (or any bank, banking firm or
trust company doing business in the United States or abroad which
is qualified under the Investment Company Act of 1940, as amended,
to act as a custodian and has been designated by the Custodian as
its agent for this purpose) registered in the name of the Fund or
in the name of a nominee of the Custodian referred to in Section
2.3
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hereof or in proper form for transfer; (b) in the case of a
purchase effected through a Securities System, in accordance with
the conditions set forth in Section 2.10 hereof; (c) in the case
of a purchase involving the Direct Paper System, in accordance
with the conditions set forth in Section 2.10A; (d) in the case of
repurchase agreements entered into between the Fund and the
Custodian, or another bank, or a broker--dealer which is a member
of NASD, (i) against delivery of the securities either in
certificate form or through an entry crediting the Custodian's
account at the Federal Reserve Bank with such securities or (ii)
against delivery of the receipt evidencing purchase by the Fund of
securities owned by the Custodian along with written evidence of
the agreement by the Custodian to repurchase such securities from
the Fund or (e) for transfer to a time deposit account of the Fund
in any bank, whether domestic or foreign; such transfer may be
effected prior to receipt of a confirmation from a broker and/or
the applicable bank pursuant to Proper Instructions from the Fund
as defined in Article 4;
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2) In connection with conversion, exchange or surrender of securities
owned by the Fund as set forth in Section 2.2 hereof;
3) For the payment of any expense or liability incurred by the Fund,
including but not limited to the following payments for the
account of the Fund: interest, taxes, management, accounting,
transfer agent and legal fees, and operating expenses of the Fund
whether or not such expenses are to be in whole or part
capitalized or treated as deferred expenses;
4) For the payment of any dividends declared pursuant to the
governing documents of the Fund;
5) For payment of the amount of dividends received in respect of
securities sold short;
6) For any other proper purpose, but only upon receipt of, in
addition to Proper Instructions, a certified copy of a resolution
of the Board of Directors or of the Executive Committee of the
Fund signed by an officer of the Fund and certified by its
Secretary or an Assistant Secretary, specifying the amount of such
payment, setting forth the purpose for which such payment is to be
made, declaring such purpose
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to be a proper purpose, and naming the person or persons to whom
such payment is to be made.
2.8 Liability for Payment in Advance of Receipt of Securities Purchased.
Except as specifically stated otherwise in this Contract, in any and
every case where payment for purchase of domestic securities for the
account of the Fund is made by the Custodian in advance of receipt of the
securities purchased in the absence of specific written instructions from
the Fund to so pay in advance, the Custodian shall be absolutely liable
to the Fund for such securities to the same extent as if the securities
had been received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act of
1940, as amended, to act as a custodian, as its agent to carry out such
of the provisions of this Article 2 as the Custodian may from time to
time direct; provided, however, that the appointment of any agent shall
not relieve the Custodian of its responsibilities or liabilities
hereunder.
2.10 Deposit of Securities in Securities Systems. The Custodian may deposit
and/or maintain domestic securities owned by the Fund in a clearing
agency registered with the Securities and Exchange Commission under
Section 17A of the Securities Exchange Act of 1934, which acts as a
securities depository, or in the book-entry system
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authorized by the U.S. Department of the Treasury and certain federal
agencies, collectively referred to herein as "Securities System" in
accordance with applicable Federal Reserve Board and Securities and
Exchange Commission rules and regulations, if any, and subject to the
following provisions:
1) The Custodian may keep domestic securities of the Fund in a
Securities System provided that such securities are represented in
an account ("Account") of the Custodian in the Securities System
which shall not include any assets of the Custodian other than
assets held as a fiduciary, custodian or otherwise for customers;
2) The records of the Custodian with respect to domestic securities
of the Fund which are maintained in a Securities System shall
identify by book-entry those securities belonging to the Fund;
3) The Custodian shall pay for domestic securities purchased for the
account of the Fund upon (i) receipt of advice from the Securities
System that such securities have been transferred to the Account,
and (ii) the making of an entry on the records of the Custodian to
reflect such payment and transfer for the account of the Fund. The
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Custodian shall transfer domestic securities sold for the account
of the Fund upon (i) receipt of advice from the Securities System
that payment for such securities has been transferred to the
Account, and (ii) the making of an entry on the records of the
Custodian to reflect such transfer and payment for the account of
the Fund. Copies of all advices from the Securities System of
transfers of domestic securities for the account of the Fund shall
identify the Fund, be maintained for the Fund by the Custodian and
be provided to the Fund at its request. Upon request, the
Custodian shall furnish the Fund confirmation of each transfer to
or from the account of the Fund in the form of a written advice or
notice and shall furnish to the Fund copies of daily transaction
sheets reflecting each day's transactions in the Securities System
for the account of the Fund.
4) The Custodian shall provide the Fund with any report obtained by
the Custodian on the Securities System's accounting system,
internal accounting control and procedures for safeguarding
domestic securities deposited in the Securities System;
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5) The Custodian shall have received the initial or annual
certificate, as the case may be, required by Article 12 hereof;
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for any loss or damage to
the Fund resulting from use of the Securities System by reason of
any negligence, misfeasance or misconduct of the Custodian or any
of its agents or of any of its or their employees or from failure
of the Custodian or any such agent to enforce effectively such
rights as it may have against the Securities System; at the
election of the Fund, it shall be entitled to be subrogated to the
rights of the Custodian with respect to any claim against the
Securities System or any other person which the Custodian may have
as a consequence of any such loss or damage if and to the extent
that the Fund has not been made whole for any such loss or damage.
2.10A Fund Assets Held in the Custodian's Direct Paper System The Custodian may
deposit and/or maintain securities owned by the Fund in the Direct Paper
System of the Custodian subject to the following provisions:
1) No transaction relating to securities in the Direct Paper System
will be effected in the absence of Proper Instructions;
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2) The Custodian may keep securities of the Fund in the Direct Paper
System only if such securities are represented in an account
("Account") of the Custodian in the Direct Paper System which
shall not include any assets of the Custodian other than assets
held as a fiduciary, custodian or otherwise for customers;
3) The records of the Custodian with respect to securities of the
Fund which are maintained in the Direct Paper System shall
identify by book-entry those securities belonging to the Fund;
4) The Custodian shall pay for securities purchased for the account
of the Fund upon the making of an entry on the records of the
Custodian to reflect such payment and transfer of securities to
the account of the Fund. The Custodian shall transfer securities
sold for the account of the Fund upon the making of an entry on
the records of the Custodian to reflect such transfer and receipt
of payment for the account of the Fund;
5) The Custodian shall furnish the Fund confirmation of each transfer
to or from the account of the Fund, in the form of a written
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advice or notice, of Direct Paper on the next business day
following such transfer and shall furnish to the Fund copies of
daily transaction sheets reflecting each day's transaction in the
Securities System for the account of the Fund;
6) The Custodian shall provide the Fund with any report on its system
of internal accounting control as the Fund may reasonably request
from time to time.
2.11 Segregated Account. The Custodian shall upon receipt of Proper
Instructions establish and maintain a segregated account or accounts for
and on behalf of the Fund, into which account or accounts may be
transferred cash and/or securities, including securities maintained in an
account by the Custodian pursuant to Section 2.10 hereof, (1) in
accordance with the provisions of any agreement among the Fund, the
Custodian and a broker-dealer registered under the Exchange Act and a
member of the NASD (or any futures commission merchant registered under
the Commodity Exchange Act), relating to compliance with the rules of The
Options Clearing Corporation and of any registered national securities
exchange (or the Commodity Futures Trading Commission or any registered
contract market), or of any similar organization or organizations,
regarding escrow or other arrangements in connection with transactions by
the Fund, (ii) for purposes of
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segregating cash or government securities in connection with options
purchased, sold or written by the Fund or commodity futures contracts or
options thereon purchased or sold by the Fund, (iii) for the purposes of
compliance by the Fund with the procedures required by Investment Company
Act Release No. 10666, or any subsequent release or releases of the
Securities and Exchange Commission relating to the maintenance of
segregated accounts by registered investment companies and (iv) for other
proper corporate purposes, but only, in the case of clause (iv), upon
receipt of, in addition to Proper Instructions, a certified copy of a
resolution of the Board of Directors or of the Executive Committee signed
by an officer of the Fund and certified by the Secretary or an Assistant
Secretary, setting forth the purpose or purposes of such segregated
account and declaring such purposes to be proper corporate purposes.
2.12 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and state
tax purposes in connection with receipt of income or other payments with
respect to domestic securities of the Fund held by it and in connection
with transfers of such securities.
2.13 Proxies. The Custodian shall, with respect to the domestic securities
held hereunder, cause to be promptly executed by the registered holder of
such securities, if the securities are registered otherwise than in the
name
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of the Fund or a nominee of the Fund, all proxies, without indication of
the manner in which such proxies are to be voted, and shall promptly
deliver to the Fund such proxies, all proxy soliciting materials and all
notices relating to such securities.
2.14 Communications Relating to Fund Portfolio Securities Subject to the
provisions of Section 2.3, the Custodian shall transmit promptly to the
Fund all written information (including, without limitation, pendency of
calls and maturities of domestic securities and expirations of rights in
connection therewith and notices of exercise of call and put options
written by the Fund and the maturity of futures contracts purchased or
sold by the Fund) received by the Custodian from issuers of the domestic
securities being held for the Fund. With respect to tender or exchange
offers, the Custodian shall transmit promptly to the Fund all written
information received by the Custodian from issuers of the domestic
securities whose tender or exchange is sought and from the party (or his
agents) making the tender or exchange offer. If the Fund desires to take
action with respect to any tender offer, exchange offer or any other
similar transaction, the Fund shall notify the Custodian at least three
business days prior to the date on which the Custodian is to take such
action.
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2.15 Reports to Fund by Independent Public Accountants The Custodian shall
provide the Fund, at such time as the Fund may reasonably require, with
reports by independent public accountants on the accounting system,
internal accounting control and procedures for safeguarding securities,
futures contracts and options on futures contracts, including domestic
securities deposited and/or maintained in a Securities System, relating
to the services provided by the Custodian under this Contract; such
reports shall be of sufficient scope and in sufficient detail, as may
reasonably be required by the Fund, to provide reasonable assurance that
any material inadequacies would be disclosed by such examination, and, if
there are no such inadequacies, the reports shall so state.
3. Duties of the Custodian with Respect to Property of the Fund Held Outside of
the United States
3.1 Appointment of Foreign Sub-Custodians
The Fund hereby authorizes and instructs the Custodian to employ as
sub-custodians for the Fund's securities and other assets maintained
outside the United States the foreign banking institutions and foreign
securities depositories designated on Schedule A hereto ("foreign
sub-custodians"). Upon receipt of "Proper Instructions" as defined in
Section 4 of this Contract, together with a certified resolution of the
Fund's Board of Directors, the Custodian and the Fund may agree to amend
Schedule A
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hereto from time to time to designate additional foreign banking
institutions and foreign securities depositories to act as
sub-custodian. Upon receipt of Proper Instructions, the Fund may
instruct the Custodian to cease the employment of any one or more such
sub-custodians for maintaining custody of the Fund's assets.
3.2 Assets to be Held. The Custodian shall limit the securities and other
assets maintained in the custody of the foreign sub-custodians to: (a)
"foreign securities", as defined in paragraph (c)(l) of Rule 17f-5 under
the Investment Company Act of 1940, and (b) cash and cash equivalents in
such amounts as the Custodian or the Fund may determine to be reasonably
necessary to effect the Fund's foreign securities transactions.
3.3 Foreign Securities Depositories. Except as may otherwise be agreed upon
in writing by the Custodian and the Fund, assets of the Fund shall be
maintained in foreign securities depositories only through arrangements
implemented by the foreign banking institutions serving as sub-custodians
pursuant to the terms hereof. Where possible, such arrangements shall
include entry into agreements containing the provisions set forth in
Section 3.5 hereof.
3.4 Segregation of Securities. The Custodian shall identify on its books as
belonging to the Fund, the foreign securities of the Fund held by each
foreign
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sub-custodian. Each agreement pursuant to which the Custodian employs a
foreign banking institution shall require that such institution establish
a custody account for the Custodian on behalf of the Fund and physically
segregate in that account, securities and other assets of the Fund, and,
in the event that such institution deposits the Fund's securities in a
foreign securities depository, that it shall identify on its books as
belonging to the Custodian, as agent for the Fund, the securities so
deposited.
3.5 Agreements with Foreign Banking Institutions. Each agreement with a
foreign banking institution shall be substantially in the form set forth
in Exhibit 1 hereto and shall provide that: (a) the Fund's assets will
not be subject to any right, charge, security interest, lien or claim of
any kind in favor of the foreign banking institution or its creditors or
agent, except a claim of payment for their safe custody or
administration; (b) beneficial ownership of the Fund's assets will be
freely transferable without the payment of money or value other than for
custody or administration; (c) adequate records will be maintained
identifying the assets as belonging to the Fund; (d) officers of or
auditors employed by, or other representatives of the Custodian,
including to the extent permitted under applicable law the independent
public accountants for the Fund, will be given access to the books and
records of the foreign banking institution
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relating to its actions under its agreement with the Custodian; and (e)
assets of the Fund held by the foreign sub-custodian will be subject
only to the instructions of the Custodian or its agents.
3.6 access of Independent Accountants of the Fund. Upon request of the Fund,
the Custodian will use its best efforts to arrange for the independent
accountants of the Fund to be afforded access to the books and records of
any foreign banking institution employed as a foreign sub-custodian
insofar as such books and records relate to the performance of such
foreign banking institution under its agreement with the Custodian.
3.7 Reports by Custodian. The Custodian will supply to the Fund from time to
time, as mutually agreed upon, statements in respect of the securities
and other assets of the Fund held by foreign sub-custodians, including
but not limited to an identification of entities having possession of the
Fund's securities and other assets and advices or notifications of any
transfers of securities to or from each custodial account maintained by a
foreign banking institution for the Custodian on behalf of the Fund
indicating, as to securities acquired for the Fund, the identity of the
entity having physical possession of such securities.
3.8 Transactions in Foreign Custody Account
(a) Except as otherwise provided in paragraph (b) of this Section 3.8,
the provision of Sections 2.2 and 2.7 of
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this Contract shall apply, mutatis mutandis to the foreign securities of
the Fund held outside the United States by foreign sub-custodians.
(b) notwithstanding any provision of this Contract to the contrary,
settlement and payment for securities received for the account of the
Fund and delivery of securities maintained for the account of the Fund
may be effected in accordance with the customary established securities
trading or securities processing practices and procedures in the
jurisdiction or market in which the transaction occurs, including,
without limitation, delivering securities to the purchaser thereof or to
a dealer therefor (or an agent for such purchaser or dealer) against a
receipt with the expectation of receiving later payment for such
securities from such purchaser or dealer.
(c) Securities maintained in the custody of a foreign sub-custodian may
be maintained in the name of such entity's nominee to the same extent as
set forth in Section 2.3 of this Contract, and the Fund agrees to hold
any such nominee harmless from any liability as a holder of record of
such securities.
3.9 Liability of Foreign Sub-Custodians. Each agreement pursuant to which
the Custodian employs a foreign banking institution as a foreign
sub-custodian shall require the institution to exercise reasonable care
in the performance of its duties and to indemnify, and hold harmless, the
Custodian and each Fund from and against
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any loss, damage, cost, expense, liability or claim arising out of or in
connection with the institution's performance of such obligations. At the
election of the Fund, it shall be entitled to be subrogated to the rights
of the Custodian with respect to any claims against a foreign banking
institution as a consequence of any such loss, damage, cost, expense,
liability or claim if and to the extent that the Fund has not been made
whole for any such loss, damage, cost, expense, liability or claim.
3.10 Liability of Custodian. The Custodian shall be liable for the acts or
omissions of a foreign banking institution to the same extent as set
forth with respect to sub-custodians generally in this Contract and,
regardless of whether assets are maintained in the custody of a foreign
banking institution, a foreign securities depository or a branch of a
U.S. bank as contemplated by paragraph 3.13 hereof, the Custodian shall
not be liable for any loss, damage, cost, expense, liability or claim
resulting from nationalization, expropriation, currency restrictions, or
acts of war or terrorism or any loss where the sub-custodian has
otherwise exercised reasonable care. Notwithstanding the foregoing
provisions of this paragraph 3.10, in delegating custody duties to State
Street London Ltd., the Custodian shall not be relieved of any
responsibility to the Fund for any loss due to such delegation, except
such loss as may result from (a) political risk
-26-
<PAGE>
(including, but not limited to, exchange control restrictions,
confiscation, expropriation, nationalization, insurrection, civil strife
or armed hostilities) or (b) other losses (excluding a bankruptcy or
insolvency of State Street London Ltd. not caused by political risk) due
to Acts of God, nuclear incident or other losses under circumstances
where the Custodian and State Street London Ltd. have exercised
reasonable care.
3.11 Reimbursement for Advances. If the Fund requires the Custodian to advance
cash or securities for any purpose including the purchase or sale of
foreign exchange or of contracts for foreign exchange, or in the event
that the Custodian or its nominee shall incur or be assessed any taxes,
charges, expenses, assessments, claims or liabilities in connection with
the performance of this Contract, except such as may arise from its or
its nominee's own negligent action, negligent failure to act or willful
misconduct, any property at any time held for the account of the Fund
shall be security therefor and should the Fund fail to repay the
Custodian promptly, the Custodian shall be entitled to utilize available
cash and to dispose of the Fund assets to the extent necessary to obtain
reimbursement.
3.12 Monitoring Responsibilities. The Custodian shall furnish annually to the
Fund, during the month of June, information concerning the foreign
sub-custodians employed by the Custodian. Such information shall be
-27-
<PAGE>
similar in kind and scope to that furnished to the Fund in connection
with the initial approval of this Contract. In addition, the Custodian
will promptly inform the Fund in the event that the Custodian learns of a
material adverse change in the financial condition of a foreign
sub-custodian or any material loss of the assets of the Fund or in the
case of any foreign sub-custodian not the subject of an exemptive order
from the Securities and Exchange Commission is notified by such foreign
sub-custodian that there appears to be a substantial likelihood that its
shareholders' equity will decline below $200 million (U.S. dollars or the
equivalent thereof) or that its shareholders' equity has declined below
$200 million (in each case computed in accordance with generally accepted
U.S. accounting principles).
3.13 Branches of U.S. Banks
(a) Except as otherwise set forth in this Contract, the provisions hereof
shall not apply where the custody of the Fund assets are maintained in a
foreign branch of a banking institution which is a "bank" as defined by
Section 2(a)(5) of the Investment Company Act of 1940 meeting the
qualification set forth in Section 26(a) of said Act. The appointment of
any such branch as a sub-custodian shall be governed by paragraph 1 of
this Contract.
(b) Cash held for the Fund in the United Kingdom shall be maintained in
an interest bearing account established for
-28-
<PAGE>
the Fund with the Custodians London branch, which account shall be
subject to the direction of the Custodian, State Street London Ltd. or
both.
4. Proper Instructions
Proper Instructions as used herein means a writing signed or initialled
by one or more person or persons as the Board of Directors shall have from time
to time authorized. Each such writing shall set forth the specific transaction
or type of transaction involved, including a specific statement of the purpose
for which such action is requested. Oral instructions will be considered Proper
Instructions if the Custodian reasonably believes them to have been given by a
person authorized to give such instructions with respect to the transaction
involved. The Fund shall cause all oral instructions to be confirmed in writing.
Upon receipt of a certificate of the Secretary or an Assistant Secretary as to
the authorization by the Board of Directors of the Fund accompanied by a
detailed description of procedures approved by the Board of Directors, Proper
Instructions may include communications effected directly between
electro-mechanical or electronic devices provided that the Board of Directors
and the Custodian are satisfied that such procedures afford adequate safeguards
for the Fund's assets. For purposes of this Section, Proper Instructions shall
include instructions received by the Custodian pursuant to any three--party
agreement which requires a segregated asset account in accordance with Section
2.11.
-29-
<PAGE>
5. Actions Permitted without Express Authority
The Custodian may in its discretion, without express authority from the
Fund:
1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this Contract,
provided that all such payments shall be accounted for to the Fund;
2) surrender securities in temporary form for securities in definitive
form;
3) endorse for collection, in the name of the Fund, checks, drafts and
other negotiable instruments; and
4) in general, attend to all non-discretionary details in connection with
the sale, exchange, substitution, purchase, transfer and other dealings with the
securities and property of the Fund except as otherwise directed by the Board of
Directors of the Fund.
6. Evidence of Authority
The Custodian shall be protected in acting upon any instructions, notice,
request, consent, certificate or other instrument or paper believed by it to be
genuine and to have been properly executed by or on behalf of the Fund. The
Custodian may receive and accept a certified copy of a vote of the Board of
Directors of the Fund as conclusive evidence (a) of the authority of any person
to act in accordance with such vote or (b) of any determination or of any action
by the Board of Directors pursuant to the Articles of Incorporation as described
in such vote, and such vote may be considered as in full force and effect until
receipt by the Custodian of written notice to the contrary.
-30-
<PAGE>
7. Duties of Custodian with Respect to the Books of Account and Calculation of
Net Asset Value and Net Income
The Custodian shall cooperate with add supply necessary information to the
entity or entities appointed by the Board of Directors of the Fund to keep the
books of account of the Fund and/or compute the net asset value per share of the
outstanding shares of the Fund or, if directed in writing to do so by the Fund,
shall itself keep such books of account and/or compute such net asset value per
share. If so directed, the Custodian shall also calculate weekly the net income
of the Fund as described in the Fund's currently effective prospectus and shall
advise the Fund and the Transfer Agent weekly of the total amounts of such net
income and, if instructed in writing by an officer of the Fund to do so, shall
advise the Transfer Agent periodically of the division of such net income among
its various components. The calculations of the net asset value per share and
the weekly income of the Fund shall be made at the time or times described from
time to time in the Fund's currently effective prospectus.
8. Records
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet the
obligations of the Fund under the Investment Company Act of 1940, with
particular attention to Section 21 thereof and Rules 31a-l and 31a-2 thereunder.
All such records shall be the property of the Fund and shall at all times during
the regular business hours of the Custodian be open for inspection by duly
authorized officers, employees or agents
-31-
<PAGE>
of the Fund and employees and agents of the Securities and Exchange Commission.
The Custodian shall, at the Fund's request, supply the Fund with a tabulation of
securities owned by the Fund and held by the Custodian and shall, when requested
to do so by the Fund and for such compensation as shall be agreed upon between
the Fund and the Custodian, include certificate numbers in such tabulations.
9. Opinion of Fund's Independent Accountant
The Custodian shall take all reasonable action, as the Fund may from time
to time request, to obtain from year to year favorable opinions from the Fund's
independent accountants with respect to its activities hereunder in connection
with the preparation of the Fund's Form N-2, and Form N-SAR or other periodic
reports to the Securities and Exchange Commission and with respect to any other
requirements of such Commission.
10. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its services
and expenses as Custodian, as agreed upon from time to time between the Fund and
the Custodian.
11. Responsibility of Custodian
So long as and to the extent that it is in the exercise of reasonable care,
the Custodian shall not be responsible for the title, validity or genuineness of
any property or evidence of title thereto received by it or delivered by it
pursuant to this Contract and shall be held harmless in acting upon any notice,
request, consent, certificate or other instrument reasonably believed by it to
be genuine and to be signed by the proper party
-32-
<PAGE>
or parties, including any futures commission merchant acting pursuant to the
terms of a three-party futures or options agreement. The Custodian shall be held
to the exercise of reasonable care in carrying out the provisions of this
Contract, but shall be kept indemnified by and shall be without liability to the
Fund for any action taken or omitted by it in good faith without negligence. It
shall be entitled to rely on and may act upon advice of counsel (who may be
counsel for the Fund) on all matters, and shall be without liability for any
action reasonably taken or omitted pursuant to such advice.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution appointed pursuant to the provisions of Article 3 to the
same extent as set forth in Article 1 hereof with respect to sub--custodians
located in the United States and, regardless of whether assets are maintained in
the custody of a foreign banking institution, a foreign securities depository or
a branch of a U.S. bank as contemplated by paragraph 3.11 hereof, the Custodian
shall not be liable for any loss, damage, cost, expense, liability or claim
resulting from, or caused by, the direction of or authorization by the Fund to
maintain custody or any securities or cash of the Fund in a foreign country
including but not limited to, losses resulting from. nationalization,
expropriation, currency restrictions, or acts of war or terrorism.
If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian,
-33-
<PAGE>
result in the Custodian or its nominee assigned to the Fund being liable for the
payment of money or incurring liability of some other form, the Fund, as a
prerequisite to requiring the Custodian to take such action, shall provide
indemnity to the Custodian in an amount and form satisfactory to it.
If the Fund requires the Custodian to advance cash or securities for any
purpose or in the event that the Custodian or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or liabilities in
connection with the performance of this Contract, except such as may arise from
its or its nominee's own negligent action, negligent failure to act or willful
misconduct, any property at any time held for the account of the Fund shall be
security therefor and should the Fund fail to repay the Custodian promptly, the
Custodian shall be entitled to utilize available cash and to dispose of the Fund
assets to the extent necessary to obtain reimbursement.
12. Effective Period, Termination and Amendment
This Contract shall become effective as of its execution, shall continue in
full force and effect until terminated as hereinafter provided, may be amended
at any time by mutual agreement of the parties hereto and may be terminated by
either party by an instrument in writing delivered or mailed, postage prepaid to
the other party, such termination to take effect not sooner than thirty (30)
days after the date of such delivery or mailing; provided, however that the
Custodian shall not act under Section 2.10 hereof in the absence of receipt of
an initial certificate of the Secretary or an Assistant Secretary that the
-34-
<PAGE>
Board of Directors of the Fund has approved the initial use of a particular
Securities System and the receipt of an annual certificate of the Secretary or
an Assistant Secretary that the Board of Directors has reviewed the use by the
Fund of such Securities System, as required in each case by Rule 17f-4 under the
Investment Company Act of 1940, as amended and that the Custodian shall not act
under Section 2.l0A hereof in the absence of receipt of an initial certificate
of the Secretary or an Assistant Secretary that the Board of Directors has
approved the initial use of the Direct Paper System and the receipt of an annual
certificate of the Secretary or an Assistant Secretary that the Board of
Directors has reviewed the use by the Fund of the Direct Paper System; provided
further, however, that the Fund shall not amend or terminate this Contract in
contravention of any applicable federal or state regulations, or any provision
of the Articles of Incorporation, and further provided, that the Fund may at any
time by action of its Board of Directors (i) substitute another bank or trust
company for the Custodian by giving notice as described above to the Custodian,
or (ii) immediately terminate this Contract in the event of the appointment of a
conservator or receiver for the Custodian by the Comptroller of the Currency or
upon the happening of a like event at the direction of an appropriate regulatory
agency or court of competent jurisdiction.
Upon termination of the Contract, the Fund shall pay to the Custodian such
compensation as may be due as of the date of such termination and shall likewise
reimburse the Custodian for its costs, expenses and disbursements.
-35-
<PAGE>
13. Successor Custodian
If a successor custodian shall be appointed by the Board of Directors of
the Fund, the Custodian shall, upon termination, deliver to such successor
custodian at the office of the Custodian, duly endorsed and in the form for
transfer, all securities then held by it hereunder and shall transfer to an
account of the successor custodian all of the Fund's securities held in a
Securities System.
If no such successor custodian shall be appointed, the Custodian shall, in
like manner, upon receipt of a certified copy of a vote of the Board of
Directors of the Fund, deliver at the office of the Custodian and transfer such
securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Directors shall have been delivered to
the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or trust
company, which is a bank as defined in the Investment Company Act of 1940, doing
business in Boston, Massachusetts, of its own selection, having an aggregate
capital, surplus, and undivided profits, as shown by its last published report,
of not less than $25,000,000, all securities, funds and other properties held by
the Custodian and all instruments held by the Custodian relative thereto and all
other property held by it under this Contract and to transfer to an account of
such successor custodian all of the Fund's securities held in any Securities
System. Thereafter,
-36-
<PAGE>
such bank or trust company shall be the successor of the Custodian under this
Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Directors to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties and
the provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in full force and effect.
14. Interpretive and Additional Provisions
In connection with the operation of this Contract, the Custodian and the
Fund may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, provided that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations or any provision of
the Articles of Incorporation of the Fund. No interpretive or additional
provisions made as provided in the preceding sentence shall be deemed to be an
amendment of this Contract.
-37-
<PAGE>
15. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
16. Prior Contracts
This Contract supersedes and terminates, as of the date hereof, all prior
contracts between the Fund and the Custodian relating to the custody of the
Fund's assets.
17. Additional Funds
In the event that the Fund establishes an additional series of capital
stock other than the Shares with respect to which it desires to have the
Custodian render services as Custodian under the terms hereof, it shall so
notify the Custodian in writing, and if the Custodian agrees in writing to
provide such services, such additional series of Shares shall become a Fund
hereunder.
18. Notices
Any notice shall be sufficiently given when sent by overnight, registered
or certified mail to the other party at the address of such party set forth
above or at such other address as such party may from time to time specify in
writing to the other party.
-38-
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the 21st day of December, 1989.
ATTEST GLOBAL UTILITY FUND, INC.
/s/ Frances M. Stadler By Edward Beach
- -------------------------------- ----------------------------------
Assistant Secretary President
/s/ D. Cardillo By [ILLEGIBLE]
- -------------------------------- ----------------------------------
Assistant Secretary Vice President
-39-
<PAGE>
SCHEDULE A
Prudential Mutual Funds
State Street
Global Custody Network
----------------------
<TABLE>
<CAPTION>
Securities Depository
or
Country Bank Clearing Agency
- ------- ---- ---------------
<S> <C> <C>
Argentina Citibank, N.A. Caja de Valores S.A.
Australia Westpac Banking Austraclear Limited; and
Corporation Reserve Bank Information
and Transfer System (RITS)
Austria GiroCredit Bank Oesterreichische
Aktiengesellschaft Kontrollbank AG
der Sparkassen (Wertpapiersammelbank
Division)
Bangladesh* Standard Chartered Bank None
Belgium Generale Bank Caisse Interprofessionnelle
de Depots et de Virements
de Titres S.A. (CIK); Banque
Nationale de Belgique
Brazil Citibank, N.A. Bolsa de Valores de Sao
Paulo (Bovespa); Banco
Central do Brasil, Systema
Especial de Liquidacao e
Custodia (SELIC)
Canada Canada Trustco The Canadian Depository for
Mortgage Company Securities Limited (CDS)
Chile Citibank, N.A. None
China The HongKong and Shanghai Shanghai Securities
Banking Corporation Limited, Central Clearing and
Shanghai and Shenzhen branches Registration Corporation
(SSCCRC)
Shenzhen Securities Registrars Co., Ltd. and
its designated agent banks
Columbia Cititrust Columbia S.A. None
Sociedad Fiduciaria
Cyprus Barclays Bank PLC None
Czech Republic Ceskoclovenska Onchodni Stredisko Cennych Papiru
Banka A.S. (SCP); Czech National Bank
(CNB)
Denmark Den Danske Bank Vaerdipapircentralen,
The Danish Securities
Center (VP)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Securities Depository
or
Country Bank Clearing Agency
- ------- ---- ---------------
<S> <C> <C>
Egypt National Bank of Egypt None
Finland Merita Bank Limited The Central Share Register
of Finland
France Banque Paribas Societe Interprofessionnelle
pour la Compensation des
Valeurs Mobilieres (SICOVAM);
Banque de France, Saturne
-System
Germany BHF - Bank Aktiengellschaft The Deutscher Kassenverein
AG
Greece National Bank of Greece S.A. The Central Depository
(Apothetirio Titlon A.E.)
Hong Kong Standard Chartered Bank The Central Clearing and
Settlement System (CCASS)
Hungary Citibank Budapest Rt. The Central Depository and
Clearing House (Budapest)
Ltd. (KELLER Ltd.)
India The HongKong and Shanghai None
Banking Corporation Limited+
Deutsche Bank A.G.
Indonesia Standard Chartered Bank None
Ireland Bank of Ireland The Central Bank of Ireland,
The Gilt Settlement Office
(GSO)
Israel Bank Hapoalim B.M. The Clearing House of the
Tel Aviv Stock Exchange
Italy Morgan Guaranty Monte Titoli, S.p.A.;
Trust Company Banca d'Italia
Japan The Daiwa Bank, Limited Japan Securities Depository
Center (JASDEC); Bank of
Sumitomo Trust & Banking Japan Net System
Co., Ltd.
Korea SEOULBANK Korea Securities Depository
(KSD)
Luxembourg -- Cedel
Malaysia Standard Chartered Bank Malaysian Central Deposit
Malaysia Berhad Sdn. Bhd. (MCD)
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Securities Depository
or
Country Bank Clearing Agency
- ------- ---- ---------------
<S> <C> <C>
Mexico Citibank Mexico, N.A. S.D.INDEVAL, S.A. de C.V.
(Instituto para el Deposito
de Valores); Banco de Mexico
Morocco* Banque Commerciale du Maroc None
Netherlands MeesPierson N.V. Nederlands Centraal
Instituut voor Giraal
Effectenverkeer B.V.
(NECIGEF)
New Zealand ANZ Banking Group The Reserve Bank of New
(New Zealand) Limited Zealand, Austraclear NZ
Norway Christiania Bank og Verdipapirsentralen,
Kreditkasse The Norwegian Registry
of Securities (VPS)
Pakistan Deutsche Bank AG None
Peru Citibank, N.A. Caja de Valores (CAVAL)
Philippines Standard Chartered Bank None
Poland Citibank Poland, S.A. The National Depository of
Securities (Centrum
Krajowego Depozytu Papierow
Wartosciowych)
Portugal Banco Comercial Portugues Central de Valores
Mobiliarios (Central)
Singapore The Development Bank The Central Depository
of Singapore Ltd. (Pte) Limited (CDP)
Slovak Republic Cekoslovenska Obchodna Stredisko cennych papierov
Banka A.S. (SCP); National Bank of
Slovakia
South Africa Standard Bank of None
South Africa Ltd.
Spain Banco Santander, S.A. Servicio de Compensacion y
Liquidacion de Valores
(SCLV); Banco de Espana,
Anotaciones en Cuenta
Sri Lanka The HongKong and Shanghai The Central Depository
Banking Corporation Limited System (Pvt) Limited
Sweden Skandinaviska Vardepapperscentralen,
Enskilda Banken VPC, AB, The Swedish
Securities Depository
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Securities Depository
or
Country Bank Clearing Agency
- ------- ---- ---------------
<S> <C> <C>
Switzerland Union Bank of Switzerland Schweizerische Effekten
Giro AG (SEGA)
Taiwan Central Trust of China The Taiwan Securities
Central Depository Company,
Ltd. (TSCD)
Thailand Standard Chartered Bank Thailand Securities Central
Depository Company, Ltd.
(TSCD)
Turkey Citibank, N.A. Istanbul Stock Exchange
Settlement and Custody
Co., Inc. (I.M.K.B. Takas
ve Saklama A.S.)
Transnational -- The Euroclear System
Cedel
United Kingdom State Street Bank and The Bank of England,
Trust Company, London The Central Gilts Office
branch, and State Street (CGO); The Central London
Limited, a subsidiary Moneymarkets Office (CMO)
of State Street Bank
and Trust Company
Uruguay Citibank, N.A. None
Venezuela Citibank, N.A. None
</TABLE>
- --------------------------------------------------------------------------------
* Funds marked by an asterisk have been approved only for The Target
Portfolio Trust
+ The Asia Pacific Fund, Inc. only
4
<PAGE>
Prudential Mutual Funds
State Street
Global Custody Network
<TABLE>
<CAPTION>
Securities Depository
or
Country Bank Clearing Agency
- ------- ---- ---------------
<S> <C> <C>
Argentina Citibank, N.A. Caja de Valores S.A.
Australia Westpac Banking Austraclear Limited; and
Corporation Reserve Bank Information
and Transfer System (RITS)
Austria GiroCredit Bank Oesterreichische
Aktiengesellschaft Kontrollbank AG
der Sparkassen (Wertpapiersammelbank
Division)
Bangladesh* Standard Chartered Bank None
Belgium Generale Bank Caisse Interprofessionnelle
de Depots et de Virements
de Titres S.A. (CIK); Banque
Nationale de Belgique
Brazil Citibank, N.A. Bolsa de Valores de Sao
Paulo (Bovespa); Banco
Central do Brasil, Systema
Especial de Liquidacao e
Custodia (SELIC)
Canada Canada Trustco The Canadian Depository for
Mortgage Company Securities Limited (CDS)
Chile Citibank, N.A. None
China The HongKong and Shanghai Shanghai Securities
Banking Corporation Limited, Central Clearing and
Shanghai and Shenzhen branches Registration Corporation
(SSCCRC)
Shenzhen Securities Central Clearing Co.,
Ltd. (SSCC)
Columbia Cititrust Columbia S.A. None
Sociedad Fiduciaria
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Securities Depository
or
Country Bank Clearing Agency
- ------- ---- ---------------
<S> <C> <C>
Cyprus Barclays Bank PLC None
Cyprus Offshore Banking Unit
Czech Republic Ceskoclovenska Obchodni Stredisko Cennych Papiru
Banka A.S. (SCP); Czech National Bank
(CNB)
Denmark Den Danske Bank Vaerdipapircentralen,
The Danish Securities
Center (VP)
Egypf National Bank of Egypt None
Finland Merita Bank Limited The Central Share Register
of Finland
France Banque Paribas Societe Interprofessionnelle
pour la Compensation des
Valeurs Mobilieres (SICOVA
Banque de France, Saturne
System
Germany Dresdner Bank AG The Deutscher Kassenvere
AG
Greece National Bank of Greece S.A. The Central Depository
(Apothetirio Titlon A.E.)
Hong Kong Standard Chartered Bank The Central Clearing and
Settlement System (CCASS
Hungary Citibank Budapest Rt. The Central Depository and
Clearing House (Budapest)
Ltd. (KELLER Ltd.)
India The HongKong and Shanghai None
Banking Corporation Limited
Deutsche Bank AG
Indonesia Standard Chartered Bank None
Ireland Bank of Ireland The Central Bank of Ireland
The Gilt Settlement Office
(GSO)
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Securities Depository
or
Country Bank Clearing Agency
- ------- ---- ---------------
<S> <C> <C>
Israel Bank Hapoalim B.M. The Clearing House of the
Tel Aviv Stock Exchange
Italy Morgan Guaranty Monte Titoli, S.p.A.;
Trust Company Banca d'ltalia
Banque Paribas
Japan The Daiwa Bank, Limited Japan Securities Depository
Center (JASDEC); Bank of
Sumitomo Trust & Banking Japan Net System
Co., Ltd.
The Fuji Bank, Limited
Korea SEOULBANK Korea Securities Depository
(KSD)
Luxembourg -- Cedel
Malaysia Standard Chartered Bank Malaysian Central Depositor
Malaysia Berhad Sdn. Bhd. (MCD)
Mexico Citibank Mexico, N.A. S.D.INDEVAL, S.A. de C.V.
(Instituto para el Deposito
de Valores); Banco de Mexico
Morocco Banque Commerciale du Maroc None
Netherlands MeesPierson N.V. Nederlands Centraal
Instituut voor Giraal
Effectenverkeer B.V.
(NECIGEF)
New Zealand ANZ Banking Group New Zealand Central
(New Zealand) Limited Securities Depository
Limited (NZCSD)
Norway Christiania Bank og Verdipapirsentralen,
Kreditkasse The Norwegian Registry
of Securities (VPS)
Pakistan Deutsche Bank AG None
Peru Citibank, N.A. Caja de Valores (CAVAL)
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Securities Depository
or
Country Bank Clearing Agency
- ------- ---- ---------------
<S> <C> <C>
Philippines Standard Chartered Bank None
Poland Citibank Poland, S.A. The National Depository of
Securities(Krajowy Depozyt
Papierow Wartosciowych);
National Bank of Poland
Portugal Banco Comercial Portugues Central de Valores
Mobiliarios (Central)
Singapore The Development Bank The Central Depository
of Singapore Ltd. (Pte) Limited (CDP)
Slovak Republic Cekoslovenska Obchodna Stredisko Cennych Papiero
Banka A.S. (SCP); National Bank of
Slovakia
South Africa Standard Bank of The Central Depository
South Africa Ltd. Limited
Spain Banco Santander, S.A. Servicio de Compensacion
Liquidacion de Valores
(SCLV); Banco de Espana,
Anotaciones en Cuenta
Sri Lanka* The HongKong and Shanghai The Central Depository
Banking Corporation Limited System (Pvt) Limited
Sweden Skandinaviska Vardepapperscentralen,
Enskilda Banken VPC, AB, The Swedish
Securities Depository
Switzerland Union Bank of Switzerland Schweizerische Effekten-
Giro AG (SEGA)
Taiwan Central Trust of China The Taiwan Securities
Central Depository Company
Ltd. (TSCD)
Thailand Standard Chartered Bank Thailand Securities Central
Depository Company, Ltd.
(TSCD)
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Securities Depository
or
Country Bank Clearing Agency
- ------- ---- ---------------
<S> <C> <C>
Turkey Citibank, N.A. Takas ve Saklama Bankasi
A.S. (TAKASBANK); Central
Bank of Turkey
Transnational -- The Euroclear System
Cedel
United Kingdom State Street Bank and The Bank of England,
Trust Company, London The Central Gilts Office
branch, and State Street (CGO); The Central London
Limited, a subsidiary Moneymarkets Office (CMC)
of State Street Bank
and Trust Company
Uruguay Citibank, N.A. None
Venezuela Citibank, N.A. None
</TABLE>
- --------------------------------------------------------------------------------
* Funds marked by an asterisk have been approved only for The Target
Portfolio Trust
5
<PAGE>
Prudential Mutual Funds
State Street Global Custody Network
Name of Fund Board Approval Date:
- ------------ -------------------
Global Utility Fund, Inc. August 29, 1996
Prudential Allocation Fund August 28, 1996
Prudential Equity Fund, Inc. August 28, 1996
Prudential Equity Income Fund August 28, 1996
Prudential Diversified Bond Fund, Inc. July 9,1996
Prudential Distressed Securities Fund, Inc. August 27, 1996
Prudential Emerging Growth Fund, Inc. October 12, 1996
Prudential Global Genesis Fund, Inc. August 28, 1996
Prudential Global Limited Maturity Fund, Inc. July 11, 1996
Prudential Intermediate Global Income Fund, Inc. August 27, 1996
Prudential Jennison Series Fund, Inc. July 9, 1996
Prudential Multi-Sector Fund, Inc. August 28, 1996
Prudential Natural Resources Fund, Inc. August 28, 1996
Prudential Pacific Growth Fund, Inc. July11, 1996
Prudential Small Companies Fund, Inc. August 27, 1996
Prudential Utility Fund, Inc. July 10, 1996
Prudential World Fund, Inc. July 11, 1996
The Target Portfolio Trust July 9, 1996
The Global Government Plus Fund, Inc. August 28, 1996
The Global Total Return Fund, Inc. August 29, 1996
/s/ [ILLEGIBLE]
- -------------------------
Funds' Authorized Officer
Date: November 26,1996
6
TRANSFER AGENCY AND SERVICE AGREEMENT
between
GLOBAL UTILITY FUND, INC.
and
PRUDENTIAL MUTUAL FUND SERVICES, INC.
<PAGE>
TABLE OF CONTENTS
Article 1 Terms of Appointment; Duties of the Agent .............. 1
Article 2 Fees and Expenses ...................................... 7
Article 3 Representations and Warranties of the Agent ............ 7
Article 4 Representations of Warranties of the Fund .............. 8
Article 5 Duty of Care and Indemnification ....................... 9
Article 6 Documents and Covenants of the Fund and the Agent ...... 12
Article 7 Termination of Agreement ............................... 14
Article 8 Assignment ............................................. 14
Article 9 Affiliations ........................................... 15
Article 10 Amendment .............................................. 16
Article 11 Applicable Law ......................................... 16
Article 12 Miscellaneous .......................................... 16
Article 13 Merger of Agreement .................................... 17
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the 4th day of February, 1991 by and between GLOBAL
UTILITY FUND, INC., a Maryland corporation, having its principal office and
place of business at One Seaport Plaza, New York, New York 10292 (the Fund), and
PRUDENTIAL MUTUAL FUND SERVICES, INC., a New Jersey corporation, having its
principal office and place of business at Raritan Plaza One, Edison, New Jersey
08837 (the Agent or PMFS).
WHEREAS, the Fund desires to appoint PMFS as its transfer agent, dividend
disbursing agent and shareholder servicing agent in connection with certain
other activities, and PMFS desires to accept such appointment;
NOW THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:
Article 1 Terms of Appointment; Duties of PMFS
1.01 Subject to the terms and conditions set forth in this Agreement, the
Fund hereby employs and appoints PMFS to act as, and PMFS agrees to act as, the
transfer agent for the authorized and issued shares of the common stock of each
series of the Fund, $.001 par value (Shares), dividend disbursing agent and
shareholder servicing agent in connection with any accumulation, open-account
or similar plans provided to the shareholders of the Fund or any series thereof
(Shareholders) and set out in the currently effective prospectus and statement
of additional
<PAGE>
information (prospectus) of the Fund, including without limitation any periodic
investment plan or periodic withdrawal program.
1.02 PMFS agrees that it will perform the following services:
(a) In accordance with procedures established from time to time by
agreement between the Fund and PMFS, PMFS shall:
(i) Receive for acceptance, orders for the purchase of Shares, and promptly
deliver payment and appropriate documentation therefor to the Custodian of the
Fund authorized pursuant to the Articles of Incorporation of the Fund (the
Custodian);
(ii) Pursuant to purchase orders, issue the appropriate number of Shares
and hold such Shares in the appropriate Shareholder account;
(iii) Receive for acceptance redemption requests and redemption directions
and deliver the appropriate documentation therefor to the Custodian;
(iv) At the appropriate time as and when it receives monies paid to it by
the Custodian with respect to any redemption, pay over or cause to be paid over
in the appropriate manner such monies as instructed by the redeeming
Shareholders;
(v) Effect transfers of Shares by the registered owners thereof upon
receipt of appropriate instructions;
(vi) Prepare and transmit payments for dividends and distributions declared
by the Fund:
(vii) Calculate any sales charges payable by a Shareholder on purchases
and/or redemptions of Shares of the Fund as such charges may be reflected in the
prospectus;
<PAGE>
(viii) Maintain records of account for and advise the Fund and its
Shareholders as to the foregoing; and
(ix) Record the issuance of Shares of the Fund and maintain pursuant to
Rule l7Ad-10(e) under the Securities Exchange Act of 1934 (1934 Act) a record
of the total number of Shares of the Fund which are authorized, based upon data
provided to it by the Fund, and issued and outstanding. PMFS shall also provide
to the Fund on a regular basis the total number of Shares which are authorized,
issued and outstanding and shall notify the Fund in case any proposed issue of
Shares by the Fund would result in an overissue. In case any issue of Shares
would result in an overissue, PMFS shall refuse to issue such Shares and shall
not countersign and issue any certificates requested for such Shares. When
recording the issuance of Shares, PMFS shall have no obligation to take
cognizance of any Blue Sky laws relating to the issue or sale of such Shares,
which functions shall be the sole responsibility of the Fund.
(b) In addition to and not in lieu of the services set forth in the above
paragraph (a), PMFS shall: (i) perform all of the customary services of a
transfer agent, dividend disbursing agent and, as relevant, shareholder
servicing agent in connection with accumulation, open-account or similar plans
(including without limitation any periodic investment plan or periodic
withdrawal program), including but not limited to, maintaining all Shareholder
accounts, preparing Shareholder meeting lists, mailing
-5-
<PAGE>
proxies, receiving and tabulating proxies, mailing Shareholder reports and
prospectuses to current Shareholders, withholding taxes on non-resident alien
accounts, preparing and filing appropriate forms required with respect to
dividends and distributions by federal tax authorities for all Shareholders,
preparing and mailing confirmation forms and statements of account to
Shareholders for all purchases and redemptions of Shares and other confirmable
transactions in Shareholder accounts, preparing and mailing activity statements
for Shareholders and providing Shareholder account information and (ii) provide
a system which will enable the Fund to monitor the total number of Shares sold
in each State or other jurisdiction.
(c) In addition, the Fund shall (i) identify to PMFS in writing those
transactions and assets to be treated as exempt from Blue Sky reporting for each
State and (ii) verify the establishment of transactions for each State on the
system prior to activation and thereafter monitor the daily activity for each
State. The responsibility of PMFS for the Fund's registration status under the
Blue Sky or securities laws of any State or other jurisdiction is solely limited
to the initial establishment of transactions subject to Blue Sky compliance by
the Fund and the reporting of such transactions to the Fund as provided above
and as agreed from time to time by the Fund and PMFS.
PMFS may also provide such additional services and functions not
specifically described herein as may be mutually agreed between PMFS and the
Fund and set forth in Schedule B hereto.
-6-
<PAGE>
Procedures applicable to certain of these services may be established from
time to time by agreement between the Fund and PMFS.
Article 2 Fees and Expenses
2.01 For performance by PMFS pursuant to this Agreement, the Fund agrees to
pay PMFS an annual maintenance fee for each Shareholder account and certain
transactional fees as set out in the fee schedule attached hereto as Schedule A.
Such fees and out-of-pocket expenses and advances identified under Section 2.02
below may be changed from time to time subject to mutual written agreement
between the Fund and PMFS.
2.02 In addition to the fees paid under Section 2.01 above, the Fund agrees
to reimburse PMFS for out-of-pocket expenses or advances incurred by PMFS for
the items set out in Schedule A attached hereto. In addition, any other expenses
incurred by PMFS at the request or with the consent of the Fund will be
reimbursed by the Fund.
2.03 The Fund agrees to pay all fees and reimbursable expenses within a
reasonable period of time following the mailing of the respective billing
notice. Postage for mailing of dividends, proxies, Fund reports and other
mailings to all Shareholder accounts shall be advanced to PMFS by the Fund upon
request prior to the mailing date of such materials.
Article 3 Representations and Warranties of PMFS
PMFS represents and warrants to the Fund that:
3.01 It is a corporation duly organized and existing
-7-
<PAGE>
and in good standing under the laws of Nev Jersey and it is duly qualified to
carry on its business in New Jersey.
3.02 It is and will remain registered with the U.S. Securities and Exchange
Commission (SEC) as a Transfer Agent pursuant to the requirements of Section 17A
of the 1934 Act.
3.03 It is empowered under applicable laws and by its charter and By--Laws
to enter into and perform this Agreement.
3.04 All requisite corporate proceedings have been taken to authorize it to
enter into and perform this Agreement.
3.05 It has and will continue to have access to the necessary facilities,
equipment and personnel to perform its duties and obligations under this
Agreement.
Article 4 Representations and Warranties of the Fund
The Fund represents and warrants to PMFS that:
4.01 It is a corporation duly organized and existing and in good standing
under the laws of Maryland.
4.02 It is empowered under applicable laws and by its Articles of
Incorporation and By-Laws to enter into and perform this Agreement.
4.03 All corporate proceedings required by said Articles of Incorporation
and By-Laws have been taken to authorize it to enter into and perform this
Agreement.
4.04 It is an investment company registered with the SEC under the
Investment Company Act of 1940, as amended (the 1940 Act).
4.05 A registration statement under the Securities Act
-8-
<PAGE>
of 1933 (the 1933 Act) is currently effective and will remain effective, and
appropriate state securities law filings have been made and will continue to be
made, with respect to all Shares of the Fund being offered for sale.
Article 5 Duty of Care and Indemnification
5.01 PMFS shall not be responsible for, and the Fund shall indemnify and
hold PMFS harmless from and against, any and all losses, damages, costs,
charges, counsel fees, payments, expenses and liability arising out of or
attributable to:
(a) All actions of PMFS or its agents or subcontractors required to be
taken pursuant to this Agreement, provided that such actions are taken in good
faith and without negligence or willful misconduct.
(b) The Fund's refusal or failure to comply with the terms of this
Agreement, or which arise out of the Fund's lack of good faith, negligence or
willful misconduct or which arise out of the breach of any representation or
warranty of the Fund hereunder.
(c) The reliance on or use by PMFS or its agents or subcontractors of
information, records and documents which (i) are received by PMFS or its agents
or subcontractors and furnished to it by or on behalf of the Fund, and (ii) have
been prepared and/or maintained by the Fund or any other person or firm on
behalf of the Fund.
(d) The reliance on, or the carrying out by PMFS or its agents or
subcontractors of, any instructions or requests of the Fund.
-9-
<PAGE>
(e) The offer or sale of Shares in violation of any requirement under the
federal securities laws or regulations or the securities or Blue Sky laws of any
State or other jurisdiction that such Shares be registered in such State or
other jurisdiction or in violation of any stop order or other determination or
ruling by any federal agency or any State or other jurisdiction with respect to
the offer or sale of such Shares in such State or other jurisdiction.
5.02 PMFS shall indemnify and hold the Fund harmless from and against any
and all losses, damages, costs, charges, counsel fees, payments, expenses and
liability arising out of or attributable to any action or failure or omission to
act by PMFS as a result of PMFS' lack of good faith, negligence or willful
misconduct.
5.03 At any time PMFS may apply to any officer of the Fund for
instructions, and may consult with legal counsel, with respect to any matter
arising in connection with the services to be performed by PMFS under this
Agreement, and PMFS and its agents or subcontractors shall not be liable and
shall be indemnified by the Fund for any action taken or omitted by it in
reliance upon such instructions or upon the opinion of such counsel. PMFS, its
agents and subcontractors shall be protected and indemnified in acting upon any
paper or document furnished by or on behalf of the Fund, reasonably believed to
be genuine and to have been signed by the proper person or persons, or upon any
instruction, information, data, records or documents provided to PMFS or its
agents or
-10-
<PAGE>
subcontractors by machine readable input, telex, CRT data entry or other similar
means authorized by the Fund, and shall not be held to have notice of any change
of authority of any person, until receipt of written notice thereof from the
Fund. PMFS, its agents and subcontractors shall also be protected and
indemnified in recognizing stock certificates which are reasonably believed to
bear the proper manual or facsimile signature of the officers of the Fund, and
the proper countersignature of any former transfer agent or registrar, or of a
co-transfer agent or co-registrar.
5.04 In the event either party is unable to perform its obligations under
the terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage reasonably beyond its control, or other causes
reasonably beyond its control, such party shall not be liable for damages to the
other for any damages resulting from such failure to perform or otherwise from
such causes.
5.05 Neither party to this Agreement shall be liable to the other party for
consequential damages under any provision of this Agreement or for any act or
failure to act hereunder.
5.06 In order that the indemnification provisions contained in this Article
5 shall apply, upon the assertion of a claim for which either party may be
required to indemnify the other, the party seeking indemnification shall
promptly notify the other party of such assertion, and shall keep the other
party advised with respect to all developments concerning such claim. The party
who may be required to indemnify shall have the option to participate
-11-
<PAGE>
with the party seeking indemnification in the defense of such claim. The party
seeking indemnification shall in no case confess any claim or make any
compromise in any case in which the other party may be required to indemnify it
except with the other party's prior written consent.
Article 6 Documents and Covenants of the Fund and PMFS
6.01 The Fund shall promptly furnish to PMFS the following:
(a) A certified copy of the resolution of the Board of Directors of the
Fund authorizing the appointment of PMFS and the execution and delivery of this
Agreement;
(b) A certified copy of the Articles of Incorporation and By-Laws of the
Fund and all amendments thereto;
(c) The current registration statements and any amendments and supplements
thereto filed with the SEC pursuant to the requirements of the 1933 Act and the
1940 Act;
(d) A specimen of the certificate for Shares of the Fund in the form
approved by the Board of Directors, with a certificate of the Secretary of the
Fund as to such approval:
(e) All account application forms or other documents relating to
Shareholder accounts and/or relating to any plan program or service offered or
to be offered by the Fund; and
(f) Such other certificates, documents or opinions as the Agent deems to be
appropriate or necessary for the proper performance of its duties.
6.02 PMFS hereby agrees to establish and maintain facilities and procedures
reasonably acceptable to the Fund for
-12-
<PAGE>
safekeeping of stock certificates, check forms and facsimile signature
imprinting devices, if any; and for the preparation or use, and for keeping
account of, such certificates, forms and devices.
6.03 PMFS shall prepare and keep records relating to the services to be
performed hereunder, in the form and manner as it may deem advisable. To the
extent required by Section 31 of the 1940 Act, and the Rules and Regulations
thereunder, PMFS agrees that all such records prepared or maintained by PMFS
relating to the services to be performed by PMFS hereunder are the property of
the Fund and will be preserved, maintained and made available in accordance with
such Section 31 of the 1940 Act, and the Rules and Regulations thereunder, and
will be surrendered promptly to the Fund on and in accordance with its request.
6.04 PMFS and the Fund agree that all books, records, information and data
pertaining to the business of the other party which are exchanged or received
pursuant to the negotiation or the carrying out of this Agreement shall remain
confidential and shall not be voluntarily disclosed to any other person except
as may be required by law or with the prior consent of PMFS and the Fund.
6.05 In case of any requests or demands for the inspection of the
Shareholder records of the Fund, PMFS will endeavor to notify the Fund and to
secure instructions from an authorized officer of the Fund as to such
inspection. PMFS reserves the right, however, to exhibit the Shareholder records
to any person whenever it is advised by its counsel that it may be held liable
-13-
<PAGE>
for the failure to exhibit the Shareholder records to such person.
Article 7 Termination of Agreement
7.01 This Agreement may be terminated by either party upon one hundred
twenty (120) days written notice to the other.
7.02 Should the Fund exercise its right to terminate, all out--of-pocket
expenses associated with the movement of records and other materials will be
borne by the Fund. Additionally, PMFS reserves the right to charge for any other
reasonable fees and expenses associated with such termination.
Article 8 Assignment
8.01 Except as provided in Section 8.03 below, neither this Agreement nor
any rights or obligations hereunder may be assigned by either party without the
written consent of the other party.
8.02 This Agreement shall inure to the benefit of and be binding upon the
parties and their respective permitted successors and assigns.
8.03 PMFS may, in its sole discretion and without further consent by the
Fund, subcontract, in whole or in part, for the performance of its obligations
and duties hereunder with any person or entity including but not limited to: (i)
Prudential-Bache Securities Inc. (Prudential-Bache), a registered
broker-dealer, (ii) The Prudential Insurance Company of America (Prudential),
(iii) Pruco Securities Corporation, a registered broker-dealer, (iv) any
Prudential-Bache or Prudential subsidiary or affiliate duly registered as a
broker-dealer and/or a transfer
-14-
<PAGE>
agent pursuant to the 1934 Act or (vi) any other Prudential-Bache or Prudential
affiliate or subsidiary; provided, however, that PMFS shall be as fully
responsible to the Fund for the acts and omissions of any agent or subcontractor
as it is for its own acts and omissions.
Article 9 Affiliations
9.01 PMFS may now or hereafter, without the consent of or notice to the
Fund, function as Transfer Agent and/or Shareholder Servicing Agent for any
other investment company registered with the SEC under the 1940 Act, including
without limitation any investment company whose adviser, administrator, sponsor
or principal underwriter is or may become affiliated with Prudential-Bache
and/or Prudential or any of its or their direct or indirect subsidiaries or
affiliates.
9.02 It is understood and agreed that the directors, officers, employees,
agents and Shareholders of the Fund, and the directors, officers, employees,
agents and shareholders of the Fund's investment adviser and/or distributor, are
or may be interested in the Agent as directors, officers, employees, agents,
shareholders or otherwise, and that the directors, officers, employees, agents
or shareholders of the Agent may be interested in the Fund as directors,
officers, employees, agents, Shareholders or otherwise, or in the investment
adviser and/or distributor as officers, directors, employees, agents,
shareholders or otherwise.
-15-
<PAGE>
Article 10 Amendment
10.01 This Agreement may be amended or modified by a written agreement
executed by both parties and authorized or approved by a resolution of the Board
of Directors of the Fund.
Article 11 Applicable Law
11.01 This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of the State of New Jersey.
Article 12 Miscellaneous
12.01 In the event of an alleged loss or destruction of any Share
certificate, no new certificate shall be issued in lieu thereof, unless there
shall first be furnished to PMFS an affidavit of loss or non-receipt by the
holder of Shares with respect to which a certificate has been lost or destroyed,
supported by an appropriate bond satisfactory to PMFS and the Fund issued by a
surety company satisfactory to PMFS, except that PMFS may accept an affidavit of
loss and indemnity agreement executed by the registered holder (or legal
representative) without surety in such form as PMFS deems appropriate
indemnifying PMFS and the Fund for the issuance of a replacement certificate, in
cases where the alleged loss is in the amount of $1000 or less.
12.02 In the event that any check or other order for payment of money on
the account of any Shareholder or new investor is returned unpaid for any
reason, PMFS will (a) give prompt notification to the Fund's distributor
(Distributor) of such non-payment; and (b) take such other action, including
imposition
-16-
<PAGE>
of a reasonable processing or handling fee, as PMFS may, in its sole discretion,
deem appropriate or as the Fund and the Distributor may instruct PMFS.
12.03 Any notice or other instrument authorized or required by this
Agreement to be given in writing to the Fund or to PMFS shall be sufficiently
given if addressed to that party and received by it at its office set forth
below or at such other place as it may from time to time designate in writing.
To the Fund:
Global Utility Fund, Inc.
One Seaport Plaza
New York, NY 10292
Attention: President
To PMFS:
Prudential Mutual Fund Services, Inc.
Raritan Plaza One
Edison, NJ 08837
Attention: President
Article 13 Merger of Agreement
13.01 This Agreement constitutes the entire agreement between the parties
hereto and supersedes any prior agreement with respect to the subject matter
hereof whether oral or written.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their names and on their behalf under their seals by and through
their duly authorized officers, as of the day and year first above written.
-17-
<PAGE>
GLOBAL UTILITY FUND, INC.
BY: /s/ Edward D. Beach
----------------------------
President
ATTEST:
/s/ Stephanie Xupolos
- -----------------------------
PRUDENTIAL MUTUAL FUND
SERVICES, INC.
BY: /s/ ILLEGIBLE
----------------------------
President
ATTEST:
/s/ ILLEGIBLE
- -----------------------------
-18-
<PAGE>
Schedule A
Prudential Mutual Fund Services, Inc.
Fee Schedule
Fee Information for Services as
Transfer Agent, Dividend Disbursing Agent
and Shareholder Servicing Agent
GLOBAL UTILITY FUND, INC.
General - Fees are based on an annual per shareholder account charge for account
maintenance plus out-of-pocket expenses. In addition, there is a one time set-up
charge per account for manually established accounts and a monthly charge for
inactive zero balance accounts. The effective period of this fee schedule is
February 4, 1991 through December 31, 1991 and shall continue thereafter from
year to year, unless otherwise amended.
Annual Maintenance Charges - The annual maintenance charge includes the
processing of all transactions and correspondence. The fee is billable on a
monthly basis at the rate of 1/12 of the annual tee. A charge is made for an
account in the month that an account opens or closes.
Annual Maintenance Per Account Fee $ 10.00
Other charges
New Account Set-up Fee for Manually $ 2.00
Established Accounts
Monthly Inactive Zero Balance Account Fee $ .20
Out-of-Pocket Expenses -- Out-of-pocket expenses include but are not limited
to: postage, stationery and printing, allocable communication costs, microfilm,
microfiche, and expenses incurred at the specific direction of the Fund.
Payment - An invoice will be presented to the Fund on a monthly basis assessing
the Fund the appropriate fee and out-of-pocket expenses.
PRUDENTIAL MUTUAL FUND
GLOBAL UTILITY FUND, INC. SERVICES,
NAME: Edward D. Beach NAME: ILLEGIBLE
-------------------------- -------------------------
TITLE: Treasurer TITLE: President
DATE: February 4, 1991 DATE: February 4, 1991
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 11 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
November 19, 1997, relating to the financial statements and financial highlights
of Global Utility Fund, Inc., which appears in such Statement of Additional
Information, and to the incorporation by reference of our report into the
Prospectus which constitutes part of this Registration Statement. We also
consent to the reference to us under the heading "Custodian, Transfer and
Dividend Disbursing Agent and Independent Accountants" in such Statement of
Additional Information and to the reference to us under the heading "Financial
Hightlights" in such Prospectus.
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
November 25, 1997
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in Post Effective Amendment No. 11 to Registration
Statement No. 33- 37356 of Global Utility Fund, Inc., of our report dated
November 14, 1996, appearing in the Statement of Additional Information, which
is included in such Registration Statement, and to the references to us under
the heading "Financial Highlights" appearing in the Prospectus, which is also
included in such Registration Statement.
Deloitte & Touche LLP
New York, New York
November 21, 1997
GLOBAL UTILITY FUND
EXHIBIT
AVERAGE ANNUAL TOTAL RETURN
CALCULATION
n
P(1+T) = ERV
Where:
P = hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years
ERV = ending redeemable value.
One Year ended September 30, 1997
------------------------------------------------------
Class A Class B Class C
------- ------- -------
P = $1,000 $1,000 $1,000
ERV = $1,206 $1,210 $1,250
n = 1.0 1.0 1.0
T = 20.57% 20.96% 24.96%
Five Years ended
September 30, 1997
------------------------------
Class A Class B
------- --------
P = $1,000 $1,000
ERV = $1,808 $1,823
n = 5.0 5.0
T = 12.58% 12.76%
Since Inception Period ended September 30, 1997
------------------------------------------------------
Class A Class B Class C
------- ------- -------
P = $1,000 $1,000 $1,000
ERV = $2,533 $2,199 $1,527
n = 7.7 6.5 3.2
T = 12.83% 12.89% 14.14%
GLOBAL UTILITY FUND,INC.
(the Fund)
PLAN PURSUANT TO RULE 18F-3
The Fund hereby adopts this plan pursuant to Rule 18f-3 under the
Investment Company Act of 1940 (the 1940 Act), setting forth the separate
arrangement and expense allocation of each class of shares. Any material
amendment to this plan is subject to prior approval of the Board of Directors,
including a majority of the independent Directors.
CLASS CHARACTERISTICS
CLASS A SHARES: Class A shares are subject to a high
- --------------- initial sales charge and a distribution
and/or service fee pursuant to Rule 12b-1
under the 1940 Act (Rule 12b-1 fee) not to
exceed .30 of 1% per annum of the average
daily net assets of the class. The initial
sales charge is waived or reduced for
certain eligible investors.
CLASS B SHARES: Class B shares are not subject to an initial
- --------------- sales charge but are subject to a high
contingent deferred sales charge (declining
by 1% each year) which will be imposed on
certain redemptions and a Rule 12b-1 fee of
not to exceed [.75 of 1%/1%] per annum of
the average daily net assets of the class.
The contingent deferred sales charge is
waived for certain eligible investors. Class
B shares automatically convert to Class A
shares approximately [seven] years after
purchase.
CLASS C SHARES: Class C shares are not subject to an
- --------------- initialsales charge but are subject to a
low contingent deferred sales charge
(declining by 1% each year) which will be
imposed on certain redemptions and a Rule
12b-1 fee not to exceed 1% per annum of the
average daily net assets of the class.
CLASS Z SHARES: Class Z shares are not subject to
- --------------- either an initial or contingent deferred
sales charge nor are they subject to any
Rule 12b-1 fee.
INCOME AND EXPENSE ALLOCATIONS
Income, any realized and unrealized capital gains and losses, and
expenses not allocated to a particular class, will be allocated to each
class on the basis of the net asset value of that class in relation to
the net asset value of the Fund.
DIVIDENDS AND DISTRIBUTIONS
Dividends and other distributions paid by the Fund to each class of
shares, to the extent paid, will be paid on the same day and at the
same time, and will be determined in the same manner and will be in the
same amount, except that the amount of the dividends and other
distributions declared and paid by a particular class may be different
from that paid by another class because of Rule 12b-1 fees and other
expenses borne exclusively by that class.
EXCHANGE PRIVILEGE
Each class of shares is generally exchangeable for the same class of
shares (or the class of shares with similar characteristics), if any,
of the other Prudential Mutual Funds (subject to certain minimum
investment requirements) at relative net asset value without the
imposition of any sales charge.
Class B and Class C shares (which are not subject to a contingent
deferred sales charge) of shareholders who qualify to purchase Class A
shares at net asset value will be automatically exchanged for Class A
shares on a quarterly basis, unless the shareholder elects otherwise.
CONVERSION FEATURES
Class B shares will automatically convert to Class A shares on a
quarterly basis approximately seven years after purchase. Conversions
will be effected at relative net asset value without the imposition of
any additional sales charge.
GENERAL
A. Each class of shares shall have exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and
shall have separate voting rights on any matter submitted to
shareholders in which the interests of one class differ from the
interests of any other class.
B. On an ongoing basis, the Directors, pursuant to their fiduciary
responsibilities under the 1940 Act and otherwise, will monitor the
Fund for the existence of any material conflicts among the interests of
its several classes. The Directors, including a majority of the
independent Directors, shall take such action as is reasonably
necessary to eliminate any such conflicts that may develop. Prudential
Mutual Fund Management LLC, the Fund's Manager, will be responsible for
reporting any potential or existing conflicts to the Directors.
C. For purposes of expressing an opinion on the financial statements of
the Fund, the methodology and procedures for calculating the net asset
value and dividends/distributions of the Fund's several classes and the
proper allocation of income and expenses among such classes will be
examined annually by the Fund's independent auditors who, in performing
such examination, shall consider the factors set forth in the relevant
auditing standards adopted, from time to time, by the American
Institute of Certified Public Accountants.
Dated: May 9, 1996
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