As filed with the Securities and Exchange Commission on November 27, 1998
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 EXHIBIT INDEX
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 H
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 12 H
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 H
AMENDMENT NO. 18 H
(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
DAVID F. CONNOR, 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
----------
PART A
<S> <C>
Item 1. Cover Page ........................................................... Cover Page
Item 2. Synopsis ............................................................. Fund Expenses
Item 3. Condensed Financial Information ...................................... Fund Expenses; Financial Highlights;
How The Fund Calculates Performance
Item 4. General Description of Registrant .................................... Cover Page; Fund Highlights; How The
Fund Invests; General Information
Item 5. Management of the Fund ............................................... Financial Highlights; How The Fund is
Managed
Item 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
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.
</TABLE>
<PAGE>
Global Utility Fund, Inc.
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PROSPECTUS DATED NOVEMBER 27, 1998
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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 and is available at the Web
site of The Prudential Insurance Company of America (http://www.prudential.com).
Additional information about the Fund has been filed with the Securities and
Exchange Commission (the Commission) in a Statement of Additional Information,
dated November 27, 1998, which information is incorporated herein by reference
(is legally considered a part of this Prospectus) and is available without
charge upon request to the Fund, at the address or telephone number noted above.
The Commission maintains a Web site (http://www.sec.gov) that contains the
Statement of Additional Information, material incorporated by reference and
other information regarding the Fund.
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INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
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AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OF ANY BANK AND IS NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY.
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, 1998, PIFM
served as manager or administrator to 67 investment companies, including 45
mutual funds, with aggregate assets of approximately $68.2 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 October 31, 1998, the Subadviser held investment authority over
approximately $196.7 billion of assets. See "How the Fund is
Managed--Manager" at page 16 and "How the Fund is Managed -- Subadviser" at
page 17.
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Investment Management Services LLC (the Distributor) acts as
the Distributor of the Fund's Class A, Class B, Class C and Class Z shares
and is paid a distribution and service fee with respect to Class A shares
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. The Distributor 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>
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WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000 for Class A and Class B shares
and $2,500 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 Investment
Plan the minimum initial and subsequent investment is $50. See "Shareholder
Guide -- How to Buy Shares of the Fund" at page 23 and "Shareholder
Guide--Shareholder Services" at page 35.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through the Distributor or brokers
or dealers that have entered into agreements to act as participating or
introducing brokers for the Distributor (Dealers) or directly from the Fund
through its transfer agent, Prudential Mutual Fund Services LLC. (PMFS or the
Transfer Agent). In each case, sales are made at the net asset value per
share (NAV) next determined after receipt of your purchase order by the
Transfer Agent, a Dealer or the Distributor plus a sales charge, which may be
imposed either at the time of purchase, on a deferred basis, or both. Class A
shares are sold with a front-end sales charge. Class B shares are subject to
a contingent deferred sales charge (CDSC). Class C shares are sold with a low
front-end sales charge, but are also subject to a CDSC. Class Z shares are
offered to a limited group of investors at NAV without any sales charge. See
"How the Fund Values its Shares" at page 19 and "Shareholder Guide--How to
Buy Shares of the Fund" at page 22.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers four classes of shares:
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 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 with an initial sales charge of 1% of the
offering price and are also subject to a CDSC of 1%
on redemptions for a period of 18 months after
purchase. Class C shares are subject to higher
ongoing distribution-related expenses than Class A
shares but, unlike Class B shares, 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
your Dealer, the Distributor or the Transfer Agent receives your sell order.
The proceeds of redemptions of Class B and Class C shares may be subject to a
CDSC. Dealers may charge their customers a separate fee for handling sale
transactions. Participants in programs sponsored by Prudential Retirement
Services should contact their client representative for more information
about selling their Class Z shares. See "Shareholder Guide--How to Sell Your
Shares" at page 29.
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
- --------------------------------------------------------------------------------
<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 1% 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 proceeds,
whichever is lower) ............ None 5% during the first year, 1% on None
decreasing by 1% annually to redemptions
1% in the fifth and sixth years made within
and 0% the seventh year* 18 months 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 ......................... .26% .26% .26% .26%
----- ----- ----- -----
Total Fund Operating Expenses
(after reduction) ................... 1.18% 1.93% 1.93% .93%
===== ===== ===== =====
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 .............................................. $61 $86 $112 $186
Class B .............................................. $70 $91 $114 $197
Class C .............................................. $39 $70 $113 $233
Class Z .............................................. $ 9 $30 $ 51 $114
You would pay the following expenses on the same investment assuming no
redemption:
Class A .............................................. $61 $86 $112 $186
Class B .............................................. $20 $61 $104 $197
Class C .............................................. $29 $70 $113 $233
Class Z .............................................. $ 9 $30 $ 51 $114
</TABLE>
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." The above example is based on data
for the fiscal year ended September 30, 1998. "Other Expenses" includes
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."
+ Dealers independently may charge additional fees for shareholder
transactions or advisory services. Pursuant to rules of the National
Association of Securities Dealers, Inc., the aggregate initial sales
charges, deferred sales charges and asset-based sales charges on shares
of the Fund may not exceed 6.25% of total gross sales, subject to certain
exclusions. This 6.25% limitation is imposed on each class of the Fund
rather than on a per shareholder basis. Therefore, long-term shareholders
of the Fund may pay more in total sales charges than the economic
equivalent of 6.25% of such shareholders' investment in such shares. See
"How the Fund is Managed--Distributor."
++ Although the Class A Distribution and Service Plan provides that the Fund
may pay a distribution fee of up to .30 of 1% per annum of the average
daily net assets of the Class A shares of the Fund, the Distributor has
agreed to limit its distribution fees with respect to Class A shares of
the Fund to no more than .25 of 1% of the average daily net assets of the
Class A shares. This voluntary waiver may be terminated at any time
without notice. See "How the Fund is Managed--Distributor." Total
operating expenses without such limitation would be 1.23%.
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4
<PAGE>
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FINANCIAL HIGHLIGHTS
(FOR A SHARE OF COMMON STOCK OUTSTANDING THROUGHHOUT EACH PERIOD INDICATED)
(CLASS A SHARES)
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The following financial highlights, for the two years ended September 30, 1998,
have been audited by PricewaterhouseCoopers LLP, independent accountants, and
for the three years ended September 30, 1996, have been audited by other
independent auditors. All such audit reports 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(a)
YEAR ENDED SEPTEMBER 30, THROUGH
------------------------------------------------------------------------------ SEPTEMBER 30,
1998 1997 1996 1995 1994 1993 1992 1991 1990(E)
-------- -------- -------- -------- -------- -------- -------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning
of period ............... $ 17.52 $ 15.03 $ 14.72 $ 13.66 $ 14.63 $ 12.96 $ 12.62 $ 10.50 $ 11.16
-------- -------- -------- -------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income ..... .46(d) .49 .51 .49 .47 .44 .53 .57 .48
Net realized and
unrealized gain (loss)
on investment and
foreign currency
transactions ............ 1.67 3.34 .73 1.35 (.82) 2.46 1.01 2.23 (.67)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total from
investment
operations .......... 2.13 3.83 1.24 1.84 (.35) 2.90 1.54 2.80 (.19)
-------- -------- -------- -------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net
investment income ....... (.46) (.49) (.51) (.48) (.42) (.47) (.53) (.62) (.41)
Distributions in
excess of net
investment income ....... (.02) (.02) -- -- -- (.01) -- -- --
Distributions from net
realized gains on
investment and foreign
currency transactions ... (1.51) (.83) (.42) (.30) (.20) (.75) (.67) (.08) --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total distributions ....... (1.99) (1.34) (.93) (.78) (.62) (1.23) (1.20) (.70) (.41)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Redemption fee
retained by Fund ........ -- -- -- -- -- -- -- .02 (.06)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value,
end of period ........... $ 17.66 $ 17.52 $ 15.03 $ 14.72 $ 13.66 $ 14.63 $ 12.96 $ 12.62 $ 10.50
======== ======== ======== ======== ======== ======== ======== ======== ========
TOTAL RETURN(c) ........... 12.90% 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) ...... $123,346 $120,825 $112,800 $124,423 $126,254 $138,714 $114,654 $132,804 $161,892
-------- -------- -------- -------- -------- -------- -------- -------- --------
Average net assets (000) .. $122,384 $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 ..... 1.18% 1.21% 1.30% 1.31% 1.25% 1.30% 1.39% 1.49% 1.05%(b)
Expenses, excluding
distribution fees ..... .93% .96% 1.05% 1.06% 1.02% 1.10% 1.19% 1.36% 1.05%(b)
Net investment income ... 2.49% 3.00% 3.38% 3.58% 3.39% 3.37% 4.16% 5.06% 5.97%(b)
Portfolio turnover rate ... 20% 13% 13% 15% 19% 14% 57% 135% 27%
</TABLE>
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(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) Calculated based upon weighted average shares outstanding during the year.
(e) 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.
5
<PAGE>
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FINANCIAL HIGHLIGHTS
(FOR A SHARE OF COMMON STOCK OUTSTANDING THROUGHOUT EACH PERIOD INDICATED)
(CLASS B SHARES)
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The following financial highlights, for the two years ended September 30, 1998,
have been audited by PricewaterhouseCoopers LLP, independent accountants, and
for the three years ended September 30, 1996, have been audited by other
independent auditors. All such audit reports 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>
- ------------------------------------------------------------------------------------------------------------------------------------
MARCH 18, 1991(a)
YEAR ENDED SEPTEMBER 30, THROUGH
-------------------------------------------------------------------- SEPTEMBER 30,
1998 1997 1996 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- -------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period ..... $ 17.52 $ 15.03 $ 14.71 $ 13.66 $ 14.63 $ 12.97 $ 12.63 $ 11.97
-------- -------- -------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income ..... .32(d) .37 .40 .39 .37 .34 .43 .25
Net realized and
unrealized gain (loss)
on investment and
foreign currency
transactions ............ 1.67 3.34 .74 1.34 (.82) 2.45 1.01 .63
-------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations ........... 1.99 3.71 1.14 1.73 (.45) 2.79 1.44 .88
-------- -------- -------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net
investment income ....... (.32) (.37) (.40) (.38) (.32) (.37) (.43) (.22)
Distributions in excess
of net investment
income .................. (.02) (.02) -- -- -- (.01) -- --
Distributions from net
realized gains on
investment and foreign
currency transactions ... (1.51) (.83) (.42) (.30) (.20) (.75) (.67) --
-------- -------- -------- -------- -------- -------- -------- --------
Total distributions ....... (1.85) (1.22) (.82) (.68) (.52) (1.13) (1.10) (.22)
-------- -------- -------- -------- -------- -------- -------- --------
Net asset value,
end of period ........... $ 17.66 $ 17.52 $ 15.03 $ 14.71 $ 13.66 $ 14.63 $ 12.97 $ 12.63
======== ======== ======== ======== ======== ======== ======== ========
TOTAL RETURN(c) ........... 12.06% 25.96% 7.90% 13.32% (3.22)% 22.87% 12.23% 7.44%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
period (000) ............ $154,873 $179,270 $187,557 $227,189 $272,673 $185,259 $ 60,432 $ 30,147
Average net assets (000) .. $177,326 $185,693 $210,305 $237,983 $270,466 $ 90,254 $ 45,661 $ 18,923
Ratios to average net
assets:
Expenses, including
distribution fees ..... 1.93% 1.96% 2.05% 2.06% 2.02% 2.10% 2.19% 2.47%(b)
Expenses, excluding
distribution fees ..... .93% .96% 1.05% 1.06% 1.02% 1.10% 1.19% 1.47%(b)
Net investment income .... 1.74% 2.25% 2.62% 2.83% 2.68% 2.59% 3.43% 4.16%(b)
Portfolio turnover rate ... 20% 13% 13% 15% 19% 14% 57% 135%
- ----------
(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.
(d) Calculated based upon weighted average shares outstanding during the year.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF COMMON STOCK OUTSTANDING THROUGHOUT EACH PERIOD INDICATED)
(CLASS C SHARES)
- --------------------------------------------------------------------------------
The following financial highlights, for the two years ended September 30, 1998,
have been audited by PricewaterhouseCoopers 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 other independent
auditors. All such audit 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
1998 1997 1996 1995 SEPTEMBER 30, 1994
------- ------- ------- ------- -----------------------
PER SHARE OPERATING PERFORMANCE:
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ................. $ 17.52 $ 15.03 $ 14.71 $ 13.66 $ 13.93
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income ................................ .32(d) .37 .40 .39 .06
Net realized and unrealized gain (loss) on
investment and foreign currency transactions ....... 1.67 3.34 .74 1.34 (.24)
------- ------- ------- ------- -------
Total from investment operations ................. 1.99 3.71 1.14 1.73 (.18)
------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends from net investment income ................. (.32) (.37) (.40) (.38) (.07)
Distributions in excess of net
investment income ................................. (.02) (.02) -- -- --
Distributions from net realized gains
on investment and foreign
currency transactions .............................. (1.51) (.83) (.42) (.30) (.02)
------- ------- ------- ------- -------
Total distributions .................................. (1.85) (1.22) (.82) (.68) (.09)
------- ------- ------- ------- -------
Net asset value, end of period ....................... $ 17.66 $ 17.52 $ 15.03 $ 14.71 $ 13.66
======= ======= ======= ======= =======
TOTAL RETURN(c) ...................................... 12.06% 25.96% 7.90% 13.32% (1.32)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) ...................... $ 957 $ 760 $ 661 $ 563 $ 226
Average net assets (000) ............................. $ 969 $ 727 $ 608 $ 410 $ 131
Ratios to average net assets:
Expenses, including distribution fees .............. 1.93% 1.96% 2.05% 2.06% 2.06%(b)
Expenses, excluding distribution fees .............. .93% .96% 1.05% 1.06% 1.06%(b)
Net investment income .............................. 1.74% 2.25% 2.66% 2.83% 2.46%(b)
Portfolio turnover rate .............................. 20% 13% 13% 15% 19%
- ----------
(a) Commencement of offering of Class C shares.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period and includes reinvestment of dividends and
distributions. Total return for periods of less than a full year are not
annualized.
(d) Calculated based upon weighted average shares outstanding during the year.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF COMMON STOCK OUTSTANDING THROUGHOUT EACH PERIOD INDICATED)
(CLASS Z SHARES)
- --------------------------------------------------------------------------------
The following financial highlights, for the year ended September 30, 1998 and
the period from December 16, 1996 through September 30, 1997, have been audited
by PricewaterhouseCoopers 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 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."
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 16, 1996(a)
YEAR ENDED THROUGH
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
----------------- -----------------
PER SHARE OPERATING PERFORMANCE:
<S> <C> <C>
Net asset value, beginning of period ................ $ 17.54 $ 15.02
------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income ............................... .50(d) .34
Net realized and unrealized gain
(loss) on investment
and foreign currency transactions ................ 1.68 2.59
------- -------
Total from investment operations ................ 2.18 2.93
------- -------
LESS DISTRIBUTIONS
Dividends from net investment income ................ (.50) (.34)
Distributions in excess of
net investment income ............................. (.03) (.07)
Distributions from net realized
gains on investment
and foreign currency transactions ................. (1.51) --
------- -------
Total distributions ................................. (2.04) (.41)
------- -------
Net asset value, end of period ...................... $ 17.68 $ 17.54
======= =======
TOTAL RETURN(c) ..................................... 13.18% 19.70%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) ..................... $6,065 $ 53
Average net assets (000) ............................ $4,041 $ 16
Ratios to average net assets:
Expenses, including distribution fees ............. .93% .96%(b)
Expenses, excluding distribution fees ............. .93% .96%(b)
Net investment income ............................. 2.74% 3.25%(b)
Portfolio turnover rate ............................. 20% 13%
(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.
(d) Calculated based upon weighted average shares outstanding during the year.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
9
<PAGE>
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.
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-
11
<PAGE>
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.
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
12
<PAGE>
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").
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. 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. There is no limitation on the amount of call options the Fund may
write. 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.
13
<PAGE>
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 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 or 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 risk
that the counterparty may be unable to complete the transaction and (6) the
possible inability of the Fund to purchase or sell a portfolio security at a
time that otherwise would be favorable for it to do so, or the possible need for
the Fund to sell a portfolio security at a disadvantageous time, due to the need
for the Fund to maintain "cover" or to segregate liquid assets in connection
with hedging transactions. See "Investment Objective and Policies" 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.
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<PAGE>
SECURITIES LENDING
The Fund may lend its portfolio securities to brokers or dealers, banks or
other recognized institutional borrowers of securities, provided that the
borrower at all times maintains cash or other liquid assets or secures an
irrevocable letter of credit in favor of the Fund in an amount equivalent to at
least 100%, determined daily, of the market value of the securities loaned which
are segregated pursuant to applicable regulations. During the time portfolio
securities are on loan, the borrower will pay the Fund an amount equivalent to
any dividend or interest paid on such securities and the Fund may invest the
cash collateral and earn additional income, or it may receive an agreed-upon
amount of interest income from the borrower. As with any extensions of credit,
there are risks of delay in recovery and in some cases loss of rights in the
collateral should the borrower of the securities fail financially. The Fund will
not lend more than 30% of the value of its total assets. The Fund may pay
reasonable administration and custodial fees in connection with a loan.
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 in the future in order to secure what is considered to be an advantageous
price and yield to the Fund at the time of entering into the transaction. The
Fund's Custodian will segregate cash or other liquid assets having a value equal
to or greater than the Fund's purchase commitments. The securities so purchased
are subject to market fluctuation and no interest accrues to the purchaser
during the period between purchase and settlement. At the time of delivery of
the securities, the value may be more or less than the purchase price and an
increase in the percentage of the Fund's assets committed to the purchase of
securities on a when-issued or delayed delivery basis may increase the
volatility of the Fund's NAV.
BORROWING
The Fund may borrow up to 331/3% 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 331/3% 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 NAV 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 NAV 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 15% 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
avail-
15
<PAGE>
able 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 with legal or contractual restrictions on resale, but
with 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 Commission has taken the position that purchased OTC
Options and the assets used as "cover" for written OTC Options are illiquid
securities unless the Fund and the counterparty have provided for the Fund, at
the Fund's election, to unwind the OTC Option. The exercise of such an option
ordinarily would involve the payment by the Fund of an amount designed to
reflect the counterparty's economic loss from an early termination, but does
allow the Fund to treat the assets used as "cover" as "liquid."
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
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HOW THE FUND IS MANAGED
- --------------------------------------------------------------------------------
The Fund has a Board of Directors which, in addition to overseeing the
actions of the Fund's Manager, Subadviser and Distributor, as set forth below,
decides upon matters of general policy. The Fund's Manager conducts and
supervises the daily business operations of the Fund. The Fund's Subadviser
furnishes daily investment advisory services.
For the fiscal year ended September 30, 1998, 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 1.18%, 1.93%, 1.93% and .93%, 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 in New York as a limited liability company. For the fiscal
year ended September 30, 1998, the Fund paid management fees to PIFM of .67% of
the Fund's average net assets. See "Management of the Fund--The Manager" in the
Statement of Additional Information.
As of October 31, 1998, PIFM served as the manager to 45 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 $68.2 billion.
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<PAGE>
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 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, 1998, PIFM paid subadvisory fees to Wellington
Management of .47% of the Fund's average net assets.
The Subadviser is a Massachusetts limited liability 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 October 31, 1998, the Subadviser held investment authority
over approximately $196.7 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 INVESTMENT MANAGEMENT SERVICES LLC(THE DISTRIBUTOR), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS A LIMITED
LIABILITY COMPANY 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. Prudential
Securities Incorporated (Prudential Securities), One Seaport Plaza, New York,
New York 10292 previously served as the distributor of Fund shares.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS
B PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), THE DISTRIBUTOR INCURS THE EXPENSES OF DISTRIBUTING THE
FUND'S CLASS A, CLASS B AND CLASS C SHARES. THE DISTRIBUTOR ALSO INCURS THE
EXPENSES OF DISTRIBUTING THE FUND'S CLASS Z SHARES UNDER THE DISTRIBUTION
AGREEMENT, NONE OF WHICH ARE PAID FOR OR REIMBURSED BY THE FUND. These expenses
include commissions and account servicing fees paid to, or on account of,
Dealers or financial institutions which have entered into agreements with the
Distributor, advertising expenses, the cost of printing and mailing prospectuses
to potential
17
<PAGE>
investors and indirect and overhead costs of the Distributor associated with the
sale of Fund shares, including lease, utility, communications and sales
promotion expenses.
Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
The distribution and/or service fees may also be used by the Distributor
to compensate on a continuing basis Dealers in consideration for the
distribution, marketing, administrative and other services and activities
provided by Dealers with respect to the promotion of the sale of the Fund's
shares and the maintenance of related shareholder accounts.
UNDER THE CLASS A PLAN, THE FUND MAY PAY THE DISTRIBUTOR FOR ITS
DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE
OF UP TO .30 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES. The
Class A Plan provides that (i) up to .25 of 1% of the average daily net assets
of the Class A shares may be used to pay for personal service and/or the
maintenance of shareholder accounts (service fee) and (ii) total distribution
fees (including the service fee of .25 of 1%) may not exceed .30 of 1% of the
average daily net assets of the Class A shares. The Distributor has voluntarily
limited its distribution-related fees payable under the Class A Plan to .25% of
the average daily net assets of the Class A shares. The voluntary waiver may be
terminated at any time without notice.
UNDER THE CLASS B AND CLASS C PLANS, THE FUND PAYS THE DISTRIBUTOR FOR ITS
DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C SHARES AT AN
ANNUAL RATE OF 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 the
Distributor 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. The Distributor also receives CDSCs from
certain redeeming shareholders. See "Shareholder Guide -- How to Sell Your
Shares -- Contingent Deferred Sales Charges."
For the fiscal year ended September 30, 1998, 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 and
Class C shares of the Fund will be allocated to each such class based upon the
ratio of sales of each such class to the sales of Class A, Class B or Class C
shares of the Fund other than expenses allocable to a particular class. The
distribution fee and sales charge of one class will not be used to subsidize the
sale of another class.
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 distribution and service fees incurred
under any Plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Fund under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to Dealers and other persons which
distribute shares of the Fund (including Class Z shares). Such payments may be
calculated by reference to the net asset value of shares sold by such persons or
otherwise.
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<PAGE>
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 AND SUBSIDY
PIFM may from time to time waive all or a portion of its management fee
and subsidize all or a portion of the operating expenses of the Fund. In
addition, the Distributor has waived a portion of its distribution fee for the
Class A shares as described under "Distributor." Fee waivers and expense
subsidies will increase the Fund's total return. See "Performance Information"
in the Statement of Additional Information and "Fund Expenses" above.
PORTFOLIO TRANSACTIONS
Affiliates of the Distributor may act as brokers or futures commission
merchants for the Fund, provided that the commissions, fees or other
remuneration they receive are fair and reasonable. See "Portfolio Transactions
and Brokerage" in the Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and, in that capacity, maintains certain financial and accounting books and
records pursuant to an agreement with the Fund. Its mailing address is P.O. Box
1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and in
those capacities maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PIFM. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
YEAR 2000
The services provided to the Fund and the shareholders by the Manager, the
Subadviser, the Distributor, the Transfer Agent and the Custodian depend on the
smooth functioning of their computer systems and those of outside service
providers. Many computer software systems in use today cannot distinguish the
year 2000 from the year 1900 because of the way dates are encoded and
calculated. Such event could have a negative impact on handling securities
trades, payments of interest and dividends, pricing and account services.
Although, at this time, there can be no assurance that there will be no adverse
impact on the Fund, the Manager, the Subadviser, the Distributor, the Transfer
Agent and the Custodian have advised the fund that they have been actively
working on necessary changes to their computer systems to prepare for the year
2000 and expect that their systems, and those of outside service providers, will
be adapted in time for that event.
Additionally, issuers of securities generally as well as those purchased
by the Fund may confront year 2000 compliance issues which, if material and not
resolved, could have an adverse impact on securities markets and/or a specific
issuer's performance and result in a decline in the value of securities held by
the Fund.
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<PAGE>
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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 NAV 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 and/or
service fees. It is expected, however, that the NAV 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 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."
20
<PAGE>
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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
the excess of net short-term capital gain (i.e. the excess of short-term capital
gains over short-term capital losses) over net long-term capital loss
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 gain (i.e., the excess of net long-term
capital gain over net short-term capital loss) distributed to shareholders will
be taxable as long-term capital gains to the shareholders, whether or not
reinvested and regardless of the length of time a shareholder has owned his or
her shares. The maximum federal long-term capital gains tax rate for corporate
shareholders currently is the same as the maximum federal tax rate for ordinary
income (35%). The maximum federal long-term capital gains tax rate for
individual shareholders for securities held more than one year is 20% and the
maximum federal tax rate for ordinary income is 39.6%.
Both income dividends and capital gain distributions are taxable to
shareholders in the year in which received, whether they are received in cash or
in additional shares. In addition, certain dividends declared by the Fund will
be treated as received by shareholders on December 31 of the year the dividends
are declared. This rule applies to dividends declared by the Fund in October,
November or December of a calendar year, payable to shareholders of record on a
date in any such month, if such dividends are paid during January of the
following calendar year.
Dividends received by corporate shareholders are eligible for a
dividends-received deduction of 70% to the extent the Fund's income is derived
from qualified dividends received by the Fund from domestic corporations.
Dividends attributable to foreign corporations, interest income, capital and
currency gain, gain or loss from Section 1256 contracts and income from some
other sources will not be eligible for the corporate dividends-received
deduction. See "Taxes, Dividends and Distributions" in the Statement of
Additional Information. Corporate shareholders should consult their tax advisers
regarding other requirements applicable to the dividends-received deduction.
Any gain or loss realized upon a sale or redemption (including any
exchange) of Fund shares by a shareholder who is not a dealer in securities will
be treated as long-term capital gain or loss if the shares have been held more
than one year and otherwise as a short-term capital gain or loss. Any such loss
with respect to shares that are held for six months or less, however, will be
treated as a long-term capital loss to the extent of any capital gain
distributions received by the shareholder. With respect to non-corporate
shareholders, gain or loss on shares held more than one year will be considered
in determining a holder's adjusted net capital gain subject to a maximum
statutory tax rate of 20%.
The Fund has obtained opinions of counsel to the effect that neither (i)
the conversion of Class B shares into Class A shares nor (ii) the exchange of
any class of the Fund's shares for any other class of its shares constitutes a
taxable event for federal income tax purposes. However, such opinions are not
binding on the Internal Revenue Service.
21
<PAGE>
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 BUY SHARES ON OR IMMEDIATELY BEFORE 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.
WITHHOLDING TAXES
Under the Internal Revenue Code, the Fund is required to withhold and
remit to the U.S. Treasury 31% of dividends, capital gain distributions and
redemption proceeds payable on the accounts of certain shareholders who fail to
furnish their correct tax identification numbers to the IRS on 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 gains paid to a foreign shareholder will generally be subject to
U.S. withholding tax at the rate of 30% (or lower treaty rate).
Shareholders should consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Taxes, Dividends and
Distributions" in the Statement of Additional Information.
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GENERAL INFORMATION
- --------------------------------------------------------------------------------
DESCRIPTION OF COMMON STOCK
THE FUND WAS INCORPORATED IN MARYLAND ON NOVEMBER 18, 1988 AND COMMENCED
OPERATIONS AS A CLOSED-END DIVERSIFIED MANAGEMENT INVESTMENT COMPANY ON JANUARY
2, 1990. ON DECEMBER 20, 1990, SHAREHOLDERS APPROVED OPEN-ENDING THE FUND AND
SINCE FEBRUARY 4, 1991, THE FUND HAS OPERATED AS AN OPEN-END FUND. THE FUND IS
AUTHORIZED TO ISSUE 2 BILLION SHARES OF $.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 vot-
22
<PAGE>
ing 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 Commission
under the Securities Act of 1933. Copies of the Registration Statement may be
obtained at a reasonable charge from the Commission or may be examined, without
charge, at the office of the Commission in Washington, D.C.
- --------------------------------------------------------------------------------
SHAREHOLDER GUIDE
- --------------------------------------------------------------------------------
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE FUND THROUGH THE DISTRIBUTOR, THROUGH
DEALERS, INCLUDING PRUDENTIAL SECURITIES OR PRUSEC, OR DIRECTLY FROM THE FUND
THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND SERVICES LLC (PMFS OR THE
TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES, P.O. BOX 15020, NEW BRUNSWICK,
NEW JERSEY 08906-5020. Participants in programs sponsored by Prudential
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 (in accordance with procedures
established by the Transfer Agent in connection with investors' accounts) by the
Distributor, your Dealer or the Transfer Agent plus a sales charge which, at
your option, may be imposed either at the time of purchase, on a deferred basis,
or both. Class A shares are sold with a front-end sales charge. Class B
23
<PAGE>
shares are subject to a contingent deferred sales charge (CDSC). Class C shares
are sold with a low front-end sales charge, but are also subject to a CDSC.
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 $2,500 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 Investment Plan, the minimum initial and subsequent
investment is $50. See "Shareholder Services" below.
Application forms can be obtained from the Transfer Agent, the Distributor
or a Dealer. 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 placement
of the order.
Dealers may charge their customers a separate fee for processing purchases
and redemptions. In addition, transactions in Fund shares may be subject to
postage and handling charges imposed by your Dealer. Any such charges are
retained by the Dealer and are not remitted to the Fund.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire,
you must complete an application and telephone PMFS at (800) 225-1852
(toll-free) to receive an account number. The following information will be
requested: your name, address, tax identification number, class election,
dividend distribution election, amount being wired, and wiring bank.
Instructions should then be given by you to your bank to transfer funds by wire
to State Street Bank and Trust Company, 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 the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Fund as of that day.
In making a subsequent purchase order by wire, you should wire State
Street directly and should be sure that the wire specifies 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.
24
<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% .30 of 1% (Currently Initial sales charge waived or
of 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 initial sales charge of 1% 1% Shares do not convert to another class
and maximum CDSC of 1% of the lesser
of the amount invested or the redemption
proceeds on redemptions made within
18 months 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, (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 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, Class B and Class C shares than for selling 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:
25
<PAGE>
If you intend to hold your investment in a Fund for less than 4 years and
do not qualify for a reduced sales charge on Class A shares. since Class A
shares are subject to an initial sales charge of 5% and Class B shares are
subject to a CDSC of 5% which declines to zero over a 6-year period, you should
consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for longer than 4 years. but less
than 5 years. and do not qualify for a reduced sales charge on Class A shares,
you should consider purchasing Class B or Class C shares over Class A shares.
This is because the sales charge plus the cumulative annual distribution-related
fee on Class A shares would exceed those of the Class B and Class C shares if
you redeem your investment during this time period. In addition, more of your
money would be invested initially in the case of Class C shares. because of the
relatively low initial sales charge, and all of your money would be invested
initially in the case of Class B shares, which are sold at NAV.
If you intend to hold your investment for longer than 5 years, you should
consider purchasing Class A shares over either Class B or Class C shares. This
is because the maximum sales charge plus the cumulative annual
distribution-related fee on Class A shares would be less than those of the Class
B and 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 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 for more than 5 years in the
case of Class C shares for the higher cumulative annual distribution-related fee
on those shares plus, in the case of Class C shares, the 1% initial sales charge
to exceed the initial sales charge plus the cumulative annual
distribution-related fees on Class A shares. This does not take into account the
time value of money, which further reduces the impact of the higher Class B or
Class C distribution-related fee on the investment, fluctuations in NAV, the
effect of the return on the investment over this period of time or redemptions
when the CDSC is applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT
OR UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A
SHARES, UNLESS THE PURCHASER IS ELIGIBLE TO PURCHASE CLASS Z SHARES. See
"Reduction and Waiver of Initial Sales Charges" and "Class Z Shares" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial
sales charge alternative is the next determined NAV plus a sales charge
(expressed as a percentage of the offering price and of the amount invested) as
shown in the following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
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>
26
<PAGE>
The Distributor may reallow the entire sales charge to Dealers. Dealers
may be deemed to be underwriters, as that term is defined under the federal
securities laws. The Distributor reserves the right, without prior notice to any
Dealer, to suspend or eliminate Dealer concessions or commissions.
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 NAV 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.
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, deferred
compensation and annuity plans under Sections 401(a), 403(b) or 457 of the
Internal Revenue Code, "rabbi" trusts and non-qualified deferred compensation
plans that are sponsored by any employer that has a tax qualified benefit plan
with Prudential (collectively, Benefit Plans), provided that the Benefit Plan
has existing assets of at least $1 million invested in shares of Prudential
Mutual Funds (excluding money market funds other than those acquired pursuant to
the exchange privilege) or 250 eligible employees or participants. In the case
of Benefit Plans whose accounts are held directly with the Transfer Agent or
Prudential Securities and for which the Transfer Agent or Prudential Securities
does individual account recordkeeping (Direct Account Benefit Plans) and Benefit
Plans sponsored by Prudential, Prudential Securities or its subsidiaries
(Prudential Securities or Subsidiary Prototype Benefit Plans), Class A shares
may be purchased at NAV by participants who are repaying loans made from such
plans to the participant.
PRUDENTIAL RETIREMENT PROGRAMS. Class A shares may be purchased at NAV by
certain savings, retirement and deferred compensation plans, qualified or
non-qualified under the Internal Revenue Code, for which Prudential provides
administrative or recordkeeping services, 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
PruArray Program (benefit plan recordkeeping services) (hereinafter referred to
as a PruArray Plan). All Benefit Plans of a company (or affiliated companies
under common control) for which Prudential serves as plan administrator or
recordkeeper are aggregated in meeting the $1 million threshold, provided that
Prudential has been notified in advance of the entitlement to the waiver of the
sales charge based on aggregated assets. The term "existing assets" as used
herein includes stock issued by a plan sponsor, shares of Prudential Mutual
Funds and shares of certain unaffiliated mutual funds that participate in the
PruArray Plan (Participating Funds). "Existing assets" also include monies
invested in The Guaranteed Interest Account (GIA), a group annuity insurance
product issued by Prudential, the Guaranteed Insulated Separate Account, a
separate account offered by Prudential, and units of The Stable Value Fund
(SVF), an unaffiliated bank collective fund. Class A shares may also be
purchased at NAV by plans that have monies invested in GIA and SVF, provided (i)
the purchase is made with the proceeds of a redemption from either GIA or SVF
and (ii) Class A shares are an investment option of the plan.
PRUARRAY ASSOCIATION BENEFIT PLANS. Class A shares are also offered at NAV
to Benefit Plans or non-qualified plans sponsored by employers which are members
of a common trade, professional or membership association (Association) that
participate in the PruArray Plan provided that the Association enters into a
written agreement with Prudential. Such Benefit Plans or non-qualified plans may
purchase Class A shares at NAV without regard to the assets or number of
participants in the individual employer's qualified plan(s) or non-qualified
plans so long as the employers in the Association
27
<PAGE>
(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 NAV to
employees of companies that enter into a written agreement with Prudential
Retirement Services to participate in the PruArray Savings Program. Under this
Program, a limited number of Prudential Mutual Funds are available for purchase
at NAV by Individual Retirement Accounts and Savings Accumulation Plans of the
company's employees. The Program is available only to (i) employees who open an
IRA or Savings Accumulation Plan account with the Transfer Agent and (ii)
spouses of employees who open an IRA account with the Transfer Agent. The
program is offered to companies that have at least 250 eligible employees.
SPECIAL RULES APPLICABLE TO RETIREMENT PLANS. After a Benefit Plan or
PruArray Plan qualifies to purchase Class A shares at NAV, all subsequent
purchases will be made at NAV.
OTHER WAIVERS. In addition, Class A shares may be purchased at NAV,
through the Distributor or the Transfer Agent, by the following persons: (a)
officers of the Prudential Mutual Funds (including the Fund), (b) employees of
the Distributor, Prudential Securities, PIFM and their subsidiaries and members
of the families of such persons who maintain an "employee related" account at
Prudential Securities or the Transfer Agent, (c) employees of subadvisers of the
Prudential Mutual Funds provided that such purchases at NAV are permitted by
such person's employer, (d) Prudential, employees and special agents of
Prudential and its subsidiaries and all persons who have retired directly from
active service with Prudential or one of its subsidiaries, (e) registered
representatives and employees of Dealers who have entered into a selected dealer
agreement with the Distributor, 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, (g) investors
in Individual Retirement Accounts, provided the purchase is made in a directed
rollover to such Individual Retirement Account with the proceeds from a tax-free
rollover of assets from a Benefit Plan for which Prudential provides
administrative or recordkeeping services and further provided that such purchase
is made within 60 days of receipt of the Benefit Plan distributon; (h) orders
placed by broker-dealers, investment advisers or financial planners who have
entered into an agreement with the Distributor, who place trades for their own
accounts or the accounts of their clients and who charge a management,
consulting or other fee for their services (e.g. mutual fund "wrap" or asset
allocation programs), and (i) orders placed by clients of broker-dealers,
investment advisers or financial planners who place trades for customer accounts
if the accounts are linked to the master account of such broker-dealer,
investment adviser or financial planner and the broker-dealer, investment
adviser or financial planner charges its clients a separate fee for its services
(e.g. mutual fund "supermarket programs").
For an investor to obtain any reduction or waiver of the initial sales
charges, at the time of the sale either the Transfer Agent must be notified
directly by the investor or the Distributor must be notified by the Dealer
facilitating the transaction that the sale qualifies for the reduced or waived
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions. 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 shares is the NAV next determined following
receipt of an order in proper form by the Transfer Agent, your Dealer or the
Distributor. The offering price of Class C shares is the NAV next determined
fol-
28
<PAGE>
lowing receipt of an order in proper form by the Transfer Agent, your Dealer or
the Distributor plus a sales charge equal to 1% of the public offering price.
Redemption of Class B and Class C shares may be subject to a CDSC. See "How to
Sell Your Shares -- Contingent Deferred Sales Charges."
The Distributor will pay, from its own resources, sales commissions of up
to 4% of the purchase price of Class B shares to Dealers, financial advisers and
other persons who sell Class B shares at the time of sale. This facilitates the
ability of the Fund to sell the Class B shares without an initial sales charge
being deducted at the time of purchase. The Distributor anticipates that it will
recoup its advancement of sales commissions from the combination of the CDSC and
the distribution fee. In connection with the sale of Class C shares, the
Distributor will pay, partially from its own resources, Dealers, financial
advisers and other persons which distribute Class C shares a sales commission of
up to 2% of the purchase price at the time of the sale. 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 Trust is Managed
- -- Distributor."
WAIVER OF INITIAL SALES CHARGE -- CLASS C SHARES
BENEFIT PLANS. Class C shares may be purchased at NAV, without payment of
an initial sales charge, by Benefit Plans (as defined above). In the case of
Benefit Plans whose accounts are held directly with the Transfer Agent or
Prudential Securities and for which the Transfer Agent or Prudential Securities
does individual account recordkeeping (Direct Account Benefit Plans) and Benefit
Plans sponsored by Prudential. Prudential Securities or its subsidiaries
(Prudential Securities or Subsidiary Prototype Benefit Plans), Class C shares
may be purchased at NAV by participants who are repaying the loans made from
such plans to the participant.
PRUDENTIAL RETIREMENT PLANS. The initial sales charge will be waived with
respect to purchases of Class C shares by qualified and non-qualified retirement
and deferred compensation plans participating in the PruArray Plan and other
plans for which Prudential provides administrative or recordkeeping services.
INVESTMENTS OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES.
Investors may purchase Class C shares at NAV, without the initial sales charge,
with the proceeds from the redemption of shares of any unaffiliated registered
investment company which were not held through an account with any Prudential
affiliate. Such purchases must be made within 60 days of the redemption.
Investors eligible for this waiver include: (i) investors purchasing Shares
through an account at Prudential Securities Incorporated; (ii) investors
purchasing shares through an ADVANTAGE Account or an Investor Account with Pruco
Securities Corporation; and (iii) investors purchasing shares through other
Dealers. This waiver is not available to investors who purchase shares directly
from the Transfer Agent. You must notify the Transfer Agent directly or through
your Dealer if you are entitled to this waiver and provide the Transfer Agent
with such supporting documents as it may deem appropriate.
CLASS Z SHARES
Class Z shares are currently available for purchase by: (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 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 an affiliate of the Distributor 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 an affiliate of the Distributor for whom Class Z shares of the
Prudential Mutual Funds are an available investment option; (iv) Benefit Plans
for which an affiliate of the Distributor provides administrative or
recordkeeping services 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);
(vi) employees of Prudential or Prudential Securities who participate in an
29
<PAGE>
employer-sponsored employee savings plan; and (vii) Prudential with an
investment of $10 million or more. After a Benefit Plan qualifies to purchase
Class Z shares, all subsequent purchase will be for Class Z shares.
In connection with the sale of Class Z shares, the Manager, the
Distributor or one of their affiliates may pay Dealers, financial advisers and
other persons which distribute shares a finders' fee from its own resources
based on a percentage of the net asset value of shares sold by such persons.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES AT ANY TIME FOR CASH AT THE NAV NEXT DETERMINED
AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM (IN ACCORDANCE WITH
PROCEDURES ESTABLISHED BY THE TRANSFER AGENT IN CONNECTION WITH INVESTORS'
ACCOUNTS) BY THE TRANSFER AGENT, THE DISTRIBUTOR OR YOUR DEALER. SEE "HOW THE
FUND VALUES ITS SHARES." In certain cases, however, redemption proceeds will be
reduced by the amount of any applicable CDSC, as described below. See
"Contingent Deferred Sales Charges" below. If you are redeeming your shares
through a Dealer, your Dealer must receive your sell order before the Fund
computes its NAV for that day (i.e., 4:15 p.m., New York time) in order to
receive that day's NAV. Your Dealer will be responsible for furnishing all
necessary documentation to the Distributor and may charge you for its services
in connection with redeeming shares of the Fund.
IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR
REDEMPTION SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF
YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE
OF THE CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT, THE DISTRIBUTOR OR
YOUR DEALER IN ORDER FOR THE REDEMPTION REQUEST TO BE PROCESSED. IF REDEMPTION
IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR FIDUCIARY, WRITTEN EVIDENCE
OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST BE SUBMITTED BEFORE SUCH
REQUEST WILL BE ACCEPTED. All correspondence and documents concerning
redemptions should be sent to the Fund in care of its Transfer Agent, Prudential
Mutual Fund Services LLC, Attention: Redemption Services, P.O. Box 15010, New
Brunswick, New Jersey 08906-5010, the Distributor or to your Dealer.
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 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, THE DISTRIBUTOR OR YOUR DEALER
OF THE CERTIFICATE AND/OR WRITTEN REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD
SHARES THROUGH A DEALER, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE
CREDITED TO YOUR ACCOUNT AT YOUR DEALER, 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 Commission, by order, so permits; provided that applicable rules and
regulations of the Commission 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, WHICH MAY TAKE UP TO 10 CALENDAR DAYS FROM THE TIME OF
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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 conformity with applicable rules of
the Commission. 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 NAV 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 NAV next
determined after the order is received, which must be within 90 days after the
date of the redemption. Any CDSC paid in connection with such redemption will be
credited (in shares) to your account. (If less than a full repurchase is made,
the credit will be on a pro rata basis.) You must notify the Transfer Agent,
either directly or through the Distributor or your Dealer, at the time the
repurchase privilege is exercised to adjust your account for the CDSC you
previously paid. Thereafter, any redemptions will be subject to the CDSC
applicable at the time of the redemption. See "Contingent Deferred Sales
Charges" below. Exercise of the repurchase privilege will generally not affect
federal income tax treatment of any gain realized upon redemption. However, if
the redemption was made within a 30-day period of the repurchase and if the
redemption resulted in a loss, some or all of the loss, depending on the amount
reinvested, will not be allowed for federal income tax purposes. For more
information on the rule which disallows a loss on the sale or exchange of shares
of the Fund which are replaced, see "Taxes, Dividends and Distributions" in the
Statement of Additional Information.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred
sales charge or CDSC declining from 5% to zero over a six-year period. Class C
shares redeemed within 18 months of purchase (or one year in the case of shares
purchased prior to November 2, 1998) will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which reduces the current value of
your Class B or Class C shares to an amount which is lower than the amount of
all payments by you for shares during the preceding six years, in the case of
Class B shares, and 18 months, in the case of Class C shares (or one year in the
case of shares purchased prior to November 2, 1998). A CDSC will be applied on
the lesser of the original purchase price or the current value of the shares
being redeemed. Increases in the value of your shares or shares acquired through
reinvestment of dividends or distributions are not subject to a CDSC. The amount
of any CDSC will be paid to and retained by the Distributor. See "How the Fund
is Managed -- Distributor" and "Waiver of Contingent Deferred Sales Charges"
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.
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<PAGE>
The following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:
CONTINGENT DEFERRED SALES CHARGE
YEAR SINCE PURCHASE AS A PERCENTAGE OF DOLLARS INVESTED
PAYMENT MADE OR REDEMPTION PROCEEDS
------------------ --------------------------------
First .......................... 5.0%
Second ......................... 4.0%
Third .......................... 3.0%
Fourth ......................... 2.0%
Fifth .......................... 1.0%
Sixth .......................... 1.0%
Seventh ........................ None
In determining whether a CDSC is applicable to a redemption, the
calculation will be made in a manner that results in the lowest possible rate.
It will be assumed that the redemption is made first of amounts representing
shares acquired pursuant to the reinvestment of dividends and distributions;
then of amounts representing the increase in NAV 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, recognized on the redemption of
shares.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES -- CLASS B SHARES. The CDSC
will be waived in the case of a redemption following the death or disability of
a shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability.
The CDSC will also be waived in the case of a total or partial redemption
in connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions are: (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 (including a Roth IRA), a lump-sum or other distribution after
attaining age 591/2 or a periodic distribution based on life expectancy; (iii)
in the case of a Section 403(b) custodial account, a lump sum or other
distribution after attaining age 591/2; and (iv) 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. Finally, the CDSC will be waived to the extent that the proceeds
from shares redeemed are invested in Prudential mutual funds, Prudential's
Guaranteed Interest Account, Prudential's Guaranteed Insulated Separate Account,
or The Stable Value Fund. The waiver does not apply in the case of a tax-free
rollover or transfer of assets, other than one following a separation from
service (i.e., following voluntary or involuntary termination of employment or
following retirement). Under no circumstances will the CDSC be waived on
redemptions resulting from the termination of a tax-deferred retirement plan,
unless such redemptions otherwise qualify for a waiver as described above. In
the case of Direct Account and Prudential
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<PAGE>
Securities or Subsidiary Prototype Benefit Plans, the CDSC will be waived on
redemptions which represent borrowings from such plans. Shares purchased with
amounts used to repay a loan from such plans on which a CDSC was not previously
deducted will thereafter be subject to a CDSC without regard to the time such
amounts were previously invested. In the case of a 401(k) plan, the CDSC will
also be waived upon the redemption of shares purchased with amounts used to
repay loans made from the account to the participant and from which a CDSC was
previously deducted.
SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on
certain redemptions from a Systematic Withdrawal Plan. On an annual basis, up to
12% of the total dollar amount subject to the CDSC may be redeemed without
charge. The Transfer Agent will calculate the total amount available for this
waiver annually on the anniversary date of your purchase or, for shares
purchased prior to March 1, 1997, on March 1 of the current year. The CDSC will
be waived (or reduced) on redemptions until this threshold 12% 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 Transfer Agent either directly or through your Dealer,
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
PRUDENTIAL RETIREMENT PLANS. The CDSC will be waived on redemptions from
qualified and non-qualified retirement and deferred compensation plans that
participate in the PruArray Program and other plans for which Prudential
provides administrative or recordkeeping services. The CDSC will also be waived
on redemptions from Benefit Plans sponsored by Prudential and its affiliates to
the extent that the redemption proceeds are invested in The Guaranteed
Investment Account, a group annuity insurance product issued by Prudential, the
Guaranteed Insulated Separate Account, a separate account offered by Prudential,
and units of The Stable Value Fund, an unaffiliated bank collective fund.
OTHER BENEFIT PLANS. The CDSC will be waived on redemptions from Benefit
Plans holding shares through a Dealer not affiliated with Prudential and for
whom the Dealer provides administrative or recordkeeping services.
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.
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<PAGE>
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (i.e., $1,000
divided by $2,100 (47.62%) multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share NAV of the Class A shares may be higher than that
of the Class B shares at the time of conversion. Thus, although the aggregate
dollar value will be the same, you may receive fewer Class A shares than Class B
shares converted. 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, 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 confirma-
34
<PAGE>
tion of the exchange transaction will be sent to you. NEITHER THE FUND NOR ITS
AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH RESULTS FROM ACTING
UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER THE FOREGOING
PROCEDURES. All exchanges will be made on the basis of the relative NAV of the
two funds next determined after the request is received in good order.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON
THE FACE OF THE CERTIFICATES MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE
OF SHARES MAY BE DIFFICULT TO IMPLEMENT AND 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, Prusec or
another Dealer 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 NAV.
Similarly, participants in Prudential Securities' 401(k) Plan for which the
Fund's Class Z shares are an available option and who wish to transfer their
Class Z shares out of the Prudential Securities 401(k) Plan following separation
from service (i.e., voluntary or involuntary termination of employment or
retirement) will have their Class Z shares exchanged for Class A shares at NAV.
The exchange privilege is not a right and may be suspended, modified or
terminated on 60 day's notice to shareholders.
FREQUENT TRADING. 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, 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).
35
<PAGE>
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 subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
your Dealer, you should contact your Dealer.
o AUTOMATIC INVESTMENT PLAN (AIP). Under AIP 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 brokerage account (including a Command Account). For
additional information about this service, you may contact the Distributor, your
Dealer 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 your Dealer 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 THE PRUTECTOR PROGRAM-OPTIONAL GROUP TERM LIFE INSURANCE. Prudential
makes available optional group term life insurance coverage to purchasers of
shares of certain Prudential Mutual Funds which are held in an eligible
brokerage account. This insurance protects the value of your mutual fund
investment for your beneficiaries against market downturns. The insurance
benefit is based on the difference at the time of the insured's death between
the "protected value" and the then current market value of the shares. This
coverage is not available in all states and is subject to various restrictions
and limitations. For more complete information about this program, including
charges and expenses, please contact your Prudential representative.
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 (732)
417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
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<PAGE>
- --------------------------------------------------------------------------------
THE PRUDENTIAL MUTUAL FUND FAMILY
- --------------------------------------------------------------------------------
PRUDENTIAL OFFERS A BROAD RANGE OF MUTUAL FUNDS DESIGNED TO MEET YOUR
INDIVIDUAL NEEDS. WE WELCOME YOU TO REVIEW THE INVESTMENT OPTIONS AVAILABLE
THROUGH OUR FAMILY OF FUNDS. FOR MORE INFORMATION ON THE PRUDENTIAL MUTUAL
FUNDS, INCLUDING CHARGES AND EXPENSES, CONTACT YOUR PRUDENTIAL SECURITIES
FINANCIAL ADVISER OR PRUSEC REPRESENTATIVE OR TELEPHONE THE 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 High Yield Total Return Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
- --------------------------------------------------------------------------------
TAX-EXEMPT BOND FUNDS
- --------------------------------------------------------------------------------
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Income Series
Insured Series
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 Developing Markets Fund
Prudential Developing Markets Equity Fund
Prudential Latin America Equity Fund
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.
- --------------------------------------------------------------------------------
EQUITY FUNDS
- --------------------------------------------------------------------------------
Prudential Balanced Fund
Prudential Distressed Securities Fund, Inc.
Prudential Diversified Funds
Prudential Diversified Conservative Growth Fund
Prudential Diversified Moderate Growth Fund
Prudential Diversified High Growth Fund
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Index Series Fund
Prudential Bond Market Index Fund
Prudential Europe Index Fund
Prudential Pacific Index Fund
Prudential Small-Cap Index Fund
Prudential Stock Index Fund
The Prudential Investment Portfolios, Inc.
Prudential Active Balanced Fund
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Mid-Cap Value Fund
Prudential Real Estate Securities Fund, Inc.
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential 20/20 Focus Fund
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
- --------------------------------------------------------------------------------
MONEY MARKET FUNDS
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o TAXABLE MONEY MARKET FUNDS
Cash Accumulation Trust
Liquid Assets Fund
National Money Market Fund
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
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>
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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.
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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 .............................................................. 17
Distributor ............................................................. 17
Fee Waivers and Subsidy ................................................. 19
Portfolio Transactions .................................................. 19
Custodian and Transfer and
Dividend Disbursing Agent ............................................. 19
Year 2000 ............................................................... 19
HOW THE FUND VALUES ITS SHARES ............................................ 20
HOW THE FUND CALCULATES PERFORMANCE ....................................... 20
TAXES, DIVIDENDS AND DISTRIBUTIONS ........................................ 21
GENERAL INFORMATION ....................................................... 22
Description of Common Stock ............................................. 22
Additional Information .................................................. 23
SHAREHOLDER GUIDE ......................................................... 23
How to Buy Shares of the Fund ........................................... 23
Alternative Purchase Plan ............................................... 25
How to Sell Your Shares ................................................. 30
Conversion Feature--Class B Shares ........................................ 33
How to Exchange Your Shares ............................................. 34
Shareholder Services .................................................... 36
THE PRUDENTIAL MUTUAL FUND FAMILY ......................................... A-1
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MF150A
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Class A: 37936G 30 3
Class B: 37936G 20 4
CUSIP Nos.: Class C: 37936G 40 2
Class Z: 37936G 50 1
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Global
Utility
Fund, Inc.
PROSPECTUS
November 27, 1998
www.prudential.com
[LOGO]
<PAGE>
GLOBAL UTILITY FUND, INC.
Statement of Additional Information
dated November 27, 1998
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 November 27, 1998, a copy
of which may be obtained upon request from the Fund at the address or telephone
number above.
TABLE OF CONTENTS
CROSS-REFERENCE
TO PAGE IN
PAGE PROSPECTUS
---- ----------
General Information .............................. B-2 22
Investment Objective and Policies ................ B-2 9
Investment Restrictions .......................... B-14 16
Information Regarding Directors and Officers ..... B-16 16
Management of the Fund ........................... B-18 16
Portfolio Transactions and Brokerage ............. B-21 9
Purchase and Redemption of Fund Shares ........... B-22 23
Shareholder Investment Account ................... B-25 29
Net Asset Value .................................. B-29 19
Taxes, Dividends and Distributions ............... B-29 20
Performance Information .......................... B-31 19
Custodian, Transfer and Dividend
Disbursing Agent, Independent
Accountants and Counsel ........................ B-34 19
Financial Statements ............................. B-35 --
Report of Independent Accountants ................ B-48 --
Independent Auditors' Report ..................... B-49 --
Appendix I-General Investment Information ........ I-1 --
Appendix II-Historical Performance Data .......... II-1 --
Appendix III-Information Relating
to The Prudential .............................. III-1 --
================================================================================
MF150B
<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, Dividends
and Distributions."
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 counterparty, 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.
B-4
<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
B-9
<PAGE>
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.
B-10
<PAGE>
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.
B-11
<PAGE>
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
B-12
<PAGE>
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 with legal or contractual
restrictions on resale but with 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.
B-13
<PAGE>
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 Commission 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 ASSETS
When the Fund is required to segregate assets in connection with certain
hedging transactions, it will mark cash or liquid assets as segregated with the
Fund's Custodian. "Liquid assets" means 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, 1997 and 1998 its portfolio turnover was 13% and 20%,
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.
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
B-14
<PAGE>
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>
Eugene C. Dorsey (71) 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 Co., Inc.; past
Chairman, Independent Sector, Washington, D.C.
(largest national coalition of philanthropic
organizations); 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.; Trustee of the Target Portfolio Trust and
Prudential Diversified Funds.
Douglas H. McCorkindale (59) Director President (since September 1997) and Vice
Chairman, (since March 1984) of Gannett Co.,
Inc.; Director of Continental Airlines, Inc.,
Gannett Co. Inc., Frontier Corporation, First
Financial Fund, Inc. and The High Yield Plus
Fund, Inc.; Trustee of the Target Portfolio
Trust and Prudential Diversified Funds.
Thomas T. Mooney (57) Director President of the Greater Rochester Metro Chamber of
55 St. Paul Street Commerce; former Rochester City Manager;
Rochester, NY 14604 Trustee of Center for Governmental Research, Inc.;
Director of Blue Cross of Rochester, The
Business Council of New York State, Executive
Service Corps of Rochester, Monroe County Water
Authority, Rochester Jobs, Inc., Northeast-
Midwest Institute, Monroe County Industrial
Development Corporation, and The High Yield
Income Fund, Inc.; President, Director and
Treasurer, First Financial Fund, Inc. and The
High Yield Plus Fund, Inc.; Trustee of the
Target Portfolio Trust and Prudential
Diversified Funds.
*Brian M. Storms (44) President President, Prudential Investments (October 1998-present);
and Director President of Prudential Mutual Funds, Annuities, and
Investment Management Services (September
1996-October 1998); Managing Director, Fidelity Investments
Institutional Services Company, Inc. (July 1991-September
1996); President, J.K. Schofield (October 1989-September
1991); Senior Vice President, Invest Financial Corporation
(September 1982-October 1989); Trustee of the Target
Portfolio Trust and Prudential Diversified Funds.
David F. Connor (34) Secretary Assistant General Counsel (since March 1998) of
PIFM; Associate Attorney, Drinker Biddle &
Reath LLP prior thereto.
Grace C. Torres (39) Treasurer First Vice President (since December 1996) of PIFM;
and Principal First Vice President (since March 1994) of Prudential
Financial and Securities; formerly First Vice President (March
Accounting 1994-September 1996) of Prudential Mutual Fund
Officer Management, Inc.; and, Vice President (July
1989-March 1994) of Bankers Trust Corporation.
Stephen M. Ungerman (45) Assistant Tax Director (since March 1996) of Prudential
Treasurer Investments and the Private Asset Group of The
Prudential Insurance Company of America (Prudential);
formerly First Vice President (February
1993-September 1996) of Prudential Mutual Fund
Management, Inc. (February 1993-September 1996)
and Senior Tax Manager (1981-January 1993) of
Price Waterhouse LLP.
</TABLE>
- ----------------
* Indicates those directors that are "interested persons" of the Fund as
defined in the 1940 Act.
+ Unless otherwise indicated, the address of the Directors and Officers is c/o
Prudential Investments Fund Management LLC, Gateway Center Three, 100
Mulberry Street, Newark, New Jersey 07102-4077.
B-16
<PAGE>
The Directors of the Fund are also trustees, directors and officers of some
or all of the other investment companies distributed by Prudential Investment
Management Services LLC.
The 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. Mr. Dorsey is scheduled to retire on December
31, 1999.
Pursuant to the terms of the Management Agreement with the Fund, the
Manager or Subadviser, as appropriate, pays all compensation of officers and
employees of the Fund as well as the fees and expenses of all Directors of the
Fund who are affiliated persons of the Manager or Subadviser. The Fund pays each
of its Directors who is not an affiliated person of the Manager or the
Subadviser annual compensation of $6,000, 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 exemptive order
from the Commission, 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, 1997, Mr. Dorsey elected to reduce his Director's fees pursuant to
the deferred fee agreement.
The following table sets forth the aggregate compensation paid by the Fund
to the Directors who are not affiliated with the Manager or Subadviser for the
fiscal year ended September 30, 1998 and the aggregate compensation paid to such
Directors for service on the Fund's board and the boards of all other investment
companies managed by PIFM (Fund Complex) for the calendar year ended December
31, 1997.
<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>
Eugene C. Dorsey*, Director $5,750 None N/A $70,000(16/43)**
Thomas T. Mooney*, Director $5,750 None N/A $115,000(31/64)**
Douglas H. McCorkindale*, Director $5,750 None N/A $70,000(20/35)**
Richard A. Redeker+, Former Director None None N/A --
Brian M. Storms+, Director and President None None N/A N/A
</TABLE>
- ----------
* Total compensation from all of the funds in the Fund Complex for the calendar
year ended December 31, 1997, includes amounts deferred at the election of
Directors under the funds' deferred compensation plan. Including accrued
interest, total compensation amounted to approximately $87,401, $71,640, and
$143,909 for Mr. Dorsey, Mr. McCorkindale, and Mr. Mooney, respectively.
** Indicates number of funds/portfolios in Fund Complex (including the Fund) to
which aggregate compensation relates.
+ Richard A. Redeker, who was an interested Director, did not receive, and
Brian M. Storms, who is an interested Director, does not receive compensation
from the Fund or any fund in the Fund Complex.
As of November 6, 1998, 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 6, 1998 the beneficial owners, directly or indirectly, of
more than 5% of the outstanding shares of any class of beneficial interest were:
Nelag Partners, 37791 Halper Lake Drive, Rancho Mirage, CA 92270, who held 3,405
Class C shares (6%).
As of November 6, 1998, Prudential Securities was the record holder for
other beneficial owners of 4,695,578 Class A shares (or 68% of the outstanding
Class A shares), 5,738,815 Class B shares (or 66% of the outstanding Class B
shares), 38,802 Class C shares (or 71% of the outstanding Class C shares) and
11,170 Class Z shares (or 3% of the outstanding Class Z shares) of the Fund.
B-17
<PAGE>
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 (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, 1998, PIFM managed and/or administered open-end and closed-end
management investment companies with assets of approximately $68.2 billion.
According to the Investment Company Institute, as of October 31, 1998, the
Prudential Mutual Funds was the 18th largest family of mutual funds in the
United States.
PIFM is a subsidiary of Prudential Securities and the Prudential Insurance
Company of America (Prudential). Prudential Mutual Fund Services LLC (PMFS or
the Transfer Agent), a wholly owned subsidiary of PIFM, serves as the transfer
agent for the Prudential Mutual Funds and, in addition, provides customer
service, recordkeeping and management and administration services to qualified
plans.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PIFM, subject to the supervision of the Fund's 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 (State Street or the Custodian), the
Fund's custodian, and PMFS, the Fund's transfer and dividend disbursing agent.
The management services of PIFM for the Fund are not exclusive under the terms
of the Management Agreement and PIFM is free to, and does, render management
services to others.
For its services, PIFM receives 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 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 Commission, including the preparation and printing of the Fund's
registration statements and prospectuses for such purposes, and paying the fees
and expenses of notice filings made in accordance with state securities laws,
(k) allocable communications expenses with respect to investor services and all
expenses of shareholders' and Directors' meetings and of preparing, printing and
mailing reports, proxy statements and prospectuses to shareholders in the amount
B-18
<PAGE>
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 12, 1998, 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 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" (as defined in the Investment Company Act) of any such
party on May 12, 1998, and by shareholders of the Fund on December 30, 1991.
For the fiscal years ended September 30, 1996, 1997 and 1998, the Fund paid
$2,195,690, $2,040,052 and $2,050,958, respectively, to PIFM under the
Management Agreement and PIFM paid subadvisory fees of $1,533,621, $1,434,579
and $1,441,519, respectively, to Wellington Management under the Subadvisory
Agreement.
THE DISTRIBUTOR
Prudential Investment Management Services LLC (PIMS or the Distributor),
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, acts
as the distributor of the shares of the Fund. Prior to June 1, 1998, Prudential
Securities Incorporated (Prudential Securities), was the Fund's distributor.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the Fund
under Rule 12b-1 under the 1940 Act and a distribution agreement (the
Distribution Agreement), the Distributor incurs the expenses of distributing the
Fund's Class A shares, Class B shares and Class C shares. The Distributor 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
B-19
<PAGE>
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, as amended and
restated, were approved by the Board of Directors, including a majority of the
Rule 12b-1 Directors, on May 12, 1998. The Class A Plan, as previously amended,
was approved by Class A and Class B shareholders, and the Class B Plan, as
previously 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, 1998, Prudential
Securities, as the predecessor distributor, and the Distributor received
$305,959 from the Fund under the Class A Plan. These amounts were 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, 1998,
Prudential Securities and the Distributor also received approximately $33,500 in
initial sales charges.
CLASS B PLAN. For the fiscal year ended September 30, 1998, Prudential
Securities, as the predecessor distributor, and the Distributor received
$1,773,262 from the Fund under the Class B Plan and spent approximately $413,700
in distributing the Fund's Class B shares. It is estimated that of the latter
amounts, $3,200 (.78%) was spent on printing and mailing of prospectuses to
other than current shareholders; $69,100 (16.70%) 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 $341,000 (82.52%) on the aggregate of (i)
payments of commissions and account servicing fees to financial advisers
($287,000 or 69.49%) and (ii) an allocation on account of overhead and other
branch office distribution-related expenses ($53,900 or 13.03%). 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.
The Distributor also receives the proceeds of contingent deferred sales
charges paid by investors upon certain redemptions of Class B shares. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred SaleS Charge"
in the Prospectus. For the fiscal year ended September 30, 1998, Prudential
Securities, as the predecessor distributor, and the Distributor received
approximately $182,400 in contingent deferred sales charges attributable to
Class B shares.
CLASS C PLAN. For the fiscal year ended September 30, 1998, Prudential
Securities, as the predecessor distributor, and the Distributor received $9,690
under the Class C Plan and spent approximately $10,900 in distributing the
Fund's Class C shares. It is estimated that of the latter amounts, approximately
$1,400 (12.84%) of the aggregate was spent on printing and mailing of
prospectuses to other than current shareholders; $100 (.92%) of the aggregate
was spent on commissions paid to or on account of representatives of Prusec; and
$9,400 (86.24%) of the aggregate was spent on payments of commissions and
account servicing fees to financial advisers.
The Distributor also receives the proceeds of contingent deferred sales
charges paid by investors upon certain redemptions of Class C shares. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred SaleS Charges"
in the Prospectus. For the fiscal year ended September 30, 1998, Prudential
Securities and the Distributor received approximately $100 in contingent
deferred sales charges attributable to Class C shares.
The Class A, Class B and Class C Plans continue in effect from year to
year, provided that each such continuance is approved at least annually by a
vote of the 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.
B-20
<PAGE>
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
the Distributor to the extent permitted by applicable law against certain
liabilities under federal securities laws. The Distribution Agreement was
approved by the Board of Directors, including a majority of the Rule 12b-1
Directors, on May 12, 1998.
NASD MAXIMUM SALES CHARGE RULE. Pursuant to rules of the NASD, the
Distributor is required to limit aggregate initial sales charges, deferred sales
charges and asset-based sales charges to 6.25% of total gross sales of each
class of shares. Interest charges on unreimbursed distribution expenses equal to
the prime rate plus one percent per annum may be added to the 6.25% limitation.
Sales from the reinvestment of dividends and distributions are not included in
the calculation of the 6.25% limitation. The annual asset-based sales charge on
shares of the Fund may not exceed .75% of 1% per class. The 6.25% limitation
applies to the Fund rather than on a per shareholder basis. If aggregate sales
charges were to exceed 6.25% of total gross sales of any class, all sales
charges on shares of that class would be suspended.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board of Directors of the Fund and
the oversight and review of the Manager, the Subadviser will arrange for the
execution of the Fund's portfolio transactions and the allocation of brokerage.
In executing portfolio transactions, the Subadviser seeks to obtain the best net
results for the Fund, taking into account such factors as price (including the
applicable brokerage commission or dealer spread), size of order, difficulty of
execution and operational facilities of the firm involved. The Fund may invest
in securities traded in the OTC markets and deal directly with the dealers who
make markets in the securities involved, unless a better price or execution
could be obtained by using a broker. While the Subadviser generally will seek
reasonably competitive commission rates, payment of the lowest commission or
spread is not necessarily consistent with best net results in particular
transactions. The Fund will not deal with Prudential Securities (or any
affiliate) in any transaction in which Prudential Securities (or an affiliate)
acts as principal, except in accordance with the rules of the Commission.
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 Commission. This limitation, in the
opinion of the Fund, will not significantly affect the Fund's ability to pursue
its present investment objective. However, in the future in other circumstances,
the Fund may be at a disadvantage because of this limitation in comparison to
other funds with similar objectives but not subject to such limitations.
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
B-21
<PAGE>
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,
as amended, Prudential Securities may not retain compensation for effecting
transactions on a national securities exchange for the Fund unless the Fund has
expressly authorized the retention of such compensation. Prudential Securities
must furnish to the Fund at least annually a statement setting forth the total
amount of all compensation retained by Prudential Securities from transactions
effected for the Fund during the applicable period. Brokerage transactions with
Prudential Securities (or any affiliate) are also subject to such fiduciary
standards as may be imposed upon Prudential Securities (or any affiliate) by
applicable law.
The table below sets forth information concerning the payment of
commissions by the Fund for the three years ended September 30, 1998.
FISCAL YEAR ENDED SEPTEMBER 30,
----------------------------------------
1998 1997 1996
---- ---- ----
Total brokerage commissions
paid by the Fund .............. $140,952 $174,648 $140,846
The Fund effected no transactions that involved the payment of commissions
through Prudential Securities during the fiscal year ended September 30, 1998.
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 (NAV) plus a sales charge which, at the election of
the investor, may be imposed either at the time of purchase, on a deferred basis
or both. Class A shares are sold with a front-end sales charge. Class B shares
are subject to a contingent deferred sales charge (CDSC). Class C shares are
sold with a low front-end sales charge, but are also subject to a CDSC. 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%, Class C*
shares are sold with an initial sales charge of 1%, and Class B* and Class Z
shares are sold at NAV.
B-22
<PAGE>
Using the Fund's NAV at September 30, 1998, the maximum offering price of
the Fund's shares was as follows:
CLASS A
Net asset value and redemption price per Class A share ..... $17.66
Maximum sales charge (5% of offering price) ................ .93
------
Maximum offering price ..................................... $18.59
======
CLASS B
Net asset value, offering price, and
redemption price per Class B share* ...................... $17.66
======
CLASS C
Net asset value and redemption price per Class C share* .... $17.66
Sales charge (1% of offering price) ........................ .18
------
Offering price ............................................. $17.84
======
CLASS Z
Net asset value, offering price,
and redemption price per Class Z share ................... $17.68
======
----------
* 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.
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;
(g) one or more employee benefit plans of a company controlled by an
individual; and
(h) (i) a client of a Prudential Securities financial adviser who gives such
financial adviser discretion to purchase the Prudential Mutual Funds for his or
her account only in connection with participation in a market timing program and
for which program Prudential Securities receives a separate advisory fee or (ii)
a client of an unaffiliated registered investment adviser which is a client of a
Prudential Securities financial adviser, if such unaffiliated adviser has
discretion to purchase the Prudential Mutual Funds for the accounts of his or
her customers but only if the client of such unaffiliated adviser participates
in a market timing program conducted by such unaffiliated adviser; provided such
accounts in the aggregate have at least $15 million invested in the Prudential
Mutual Funds.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that employer).
The Transfer Agent, the Distributor or your Dealer 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.
B-23
<PAGE>
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of related
investors, as described above under "Combined Purchase and Cumulative Purchase
Privilege," may aggregate the value of their existing holdings of shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) to determine the
reduced sales charge. However, the value of shares held directly with the
Transfer Agent and through your Dealer will not be aggregated to determine the
reduced sales charge. The value of existing holdings for purposes of determining
the reduced sales charge is calculated using the maximum offering price (NAV
plus maximum sales charge) as of the previous business day. See "How the Fund
Values Its Shares" in the Prospectus.
The Distributor or the Transfer Agent must be notified at the time of
purchase that the investor is entitled to a reduced sales charge. The reduced
sales charge will be granted subject to confirmation of the investor's holdings.
Rights of accumulation are not available to individual participants in any
retirement or group plans.
LETTERS OF INTENT. Reduced sales charges are also available to investors
(or an eligible group of related investors), including retirement and group
plans, who enter into a written Letter of Intent providing for the purchase,
within a thirteen-month period, of shares of the Fund and shares of other
Prudential Mutual Funds (Investment Letter of Intent). Retirement and group
plans may also qualify to purchase Class A shares at NAV by entering into a
Letter of Intent whereby they agree to enroll, within a thirteen-month period, a
specified number of eligible employees or participants (Participant Letter of
Intent).
For purposes of the Investment Letter of Intent, 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 your Dealer will not be aggregated to determine the reduced sales
charge.
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 enrollment 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.
The Distributor 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 (CDSC) 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.
B-24
<PAGE>
CATEGORY OF WAIVER
Death
Disability--An individual will be considered disabled if he or she is unable to
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or to be of long-continued and indefinite duration.
Distribution from an IRA or 403(b) Custodial Account
Distribution from Retirement Plan
Excess Contributions
REQUIRED DOCUMENTATION
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.
A copy of the Social Security Administration award letter or a letter from a
physician on the physician's letterhead stating that the shareholder (or, in the
case of a trust, the grantor) is permanently disabled. The letter must also
indicate the date of disability.
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.
A letter signed by the plan administrator/trustee indicating the reason for the
distribution.
A letter from the shareholder (for an IRA) or the plan administrator/trustee on
company letterhead indicating the amount of the excess and whether or not taxes
have been paid.
The Transfer Agent reserves the right to request such additional documents as
it may deem appropriate.
QUANTITY DISCOUNT--CLASS B SHARES PURCHASED PRIOR TO AUGUST 1, 1994
The CDSC is reduced on redemptions of Class B shares of the Fund purchased
prior to August 1, 1994 if immediately after a purchase of such shares, the
aggregate cost of all Class B shares of the Fund owned by you in a single
account exceeded $500,000. For example, if you purchased $100,000 of Class B
shares of the Fund and the following year 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:
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
------------- ----------------------- ---------------
First 3.0% 2.0%
Second 2.0% 1.0%
Third 1.0% 0%
Fourth and thereafter 0% 0%
You must notify the Transfer Agent, the Distributor or your Dealer at the
time of redemption, that you are entitled to the reduced CDSC. The reduced CDSC
will be granted subject to confirmation of your holdings.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which the shares are held for the
investor by the Transfer Agent. If a stock certificate is desired, it must be
requested in writing for each transaction. Certificates are issued only for full
shares and may be redeposited in the Account at any time. There is no charge to
the investor for issuance of a certificate. The Fund makes available to its
shareholders the following privileges and plans.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS. For the
convenience of investors, all dividends and distributions are automatically
reinvested in full and fractional shares of the Fund. 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 NAV by
returning the check or the proceeds to the Transfer Agent within 30 days after
the payment date. The investment will be made at the NAV per share next
determined after receipt of the check or proceeds by the Transfer Agent. Such
shareholders will receive credit for any CDSC paid in connection with the amount
of proceeds being reinvested.
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<PAGE>
EXCHANGE PRIVILEGE. The Fund makes available to its shareholders the
privilege of exchanging their shares of the Fund for shares of certain other
Prudential Mutual Funds, including one or more specified money market funds,
subject in each case to the minimum investment requirements of such funds.
Shares of such other Prudential Mutual Funds may also be exchanged for shares of
the Fund. All exchanges are made on the basis of the relative NAV next
determined after receipt of an order in proper form. An exchange will be treated
as a redemption and purchase for tax purposes. 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 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 of the Fund 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 the Class B and Class C shares
acquired as a result an exchange. The applicable sales charge will be that
imposed by the fund in which shares were initially purchased and the purchase
date will be deemed to be the first day of the month after the initial purchase,
rather than the date of the exchange.
Class B and Class C shares of the Fund may also be exchanged for shares of
an eligible money market fund without imposition of any CDSC at the time of
exchange. Upon subsequent redemption from such money market fund or after
re-exchange into the Fund, such shares will be subject to the CDSC calculated
without regard to the time such shares were held in the money market fund. In
order to minimize the period of time in which shares are subject to a CDSC,
shares exchanged out of the money market fund will be exchanged on the basis of
their remaining holding periods, with the longest remaining holding periods
being transferred first. In measuring the time period shares are held in a money
market fund and "tolled" for purposes of calculating the CDSC holding period,
exchanges are deemed to have been made on the last day of the month. Thus, if
shares are exchanged into the Fund from a money market fund during the month
(and are held in the Fund at the end of 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 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.
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<PAGE>
Additional details about the exchange privilege and prospectuses for each
of the Prudential Mutual Funds are available from the Transfer Agent, the
Distributor or your Dealer. The exchange privilege may be modified, suspended or
terminated upon 60 day's notice, and any fund, including the Fund, or the
Distributor has the right to reject any exchange application relating to such
fund's shares.
DOLLAR COST AVERAGING
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more shares
when the price is low and fewer shares when the price is high. The average cost
per share is lower than it would be if a constant number of shares were bought
at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2011, the cost of four years at a private
college could reach $210,000 and over $90,000 at a public university.1
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.2
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
----------------- -------- -------- -------- --------
25 years .............. $ 110 $ 165 $ 220 $ 275
20 years .............. 176 264 352 440
15 years .............. 296 444 592 740
10 years .............. 555 833 1,110 1,388
5 years ............... 1,371 2,057 2,742 3,428
See "Automatic Investment Plan"
- ----------
1 Some 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.
2 The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not intended
to reflect the performance of an investment in shares of the Fund. The
investment return and principal value of an investment will fluctuate so that an
investor's shares when redeemed may be worth more or less than their original
cost.
AUTOMATIC INVESTMENT PLAN (AIP)
Under AIP, an investor may arrange to have a fixed amount automatically
invested in shares of the Fund monthly by authorizing his or her bank account or
brokerage account (including a Prudential Securities Command Account) to be
debited to invest specified dollar amounts in shares of the Fund. The investor's
bank must be a member of the Automatic Clearing House System. Stock certificates
are not issued to AIP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, the Distributor or your Dealer.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders through the
Transfer Agent, the Distributor or your Dealer. Such withdrawal plan provides
for monthly or quarterly checks in any amount, except as provided below, up to
the value of the shares in the shareholder's account. Withdrawals of Class B or
Class C shares may be subject to a CDSC. See "Shareholder Guide--How to Sell
Your Shares--Contingent Deferred Sales Charges" in the Prospectus.
In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account value applies, (ii) withdrawals may not be for less than $100 and (iii)
the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at NAV on
shares held under this plan. See "Shareholder Investment Account--Automatic
Reinvestment of Dividends and/or Distributions" above.
The Distributor 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.
B-27
<PAGE>
Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must generally be recognized for federal income tax
purposes. In addition, withdrawals made concurrently with purchases of
additional shares are inadvisable because of the applicable sales charges to (i)
the purchase of Class A and Class C 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-deferred accounts" under
Section 403(b)(7) of the Internal Revenue Code are available through the
Distributor. These plans are for use by both self-employed individuals and
corporate employers. These plans permit either self-direction of accounts by
participants, or a pooled account arrangement. Information regarding the
establishment of these plans, the administration, custodial fees and other
details are available from the Distributor or the Transfer Agent.
Investors who are considering the adoption of such a plan should consult
with their own legal counsel or tax adviser with respect to the establishment
and maintenance of any such plan.
TAX-DEFERRED RETIREMENT ACCOUNTS
INDIVIDUAL RETIREMENT ACCOUNTS. An individual retirement account (IRA)
permits the deferral of federal income tax on income earned in the account until
the earnings are withdrawn. The following chart represents a comparison of the
earnings in a personal savings account with those in an IRA, assuming a $2,000
annual contribution, an 8% rate of return and a 39.6% federal income tax bracket
and shows how much more retirement income can accumulate within an IRA as
opposed to a taxable individual savings account.
TAX-DEFERRED COMPOUNDING1
-------------------------------------------------------------------
CONTRIBUTIONS
MADE OVER: PERSONAL SAVINGS IRA
----------- --------------- -------
10 years $26,165 $31,291
15 years 44,675 58,649
20 years 68,109 98,846
25 years 97,780 157,909
30 years 135,346 244,692
- ----------
1 The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated. Earnings in
a traditional IRA account will be subject to tax when withdrawn from the
account. Distributions from a Roth IRA which meet the conditions required under
the Internal Revenue Code will not be subject to tax upon withdrawal from the
account.
MUTUAL FUND PROGRAMS
From time to time, the Fund may be included in a mutual fund program with
other Prudential Mutual Funds. Under such a program, a group of portfolios will
be selected and thereafter marketed collectively. Typically, these programs are
created with an investment theme, e.g., to seek greater diversification,
protection from interest rate movements or access to different management
styles. In the event such a program is instituted, there may be a minimum
investment requirement for the program as a whole. The Fund may waive or reduce
the minimum initial investment requirements in connection with such a program.
The mutual funds in the program may be purchased individually or as part of
a program. Since the allocation of portfolios included in the program may not be
appropriate for all investors, investors should consult their financial advisor
concerning the appropriate blend of portfolios for them. If investors elect to
purchase the individual mutual funds that constitute the program in an
investment ratio different from that offered by the program, the standard
minimum investment requirements for the individual mutual funds will apply.
B-28
<PAGE>
NET ASSET VALUE
Under the Investment Company Act, the Board of Directors is responsible for
determining in good faith the fair value of securities 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. If the Fund failed to
qualify as a RJC for any taxable year, it would be taxed on the full amount of
its taxable income for that year without being able to deduct the distributions
it makes to its shareholders and the shareholders would treat all those
distributions, including distributions of net capital gain, as dividends (that
is, ordinary income) to the extent of the Fund's earnings and profits.
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 and other 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 and to avoid imposition of the 4% excise tax. 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 -- other than a "controlled foreign
corporation" as to which the Fund is a "U.S. shareholder"(as defined below) --
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. A "controlled foreign
corporation" is a foreign corporation in which, in which, on any day during its
taxable year, more than 50% of the total voting power of all voting stock
therein or the total value of all stock therein is owned, directly indirectly,
or constructively, by "U.S. shareholders," defined as U.S. persons that
individually own, directly, indirectly, or constructively, at least 10% of that
voting power. 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. The Fund may make a
"mark-to-market" election with respect to any marketable stock it holds of a
PFIC. If the election is in effect, at the end of the Fund's taxable year, the
Fund will recognize the amount of gains, if any, as ordinary income with respect
to PFIC stock. No loss will be recognized on PFIC stock, except to the extent of
gains recognized in prior years. Alternatively, a Fund, if it meets certain
requirements, may elect to treat any PFIC in which it invests as a "qualified
electing fund," in which case, 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.
The Fund may elect to "mark to market" its stock in any PFIC. "Marking-to
market, " in this context, means including in ordinary income each taxable year
the excess, if any, of the fair market value of a PFIC's stock over the Fund's
adjusted basis therein as of the end of that year. Pursuant to the election, the
Fund also would be allowed to deduct (as an ordinary, not capital, loss) the
excess, if any, of its adjusted basis in PFIC stock over the fair market value
thereof as of the taxable year-end, but only to the extent of any net
mark-to-market gains with respect to that stock included by the Fund for prior
taxable years. The Fund's adjusted basis in each PFIC's stock with respect to
which it makes this election would be adjusted to reflect the amounts of income
included and deductions taken thereunder (and under regulations proposed in 1992
that provided a similar election with respect to the stock of certain PFICs).
B-30
<PAGE>
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. Gains from the disposition of foreign currencies (except
certain gains therefrom that may be excluded by future regulations), and gains
from 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 (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 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. If the Fund makes this election, individuals who
have no more than $300 ($600 for married persons filing jointly) of creditable
foreign taxes included on Forms 1099 and all of whose foreign source income is
"qualified passive income" may elect each year to be exempt from the extremely
complicated foreign tax credit limitation and will be able to claim a foreign
tax credit without having to file the detailed Form 1116 that otherwise is
required. The Fund was not eligible to make such an election with respect to
B-31
<PAGE>
its fiscal year ended September 30, 1998, because the percentage of its assets
invested in securities of U.S. issuers exceeded 50% at the end of that period.
SECTION 1256 CONTRACTS. Certain options, futures and forward contracts in
which the Fund may invest may be subject to section 1256 of the Code ("section
1256 contracts"). Any section 1256 contracts held by the Fund at the end of each
taxable year generally must be "market-to-market" (that is, treated as sold for
their fair market value) for federal income tax purposes, with the result that
unrealized gains or losses will be treated as though they were realized. Sixty
percent of any net gain or loss recognized on these deemed sales, and 60% of any
net realized gain or loss from any actual sales of section 1256 contracts, will
be treated as long-term capital gain or loss, and the balance will be treated as
short-term capital gain or loss. Section 1256 contracts also may be
marked-to-market for purposes of the 4% excise tax. These rules may operate to
increase the amount that must be distributed by the Fund to satisfy the
Distribution Requirement, which will be taxable to the shareholders as ordinary
income, and to increase the net capital gain recognized to the fund, without in
either case increasing the cash available to the Fund. The Fund may elect to
exclude certain transactions from the operation of section 1256, although doing
so may have the effect of increasing the relative proportion of net short-term
capital gain (taxable as ordinary income) and/or increasing the amount of
dividends that must be distributed to meet the Distribution Requirement and
avoid imposition of the 4% excise tax described above.
STRADDLES. Code section 1092 (dealing with straddles) also may affect the
taxation of options and futures contracts in which the fund may invest. Section
1092 defines a "straddle" as offsetting positions with respect to personal
property; for these purposes, options and futures contracts are personal
property. Under section 1092, any loss from the disposition of a position in a
straddle generally may be deducted only to the extent the loss exceeds the
unrealized gain on the offsetting positions(s) of the straddle. Section 1092
also provides certain "wash sale" rules, which apply to transactions where a
position is sold at a loss and a new offsetting position is acquired within a
prescribed period, and "short sale" rules applicable to straddles. If the Fund
makes certain elections, the amount, character and timing of the recognition of
gains and losses from the affected straddle positions would be determined under
rules that vary according to the elections made. Because only a few of the
regulations implementing the straddle rules have been promulgated, the tax
consequences to the Fund of straddle transactions are not entirely clear.
APPRECIATED FINANCIAL POSITIONS. If the Fund has an "appreciated financial
position"--generally, an interest (including an interest through an option,
futures or forward contract) with respect to any stock or debt instrument (other
than "straight debt") the fair market value of which exceeds its adjusted
basisNand enters into "constructive sale" of the same or substantially similar
property, the Fund will be treated as having made an actual sale thereof, with
the result that gain will be recognized at that time. A constructive sale
generally consists of an offsetting notional principal contract or futures or
forward contract entered into by the Fund or a related financial position is
itself such a contract, acquisition of the underlying property or substantially
similar property will be deemed a constructive sale. The foregoing will not
apply, however, to any transaction during any taxable year that otherwise would
be treated as a constructive sale if the transaction is closed within 30 days
after the end of that year and the Fund holds the appreciated financial position
unhedged for 60 days after that closing (I.E., at no time during that 60-day
period is the Fund's risk of loss regarding that position reduced by reason of
certain specified transactions with respect to substantially similar or related
property, such as having an option to sell, being contractually obligated to
sell, making a short sale, or granting an option to buy substantially identical
stock or securities).
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
B-32
<PAGE>
ERV = Ending Redeemable Value at the end of the 1, 5 or 10 year periods
(or fractional portion thereof) of a hypothetical $1,000 investment
made at the beginning of the 1, 5 or 10 year periods.
Average annual total return takes into account any applicable initial or
contingent deferred sales charges but does not take into account any federal or
state income taxes that may be payable upon redemption.
The average annual total return for Class A shares for the one-year,
five-year and since inception (January 2, 1990) periods ended September 30, 1998
was 7.25%, 10.50% and 12.84%, respectively. The average annual total return for
the Class B shares for the one-year, five-year and since inception (March 18,
1991) periods ended September 30, 1998 was 7.06%, 10.67% and 12.78%,
respectively. The average annual total return for Class C shares for the one
year and since inception (August 1, 1994) periods ended September 30, 1998 was
11.06% and 13.64%, respectively. The average annual total return for Class Z
shares for the one year and since inception (December 16, 1996) periods ended
September 30, 1998 was 13.18% and 18.52%, 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 (January 2, 1990) periods ended on September 30, 1998 was
12.90%, 73.40% and 202.58%, respectively. The aggregate total return for the
Class B shares for the one-year, five-year and since inception (March 18, 1991)
periods ended September 30, 1998 was 12.06%, 67.03% and 147.63%, respectively.
The aggregate total return for Class C shares for the one year and since
inception (August 1, 1994) periods ended September 30, 1998 was 12.06% and
70.30%, respectively. The aggregate total return for Class Z shares for the one
year and since inception (December 16, 1996) periods was 13.18% and 35.51%,
respectively.
YIELD. The Fund may from time to time advertise its yield as calculated
over a 30-day period. Yield is calculated separately for Class A, Class B, Class
C and Class Z shares. 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, 1998 were
2.09%, 1.47%, 1.47% and 2.44% for Class A shares, Class B shares, Class C shares
and Class Z shares, respectively.
B-33
<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)
A LOOK AT PERFORMANCE OVER THE LONG-TERM
AVERAGE ANNUAL RETURNS
1/1/26 - 12/31/97
[THE FOLLOWING TABLE REPRESENTS A CHART IN THE PRINTED PIECE]
Common Stocks ................ 11%
Long-Term Gov't Bonds......... 5.2%
Inflation..................... 3.1%
- ----------
(1) Source: Ibbotson Associates Stocks, Bonds, Bills and Inflation-1998
Yearbook (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. All rights reserved. Common stock returns
are based on the Standard & Poor's 500 Stock Index, a market-weighted, unmanaged
index of 500 common stocks in a variety of industry sectors. It is a commonly
used indicator of broad stock price movements. This chart is for illustrative
purposes only and is not intended to represent the performance of any particular
investment or fund. Investors cannot invest directly in an index. Past
performance is not a guarantee of future results.
B-34
<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. Subcustodians provide custodial
services for the Fund's foreign assets held outside the United States. See "How
the Fund is Managed--Custodian and Transfer and Dividend Disbursing Agent" in
the Prospectus.
Prudential Mutual Fund Services 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 PIFM. PMFS provides customary transfer
agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, the payment of dividends and distributions, and
related functions. For these services, PMFS receives an annual fee per
shareholder account 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 shareholder 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,
1998, the Fund incurred fees of approximately $343,000 for the services of PMFS.
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036 served as the Fund's independent accountants and in that capacity audits
the Fund's annual financial statements.
Kirkpatrick & Lockhart LLP, 1800 Massachusetts Avenue, N.W., Washington,
D.C. 20036, serves as counsel to the Fund (except with respect to the opinions
of counsel referred to in "Taxes, Dividends and Distributions" in the
Prospectus).
B-35
<PAGE>
Portfolio of Investments as
of September 30, 1998 GLOBAL UTILITY FUND, INC.
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
US$ Value
Shares Description (Note 1)
<C> <S> <C>
- ----------------------------------------------------------------
LONG-TERM INVESTMENTS--96.4%
COMMON STOCKS--71.7%
- ----------------------------------------------------------------
Electrical Utilities--20.0%
60,000 CMS Energy Corp. $ 2,613,750
150,000 COPEL (ADR-Peferred B Shares)
(Brazil) 956,250
300,000 DPL, Inc. 5,887,500
130,000 DQE, Inc. 5,021,250
100,000 DTE Energy Co. 4,518,750
200,000 Endesa S.A. (ADR) (Spain) 4,400,000
187,800 Espoon Sahko (ADR) (Finland) 144A 4,419,257
150,000 Huaneng Power International, Inc.*
(ADR) (China) 1,537,500
120,000 Korea Electric Power Inc. (ADR)
(South Korea) 1,080,000
80,000 New Century Energies, Inc. 3,895,000
100,000 NIPSCO Industries, Inc. 3,287,500
70,000 Pinnacle West Capital Corp. 3,136,875
850,000 Scottish Power PLC (United Kingdom) 8,231,173
277,300 Shandong Huaneng Power Ltd.
(ADR) (China) 1,247,850
90,000 Texas Utilities Holding Co. 4,190,625
50,000 VEBA AG (Germany) 2,596,937
-------------
57,020,217
- ----------------------------------------------------------------
Gas Utilities--10.8%
350,000 Australian Gas Light Co. (Australia) 2,405,427
125,000 El Paso Energy Corp. 4,054,688
100,000 Enron Corp. 5,281,250
120,000 Equitable Resources, Inc. 3,052,500
50,000 MCN Energy Group, Inc. 853,125
54,426 NTL Incorporated 2,333,515
200,000 TransCanada Pipelines Ltd. (Canada) 2,914,688
250,000 Westcoast Energy, Inc. (Canada) 4,707,712
100,000 Williams Companies, Inc. 2,875,000
90,000 YPF Sociedad Anonima (ADR-Class D
Shares) (Argentina) 2,340,000
-------------
30,817,905
Telecommunications--34.3%
65,000 AirTouch Communications, Inc.* 3,705,000
130,000 AT&T Corp. 7,596,875
100,000 BC Telecom, Inc. (Canada) 2,357,950
120,000 BCE, Inc. (Canada) 3,352,500
140,000 Bell Atlantic Corp. 6,781,250
76,096 Cia Telecom de Chile, S.A. (ADR)
(Chile) 1,455,336
43,000 Empresas Telex-Chile S.A. (ADR)
(Chile) 20,156
111,222 Hellenic Telecom Org. (Greece) 2,656,668
236,829 MCI Worldcom Inc. 11,582,418
40,000 Portugal Telecom, S.A. (ADS)
(Portugal) 1,440,000
300,000 SBC Communications Inc. 13,331,250
70,000 Sprint Corp. 5,040,000
40,000 Telecom Corp. New Zealand Ltd. (ADR)
(New Zealand) 1,205,000
700,000 Telecom Italia Mobile S.p.A. (Italy) 4,066,057
300,000 Telecom Italia S.p.A. (Italy) 2,060,502
2,000,000 Telecom Italia S.p.A. Risp
(Nonconvertible) (Italy) 9,534,160
40,000 Telefonica de Argentina S.A. (ADR-
Class B Shares) (Argentina) 1,177,500
50,000 Telefonos de Mexico, S.A. (ADR-
Class L Shares) (Mexico) 2,212,500
43,636 Telefonica, S.A. (ADR) (Spain) 4,709,961
130,000 US West Inc. 6,816,875
200,000 Videsh Sanchar Nigam Ltd. (GDR)
(India) 144A 2,195,000
40,000 Vodafone Group PLC (ADR)
(United Kingdom) 4,510,000
-------------
97,806,958
- ----------------------------------------------------------------
Water Utilities & Other--6.6%
28,000 Alcatel Alsthom (France) 2,482,641
167,800 American Water Works Co., Inc. 5,264,725
280,000 Anglian Water PLC (United Kingdom) 4,500,047
41,000 ENI S.p.A. (ADR) (Italy) 2,511,250
60,000 Lucent Technologies, Inc. 4,143,750
-------------
18,902,413
Total common stocks
(cost $129,390,170) 204,547,493
-------------
</TABLE>
- ----------------------------------------------------------------
See Notes to Financial Statements. B-36
<PAGE>
Portfolio of Investments as
of September 30, 1998 GLOBAL UTILITY FUND, INC.
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
US$ Value
Shares Description (Note 1)
<C> <S> <C>
- ----------------------------------------------------------------
PREFERRED STOCKS--1.3%
Philippine Long Distance Telephone
Co. (The Philippines)
43,700 $3.50 Conv. Ser. III (GDS) $ 1,704,300
92,216 5.75% Conv. Ser. II (GDS) 1,939,171
-------------
Total preferred stocks
(cost $4,189,000) 3,643,471
-------------
- ----------------------------------------------------------------
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000)
<C> <C> <S> <C>
DEBT OBLIGATIONS--23.4%
CORPORATE BONDS--22.7%
- -------------------------------------------------------------------
Electrical Utilities--14.6%
Ba1 $ 1,000 AES Corp.,
8.375%, 8/15/07 945,000
NR 1,000 Arizona Public Service
Co.,
6.25%, 1/15/05 1,027,070
Baa1 1,000D Chilgener, S.A.,
6.50%, 1/15/06 (Chile) 825,820
NR 1,000 Cleveland Elec. Illum.
Co.,
7.43%, 11/1/09 1,087,410
Ba3 1,000 CMS Energy Corp.,
8.125%, 5/15/02 1,048,510
NR 1,000D Compania De Transporte
Energia,
9.25%, 4/1/08 (Brazil) 745,000
A1 1,000 Consolidated Edison Co.
of NY, Inc.,
7.625%, 3/1/04 1,107,700
NR 1,000D CSW Investments,
7.45%, 8/1/06
(United Kingdom) 1,132,130
Aa3 1,000 Duke Energy Corp.,
5.875%, 6/1/01 1,020,460
Baa1 1,000D Eastern Energy Limited,
6.75%, 12/1/06
(Australia) 1,067,080
Ba2 1,000 El Paso Electric Co.,
8.25%, 2/1/03, Ser. C 1,080,770
<CAPTION>
Moody's Principal
Rating Amount US$ Value
(Unaudited) (000) Description (Note 1)
<C> <C> <S> <C>
- -------------------------------------------------------------------
Baa1 1,000D Empresa Electrica del
Norte Grande S.A.,
7.75%, 3/15/06 (Chile) 841,260
Florida Power Corp.,
Aa3 500 6.00%, 7/1/03 516,620
A1 650 6.75%, 2/1/28 673,894
Baa3 1,000 Gulf States Utilities
Co.,
8.25%, 4/1/04 1,113,960
Baa1 1,000D Hyder PLC,
6.875%, 12/15/07
(United Kingdom) 1,067,500
Ba1** 1,000D Inversora Electrica
Buenos Aires S.A.,
9.00%, 9/16/04
(Argentina) 735,000
A1 1,500 Monongahela Power Co.,
7.375%, 7/1/02 1,612,215
Northern States Power
Co.,
Aa3 1,000 5.75%, 12/1/00 1,010,800
Aa3 1,000 6.50%, 3/1/28 1,024,140
Baa3 1,000 NRG Energy, Inc.,
7.50%, 6/15/07 1,065,040
Aa3 640 Oklahoma Gas & Electric
Co.,
6.50%, 4/15/28 664,102
A1 2,000 Potomac Edison Co.,
8.875%, 8/1/21 2,106,780
Baa2 1,000 PP&L Capital Funding
Inc.,
6.79%, 11/22/04 1,079,110
Ba1 1,000 Public Service Co.
7.10%, 8/01/05 1,055,390
A2 1,000D Quebec Hydro,
7.50%, 4/1/16 (Canada) 1,118,280
Baa1 1,000D Southern Investments UK PLC,
6.80%, 12/1/06
(United Kingdom) 1,053,150
Aa3 2,000 Southwestern Electric
Power Co.,
5.25%, 4/1/00 1,999,940
Aa2 1,000 Southwestern Public Service Co.,
7.25%, 7/15/04 1,102,660
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-37
<PAGE>
Portfolio of Investments as
of September 30, 1998 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.)
Baa3 $ 1,000 System Energy Resources,
Inc.,
7.71%, 8/1/01 $ 1,051,790
Aa2 1,000 Tampa Electric Co.,
7.75%, 11/1/22 1,103,500
Ba3 1,000 Texas-New Mexico Power Co.,
10.75%, 9/15/03 1,092,610
Baa1 1,000 Texas Utilities Electric
Co.,
9.27%, 1/14/00 1,050,940
A2 1,000D United Utilities PLC,
6.45%, 4/1/08
(United Kingdom) 1,046,030
A2 2,000 Virginia Electric &
Power Co.,
6.625%, 4/1/03 2,121,900
NR 1,000 W3A Funding Corp.,
8.09%, 1/2/17 1,108,930
Aa3 1,000 Wisconsin Electric Power
Co.,
6.625%, 11/15/06 1,102,720
Baa2 1,000D Yorkshire Power Finance
Ltd.,
6.496%, 2/25/08
(United Kingdom) 1,039,157
-------------
41,644,368
- -------------------------------------------------------------------
Gas Distribution & Other Related Industries--1.7%
Baa2 1,000 El Paso Natural Gas Co.,
7.50%, 11/15/26 1,058,840
Baa2 1,000 Enron Corp.,
7.00%, 8/15/23 936,580
Ba3 1,000D Metrogas, S.A.,
10.88%, 5/15/01, Ser.
B (Argentina) 950,000
A2 1,600 Michigan Consolidated
Gas
Co., 8.25%, 5/1/14 1,939,344
-------------
4,884,764
- -------------------------------------------------------------------
Telecommunications, Media & Related Industries--6.4%
Aa3 1,000 AT&T Corp.,
7.75%, 3/1/07 1,171,040
BellSouth
Telecommunications,
Aaa 2,000 6.125%, 9/23/08
(Eurobonds) 2,112,500
Aaa 2,000 7.00%, 10/1/25 2,259,700
NR 1,000 Century Telephone
Enterprises, Inc.,
6.30%, 1/15/08 1,049,410
NR 1,000D Comtel Brasileira Ltd.,
10.75%, 9/26/04
(Brazil) 700,000
Baa1 1,000 GTE Corp.,
7.51%, 4/1/09 1,170,070
A2 1,000 GTE Florida, Inc.,
7.25%, 10/15/25 1,055,320
Aaa 1,000 Indiana Bell Telephone
Co., Inc.,
7.30%, 8/15/26 1,164,420
Aaa 1,000 New Jersey Bell Telephone Co.,
8.00%, 6/1/22 1,217,960
A2 1,000 New York Telephone Co.,
6.00%, 4/15/08 1,052,430
A1 2,000 Pacific Bell,
6.625%, 11/1/09 2,223,580
Ba2 1,000D Philippine Long Distance
Telephone Co.,
9.25%, 6/30/06
(The Philippines) 810,000
Baa2 1,000 US West Inc.,
6.375%, 7/15/08 1,076,048
Baa2 1,000 Worldcom, Inc.,
6.40%, 8/15/05 1,055,220
-------------
18,117,698
Total corporate bonds
(cost $62,563,397) 64,646,830
-------------
- -------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES--0.7%
2,000 United States Treasury Notes,
5.75%, 8/15/03
(cost $2,042,188) 2,122,180
-------------
Total debt obligations
(cost $64,605,585) 66,769,010
-------------
Total long-term
investments
(cost $198,184,755) 274,959,974
-------------
</TABLE>
- -------------------------------------------------------------------
See Notes to Financial Statements. B-38
<PAGE>
GLOBAL UTILITY FUND, INC.
Portfolio of Investments as of September 30, 1998
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount US$ Value
(000) Description (Note 1)
<C> <S> <C>
- ----------------------------------------------------------------
SHORT-TERM INVESTMENTS--3.2%
REPURCHASE AGREEMENTS
$9,089 PaineWebber Inc., 5.45%, due
10/01/98, in the amount of
$9,090,376; (cost $9,089,000;
collateralized by $8,975,000 U.S.
Treasury Notes, 7.125%, due
10/15/98, value including accrued
interest-$9,279,745) $ 9,089,000
- ----------------------------------------------------------------
Total Investments--99.6%
(cost $207,273,755; Note 4) 284,048,974
Other assets in excess of
liabilities--0.4% 1,191,740
-------------
Net Assets--100% $ 285,240,714
=============
</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-39
<PAGE>
Statement of Assets and Liabilities GLOBAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, 1998
Assets
<S> <C>
Investments, at value (cost $207,273,755).............................................................. $284,048,974
Foreign currency, at value (cost $53,059).............................................................. 53,385
Dividends and interest receivable...................................................................... 1,995,415
Receivable for Investments sold........................................................................ 1,324,572
Withholding taxes receivable........................................................................... 107,713
Receivable for Fund shares sold........................................................................ 54,811
Other assets........................................................................................... 7,615
---------------
Total assets........................................................................................ 287,592,485
---------------
Liabilities
Bank overdraft......................................................................................... 43,352
Payable for investments purchased...................................................................... 1,039,156
Payable for Fund shares reacquired..................................................................... 701,396
Accrued expenses....................................................................................... 232,576
Distribution fee payable............................................................................... 151,966
Management fee payable................................................................................. 111,597
Withholding taxes payable.............................................................................. 61,884
Deferred director's fee................................................................................ 9,844
---------------
Total liabilities................................................................................... 2,351,771
---------------
Net Assets............................................................................................. $285,240,714
===============
Net assets were comprised of:
Common stock, at par................................................................................ $ 16,153
Paid-in capital in excess of par.................................................................... 177,031,008
---------------
177,047,161
Accumulated net realized gains on investments and foreign currency transactions..................... 31,408,025
Net unrealized appreciation on investments and foreign currencies................................... 76,785,528
---------------
Net assets, September 30, 1998......................................................................... $285,240,714
===============
Class A:
Net asset value and redemption price per share
($123,346,275 / 6,984,666 shares of common stock issued and outstanding)......................... $17.66
Maximum sales charge (5.00% of offering price)...................................................... .93
Maximum offering price to public.................................................................... $18.59
===============
Class B:
Net asset value, offering price and redemption price per share
($154,872,668 / 8,771,192 shares of common stock issued and outstanding)......................... $17.66
===============
Class C:
Net asset value, offering price and redemption price per share
($957,042 / 54,203 shares of common stock issued and outstanding)................................ $17.66
===============
Class Z:
Net asset value, offering price and redemption price per share
($6,064,729 / 343,114 shares of common stock issued and outstanding)............................. $17.68
===============
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-40
<PAGE>
GLOBAL UTILITY FUND, INC.
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income September 30, 1998
<S> <C>
Income
Dividends (net of foreign withholding
taxes of $411,874).................... $ 5,969,533
Interest................................. 5,228,170
---------------
Total income.......................... 11,197,703
---------------
Expenses
Management fee........................... 2,050,958
Distribution fee--Class A................ 305,959
Distribution fee--Class B................ 1,773,262
Distribution fee--Class C................ 9,690
Transfer agent's fees and expenses....... 410,000
Custodian's fees and expenses............ 190,000
Reports to shareholders.................. 62,000
Registration fees........................ 35,000
Audit fee and expenses................... 33,000
Legal fees and expenses.................. 29,000
Directors' fees.......................... 18,000
Insurance................................ 7,000
Miscellaneous............................ 8,177
---------------
Total expenses........................ 4,932,046
---------------
Net investment income....................... 6,265,657
---------------
Realized and Unrealized Gain (Loss) on
Investments and Foreign Currency
Transactions
Net realized gain on:
Investment transactions.................. 33,940,901
Foreign currency transactions............ 4,692
---------------
33,945,593
---------------
Net change in unrealized appreciation
(depreciation) on:
Investments.............................. (4,323,937)
Foreign currencies....................... 9,798
---------------
(4,314,139)
---------------
Net gain on investments and foreign
currencies............................... 29,631,454
---------------
Net Increase in Net Assets
Resulting from Operations................... $ 35,897,111
===============
</TABLE>
GLOBAL UTILITY FUND, INC.
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended September 30,
in Net Assets 1998 1997
<S> <C> <C>
Operations
Net investment income....... $ 6,265,657 $ 7,682,317
Net realized gain on
investment and foreign
currency transactions.... 33,945,593 23,452,259
Net change in unrealized
appreciation
(depreciation) of
investments and foreign
currencies............... (4,314,139) 39,642,425
------------------ ------------
Net increase in net assets
resulting from
operations............... 35,897,111 70,777,001
------------------ ------------
Dividends and distributions
(Note 1)
Dividends from net
investment income
Class A.................. (2,991,973) (3,467,695)
Class B.................. (3,134,288) (4,197,429)
Class C.................. (17,223) (16,595)
Class Z.................. (122,173) (598)
------------------ ------------
(6,265,657) (7,682,317)
------------------ ------------
Distributions in excess of
net investment income
Class A.................. (180,906) (156,217)
Class B.................. (266,336) (189,092)
Class C.................. (1,178) (748)
Class Z.................. (114) (27)
------------------ ------------
(448,534) (346,084)
------------------ ------------
Distributions from net
realized gains
Class A.................. (10,062,149) (6,007,763)
Class B.................. (14,813,745) (9,775,323)
Class C.................. (65,425) (37,783)
Class Z.................. (6,437) --
------------------ ------------
(24,947,756) (15,820,869)
------------------ ------------
Fund share transactions (net of
share conversions) (Note 5)
Net proceeds from shares
sold..................... 34,214,868 40,299,964
Net asset value of shares
issued in reinvestment of
dividends and
distributions............ 26,214,007 19,609,298
Cost of shares reacquired... (80,331,082) (106,947,379)
------------------ ------------
Net decrease in net assets from
Fund share transactions..... (19,902,207) (47,038,117)
------------------ ------------
Total decrease................. (15,667,043) (110,386)
Net Assets
Beginning of year.............. 300,907,757 301,018,143
------------------ ------------
End of year (a)................ $285,240,714 $300,907,757
================== ============
- ---------
(a) Includes undistributed
net investment
income of ................. $ --- $ 127,164
</TABLE>
- -------------------------------------------------------------------
See Notes to Financial Statements. B-41
<PAGE>
Notes to Financial Statements GLOBAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
Global Utility Fund, Inc. (the 'Fund') is an open-end diversified management
investment company. The Fund 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 premiums and original issue discount paid 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.
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.
- --------------------------------------------------------------------------------
B-42
<PAGE>
Notes to Financial Statements GLOBAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
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 $321,370 relating to net
realized foreign currency gains and a reclassification of dividend character.
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
Management Company, LLP ('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 had a distribution agreement with Prudential Securities Incorporated
('PSI'), which acted as the distributor of the Class A, Class B, Class C and
Class Z shares of the Fund through May 31, 1998. Prudential Investment
Management Services LLC ('PIMS') became the distributor of the Fund effective
June 1, 1998 and is serving the Fund under the same terms and conditions as
under the arrangement with PSI. The Fund compensated PSI and PIMS 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 distribution or service fees are paid to
PIMS as distributor of the Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensated PSI and PIMS 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, 1998.
PSI and PIMS have advised the Fund that they received approximately $33,500 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended September 30, 1998. From these fees, PSI and PIMS paid such sales
charges to affiliated broker-dealers which in turn paid commissions to
salespersons and incurred other distribution costs.
PSI and PIMS have advised the Fund that for the fiscal year ended September 30,
1998, they received approximately $182,000 and $100 in contingent deferred sales
charges imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PSI, PIMS 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'), has a credit agreement (the 'Agreement') with an unaffiliated lender.
The maximum commitment under the Agreement is $200,000,000. Interest on any such
borrowings outstanding will be at market rates. The purpose of the Agreement is
to serve as an alternative source of funding for capital share redemptions. The
Fund did not borrowed any amounts pursuant to the Agreement during the year
ended September 30, 1998. The Funds pay a commitment fee at an annual rate of
.055 of 1% on the unused portion of the credit facility. The commitment fee is
accrued and paid quarterly on a pro rata basis by the Funds.
- --------------------------------------------------------------------------------
B-43
<PAGE>
Notes to Financial Statements GLOBAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
The Agreement expired on December 30, 1997 and has been extended through
December 29, 1998 under the same terms.
- --------------------------------------------------------------------------------
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, 1998, the Fund incurred fees of approximately $343,000 for the services of
PMFS. As of September 30, 1998, approximately $26,000 of such fees were due to
PMFS. Transfer agent fees and expenses in the Statement of Operations include
certain out-of-pocket expenses paid to nonaffiliates.
- --------------------------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the fiscal year ended September 30, 1998 were $59,196,763 and $106,415,293,
respectively.
The United States federal income tax basis of the Fund's investments at
September 30, 1998 was $207,300,462 and, accordingly, net unrealized
appreciation of investments was $76,748,512 (gross unrealized
appreciation--$90,266,142; gross unrealized depreciation--$13,517,630).
- --------------------------------------------------------------------------------
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. Prior to November 2, 1998 Class C shares
were sold with a contingent deferred sales charge of 1% during the first year.
Effective November 2, 1998, Class C shares are sold with a front-end sales
charge of 1% and a contingent deferred sales charge of 1% during the first 18
months. 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. 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.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------- ---------- ------------
<S> <C> <C>
Year ended September 30, 1998:
Shares sold........................ 521,948 $ 9,321,818
Shares issued in reinvestment of
dividends and distributions...... 563,544 9,496,627
Shares reacquired.................. (1,757,287) (31,298,612)
========== ============
Net decrease in shares outstanding
before conversion................ (671,795) (12,480,167)
Shares issued upon conversion from
Class B.......................... 759,647 13,683,739
---------- ------------
Net increase in shares
outstanding...................... 87,852 $ 1,203,572
========== ============
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)
========== ============
<CAPTION>
Class B
- -------
<S> <C> <C>
Year ended September 30, 1998:
Shares sold........................ 661,584 $ 11,938,327
Shares issued in reinvestment of
dividends and distributions...... 982,123 16,503,067
Shares reacquired.................. (2,346,288) (42,011,836)
---------- ------------
Net decrease in shares outstanding
before conversion................ (702,581) (13,570,442)
Shares reacquired upon conversion
into Class A..................... (759,735) (13,683,739)
---------- ------------
Net decrease in shares
outstanding...................... (1,462,316) $(27,254,181)
========== ============
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-44
<PAGE>
Notes to Financial Statements GLOBAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Shares Amount
- ------- ---------- ------------
<S> <C> <C>
Year ended September 30, 1998:
Shares sold........................ 343,836 $ 6,262,967
Shares issued in reinvestment of
dividends and distributions...... 4,668 78,586
Shares reacquired.................. (337,668) (6,158,331)
---------- ------------
Net increase in shares
outstanding...................... 10,836 $ 183,222
========== ============
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 decrease in shares
outstanding...................... (615) $ (13,898)
========== ============
<CAPTION>
Class Z
- -------
<S> <C> <C>
Year ended September 30, 1998:
Shares sold........................ 379,786 $ 6,691,756
Shares issued in reinvestment of
dividends and distributions...... 7,648 135,727
Shares reacquired.................. (47,365) (862,303)
---------- ------------
Net increase in shares
outstanding...................... 340,069 $ 5,965,180
========== ============
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-45
<PAGE>
Financial Highlights GLOBAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
-----------------------------------------------------------------
Year Ended September 30,
------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 17.52 $ 15.03 $ 14.72 $ 13.66 $ 14.63
-------- -------- -------- -------- --------
Income from investment operations
Net investment income......................... .46(b) .49 .51 .49 .47
Net realized and unrealized gain (loss) on
investment and foreign currency
transactions............................... 1.67 3.34 .73 1.35 (.82)
-------- -------- -------- -------- --------
Total from investment operations........... 2.13 3.83 1.24 1.84 (.35)
-------- -------- -------- -------- --------
Less distributions
Dividends from net investment income.......... (.46) (.49) (.51) (.48) (.42)
Distributions in excess of net investment
income..................................... (.02) (.02) -- -- --
Distributions from net realized gains......... (1.51) (.83) (.42) (.30) (.20)
-------- -------- -------- -------- --------
Total distributions........................ (1.99) (1.34) (.93) (.78) (.62)
-------- -------- -------- -------- --------
Net asset value, end of year.................. $ 17.66 $ 17.52 $ 15.03 $ 14.72 $ 13.66
======== ======== ======== ======== ========
TOTAL RETURN(a)............................... 12.90% 26.90% 8.65% 14.23% (2.49)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $123,346 $120,825 $112,800 $124,423 $126,254
Average net assets (000)...................... $122,384 $116,303 $120,122 $122,837 $139,166
Ratios to average net assets:
Expenses, including distribution fees...... 1.18% 1.21% 1.30% 1.31% 1.25%
Expenses, excluding distribution fees...... .93% .96% 1.05% 1.06% 1.02%
Net investment income...................... 2.49% 3.00% 3.38% 3.58% 3.39%
For Class A, B, C and Z shares:
Portfolio turnover rate.................... 20% 13% 13% 15% 19%
</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.
(b) Calculated based upon weighted average shares outstanding during the year.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-46
<PAGE>
Financial Highlights GLOBAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
-----------------------------------------------------------------
Year Ended September 30,
------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 17.52 $ 15.03 $ 14.71 $ 13.66 $ 14.63
-------- -------- -------- -------- --------
Income from investment operations
Net investment income......................... .32(b) .37 .40 .39 .37
Net realized and unrealized gain (loss) on
investment and foreign currency
transactions............................... 1.67 3.34 .74 1.34 (.82)
-------- -------- -------- -------- --------
Total from investment operations........... 1.99 3.71 1.14 1.73 (.45)
-------- -------- -------- -------- --------
Less distributions
Dividends from net investment income.......... (.32) (.37) (.40) (.38) (.32)
Distributions in excess of net investment
income..................................... (.02) (.02) -- -- --
Distributions from net realized gains......... (1.51) (.83) (.42) (.30) (.20)
-------- -------- -------- -------- --------
Total distributions........................ (1.85) (1.22) (.82) (.68) (.52)
-------- -------- -------- -------- --------
Net asset value, end of year.................. $ 17.66 $ 17.52 $ 15.03 $ 14.71 $ 13.66
======== ======== ======== ======== ========
TOTAL RETURN(a)............................... 12.06% 25.96% 7.90% 13.32% (3.22)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $154,873 $179,270 $187,557 $227,189 $272,673
Average net assets (000)...................... $177,326 $185,693 $210,305 $237,983 $270,466
Ratios to average net assets:
Expenses, including distribution fees...... 1.93% 1.96% 2.05% 2.06% 2.02%
Expenses, excluding distribution fees...... .93% .96% 1.05% 1.06% 1.02%
Net investment income...................... 1.74% 2.25% 2.62% 2.83% 2.68%
</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.
(b) Calculated based upon weighted average shares outstanding during the year.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-47
<PAGE>
Financial Highlights GLOBAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class Z
---------------------------------------------------------- -------------
August 1,
1994(d) Year
Year Ended September 30, through Ended
---------------------------------------- September 30, September 30,
1998 1997 1996 1995 1994 1998
------ ------ ------ ------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $17.52 $15.03 $14.71 $ 13.66 $ 13.93 $ 17.54
------ ------ ------ ------- ------------- ------
Income from investment operations
Net investment income................... .32(b) .37 .40 .39 .06 .50(b)
Net realized and unrealized gain (loss)
on investment and foreign currency
transactions......................... 1.67 3.34 .74 1.34 (.24) 1.68
------ ------ ------ ------- ------------- ------
Total from investment operations..... 1.99 3.71 1.14 1.73 (.18) 2.18
------ ------ ------ ------- ------------- ------
Less distributions
Dividends from net investment income.... (.32) (.37) (.40) (.38) (.07) (.50)
Distributions in excess of net
investment income.................... (.02) (.02) -- -- -- (.03)
Distributions from net realized gains... (1.51) (.83) (.42) (.30) (.02) (1.51)
------ ------ ------ ------- ------------- ------
Total distributions.................. (1.85) (1.22) (.82) (.68) (.09) (2.04)
------ ------ ------ ------- ------------- ------
Net asset value, end of period.......... $17.66 $17.52 $15.03 $ 14.71 $ 13.66 $ 17.68
====== ====== ====== ======= ============= =======
TOTAL RETURN(a)......................... 12.06% 25.96% 7.90% 13.32% (1.32)% 13.18%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $ 957 $ 760 $ 661 $ 563 $ 226 $ 6,065
Average net assets (000)................ $ 969 $ 727 $ 608 $ 410 $ 131 $ 4,041
Ratios to average net assets:
Expenses, including distribution
fees.............................. 1.93% 1.96% 2.05% 2.06% 2.06%(c) .93%
Expenses, excluding distribution
fees.............................. .93% .96% 1.05% 1.06% 1.06%(c) .93%
Net investment income................ 1.74% 2.25% 2.66% 2.83% 2.46%(c) 2.74%
<CAPTION>
December 16,
1996(e)
through
September 30,
1997
-------------
<S> <C>
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... --
-------
Total distributions.................. (.41)
-------
Net asset value, end of period.......... $ 17.54
=======
TOTAL RETURN(a)......................... 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%(c)
Expenses, excluding distribution
fees.............................. .96%(c)
Net investment income................ 3.25%(c)
</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) Calculated based upon weighted average shares outstanding during the year.
(c) Annualized.
(d) Commencement of offering of Class C shares.
(e) Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-48
<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, 1998, the results of its operations for the year then
ended, and the changes in its net assets and the financial highlights for each
of the two years in the period 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 audits. We conducted our audits 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 audits, which included
confirmation of securities at September 30, 1998 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above. The accompanying financial highlights for each of the three periods in
the period ended September 30, 1996 were audited by other independent
accountants, whose opinion dated November 14, 1996 was unqualified.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
November 20, 1998
- --------------------------------------------------------------------------------
B-49
<PAGE>
Federal Income Tax Information (Unaudited) 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, 1998) 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 $1.988 per share, comprised of $0.618 per share ordinary income and
short-term capital gains which are taxable as ordinary income and $1.37 per
share long-term capital gains which are taxable as such. The Fund paid
distributions for Class B and Class C shares totaling $1.853 per share,
comprised of $0.483 per share ordinary income and short-term capital gains which
are taxable as ordinary income and $1.37 per share long-term capital gains which
are taxable as such. The Fund paid distributions for Class Z shares totaling
$2.035 per share, comprised of $0.665 of ordinary income and short-term capital
gains which are taxable as ordinary income and $1.37 per share long-term capital
gains which is taxable as such. Further, we wish to advise you that 44% of the
ordinary income dividends paid in the fiscal year ended 1998 qualified for the
corporate dividend received deduction available to corporate taxpayers.
In January 1999, 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 1998.
- --------------------------------------------------------------------------------
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.
STANDARD DEVIATION
Standard Deviation is an absolute (non-relative) measure of volatility
which, for a mutual fund, depicts how widely the returns varied over a certain
period of time. When a fund has a high standard deviation, its range of
performance has been very wide, implying greater volatility potential. Standard
deviation is only one of several measures of a fund's volatility.
I-1
<PAGE>
APPENDIX II--HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
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 1998 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. This chart is for illustrative
purposes only and is not indicative of the past, present, or future performance
of any asset class or any Prudential Mutual Fund.
Generally, stock returns are due to capital appreciation and 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 1997. The total returns of the indices include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Fund or of any sector in which the
Fund invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees of
a mutual fund. See "Fund Expenses" in the prospectus. The net effect of the
deduction of the operating expenses of a mutual fund on these historical total
returns, including the compounded effect over time, could be substantial.
HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT
TREASURY
BONDS1 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 18.4% 2.7% 9.6%
- -------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT
MORTGAGE
SECURITIES2 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8% 5.4% 9.5%
- -------------------------------------------------------------------------------------------------------------------------------
U.S. INVESTMENT
GRADE CORPORATE
BONDS3 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3% 3.3% 10.2%
- -------------------------------------------------------------------------------------------------------------------------------
U.S. HIGH YIELD
CORPORATE
BONDS4 5.0% 12.5% 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2% 11.4% 12.8%
- -------------------------------------------------------------------------------------------------------------------------------
WORLD
GOVERNMENT
BONDS5 35.2% 2.3% (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1% (4.3)%
===============================================================================================================================
DIFFERENCE BETWEEN
HIGHEST AND LOWEST
RETURN PERCENT 33.2% 10.2% 18.8% 24.9% 30.9% 11.0% 10.3% 9.9% 5.5% 8.7% 17.1%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1LEHMAN 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.
2LEHMAN 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).
3LEHMAN 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.
4LEHMAN 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.
5SALOMON 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 December 31, 1985 through December 31, 1997. It does not represent
the performance of any Prudential Mutual Fund.
[CHART]
Source: Morgan Stanley Capital International (MSCI) and Lipper Analytical
Services, Inc. as of 12/31/97. 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 1998 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. This chart is 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, December 31, 1997. Used with
permission. This chart represents the capitalization of major world stock
markets as measured by the Morgan Stanley Capital International (MSCI) World
Index. The total market capitalization is based on the value of approximately
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 1998 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 1926-1997. Yields represent that
of an annually renewed one-bond portfolio with a remaining maturity of
approximately 20 years. This chart is for illustrative purposes only and should
not be construed to represent the yields of any Prudential Mutual Fund.
II-4
<PAGE>
APPENDIX III--INFORMATION RELATING TO PRUDENTIAL
Set forth below is information relating to The Prudential Insurance
Company of America (Prudential) and its subsidiaries as well as information
relating to the Prudential Mutual Funds. See "Management of the Fund--Manager"
in the Prospectus. The data will be used in sales materials relating to the
Prudential Mutual Funds. Unless otherwise indicated, the information is as of
December 31, 1997 and is subject to change thereafter. All information relies on
data provided by The Prudential Investment Corporation (PIC) or from other
sources believed by the Manager to be reliable. Such information has not been
verified by the Fund.
INFORMATION ABOUT PRUDENTIAL
The Manager and The Prudential Investment Corporation (PIC)1 are
subsidiaries of Prudential, which is one of the largest diversified financial
services institutions in the world and, based on total assets, the largest
insurance company in North America as of December 31, 1997. Principal products
and services include life and health insurance, other healthcare products,
property and casualty insurance, securities brokerage asset management,
investment advisory services and real estate brokerage. Prudential (together
with its subsidiaries) employs almost 79,000 persons worldwide, and maintains a
sales force of approximately 10,100 agents and 6,500 domestic and international
financial advisors. Prudential is a major issuer of annuities, including
variable annuities. Prudential seeks to develop innovative products and services
to meet consumer needs in each of its business areas. Prudential uses the Rock
of Gibraltar as its symbol.
The Prudential rock is a recognized brand name throughout the world.
INSURANCE. Prudential has been engaged in the insurance business since
1875. It insures or provides financial services to nearly 40 million people
worldwide. Long one of the largest issuers of life insurance, Prudential has 25
million life insurance policies in force today with a face value of almost $1
trillion. Prudential has the largest capital base ($12.1 billion) of any life
insurance company in the United States. Prudential provides auto insurance for
more than 1.5 million cars and insures approximately 1.2 million homes.
MONEY MANAGEMENT. Prudential is one of the largest pension fund managers
in the country, providing pension services to 1 in 3 Fortune 500 firms. It
manages $36 billion of individual retirement plan assets, such as 401(k) plans.
As of December 31, 1997, Prudential had more than $370 billion in assets under
management. Prudential Investments, a business group of Prudential (of which
Prudential Mutual Funds is a key part), manages over $211 billion in assets of
institutions and individuals. In PENSIONS & INVESTMENTS, May 12, 1997,
Prudential was ranked third in terms of total assets under management.
REAL ESTATE. The Prudential Real Estate Affiliates, the fourth largest
real estate brokerage network in the United States, has more than 37,000 brokers
and agents and more than 1,100 offices in the United States.2
HEALTHCARE. Over two decades ago, the Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, approximately 4.9
million Americans receive healthcare from a Prudential managed care membership.
FINANCIAL SERVICES. The Prudential Bank, a wholly-owned subsidiary of
Prudential, has over $4 billion in assets and serves nearly 1.5 million
customers across 50 states.
- ----------
1PIC 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 LLC as one of the subadvisers
to The Prudential Investment Portfolios, Inc., Prudential Diversified Funds, and
Mercator Asset Management LPas the subadviser to International Stock Series, a
portfolio of Prudential World Fund, Inc. There are multiple subadvisers for The
Target Portfolio Trust and Prudential Diversified Funds.
2As of December 31, 1996.
III-1
<PAGE>
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
As of December 31, 1997, Prudential Investments Fund Management is the
eighteenth largest mutual fund company 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 LLC, a premier institutional equity manager
and a subsidiary of Prudential.
HIGH YIELD FUNDS. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor
approximately 200 issues held in the Prudential High Yield Fund (currently the
largest fund of its kind in the country) along with 100 or so other high yield
bonds, which may be considered for purchase.3 Non-investment grade bonds, also
known as junk bonds or high yield bonds, are subject to a greater risk of loss
of principal and interest including default risk than higher-rated bonds.
Prudential high yield portfolio managers and analysts meet face-to-face with
almost every bond issuer in the High Yield Fund's portfolio annually, and have
additional telephone contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets--from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services
from almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from PULP AND PAPER FORECASTEr to WOMEN'S
WEAr DAILY--to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to
collect detailed information on which to trade. From natural gas prices in the
Rocky Mountains to the results of local municipal elections, a Prudential
portfolio manager or trader is able to monitor it if it's important to a
Prudential Mutual Fund.
Prudential Mutual Funds trade approximately $31 billion in U.S. and
foreign government securities a year. PIC seeks information from government
policy makers. In 1995, Prudential's portfolio managers met with several senior
U.S. and foreign government officials, on issues ranging from economic
conditions in foreign countries to the viability of index-linked securities in
the United States.
Prudential Mutual Funds' portfolio managers and analysts met with over
1,200 companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.
- ----------
3As of December 31, 1996. 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 6,000 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1997, assets held by Prudential Securities for its
clients approximated $235 billion. During 1997, over 29,000 new customer
accounts were opened each month at Prudential Securities.7
Prudential Securities has a two-year Financial Advisor training program
plus advanced education programs, including Prudential Securities "university,"
which provides advanced education in a wide array of investment areas.
In 1995, Prudential Securities' equity research team ranked 8th in
INSTITUTIONAL INVESTOR magazine's 1995 "All America Research Team" survey. Three
Prudential Securities' analysts were ranked as first-team finishers.8
In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial ArchitectsSM, 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 Investments, a business group 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, 1997.
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, 1998.
Statement of Assets and Liabilities at September 30, 1998.
Statement of Operations for the year ended September 30, 1998.
Statement of Changes in Net Assets for the years ended September
30, 1998 and 1997.
Notes to Financial Statements.
Financial Highlights.
Report of Independent Accountants.
(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. 33-37356).
(d) Articles Supplementary of Registrant.*
2. By-Laws of the Registrant. Incorporated by reference to
Exhibit 2 to Post-Effective Amendment No. 11 to Registration
Statement on Form N-1A filed via EDGAR on December 1, 1997
(File No. 33-37356)
3. Not Applicable.
4. Instruments defining rights of holders of the securities
being offered. Incorporated by reference to Post-Effective
Amendment No. 5 to the Registration Statement on Form N-1A,
filed via EDGAR on November 30, 1993 (File No. 33-25553).
5. (a) Management Agreement between the Registrant and
Prudential Mutual Fund Management, Inc. Incorporated by
reference to Exhibit 5(a) to Post-Effective Amendment
No. 11 to Registration Statement on Form N-1A filed via
EDGAR on December 1, 1997 (File No. 33-37356)
(b) Subadvisory Agreement among Registrant, Prudential
Mutual Fund Management, Inc. and Wellington Management
Company. Incorporated by reference to Exhibit 5(b) to
Post-Effective Amendment No. 11 to Registration
Statement on Form N-1A filed via EDGAR on December 1,
1997 (File No. 33-37356)
6. (a) Distribution Agreement between Registrant and
Prudential Investment Management Services LLC.*
(b) Form of Selected Dealer Agreement.*
7. Not Applicable.
8. Custodian Contract between the Registrant and State Street
Bank and Trust Company. Incorporated by reference to Exhibit
8 to Post-Effective Amendment No. 11 to Registration
Statement on Form N-1A filed via EDGAR on December 1, 1997
(File No. 33-37356)
9. Transfer Agency and Service Agreement between the Registrant
and Prudential Mutual Fund Services, Inc. Incorporated by
reference to Exhibit 9 to Post-Effective Amendment No. 11 to
Registration Statement on Form N-1A filed via EDGAR on
December 1, 1997 (File No. 33-37356)
10. Opinion and consent of Counsel.*
11. (a) Consent of Independent Accountants.*
C-1
<PAGE>
12. Not Applicable.
13. Not Applicable.
14. Not Applicable.
15. (a) Amended and Restated Distribution and Service Plan for
Class A Shares.* (b) Amended and Restated Distribution
and Service Plan for Class B Shares.* (c) Amended and
Restated Distribution and Service Plan for Class C
Shares.*
16. (a) Schedule of Computation of Performance Quotations.
Incorporated by reference to Exhibit 16(a) to
Post-Effective Amendment No. 11 to Registration
Statement on Form N-1A filed via EDGAR on December 1,
1997 (File No. 33-37356)
(b) Schedule of Computation of 30-day yield. Incorporated
by reference to Post-Effective Amendment No. 5 to
Registration Statement on Form N-1A, filed via EDGAR on
November 30, 1993 (File No. 33-37356).
17. Financial Data Schedule.*
18. Amended and Restated Rule 18f-3 Plan.*
- ----------
* Filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of November 6, 1998 there were 11,482, 16,106, 165 and 523 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(a) 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(a) to the Registration
Statement) and Section 5 of the Subadvisory Agreement (Exhibit 5(b) 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.
C-2
<PAGE>
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.
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 executive 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 Investments; Officer-in-Charge, President,
President, Chief Chief Executive Officer and Chief Operating Officer, PIFM
Executive Officer and
Chief Operating Officer
Frank W. Giordano Executive Vice President, Senior Vice President, Prudential Securities Incorporated; Executive
Secretary and Vice President, Secretary and General Counsel, PIFM
General Counsel
Robert F. Gunia Executive Vice President Vice President, Prudential Insurance Company of America;
and Treasurer Executive Vice President and Treasurer,PIFM; Senior Vice President,
Prudential Securities Incorporated
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), and is incorporated herein by reference thereto.
ITEM 29. PRINCIPAL UNDERWRITER
(a) Prudential Investment Management Services LLC (PIMS)
PIMS is distributor for Cash Accumulation Trust, Command Money Fund,
Command Government Fund, Command Tax-Free Fund, The Global Total Return Fund,
Inc., Global Utility Fund, Inc., Nicholas-Applegate Fund, Inc.
(Nicholas-Applegate Growth Equity Fund), Prudential Balanced Fund, Prudential
California Municipal Fund (California Income Series and California Series),
Prudential Distressed Securities Fund, Inc., Prudential Diversified Bond Fund,
Inc., Prudential Emerging Growth Fund, Inc., Prudential Equity Fund, Inc.,
Prudential Equity Income Fund, Prudential Europe Growth Fund, Inc., Prudential
Global Genesis Fund, Inc., Prudential Global Limited Maturity Fund, Inc.,
Prudential Government Income Fund, Inc., Prudential Government Securities Trust,
Prudential High Yield Fund, Inc., Prudential High Yield Total Return Fund, Inc.,
Prudential Index Series Fund, Prudential Institutional Liquidity Portfolio,
Inc., Prudential Intermediate Global Income Fund, Inc., Prudential International
Bond Fund,Inc., Prudential Investment Portfolios, Inc., Prudential Mid-Cap Value
Fund, Prudential MoneyMart Assets, Inc., Prudential Mortgage Income Fund, Inc.,
Prudential Municipal Bond Fund, Prudential Municipal Series Fund, Prudential
National Municipals Fund, Inc., Prudential Natural Resources Fund, Inc.,
Prudential Pacific Growth Fund, Inc., Prudential Real Estate Securities Fund,
Prudential Small-Cap Quantum Fund, Inc., Prudential Small Company Value Fund,
Inc., Prudential Special Money Market Fund, Inc., Prudential Structured Maturity
Fund, Inc., Prudential Tax-Free Money Fund, Inc., Prudential 20/20 Focus Fund,
Prudential Utility Fund, Inc., Prudential World Fund, Inc., Prudential
Diversified Funds and The Target Portfolio Trust.
(b)(i) Information concerning the officers and directors of PIMS is set
forth below.
C-3
<PAGE>
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(1) UNDERWRITER REGISTRANT
- ------- ----------- -----------
<S> <C> <C>
E. MIchael Caulfield ................ President None
Mark R. Fetting ..................... Executive Vice President None
Gateway Center Three
100 Mulberry Street
Newark, New Jersey 07102
Jean D. Hamilton .................... Executive Vice President None
Ronald P. Joelson ................... Executive Vice President None
Brian M. Storms ..................... Executive Vice President None
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102
John R. Strangfeld .................. Executive Vice President None
Mario A. Mosse ...................... Senior Vice President and Chief Operating Officer None
Scott S. Wallner .................... Vice President, Secretary and Chief Legal Officer None
Michael G. Williamson ............... Vice President, Comptroller and Chief
Financial Officer None
C. Edward Chaplin ................... Treasurer None
</TABLE>
- ----------
(1) The address of each person named is Prudential Plaza, Newark, New Jersey
07102 unless otherwise noted.
(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, 100 Mulberry
Street, Newark, New Jersey 07102-4077 and Prudential Mutual Fund Services, LLC,
Raritan Plaza One, Edison, New Jersey 08837. Documents required by Rules
31a-1(b)(4), (5), (6), (7), (9), (10) and (11), 31a-1(f), and Rule 31a-1(d) will
be kept at Gateway Center Three, 100 Mulberry Street, Newark, New Jersey
07102-4077, and the remaining accounts, books and other documents required by
such other pertinent provisions of Section 31(a) and the Rules promulgated
thereunder will be kept by State Street Bank and Trust Company and Prudential
Mutual Fund Services, LLC.
ITEM 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
Post-Effective Amendment to the Registration Statement, Registrant is not a
party to any management-related service contract.
ITEM 32. UNDERTAKINGS
Registrant makes the following undertaking:
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 Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act 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 27th day of November, 1998.
GLOBAL UTILITY FUND, INC.
/s/ Brian M. Storms
-------------------
(BRIAN M. STORMS, 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 November 27, 1998
- -----------------------------
EUGENE C. DORSEY
/s/ Douglas H. McCorkindale Director November 27, 1998
- -----------------------------
DOUGLAS H. MCCORKINDALE
/s/ Thomas T. Mooney Director November 27, 1998
- -----------------------------
THOMAS T. MOONEY
/s/ Brian M. Storms President November 27, 1998
- ----------------------------- and Director
BRIAN M. STORMS
/s/ Grace Torres Treasurer and Principal November 27, 1998
- ----------------------------- Financial and Accounting
GRACE TORRES Officer
</TABLE>
<PAGE>
EXHIBIT INDEX
1. (d) Articles Supplementary of Registrant.
6. (a) Distribution Agreement between Registrant and Prudential Investment
Management Services LLC.
(b) Form of Selected Dealer Agreement.
10. Opinion of Counsel.
11. (a) Consent of Independent Accountants.
(b) Consent of Kirkpatrick &Lockhart LLP.
15. (a) Amended and Restated Distribution and Service Plan for Class A Shares.
(b) Amended and Restated Distribution and Service Plan for Class B Shares.
(c) Amended and Restated Distribution and Service Plan for Class C Shares.
17. Financial Data Schedule.
18. Amended and Restated Rule 18f-3 Plan.
ARTICLES SUPPLEMENTARY
of
GLOBAL UTILITY FUND, INC.
Global Utility Fund, Inc., a Maryland corporation having its principal
office in Baltimore, Maryland (hereinafter called the "Corporation"), hereby
certifies to the State Department of Assessments and Taxation of Maryland that:
FIRST: In accordance with Article IV of the Charter of the Corporation
and the Maryland General Corporation Law, the Board of Directors has
reclassified the unissued shares of its Class C Common Stock (par value $.001
per share) by changing certain terms and conditions as follows:
Effective November 2, 1998, all newly-issued Class C Shares of Common
Stock shall be subject to a front-end sales charge, a contingent deferred sales
charge, and a Rule 12b-1 distribution fee as determined by the Board of
Directors from time to time in accordance with the Investment Company Act of
1940, as amended, and as disclosed in the current prospectus for such shares.
IN WITNESS WHEREOF, Global Utility Fund, Inc. has caused these presents
to be signed in its name and on its behalf by its President and witnessed by its
Secretary on October 21, 1998.
WITNESS: GLOBAL UTILITY FUND, INC.
/s/S. Jane Rose, Secretary /s/Richard A. Redeker, President
- ------------------------------ By:--------------------------
S. Jane Rose, Secretary Richard A. Redeker, President
THE UNDERSIGNED, President of Global Utility Fund, Inc., who executed
on behalf of the Corporation Articles Supplementary of which this Certificate is
made a part, hereby acknowledges in the name and on behalf of said Corporation
the foregoing Articles Supplementary to be in the corporate act of said
Corporation and hereby certifies that the matters and facts set forth herein
with respect to the authorization and approval thereof are true in all material
respects under the penalties of perjury.
/s/Richard A. Redeker, President
----------------------------------
Richard A. Redeker, President
GLOBAL UTILITY FUND, INC.
DISTRIBUTION AGREEMENT
Agreement made as of July 1, 1998, between Global Utility Fund, Inc., a
Maryland corporation (the Fund), and Prudential Investment Management Services
LLC, a Delaware limited liability company (the Distributor).
WITNESSETH
WHEREAS, the Fund is registered under the Investment Company Act of
1940, as amended (the Investment Company Act), as a diversified, open-end,
management investment company and it is in the interest of the Fund to offer its
shares for sale continuously;
WHEREAS, the shares of the Fund may be divided into classes and/or
series (all such shares being referred to herein as Shares) and the Fund
currently is authorized to offer Class A, Class B, Class C and Class Z Shares;
WHEREAS, the Distributor is a broker-dealer registered under the
Securities Exchange Act of 1934, as amended, and is engaged in the business of
selling shares of registered investment companies either directly or through
other broker-dealers;
WHEREAS, the Fund and the Distributor wish to enter into an agreement
with each other, with respect to the continuous offering of the Fund's Shares
from and after the date hereof in order to promote the growth of the Fund and
facilitate the distribution of its Shares; and
WHEREAS, the Fund has adopted a plan (or plans) of distribution
pursuant to Rule 12b-1 under the Investment Company Act with respect to certain
of its classes and/or series of Shares (the Plans) authorizing payments by the
Fund to the Distributor with respect to the distribution of such classes and/or
series of Shares and the maintenance of related shareholder accounts.
NOW, THEREFORE, the parties agree as follows:
Section 1. APPOINTMENT OF THE DISTRIBUTOR
The Fund hereby appoints the Distributor as the principal underwriter
and distributor of the Shares of the Fund to sell Shares to the public on behalf
of the Fund and the Distributor hereby accepts such appointment and agrees to
act hereunder. The Fund hereby agrees during the term of this Agreement to sell
Shares of the Fund through the Distributor on the terms and conditions set forth
below.
<PAGE>
Section 2. EXCLUSIVE NATURE OF DUTIES
The Distributor shall be the exclusive representative of the Fund to
act as principal underwriter and distributor of the Fund's Shares, except that:
2.1 The exclusive rights granted to the Distributor to sell Shares of
the Fund shall not apply to Shares of the Fund issued in connection with the
merger or consolidation of any other investment company or personal holding
company with the Fund or the acquisition by purchase or otherwise of all (or
substantially all) the assets or the outstanding shares of any such company by
the Fund.
2.2 Such exclusive rights shall not apply to Shares issued by the Fund
pursuant to reinvestment of dividends or capital gains distributions or through
the exercise of any conversion feature or exchange privilege.
2.3 Such exclusive rights shall not apply to Shares issued by the Fund
pursuant to the reinstatement privilege afforded redeeming shareholders.
2.4 Such exclusive rights shall not apply to purchases made through the
Fund's transfer and dividend disbursing agent in the manner set forth in the
currently effective Prospectus of the Fund. The term "Prospectus" shall mean the
Prospectus and Statement of Additional Information included as part of the
Fund's Registration Statement, as such Prospectus and Statement of Additional
Information may be amended or supplemented from time to time, and the term
"Registration Statement" shall mean the Registration Statement filed by the Fund
with the Securities and Exchange Commission and effective under the Securities
Act of 1933, as amended (Securities Act), and the Investment Company Act, as
such Registration Statement is amended from time to time.
Section 3. PURCHASE OF SHARES FROM THE FUND
3.1 The Distributor shall have the right to buy from the Fund on behalf
of investors the Shares needed, but not more than the Shares needed (except for
clerical errors in transmission) to fill unconditional orders for Shares placed
with the Distributor by investors or registered and qualified securities dealers
and other financial institutions (selected dealers).
3.2 The Shares shall be sold by the Distributor on behalf of the Fund
and delivered by the Distributor or selected dealers, as described in Section
6.4 hereof, to investors at the offering price as set forth in the Prospectus.
3.3 The Fund shall have the right to suspend the sale of any or all
classes and/or series of its Shares at times when redemption is suspended
pursuant to
2
<PAGE>
the conditions in Section 4.3 hereof or at such other times as may be determined
by the Board. The Fund shall also have the right to suspend the sale of any or
all classes and/or series of its Shares if a banking moratorium shall have been
declared by federal or New Jersey authorities.
3.4 The Fund, or any agent of the Fund designated in writing by the
Fund, shall be promptly advised of all purchase orders for Shares received by
the Distributor. Any order may be rejected by the Fund; provided, however, that
the Fund will not arbitrarily or without reasonable cause refuse to accept or
confirm orders for the purchase of Shares. The Fund (or its agent) will confirm
orders upon their receipt, will make appropriate book entries and upon receipt
by the Fund (or its agent) of payment therefor, will deliver deposit receipts
for such Shares pursuant to the instructions of the Distributor. Payment shall
be made to the Fund in New York Clearing House funds or federal funds. The
Distributor agrees to cause such payment and such instructions to be delivered
promptly to the Fund (or its agent).
Section 4. REPURCHASE OR REDEMPTION OF SHARES BY THE FUND
4.1 Any of the outstanding Shares may be tendered for redemption at any
time, and the Fund agrees to repurchase or redeem the Shares so tendered in
accordance with its Articles of Incorporation as amended from time to time, and
in accordance with the applicable provisions of the Prospectus. The price to be
paid to redeem or repurchase the Shares shall be equal to the net asset value
determined as set forth in the Prospectus. All payments by the Fund hereunder
shall be made in the manner set forth in Section 4.2 below.
4.2 The Fund shall pay the total amount of the redemption price as
defined in the above paragraph pursuant to the instructions of the Distributor
on or before the seventh day subsequent to its having received the notice of
redemption in proper form. The proceeds of any redemption of Shares shall be
paid by the Fund as follows: (i) in the case of Shares subject to a contingent
deferred sales charge, any applicable contingent deferred sales charge shall be
paid to the Distributor, and the balance shall be paid to or for the account of
the redeeming shareholder, in each case in accordance with applicable provisions
of the Prospectus; and (ii) in the case of all other Shares, proceeds shall be
paid to or for the account of the redeeming shareholder, in each case in
accordance with applicable provisions of the Prospectus.
4.3 Redemption of any class and/or series of Shares or payment may be
suspended at times when the New York Stock Exchange is closed for other than
customary weekends and holidays, when trading on said Exchange is restricted,
when an emergency exists as a result of which disposal by the Fund of securities
owned by it is not reasonably practicable or it is not reasonably practicable
for the Fund fairly to determine the value of its net assets, or during any
other period when the Securities and Exchange Commission, by order, so permits.
3
<PAGE>
Section 5. DUTIES OF THE FUND
5.1 Subject to the possible suspension of the sale of Shares as
provided herein, the Fund agrees to sell its Shares so long as it has Shares of
the respective class and/or series available.
5.2 The Fund shall furnish the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Shares, and this shall
include one certified copy, upon request by the Distributor, of all financial
statements prepared for the Fund by independent public accountants. The Fund
shall make available to the Distributor such number of copies of its Prospectus
and annual and interim reports as the Distributor shall reasonably request.
5.3 The Fund shall take, from time to time, but subject to the
necessary approval of the Board and the shareholders, all necessary action to
fix the number of authorized Shares and such steps as may be necessary to
register the same under the Securities Act, to the end that there will be
available for sale such number of Shares as the Distributor reasonably may
expect to sell. The Fund agrees to file from time to time such amendments,
reports and other documents as may be necessary in order that there will be no
untrue statement of a material fact in the Registration Statement, or necessary
in order that there will be no omission to state a material fact in the
Registration Statement which omission would make the statements therein
misleading.
5.4 The Fund shall use its best efforts to qualify and maintain the
qualification of any appropriate number of its Shares for sales under the
securities laws of such states as the Distributor and the Fund may approve;
provided that the Fund shall not be required to amend its Articles of
Incorporation or By-Laws to comply with the laws of any state, to maintain an
office in any state, to change the terms of the offering of its Shares in any
state from the terms set forth in its Registration Statement, to qualify as a
foreign corporation in any state or to consent to service of process in any
state other than with respect to claims arising out of the offering of its
Shares. Any such qualification may be withheld, terminated or withdrawn by the
Fund at any time in its discretion. As provided in Section 9 hereof, the expense
of qualification and maintenance of qualification shall be borne by the Fund.
The Distributor shall furnish such information and other material relating to
its affairs and activities as may be required by the Fund in connection with
such qualifications.
Section 6. DUTIES OF THE DISTRIBUTOR
6.1 The Distributor shall devote reasonable time and effort to effect
sales of Shares, but shall not be obligated to sell any specific number of
Shares. Sales of the Shares shall be on the terms described in the Prospectus.
The Distributor may
4
<PAGE>
enter into like arrangements with other investment companies. The Distributor
shall compensate the selected dealers as set forth in the Prospectus.
6.2 In selling the Shares, the Distributor shall use its best efforts
in all respects duly to conform with the requirements of all federal and state
laws relating to the sale of such securities. Neither the Distributor nor any
selected dealer nor any other person is authorized by the Fund to give any
information or to make any representations, other than those contained in the
Registration Statement or Prospectus and any sales literature approved by
appropriate officers of the Fund.
6.3 The Distributor shall adopt and follow procedures for the
confirmation of sales to investors and selected dealers, the collection of
amounts payable by investors and selected dealers on such sales and the
cancellation of unsettled transactions, as may be necessary to comply with the
requirements of the National Association of Securities Dealers, Inc. (NASD).
6.4 The Distributor shall have the right to enter into selected dealer
agreements with registered and qualified securities dealers and other financial
institutions of its choice for the sale of Shares, provided that the Fund shall
approve the forms of such agreements. Within the United States, the Distributor
shall offer and sell Shares only to such selected dealers as are members in good
standing of the NASD. Shares sold to selected dealers shall be for resale by
such dealers only at the offering price determined as set forth in the
Prospectus.
Section 7. PAYMENTS TO THE DISTRIBUTOR
7.1 With respect to classes and/or series of Shares which impose a
front-end sales charge, the Distributor shall receive and may retain any portion
of any front-end sales charge which is imposed on such sales and not reallocated
to selected dealers as set forth in the Prospectus, subject to the limitations
of Rule 2830 of the Conduct Rules of the NASD. Payment of these amounts to the
Distributor is not contingent upon the adoption or continuation of any
applicable Plans.
7.2 With respect to classes and/or series of Shares which impose a
contingent deferred sales charge, the Distributor shall receive and may retain
any contingent deferred sales charge which is imposed on such sales as set forth
in the Prospectus, subject to the limitations of Rule 2830 of the Conduct Rules
of the NASD. Payment of these amounts to the Distributor is not contingent upon
the adoption or continuation of any Plan.
Section 8. PAYMENT OF THE DISTRIBUTOR UNDER THE PLAN
8.1 The Fund shall pay to the Distributor as compensation for services
under any Plans adopted by the Fund and this Agreement a distribution and
service fee
5
<PAGE>
with respect to the Fund's classes and/or series of Shares as described in each
of the Fund's respective Plans and this Agreement.
8.2 So long as a Plan or any amendment thereto is in effect, the
Distributor shall inform the Board of the commissions and account servicing fees
with respect to the relevant class and/or series of Shares to be paid by the
Distributor to account executives of the Distributor and to broker-dealers and
financial institutions which have dealer agreements with the Distributor. So
long as a Plan (or any amendment thereto) is in effect, at the request of the
Board of Directors or any agent or representative of the Fund, the Distributor
shall provide such additional information as may reasonably be requested
concerning the activities of the Distributor hereunder and the costs incurred in
performing such activities with respect to the relevant class and/or series of
Shares.
Section 9. ALLOCATION OF EXPENSES
The Fund shall bear all costs and expenses of the continuous offering
of its Shares (except for those costs and expenses borne by the Distributor
pursuant to a Plan and subject to the requirements of Rule 12b-1 under the
Investment Company Act), including fees and disbursements of its counsel and
auditors, in connection with the preparation and filing of any required
Registration Statements and/or Prospectuses under the Investment Company Act or
the Securities Act, and all amendments and supplements thereto, and preparing
and mailing annual and periodic reports and proxy materials to shareholders
(including but not limited to the expense of setting in type any such
Registration Statements, Prospectuses, annual or periodic reports or proxy
materials). The Fund shall also bear the cost of expenses of qualification of
the Shares for sale, and, if necessary or advisable in connection therewith, of
qualifying the Fund as a broker or dealer, in such states of the United States
or other jurisdictions as shall be selected by the Fund and the Distributor
pursuant to Section 5.4 hereof and the cost and expense payable to each such
state for continuing qualification therein until the Fund decides to discontinue
such qualification pursuant to Section 5.4 hereof. As set forth in Section 8
above, the Fund shall also bear the expenses it assumes pursuant to any Plan, so
long as such Plan is in effect.
Section 10. INDEMNIFICATION
10.1 The Fund agrees to indemnify, defend and hold the Distributor, its
officers and directors and any person who controls the Distributor within the
meaning of Section 15 of the Securities Act, free and harmless from and against
any and all claims, demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any
reasonable counsel fees incurred in connection therewith) which the Distributor,
its officers, directors or any such controlling person may incur under the
Securities Act, or under common law or otherwise, arising out of or based upon
any untrue statement of a material fact contained in the Registration
6
<PAGE>
Statement or Prospectus or arising out of or based upon any alleged omission to
state a material fact required to be stated in either thereof or necessary to
make the statements in either thereof not misleading, except insofar as such
claims, demands, liabilities or expenses arise out of or are based upon any such
untrue statement or omission or alleged untrue statement or omission made in
reliance upon and in conformity with information furnished by the Distributor to
the Fund for use in the Registration Statement or Prospectus; provided, however,
that this indemnity agreement shall not inure to the benefit of any such
officer, member or controlling person unless a court of competent jurisdiction
shall determine in a final decision on the merits, that the person to be
indemnified was not liable by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties, or by reason of its reckless
disregard of its obligations under this Agreement (disabling conduct), or, in
the absence of such a decision, a reasonable determination, based upon a review
of the facts, that the indemnified person was not liable by reason of disabling
conduct, by (a) a vote of a majority of a quorum of directors or directors who
are neither "interested persons" of the Fund as defined in Section 2(a)(19) of
the Investment Company Act nor parties to the proceeding, or (b) an independent
legal counsel in a written opinion. The Fund's agreement to indemnify the
Distributor, its officers and directors or trustees and any such controlling
person as aforesaid is expressly conditioned upon the Fund's being promptly
notified of any action brought against the Distributor, its officers or
directors or trustees, or any such controlling person, such notification to be
given by letter or telegram addressed to the Fund at its principal business
office. The Fund agrees promptly to notify the Distributor of the commencement
of any litigation or proceedings against it or any of its officers or directors
in connection with the issue and sale of any Shares.
10.2 The Distributor agrees to indemnify, defend and hold the Fund, its
officers and directors and any person who controls the Fund, if any, within the
meaning of Section 15 of the Securities Act, free and harmless from and against
any and all claims, demands, liabilities and expenses (including the cost of
investigating or defending against such claims, demands or liabilities and any
reasonable counsel fees incurred in connection therewith) which the Fund, its
officers and directors or any such controlling person may incur under the
Securities Act or under common law or otherwise, but only to the extent that
such liability or expense incurred by the Fund, its directors or officers or
such controlling person resulting from such claims or demands shall arise out of
or be based upon any alleged untrue statement of a material fact contained in
information furnished in writing by the Distributor to the Fund for use in the
Registration Statement or Prospectus or shall arise out of or be based upon any
alleged omission to state a material fact in connection with such information
required to be stated in the Registration Statement or Prospectus or necessary
to make such information not misleading. The Distributor's agreement to
indemnify the Fund, its officers and directors and any such controlling person
as aforesaid, is expressly conditioned upon the Distributor's being promptly
notified of any action brought against
7
<PAGE>
the Fund, its officers and directors or any such controlling person, such
notification being given to the Distributor at its principal business office.
Section 11. DURATION AND TERMINATION OF THIS AGREEMENT
11.1 This Agreement shall become effective as of the date first above
written and shall remain in force for two years from the date hereof and
thereafter, but only so long as such continuance is specifically approved at
least annually by (a) the Board of Directors of the Fund, or by the vote of a
majority of the outstanding voting securities of the applicable class and/or
series of the Fund, and (b) by the vote of a majority of those directors who are
not parties to this Agreement or interested persons of any such parties and who
have no direct or indirect financial interest in this Agreement or in the
operation of any of the Fund's Plans or in any agreement related thereto
(independent directors), cast in person at a meeting called for the purpose of
voting upon such approval.
11.2 This Agreement may be terminated at any time, without the payment
of any penalty, by a majority of the independent directors or by vote of a
majority of the outstanding voting securities of the applicable class and/or
series of the Fund, or by the Distributor, on sixty (60) days' written notice to
the other party. This Agreement shall automatically terminate in the event of
its assignment.
11.3 The terms "affiliated person," "assignment," "interested person"
and "vote of a majority of the outstanding voting securities", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.
Section 12. AMENDMENTS TO THIS AGREEMENT
This Agreement may be amended by the parties only if such amendment is
specifically approved by (a) the Board of Directors of the Fund, or by the vote
of a majority of the outstanding voting securities of the applicable class
and/or series of the Fund, and (b) by the vote of a majority of the independent
directors cast in person at a meeting called for the purpose of voting on such
amendment.
Section 13. SEPARATE AGREEMENT AS TO CLASSES AND/OR SERIES
The amendment or termination of this Agreement with respect to any
class and/or series shall not result in the amendment or termination of this
Agreement with respect to any other class and/or series unless explicitly so
provided.
8
<PAGE>
Section 14. GOVERNING LAW
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of New Jersey as at the time in effect and
the applicable provisions of the Investment Company Act. To the extent that the
applicable law of the State of New Jersey, or any of the provisions herein,
conflict with the applicable provisions of the Investment Company Act, the
latter shall control.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year above written.
PRUDENTIAL INVESTMENT MANAGEMENT
SERVICES LLC
By: ------------------------
GLOBAL UTILITY FUND, INC.
By: ------------------------
9
DEALER AGREEMENT
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC
Prudential Investment Management Services LLC ("Distributor") and
- ------------------ ("Dealer") have agreed that Dealer will participate in the
distribution of shares ("Shares") of all the funds and series thereof (as they
may exist from time to time) comprising the Prudential Mutual Fund Family (each
a "Fund" and collectively the "Funds") and any classes thereof for which
Distributor now or in the future serves as principal underwriter and
distributor, subject to the terms of this Dealer Agreement ("Agreement"). Any
such additional Funds will be included in this Agreement upon Distributor's
written notification to Dealer.
1. LICENSING
a. Dealer represents and warrants that it is: (i) a
broker-dealer registered with the Securities and Exchange Commission ("SEC");
(ii) a member in good standing of the National Association of Securities
Dealers, Inc. ("NASD"); and (iii) licensed by the appropriate regulatory agency
of each state or other jurisdiction in which Dealer will offer and sell Shares
of the Funds, to the extent necessary to perform the duties and activities
contemplated by this Agreement.
b. Dealer represents and warrants that each of its partners,
directors, officers, employees, and agents who will be utilized by Dealer with
respect to its duties and activities under this Agreement is either
appropriately licensed or exempt from such licensing requirements by the
appropriate regulatory agency of each state or other jurisdiction in which
Dealer will offer and sell Shares of the Funds.
c. Dealer agrees that: (i) termination or suspension of its
registration with the SEC; (ii) termination or suspension of its membership with
the NASD; or (iii) termination or suspension of its license to do business by
any state or other jurisdiction or federal regulatory agency shall immediately
cause the termination of this Agreement. Dealer further agrees to immediately
notify Distributor in writing of any such action or event.
d. Dealer agrees that this Agreement is in all respects
subject to the Conduct Rules of the NASD and such Conduct Rules shall control
any provision to the contrary in this Agreement.
e. Dealer agrees to be bound by and to comply with all
applicable state and federal laws and all rules and regulations promulgated
thereunder generally affecting the sale or distribution of mutual fund shares.
2. ORDERS
a. Dealer agrees to offer and sell Shares of the Funds
(including those of each of its classes) only at the regular public offering
price applicable to such Shares and in effect at the time of each transaction.
The procedures relating to all orders and the handling of each order (including
the manner of computing the net asset value of Shares and the effective time of
orders received from Dealer) are subject to: (i) the terms of the then current
prospectus and statement of
<PAGE>
additional information (including any supplements, stickers or amendments
thereto) relating to each Fund, as filed with the SEC ("Prospectus"); (ii) the
new account application for each Fund, as supplemented or amended from time to
time; and (iii) Distributor's written instructions and multiple class pricing
procedures and guidelines, as provided to Dealer from time to time. To the
extent that the Prospectus contains provisions that are inconsistent with this
Agreement or any other document, the terms of the Prospectus shall be
controlling.
b. Distributor reserves the right at any time, and without
notice to Dealer, to suspend the sale of Shares or to withdraw or limit the
offering of Shares. Distributor reserves the unqualified right not to accept any
specific order for the purchase or sale of Shares.
c. In all offers and sales of the Shares to the public, Dealer
is not authorized to act as broker or agent for, or employee of, Distributor,
any Fund or any other dealer, and Dealer shall not in any manner represent to
any third party that Dealer has such authority or is acting in such capacity.
Rather, Dealer agrees that it is acting as principal for Dealer's own account or
as agent on behalf of Dealer's customers in all transactions in Shares, except
as provided in Section 3.i. hereof. Dealer acknowledges that it is solely
responsible for all suitability determinations with respect to sales of Shares
of the Funds to Dealer's customers and that Distributor has no responsibility
for the manner of Dealer's performance of, or for Dealer's acts or omissions in
connection with, the duties and activities Dealer provides under this Agreement.
d. All orders are subject to acceptance by Distributor in its
sole discretion and become effective only upon confirmation by Distributor.
e. Distributor agrees that it will accept from Dealer orders
placed through a remote terminal or otherwise electronically transmitted via the
National Securities Clearing Corporation ("NSCC") Fund/Serv Networking program,
provided, however, that appropriate documentation thereof and agreements
relating thereto are executed by both parties to this Agreement, including in
particular the standard NSCC Networking Agreement and any other related
agreements between Distributor and Dealer deemed appropriate by Distributor, and
that all accounts opened or maintained pursuant to that program will be governed
by applicable NSCC rules and procedures. Both parties further agree that, if the
NSCC Fund/Serv Networking program is used to place orders, the standard NSCC
Networking Agreement will control insofar as there is any conflict between any
provision of the Dealer Agreement and the standard NSCC Networking Agreement.
3. DUTIES OF DEALER
a. Dealer agrees to purchase Shares only from Distributor or
from Dealer's customers.
b. Dealer agrees to enter orders for the purchase of Shares
only from Distributor and only for the purpose of covering purchase orders
Dealer has already received from its customers or for Dealer's own bona fide
investment.
c. Dealer agrees to date and time stamp all orders received by
Dealer and promptly, upon receipt of any and all orders, to transmit to
Distributor all orders received prior to
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the time described in the Prospectus for the calculation of each Fund's net
asset value so as to permit Distributor to process all orders at the price next
determined after receipt by Dealer, in accordance with the Prospectus. Dealer
agrees not to withhold placing orders for Shares with Distributor so as to
profit itself as a result of such inaction.
d. Dealer agrees to maintain records of all purchases and
sales of Shares made through Dealer and to furnish Distributor or regulatory
authorities with copies of such records upon request. In that regard, Dealer
agrees that, unless Dealer holds Shares as nominee for its customers or
participates in the NSCC Fund/Serv Networking program, at certain matrix levels,
it will provide Distributor with all necessary information to comply properly
with all federal, state and local reporting requirements and backup and
nonresident alien withholding requirements for its customer accounts including,
without limitation, those requirements that apply by treating Shares issued by
the Funds as readily tradable instruments. Dealer represents and agrees that all
Taxpayer Identification Numbers ("TINs") provided are certified, and that no
account that requires a certified TIN will be established without such certified
TIN. With respect to all other accounts, including Shares held by Dealer in
omnibus accounts and Shares purchased or sold through the NSCC Fund/Serv
Networking program, at certain matrix levels, Dealer agrees to perform all
federal, state and local tax reporting with respect to such accounts, including
without limitation redemptions and exchanges.
e. Dealer agrees to distribute or cause to be delivered to its
customers Prospectuses, proxy solicitation materials and related information and
proxy cards, semi-annual and annual shareholder reports and any other materials
in compliance with applicable legal requirements, except to the extent that
Distributor expressly undertakes to do so in writing.
f. Dealer agrees that if any Share is repurchased by any Fund
or is tendered for redemption within seven (7) business days after confirmation
by Distributor of the original purchase order from Dealer, Dealer shall forfeit
its right to any concession or commission received by Dealer with respect to
such Share and shall forthwith refund to Distributor the full concession allowed
to Dealer or commission paid to Dealer on the original sale. Distributor agrees
to notify Dealer of such repurchase or redemption within a reasonable time after
settlement. Termination or cancellation of this Agreement shall not relieve
Dealer from its obligation under this provision.
g. Dealer agrees that payment for Shares ordered from
Distributor shall be in Fed Funds, New York clearinghouse or other immediately
available funds and that such funds shall be received by Distributor by the
earlier of: (i) the end of the third (3rd) business day following Dealer's
receipt of the customer's order to purchase such Shares; or (ii) the settlement
date established in accordance with Rule 15c6-1 under the Securities Exchange
Act of 1934, as amended. If such payment is not received by Distributor by such
date, Dealer shall forfeit its right to any concession or commission with
respect to such order, and Distributor reserves the right, without notice,
forthwith to cancel the sale, or, at its option, to sell the Shares ordered back
to the Fund, in which case Distributor may hold Dealer responsible for any loss,
including loss of profit, suffered by Distributor resulting from Dealer's
failure to make payment as aforesaid. If a purchase is made by check, the
purchase is deemed made upon conversion of the purchase instrument into Fed
Funds, New York clearinghouse or other immediately available funds.
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<PAGE>
h. Dealer agrees that it: (i) shall assume responsibility for
any loss to the Fund caused by a correction to any order placed by Dealer that
is made subsequent to the trade date for the order, provided such order
correction was not based on any negligence on Distributor's part; and (ii) will
immediately pay such loss to the Fund upon notification.
i. Dealer agrees that in connection with orders for the
purchase of Shares on behalf of any IRAs, 401(k) plans or other retirement plan
accounts, by mail, telephone, or wire, Dealer shall act as agent for the
custodian or trustee of such plans (solely with respect to the time of receipt
of the application and payments), and Dealer shall not place such an order with
Distributor until it has received from its customer payment for such purchase
and, if such purchase represents the first contribution to such a retirement
plan account, the completed documents necessary to establish the retirement
plan. Dealer agrees to indemnify Distributor and its affiliates for any claim,
loss, or liability resulting from incorrect investment instructions received by
Distributor from Dealer.
j. Dealer agrees that it will not make any conditional orders
for the purchase or redemption of Shares and acknowledges that Distributor will
not accept conditional orders for Shares.
k. Dealer agrees that all out-of-pocket expenses incurred by
it in connection with its activities under this Agreement will be borne by
Dealer.
l. Dealer agrees that it will keep in force appropriate
broker's blanket bond insurance policies covering any and all acts of Dealer's
partners, directors, officers, employees, and agents adequate to reasonably
protect and indemnify the Distributor and the Funds against any loss which any
party may suffer or incur, directly or indirectly, as a result of any action by
Dealer or Dealer's partners, directors, officers, employees, and agents.
m. Dealer agrees that it will maintain the required net
capital as specified by the rules and regulations of the SEC, NASD and other
regulatory authorities.
4. DEALER COMPENSATION
a. On each purchase of Shares by Dealer from Distributor, the
total sales charges and dealer concessions or commissions, if any, payable to
Dealer shall be as stated on Schedule A to this Agreement, which may be amended
by Distributor from time to time. Distributor reserves the right, without prior
notice, to suspend or eliminate such dealer concession or commissions by
amendment, sticker or supplement to the then current Prospectus for each Fund.
Such sales charges and dealer concessions or commissions, are subject to
reduction under a variety of circumstances as described in each Fund's then
current Prospectus. For an investor to obtain any reduction, Distributor must be
notified at the time of the sale that the sale qualifies for the reduced sales
charge. If Dealer fails to notify Distributor of the applicability of a
reduction in the sales charge at the time the trade is placed, neither
Distributor nor any Fund will be liable for amounts necessary to reimburse any
investor for the reduction that should have been effected. Dealer acknowledges
that no sales charge or concession or commission will be paid to Dealer on the
reinvestment of dividends or capital gains reinvestment or on Shares acquired in
exchange for Shares of another Fund, or class thereof, having the same sales
charge structure as the Fund, or class thereof, from which the exchange was
made, in accordance with the Prospectus.
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<PAGE>
b. In accordance with the Funds' Prospectuses, Distributor or
any affiliate may, but is not obligated to, make payments to dealers from
Distributor's own resources as compensation for certain sales that are made at
net asset value ("Qualifying Sales"). If Dealer notifies Distributor of a
Qualifying Sale, Distributor may make a contingent advance payment up to the
maximum amount available for payment on the sale. If any of the Shares purchased
in a Qualifying Sale are redeemed within twelve (12) months of the end of the
month of purchase, Distributor shall be entitled to recover any advance payment
attributable to the redeemed Shares by reducing any account payable or other
monetary obligation Distributor may owe to Dealer or by making demand upon
Dealer for repayment in cash. Distributor reserves the right to withhold
advances to Dealer, if for any reason Distributor believes that it may not be
able to recover unearned advances from Dealer.
c. With respect to any Fund that offers Shares for which
distribution plans have been adopted under Rule 12b-1 under the Investment
Company Act of 1940, as amended ("Rule 12b-1 Plans"), Distributor also is
authorized to pay the Dealer continuing distribution and/or service fees, as
specified in Schedule A and the relevant Fund Prospectus, with respect to Shares
of any such Fund, to the extent that Dealer provides distribution, marketing,
administrative and other services and activities regarding the promotion of such
Shares and the maintenance of related shareholder accounts.
d. In connection with the receipt of distribution fees and/or
service fees under Rule 12b-1 Plans applicable to Shares purchased by Dealer's
customers, Distributor directs Dealer to provide enhanced shareholder services
such as: processing purchase and redemption transactions; establishing
shareholder accounts; and providing certain information and assistance with
respect to the Funds. (Redemption levels of shareholder accounts assigned to
Dealer will be considered in evaluating Dealer's continued ability to receive
payments of distribution and/or service fees.) In addition, Dealer agrees to
support Distributor's marketing efforts by, among other things, granting
reasonable requests for visits to Dealer's office by Distributor's wholesalers
and marketing representatives, including all Funds covered by a Rule 12b-1 Plan
on Dealer's "approved," "preferred" or other similar product lists, if
applicable, and otherwise providing satisfactory product, marketing and sales
support. Further, Dealer agrees to provide Distributor with supporting
documentation concerning the shareholder services provided, as Distributor may
reasonably request from time to time.
e. All Rule 12b-1 Plan distribution and/or servicing fees
shall be based on the value of Shares attributable to Dealer's customers and
eligible for such payment, and shall be calculated on the basis of and at the
rates set forth in the compensation schedule then in effect. Without prior
approval by a majority of the outstanding shares of a Fund, the aggregate annual
fees paid to Dealer pursuant to any Rule 12b-1 Plan shall not exceed the amounts
stated as the "annual maximums" in each Fund's Prospectus, which amount shall be
a specified percent of the value of the Fund's net assets held in Dealer's
customers' accounts that are eligible for payment pursuant to the Rule 12b-1
Plans (determined in the same manner as each Fund uses to compute its net assets
as set forth in its then current Prospectus).
f. The provisions of any Rule 12b-1 Plan between the Funds and
the Distributor shall control over this Agreement in the event of any
inconsistency. Each Rule 12b-1 Plan in effect on the date of this Agreement is
described in the relevant Fund's Prospectus. Dealer
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<PAGE>
hereby acknowledges that all payments under Rule 12b-1 Plans are subject to
limitations contained in such Rule 12b-1 Plans and may be varied or discontinued
at any time.
5. REDEMPTIONS, REPURCHASES AND EXCHANGES
a. The Prospectus for each Fund describes the provisions
whereby the Fund, under all ordinary circumstances, will redeem Shares held by
shareholders on demand. Dealer agrees that it will not make any representations
to shareholders relating to the redemption of their Shares other than the
statements contained in the Prospectus and the underlying organizational
documents of the Fund, to which it refers, and that Dealer will pay as
redemption proceeds to shareholders the net asset value, minus any applicable
deferred sales charge or redemption fee, determined after receipt of the order
as discussed in the Prospectus.
b. Dealer agrees not to repurchase any Shares from its
customers at a price below that next quoted by the Fund for redemption or
repurchase, i.e., at the net asset value of such Shares, less any applicable
deferred sales charge, or redemption fee, in accordance with the Fund's
Prospectus. Dealer shall, however, be permitted to sell Shares for the account
of the customer or record owner to the Funds at the repurchase price then
currently in effect for such Shares and may charge the customer or record owner
a fair service fee or commission for handling the transaction, provided Dealer
discloses the fee or commission to the customer or record owner. Nevertheless,
Dealer agrees that it shall not under any circumstances maintain a secondary
market in such repurchased Shares.
c. Dealer agrees that, with respect to a redemption order it
has made, if instructions in proper form, including any outstanding
certificates, are not received by Distributor within the time customary or the
time required by law, the redemption may be canceled forthwith without any
responsibility or liability on Distributor's part or on the part of any Fund, or
Distributor, at its option, may buy the shares redeemed on behalf of the Fund,
in which latter case Distributor may hold Dealer responsible for any loss,
including loss of profit, suffered by Distributor resulting from Distributor's
failure to settle the redemption.
d. Dealer agrees that it will comply with any restrictions and
limitations on exchanges described in each Fund's Prospectus, including any
restrictions or prohibitions relating to frequent purchases and redemptions
(i.e., market timing).
6. MULTIPLE CLASSES OF SHARES
Distributor may, from time to time, provide Dealer with
written guidelines or standards relating to the sale or distribution of Funds
offering multiple classes of Shares with different sales charges and
distribution-related operating expenses.
7. FUND INFORMATION
a. Dealer agrees that neither it nor any of its partners,
directors, officers, employees, and agents is authorized to give any information
or make any representations concerning Shares of any Fund except those contained
in the Fund's then current Prospectus or in materials provided by Distributor.
A-6
<PAGE>
b. Distributor will supply to Dealer Prospectuses, reasonable
quantities of sales literature, sales bulletins, and additional sales
information as provided by Distributor. Dealer agrees to use only advertising or
sales material relating to the Funds that: (i) is supplied by Distributor, or
(ii) conforms to the requirements of all applicable laws or regulations of any
government or authorized agency having jurisdiction over the offering or sale of
Shares of the Funds and is approved in writing by Distributor in advance of its
use. Such approval may be withdrawn by Distributor in whole or in part upon
written notice to Dealer, and Dealer shall, upon receipt of such notice,
immediately discontinue the use of such sales literature, sales bulletins and
advertising. Dealer is not authorized to modify or translate any such materials
without Distributor's prior written consent.
8. SHARES
a. Distributor acts solely as agent for the Fund and
Distributor shall have no obligation or responsibility with respect to Dealer's
right to purchase or sell Shares in any state or jurisdiction.
b. Distributor shall periodically furnish Dealer with
information identifying the states or jurisdictions in which it is believed that
all necessary notice, registration or exemptive filings for Shares have been
made under applicable securities laws such that offers and sales of Shares may
be made in such states or jurisdictions. Distributor shall have no obligation to
make such notice, registration or exemptive filings with respect to Shares in
any state or jurisdiction.
c. Dealer agrees not to transact orders for Shares in states
or jurisdictions in which it has been informed that Shares may not be sold or in
which it and its personnel are not authorized to sell Shares.
d. Distributor shall have no responsibility, under the laws
regulating the sale of securities in the United States or any foreign
jurisdiction, with respect to the qualification or status of Dealer or Dealer's
personnel selling Fund Shares. Distributor shall not, in any event, be liable or
responsible for the issue, form, validity, enforceability and value of such
Shares or for any matter in connection therewith.
e. Dealer agrees that it will make no offers or sales of
Shares in any foreign jurisdiction, except with the express written consent of
Distributor.
9. INDEMNIFICATION
a. Dealer agrees to indemnify, defend and hold harmless
Distributor and the Funds and their predecessors, successors, and affiliates,
each current or former partner, officer, director, employee, shareholder or
agent and each person who controls or is controlled by Distributor from any and
all losses, claims, liabilities, costs, and expenses, including attorney fees,
that may be assessed against or suffered or incurred by any of them howsoever
they arise, and as they are incurred, which relate in any way to: (i) any
alleged violation of any statute or regulation (including without limitation the
securities laws and regulations of the United States or any state or foreign
country) or any alleged tort or breach of contract, related to the offer or sale
by Dealer of Shares of the Funds pursuant to this Agreement (except to the
extent that Distributor's negligence or failure to follow correct instructions
received from Dealer is the cause of such loss,
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<PAGE>
claim, liability, cost or expense); (ii) any redemption or exchange pursuant to
instructions received from Dealer or its partners, affiliates, officers,
directors, employees or agents; or (iii) the breach by Dealer of any of its
representations and warranties specified herein or the Dealer's failure to
comply with the terms and conditions of this Agreement, whether or not such
action, failure, error, omission, misconduct or breach is committed by Dealer or
its predecessor, successor, or affiliate, each current or former partner,
officer, director, employee or agent and each person who controls or is
controlled by Dealer.
b. Distributor agrees to indemnify, defend and hold harmless
Dealer and its predecessors, successors and affiliates, each current or former
partner, officer, director, employee or agent, and each person who controls or
is controlled by Dealer from any and all losses, claims, liabilities, costs and
expenses, including attorney fees, that may be assessed against or suffered or
incurred by any of them which arise, and which relate to any untrue statement of
or omission to state a material fact contained in the Prospectus or any written
sales literature or other marketing materials provided by the Distributor to the
Dealer, required to be stated therein or necessary to make the statements
therein not misleading.
c. Dealer agrees to notify Distributor, within a reasonable
time, of any claim or complaint or any enforcement action or other proceeding
with respect to Shares offered hereunder against Dealer or its partners,
affiliates, officers, directors, employees or agents, or any person who controls
Dealer, within the meaning of Section 15 of the Securities Act of 1933, as
amended.
d. Dealer further agrees promptly to send Distributor copies
of (i) any report filed pursuant to NASD Conduct Rule 3070, including, without
limitation quarterly reports filed pursuant to Rule 3070(c), (ii) reports filed
with any other self-regulatory organization in lieu of Rule 3070 reports
pursuant to Rule 3070(e) and (iii) amendments to Dealer's Form BD.
e. Each party's obligations under these indemnification
provisions shall survive any termination of this Agreement.
10. TERMINATION; AMENDMENT
a. In addition to the automatic termination of this Agreement
specified in Section 1.c. of this Agreement, each party to this Agreement may
unilaterally cancel its participation in this Agreement by giving thirty (30)
days prior written notice to the other party. In addition, each party to this
Agreement may terminate this Agreement immediately by giving written notice to
the other party of that other party's material breach of this Agreement. Such
notice shall be deemed to have been given and to be effective on the date on
which it was either delivered personally to the other party or any officer or
member thereof, or was mailed postpaid or delivered to a telegraph office for
transmission to the other party's designated person at the addresses shown
herein or in the most recent NASD Manual.
b. This Agreement shall terminate immediately upon the
appointment of a Trustee under the Securities Investor Protection Act or any
other act of insolvency by Dealer.
c. The termination of this Agreement by any of the foregoing
means shall have no effect upon transactions entered into prior to the effective
date of termination and shall
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not relieve Dealer of its obligations, duties and indemnities specified in this
Agreement. A trade placed by Dealer subsequent to its voluntary termination of
this Agreement will not serve to reinstate the Agreement. Reinstatement, except
in the case of a temporary suspension of Dealer, will only be effective upon
written notification by Distributor.
d. This Agreement is not assignable or transferable and will
terminate automatically in the event of its "assignment," as defined in the
Investment Company Act of 1940, as amended and the rules, regulations and
interpretations thereunder. The Distributor may, however, transfer any of its
duties under this Agreement to any entity that controls or is under common
control with Distributor.
e. This Agreement may be amended by Distributor at any time by
written notice to Dealer. Dealer's placing of an order or accepting payment of
any kind after the effective date and receipt of notice of such amendment shall
constitute Dealer's acceptance of such amendment.
11. DISTRIBUTOR'S REPRESENTATIONS AND WARRANTIES
Distributor represents and warrants that:
a. It is a limited liability company duly organized and
existing and in good standing under the laws of the state of Delaware and is
duly registered or exempt from registration as a broker-dealer in all states and
jurisdictions in which it provides services as principal underwriter and
distributor for the Funds.
b. It is a member in good standing of the NASD.
c. It is empowered under applicable laws and by Distributor's
charter and by-laws to enter into this Agreement and perform all activities and
services of the Distributor provided for herein and that there are no
impediments, prior or existing, regulatory, self-regulatory, administrative,
civil or criminal matters affecting Distributor's ability to perform under this
Agreement.
d. All requisite actions have been taken to authorize
Distributor to enter into and perform this Agreement.
12. ADDITIONAL DEALER REPRESENTATIONS AND WARRANTIES
In addition to the representations and warranties found
elsewhere in this Agreement, Dealer represents and warrants that:
a. It is duly organized and existing and in good standing
under the laws of the state, commonwealth or other jurisdiction in which Dealer
is organized and that Dealer will not offer Shares of any Fund for sale in any
state or jurisdiction where such Shares may not be legally sold or where Dealer
is not qualified to act as a broker-dealer.
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b. It is empowered under applicable laws and by Dealer's
organizational documents to enter into this Agreement and perform all activities
and services of the Dealer provided for herein and that there are no
impediments, prior or existing, regulatory, self-regulatory, administrative,
civil or criminal matters affecting Dealer's ability to perform under this
Agreement.
c. All requisite actions have been taken to authorize Dealer
to enter into and perform this Agreement.
d. It is not, at the time of the execution of this Agreement,
subject to any enforcement or other proceeding with respect to its activities
under state or federal securities laws, rules or regulations.
13. SETOFF; DISPUTE RESOLUTION; GOVERNING LAW
a. Should any of Dealer's concession accounts with Distributor
have a debit balance, Distributor shall be permitted to offset and recover the
amount owed from any other account Dealer has with Distributor, without notice
or demand to Dealer.
b. In the event of a dispute concerning any provision of this
Agreement, either party may require the dispute to be submitted to binding
arbitration under the commercial arbitration rules and procedures of the NASD.
The parties agree that, to the extent permitted under such arbitration rules and
procedures, the arbitrators selected shall be from the securities industry.
Judgment upon any arbitration award may be entered by any state or federal court
having jurisdiction.
c. This Agreement shall be governed and construed in
accordance with the laws of the state of New Jersey, not including any provision
which would require the general application of the law of another jurisdiction.
14. INVESTIGATIONS AND PROCEEDINGS
The parties to this Agreement agree to cooperate fully in any
securities regulatory investigation or proceeding or judicial proceeding with
respect to each's activities under this Agreement and promptly to notify the
other party of any such investigation or proceeding.
15. CAPTIONS
All captions used in this Agreement are for convenience only,
are not a party hereof, and are not to be used in construing or interpreting any
aspect hereof.
16. ENTIRE UNDERSTANDING
This Agreement contains the entire understanding of the
parties hereto with respect to the subject matter contained herein and
supersedes all previous agreements. This Agreement shall be binding upon the
parties hereto when signed by Dealer and accepted by Distributor.
A-10
<PAGE>
17. SEVERABILITY
Whenever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law.
If, however, any provision of this Agreement is held under applicable law to be
invalid, illegal, or unenforceable in any respect, such provision shall be
ineffective only to the extent of such invalidity, and the validity, legality
and enforceability of the remaining provisions of this Agreement shall not be
affected or impaired in any way.
18. ENTIRE AGREEMENT
This Agreement contains the entire understanding of the
parties hereto with respect to the subject matter contained herein and
supersedes all previous agreements and/or understandings of the parties. This
Agreement shall be binding upon the parties hereto when signed by Dealer and
accepted by Distributor.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year set forth below.
PRUDENTIAL INVESTMENT MANAGEMENT
SERVICES LLC
By: ----------------------------------
Name: ----------------------------------
Title: ----------------------------------
Date: ----------------------------------
DEALER:----------------------------------
By: ----------------------------------
(Signature)
Name: --------------------------------
Title: --------------------------------
Address: --------------------------------
Telephone: ------------------------------
NASD CRD # ------------------------------
Prudential Dealer # --------------------
(Internal Use Only)
Date: ---------------------------------
A-11
Exhibit 10
KIRKPATRICK & LOCKHART LLP
1800 MASSACHUSETTS AVENUE, N.W.
2ND FLOOR
WASHINGTON, DC 20036-1800
(202) 778-9000
November 25, 1998
Global Utility Fund
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Ladies and Gentlemen:
Global Utility Fund, Inc. (the "Company") is a corporation organized under
the laws of the State of Maryland. We understand that the Company is about to
file Post-Effective Amendment No. 12 to its Registration Statement on Form N-1A
for the purpose of updating the Company's financial statements and making
certain editorial changes.
We have, as counsel, participated in various corporate and other
proceedings relating to the Company. We have examined copies, either certified
or otherwise proved to be genuine, of its Articles of Incorporation and By-Laws,
as now in effect, the minutes of meetings of its board of directors and other
documents relating to its organization and operation, and we are generally
familiar with its corporate affairs. Based on the foregoing, it is our opinion
that the issuance of shares of common stock of the Company ("Shares") has been
duly authorized by the Company and that, when sold in accordance with the terms
contemplated by the Registration Statement, the Shares will have been legally
issued, fully paid and nonassessable by the Company.
We hereby consent to the filing of this opinion in connection with
Post-Effective Amendment No. 12 to the Company's Registration Statement on Form
N-1A (File No. 33-37356) being filed with the Securities and Exchange
Commission.
Sincerely,
/s/ Kirkpatrick & Lockhart LLP
------------------------------
KIRKPATRICK & LOCKHART LLP
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 12 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
November 20, 1998, 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
Highlights" in such Prospectus.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
November 24, 1998
GLOBAL UTILITY FUND, INC.
Amended and Restated
Distribution and Service Plan
(CLASS A SHARES)
INTRODUCTION
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Rule 2830 of the Conduct
Rules of the National Association of Securities Dealers, Inc. (NASD) has been
adopted by Global Utility Fund, Inc. (the Fund) and by Prudential Investment
Management Services LLC, the Fund's distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which
the Fund will employ the Distributor to distribute Class A shares issued by the
Fund (Class A shares). Under the Plan, the Fund intends to pay to the
Distributor, as compensation for its services, a distribution and service fee
with respect to Class A shares.
A majority of the Board of Directors of the Fund, including a majority
of those 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 this Plan or any agreements related to it (the Rule
12b-1 Directors), have determined by votes cast in person at a meeting called
for the purpose of voting on this Plan that there is a reasonable likelihood
that adoption and continuation of this Plan will benefit the Fund and its
shareholders. Expenditures under this Plan by the Fund for Distribution
Activities (defined below) are primarily intended to result in the sale of
1
<PAGE>
Class A shares of the Fund within the meaning of paragraph (a)(2) of Rule 12b-1
promulgated under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor
and/or other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
THE PLAN
The material aspects of the Plan are as follows:
1. DISTRIBUTION ACTIVITIES
The Fund shall engage the Distributor to distribute Class A shares of
the Fund and to service shareholder accounts using all of the facilities of the
Distributor's distribution network, including sales personnel and branch office
and central support systems, and also using such other qualified broker-dealers
and financial institutions as the Distributor may select, including Prudential
Securities Incorporated (Prudential Securities) and Pruco Securities Corporation
(Prusec). Services provided and activities undertaken to distribute Class A
shares of the Fund are referred to herein as "Distribution Activities."
2. PAYMENT OF SERVICE FEE
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class A shares (service
fee). The Fund shall
2
<PAGE>
calculate and accrue daily amounts payable by the Class A
shares of the Fund hereunder and shall pay such amounts monthly or at such other
intervals as the Board of Directors may determine.
3. PAYMENT FOR DISTRIBUTION ACTIVITIES
The Fund shall pay to the Distributor as compensation for its services
a distribution fee, together with the service fee (described in Section 2
hereof), of .30 of 1% per annum of the average daily net assets of the Class A
shares of the Fund for the performance of Distribution Activities. The Fund
shall calculate and accrue daily amounts payable by the Class A shares of the
Fund hereunder and shall pay such amounts monthly or at such other intervals as
the Board of Directors may determine. Amounts payable under the Plan shall be
subject to the limitations of Rule 2830 of the NASD Conduct Rules.
Amounts paid to the Distributor by the Class A shares of the Fund will
not be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class A shares according to the
ratio of the sales of Class A shares to the total sales of the Fund's shares
over the Fund's fiscal year or such other allocation method approved by the
Board of Directors. The allocation of distribution expenses among classes will
be subject to the review of the Board of Directors.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
(a) sales commissions and trailer commissions paid to, or on
account of, account executives of the Distributor;
3
<PAGE>
(b) indirect and overhead costs of the Distributor associated with
Distribution Activities, including central office and branch
expenses;
(c) amounts paid to Prudential Securities or Prusec for performing
services under a selected dealer agreement between Prudential
Securities or Prusec and the Distributor for sale of Class A
shares of the Fund, including sales commissions, trailer
commissions paid to, or on account of, agents and indirect and
overhead costs associated with Distribution Activities;
(d) advertising for the Fund in various forms through any
available medium, including the cost of printing and mailing
Fund prospectuses, statements of additional information and
periodic financial reports and sales literature to persons
other than current shareholders of the Fund; and
(e) sales commissions (including trailer commissions) paid to, or
on account of, broker-dealers and financial institutions
(other than Prudential Securities or Prusec) which have
entered into selected dealer agreements with the Distributor
with respect to Class A shares of the Fund.
4. QUARTERLY REPORTS; ADDITIONAL INFORMATION
An appropriate officer of the Fund will provide to the Board of
Directors of the Fund for review, at least quarterly, a written report
specifying in reasonable detail the amounts expended for Distribution Activities
(including payment of the service fee) and the purposes for which such
expenditures were made in compliance with the requirements of Rule 12b-1. The
Distributor will provide to the Board of Directors of the Fund such additional
information as the Board shall from time to time reasonably request, including
information about Distribution Activities undertaken or to be undertaken by the
Distributor.
The Distributor will inform the Board of Directors of the Fund of the
commissions and account servicing fees to be paid by the Distributor to account
executives of the
4
<PAGE>
Distributor and to broker-dealers and financial institutions which have selected
dealer agreements with the Distributor.
5. EFFECTIVENESS; CONTINUATION
The Plan shall not take effect until it has been approved by a vote of
a majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class A shares of the Fund.
If approved by a vote of a majority of the outstanding voting
securities of the Class A shares of the Fund, the Plan shall, unless earlier
terminated in accordance with its terms, continue in full force and effect
thereafter for so long as such continuance is specifically approved at least
annually by a majority of the Board of Directors of the Fund and a majority of
the Rule 12b-1 Directors by votes cast in person at a meeting called for the
purpose of voting on the continuation of the Plan.
6. TERMINATION
This Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Directors, or by vote of a majority of the outstanding voting
securities (as defined in the Investment Company Act) of the Class A shares of
the Fund.
7. AMENDMENTS
The Plan may not be amended to change the combined service and
distribution fees to be paid as provided for in Sections 2 and 3 hereof so as to
increase materially the amounts payable under this Plan unless such amendment
shall be approved by the vote of a majority of the outstanding voting securities
(as defined in the Investment Company Act) of the Class A shares of the Fund.
All material amendments of the Plan shall be approved by a majority of the Board
of Directors of the Fund and a majority of
5
<PAGE>
the Rule 12b-1 Directors by votes cast in person at a meeting called for the
purpose of voting on the Plan.
8. RULE 12B-1 DIRECTORS
While the Plan is in effect, the selection and nomination of the
Directors shall be committed to the discretion of the Rule 12b-1 Directors.
9. RECORDS
The Fund shall preserve copies of the Plan and any related agreements
and all reports made pursuant to Section 4 hereof, for a period of not less than
six years from the date of effectiveness of the Plan, such agreements or
reports, and for at least the first two years in an easily accessible place.
Dated: July 1, 1998
6
GLOBAL UTILITY FUND, INC.
Amended and Restated
Distribution and Service Plan
(CLASS B SHARES)
INTRODUCTION
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Rule 2830 of the Conduct
Rules of the National Association of Securities Dealers, Inc. (NASD) has been
adopted by Global Utility Fund, Inc. (the Fund) and by Prudential Investment
Management Services LLC, the Fund's distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which
the Fund will employ the Distributor to distribute Class B shares issued by the
Fund (Class B shares). Under the Plan, the Fund wishes to pay to the
Distributor, as compensation for its services, a distribution and service fee
with respect to Class B shares.
A majority of the Board of Directors of the Fund, including a majority
of those 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 this Plan or any agreements related to it (the Rule
12b-1 Directors), have determined by votes cast in person at a meeting called
for the purpose of voting on this Plan that there is a reasonable likelihood
that adoption and continuation of this Plan will benefit the Fund and its
shareholders. Expenditures under this Plan by the Fund for Distribution
Activities (defined below) are primarily intended to result in the sale of
1
<PAGE>
Class B shares of the Fund within the meaning of paragraph (a)(2) of Rule 12b-1
promulgated under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor
and/or other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
THE PLAN
The material aspects of the Plan are as follows:
1. DISTRIBUTION ACTIVITIES
The Fund shall engage the Distributor to distribute Class B shares of
the Fund and to service shareholder accounts using all of the facilities of the
Distributor's distribution network including sales personnel and branch office
and central support systems, and also using such other qualified broker-dealers
and financial institutions as the Distributor may select, including Prudential
Securities Incorporated (Prudential Securities) and Pruco Securities Corporation
(Prusec). Services provided and activities undertaken to distribute Class B
shares of the Fund are referred to herein as "Distribution Activities."
2. PAYMENT OF SERVICE FEE
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class B shares (service
fee). The Fund shall
2
<PAGE>
calculate and accrue daily amounts payable by the Class B shares of the Fund
hereunder and shall pay such amounts monthly or at such other intervals as the
Board of Directors may determine.
3. PAYMENT FOR DISTRIBUTION ACTIVITIES
The Fund shall pay to the Distributor as compensation for its services
a distribution fee of .75 of 1% per annum of the average daily net assets of the
Class B shares of the Fund for the performance of Distribution Activities. The
Fund shall calculate and accrue daily amounts payable by the Class B shares of
the Fund hereunder and shall pay such amounts monthly or at such other intervals
as the Board of Directors may determine. Amounts payable under the Plan shall be
subject to the limitations of Rule 2830 of the NASD Conduct Rules.
Amounts paid to the Distributor by the Class B shares of the Fund will
not be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class B shares according to the
ratio of the sale of Class B shares to the total sales of the Fund's shares over
the Fund's fiscal year or such other allocation method approved by the Board of
Directors. The allocation of distribution expenses among classes will be subject
to the review of the Board of Directors. Payments hereunder will be applied to
distribution expenses in the order in which they are incurred, unless otherwise
determined by the Board of Directors.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
3
<PAGE>
(a) sales commissions (including trailer commissions) paid to,
or on account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated
with performance of Distribution Activities including central
office and branch expenses;
(c) amounts paid to Prudential Securities or Prusec for
performing services under a selected dealer agreement between
Prudential Securities or Prusec and the Distributor for sale
of Class B shares of the Fund, including sales commissions and
trailer commissions paid to, or on account of, agents and
indirect and overhead costs associated with Distribution
Activities;
(d) advertising for the Fund in various forms through any
available medium, including the cost of printing and mailing
Fund prospectuses, statements of additional information and
periodic financial reports and sales literature to persons
other than current shareholders of the Fund; and
(e) sales commissions (including trailer commissions) paid to,
or on account of, broker-dealers and other financial
institutions (other than Prudential Securities or Prusec)
which have entered into selected dealer agreements with the
Distributor with respect to Class B shares of the Fund.
4. QUARTERLY REPORTS; ADDITIONAL INFORMATION
An appropriate officer of the Fund will provide to the Board of
Directors of the Fund for review, at least quarterly, a written report
specifying in reasonable detail the amounts expended for Distribution Activities
(including payment of the service fee) and the purposes for which such
expenditures were made in compliance with the requirements of Rule 12b-1. The
Distributor will provide to the Board of Directors of the Fund such additional
information as they shall from time to time reasonably request, including
information about Distribution Activities undertaken or to be undertaken by the
Distributor.
4
<PAGE>
The Distributor will inform the Board of Directors of the Fund of the
commissions and account servicing fees to be paid by the Distributor to account
executives of the Distributor and to broker-dealers and other financial
institutions which have selected dealer agreements with the Distributor.
5. EFFECTIVENESS; CONTINUATION
The Plan shall not take effect until it has been approved by a vote of
a majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class B shares of the Fund.
If approved by a vote of a majority of the outstanding voting
securities of the Class B shares of the Fund, the Plan shall, unless earlier
terminated in accordance with its terms, continue in full force and effect
thereafter for so long as such continuance is specifically approved at least
annually by a majority of the Board of Directors of the Fund and a majority of
the Rule 12b-1 Directors by votes cast in person at a meeting called for the
purpose of voting on the continuation of the Plan.
6. TERMINATION
This Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Directors, or by vote of a majority of the outstanding voting
securities (as defined in the Investment Company Act) of the Class B shares of
the Fund.
7. AMENDMENTS
The Plan may not be amended to change the combined service and
distribution expenses to be paid as provided for in Sections 2 and 3 hereof so
as to increase materially the amounts payable under this Plan unless such
amendment shall be approved by the vote of a majority of the outstanding voting
securities (as defined in the
5
<PAGE>
Investment Company Act) of the Class B shares of the Fund. All material
amendments of the Plan shall be approved by a majority of the Board of Directors
of the Fund and a majority of the Rule 12b-1 Directors by votes cast in person
at a meeting called for the purpose of voting on the Plan.
8. RULE 12B-1 DIRECTORS
While the Plan is in effect, the selection and nomination of the Rule
12b-1 Directors shall be committed to the discretion of the Rule 12b-1
Directors.
9. RECORDS
The Fund shall preserve copies of the Plan and any related agreements
and all reports made pursuant to Section 4 hereof, for a period of not less than
six years from the date of effectiveness of the Plan, such agreements or
reports, and for at least the first two years in an easily accessible place.
Dated: July 1, 1998
6
GLOBAL UTILITY FUND, INC.
Amended and Restated
Distribution and Service Plan
(CLASS C SHARES)
INTRODUCTION
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Rule 2830 of the Conduct
Rules of the National Association of Securities Dealers, Inc. (NASD) has been
adopted by Global Utility Fund, Inc. (the Fund) and by Prudential Investment
Management Services LLC, the Fund's distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which
the Fund will employ the Distributor to distribute Class C shares issued by the
Fund (Class C shares). Under the Plan, the Fund wishes to pay to the
Distributor, as compensation for its services, a distribution and service fee
with respect to Class C shares.
A majority of the Board of Directors of the Fund, including a majority
of those 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 this Plan or any agreements related to it (the Rule
12b-1 Directors), have determined by votes cast in person at a meeting called
for the purpose of voting on this Plan that there is a reasonable likelihood
that adoption and continuation of this Plan will benefit the Fund and its
shareholders. Expenditures under this Plan by the Fund for Distribution
Activities (defined below) are primarily intended to result in the sale of
1
<PAGE>
Class C shares of the Fund within the meaning of paragraph (a)(2) of Rule 12b-1
promulgated under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor
and/or other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
THE PLAN
The material aspects of the Plan are as follows:
1. DISTRIBUTION ACTIVITIES
The Fund shall engage the Distributor to distribute Class C shares of
the Fund and to service shareholder accounts using all of the facilities of the
Distributor's distribution network including sales personnel and branch office
and central support systems, and also using such other qualified broker-dealers
and financial institutions as the Distributor may select, including Prudential
Securities Incorporated (Prudential Securities) and Pruco Securities Corporation
(Prusec). Services provided and activities undertaken to distribute Class C
shares of the Fund are referred to herein as "Distribution Activities."
2. PAYMENT OF SERVICE FEE
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class C shares (service
fee). The Fund shall
2
<PAGE>
calculate and accrue daily amounts payable by the Class C shares of the Fund
hereunder and shall pay such amounts monthly or at such other intervals as the
Board of Directors may determine.
3. PAYMENT FOR DISTRIBUTION ACTIVITIES
The Fund shall pay to the Distributor as compensation for its services
a distribution fee of .75 of 1% per annum of the average daily net assets of the
Class C shares of the Fund for the performance of Distribution Activities. The
Fund shall calculate and accrue daily amounts payable by the Class C shares of
the Fund hereunder and shall pay such amounts monthly or at such other intervals
as the Board of Directors may determine. Amounts payable under the Plan shall be
subject to the limitations of Rule 2830 of the NASD Conduct Rules.
Amounts paid to the Distributor by the Class C shares of the Fund will
not be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class C shares according to the
ratio of the sale of Class C shares to the total sales of the Fund's shares over
the Fund's fiscal year or such other allocation method approved by the Board of
Directors. The allocation of distribution expenses among classes will be subject
to the review of the Board of Directors. Payments hereunder will be applied to
distribution expenses in the order in which they are incurred, unless otherwise
determined by the Board of Directors.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
3
<PAGE>
(a) sales commissions (including trailer commissions) paid to,
or on account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated
with performance of Distribution Activities including central
office and branch expenses;
(c) amounts paid to Prudential Securities or Prusec for
performing services under a selected dealer agreement between
Prudential Securities or Prusec and the Distributor for sale
of Class C shares of the Fund, including sales commissions and
trailer commissions paid to, or on account of, agents and
indirect and overhead costs associated with Distribution
Activities;
(d) advertising for the Fund in various forms through any
available medium, including the cost of printing and mailing
Fund prospectuses, statements of additional information and
periodic financial reports and sales literature to persons
other than current shareholders of the Fund; and
(e) sales commissions (including trailer commissions) paid to,
or on account of, broker-dealers and other financial
institutions (other than Prudential Securities or Prusec)
which have entered into selected dealer agreements with the
Distributor with respect to Class C shares of the Fund.
4. QUARTERLY REPORTS; ADDITIONAL INFORMATION
An appropriate officer of the Fund will provide to the Board of
Directors of the Fund for review, at least quarterly, a written report
specifying in reasonable detail the amounts expended for Distribution Activities
(including payment of the service fee) and the purposes for which such
expenditures were made in compliance with the requirements of Rule 12b-1. The
Distributor will provide to the Board of Directors of the Fund such additional
information as they shall from time to time reasonably request, including
information about Distribution Activities undertaken or to be undertaken by the
Distributor.
4
<PAGE>
The Distributor will inform the Board of Directors of the Fund of the
commissions and account servicing fees to be paid by the Distributor to account
executives of the Distributor and to broker-dealers and other financial
institutions which have selected dealer agreements with the Distributor.
5. EFFECTIVENESS; CONTINUATION
The Plan shall not take effect until it has been approved by a vote of
a majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class C shares of the Fund.
If approved by a vote of a majority of the outstanding voting
securities of the Class C shares of the Fund, the Plan shall, unless earlier
terminated in accordance with its terms, continue in full force and effect
thereafter for so long as such continuance is specifically approved at least
annually by a majority of the Board of Directors of the Fund and a majority of
the Rule 12b-1 Directors by votes cast in person at a meeting called for the
purpose of voting on the continuation of the Plan.
6. TERMINATION
This Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Directors, or by vote of a majority of the outstanding voting
securities (as defined in the Investment Company Act) of the Class C shares of
the Fund.
7. AMENDMENTS
The Plan may not be amended to change the combined service and
distribution expenses to be paid as provided for in Sections 2 and 3 hereof so
as to increase materially the amounts payable under this Plan unless such
amendment shall be approved by the vote of a majority of the outstanding voting
securities (as defined in the
5
<PAGE>
Investment Company Act) of the Class C shares of the Fund. All material
amendments of the Plan shall be approved by a majority of the Board of Directors
of the Fund and a of the Plan shall be approved by a majority of the Board of
Directors of the Fund and a majority of the Rule 12b-1 Directors by votes cast
in person at a meeting called for the purpose of voting on the Plan.
8. RULE 12B-1 DIRECTORS
While the Plan is in effect, the selection and nomination of the Rule
12b-1 Directors shall be committed to the discretion of the Rule 12b-1
Directors.
9. RECORDS
The Fund shall preserve copies of the Plan and any related agreements
and all reports made pursuant to Section 4 hereof, for a period of not less than
six years from the date of effectiveness of the Plan, such agreements or
reports, and for at least the first two years in an easily accessible place.
Dated: July 1, 1998
6
GLOBAL UTILITY FUND, INC.
(the Fund)
AMENDED AND RESTATED PLAN PURSUANT TO RULE 18F-3
The Fund hereby adopts this plan pursuant to Rule 18f-3 under the
Investment Company Act of 1940 (the 1940 Act), setting forth the separate
arrangement and expense allocation of each class of shares in the Fund. Any
material amendment to this plan is subject to prior approval of the Board of
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 from 5% to zero over a six-year period)
which will be imposed on certain redemptions and a Rule
12b-1 fee not to exceed 1% per annum of the average daily net
assets of the class. The contingent deferred sales charge
is waived for certain eligible investors. Class B shares
automatically convert to Class A shares approximately seven
years after purchase.
CLASS C SHARES: Class C shares issued before November 2, 1998 are not subject
to an initial sales charge but are subject to a 1% contingent
deferred sales charge which will be imposed on certain
redemptions within the first 12 month after purchase and a
Rule 12b-1 fee not to exceed 1% per annum of the average daily
net assets of the class. Class C shares issued on or after
November 2, 1998 are subject to a low initial sales charge and
a 1% contingent deferred sales charge which will be imposed on
certain redemptions within the first 18 months after purchase
and a Rule 12b-1 fee not to exceed 1% per annum of the average
daily net assets of the class.
<PAGE>
CLASS Z SHARES: Class Z shares are not subject to either an initial or
contingent deferred sales charge, nor are they subject to any
Rule 12b-1 fee.
INCOME AND EXPENSE ALLOCATIONS
Income, any realized and unrealized capital gains and losses, and
expenses not allocated to a particular class of the Fund will be
allocated to each class of the Fund on the basis of the net asset value
of that class in relation to the net asset value of the Fund.
DIVIDENDS AND DISTRIBUTIONS
Dividends and other distributions paid by the Fund to each class of
shares, to the extent paid, will be paid on the same day and at the
same time, and will be determined in the same manner and will be in the
same amount, except that the amount of the dividends and other
distributions declared and paid by a particular class of the Fund may
be different from that paid by another class of the Fund because of
Rule 12b-1 fees and other expenses borne exclusively by that class.
EXCHANGE PRIVILEGE
Holders of Class A Shares, Class B Shares, Class C Shares and Class Z
Shares shall have such exchange privileges as set forth in the Fund's
current prospectus. Exchange privileges may vary among classes and
among holders of a Class.
CONVERSION FEATURES
Class B shares will automatically convert to Class A shares on a
quarterly basis approximately seven years after purchase. Conversions
will be effected at relative net asset value without the imposition
of any additional sales charge.
GENERAL
A. Each class of shares shall have exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and
shall have separate voting rights on any matter submitted to
shareholders in which the interests of one class differ from the
interests of any other class.
B. On an ongoing basis, the Directors, pursuant to their fiduciary
responsibilities under the 1940 Act and otherwise, will monitor the
Fund for the
2
<PAGE>
existence of any material conflicts among the interests of its several
classes. The 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 Investments
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.
Approved: August 26, 1998
Effective: November 2, 1998
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