GLOBAL UTILITY FUND, INC.
Statement of Additional Information
dated December 1, 1999
(as revised on December 2, 1999)
Global Utility Fund, Inc. (the Fund) is an open-end, diversified management
investment company or mutual fund. The Fund's investment objective is to provide
total return, without incurring undue risk, by investing in income-producing
securities of domestic and foreign companies primarily engaged 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 "Description of the Fund, Its
Investments and Risks."
The Fund's address is Gateway Center Three, 100 Mulberry Street, Newark,
New Jersey 07102-4077, and its telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Fund's Prospectus dated December 1, 1999, a copy of
which may be obtained from the Fund upon request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Fund History .................................................. B-2
Description of the Fund, Its Investments and Risks ............ B-2
Investment Restrictions ....................................... B-17
Management of the Fund ........................................ B-18
Control Persons and Principal Holders of Securities. .......... B-21
Investment Advisory and Other Services ........................ B-22
Brokerage Allocation and Other Practices ...................... B-26
Capital Shares, Other Securities and Organization ............. B-27
Purchase, Redemption and Pricing of Fund Shares ............... B-28
Shareholder Investment Account ................................ B-36
Net Asset Value ............................................... B-41
Taxes, Dividends and Distributions ............................ B-42
Performance Information. ...................................... B-44
Financial Statements .......................................... B-46
Report of Independent Accountants ............................. B-60
Description of Security Ratings ............................... A-1
Appendix I-General Investment Information ..................... I-1
Appendix II-Historical Performance Data ....................... II-1
Appendix III-Information Relating to Prudential ............... III-1
</TABLE>
- ------------------------------------------------------------------------
MF150B
B-1
<PAGE>
FUND HISTORY
The Fund was incorporated under the laws of Maryland on February 21, 1990.
It operated as a closed-end fund until February 1, 1991. Since February 4, 1991,
the Fund has operated as an open-end management investment company under the
Investment Company Act of 1940, as amended (1940 Act).
DESCRIPTION OF THE FUND, ITS INVESTMENTS AND RISKS
(A) CLASSIFICATION. The Fund is a diversified, open-end management
investment company.
(B) AND (C) INVESTMENT STRATEGIES, POLICIES AND RISKS. This section
provides additional information on the principal investment policies and
strategies of the Fund, as well as information on certain non-principal
investment policies and strategies.
The Fund's investment objective is to provide total return, without
incurring undue risk, by investing in income-producing securities of domestic
and foreign companies primarily engaged in the utility industries. The Fund's
total return will consist of current income and growth of capital. Wellington
Management Company LLP, 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. Up to 5% of the above referenced 65% may be invested in options and
futures contracts on securities in the utility industries. In addition, up to
35% of the Fund's assets may be invested in equity and debt securities of
companies outside the utility industry.
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.
B-2
<PAGE>
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 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 U.S. 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.
B-3
<PAGE>
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 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."
The Fund may invest in debt securities issued by supranational
organizations such as the World Bank, the European Investment Bank, the European
Coal and Steel Community and the Asian Development Bank.
The Fund may invest in debt securities issued by "semi-governmental
entities" such as entities owned by a national, state or equivalent government
or are obligations of a political unit that are not backed by a national
government's "full faith and credit" and general taxing powers. Examples of
semi-governmental issuers include, among others, the Province of Ontario and the
City of Stockholm.
Foreign government securities also include mortgage-backed securities
issued or guaranteed by foreign entities including semi-governmental entities
and Brady Bonds, which are long-term bonds issued by governmental entities in
developing countries as part of a restructuring of their commercial loans.
A change in the value of a foreign currency against the US. dollar will
result in a corresponding change in the U.S. dollar value of the Fund's assets
denominated in that currency. These currency fluctuations can result in gains or
losses for the Fund. For example, if a foreign security increases in value as
measured in its currency, an increase in value of the U.S. dollar, relative to
the currency in which the foreign security is denominated, can offset some or
all of such gains. These currency 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 exchange rate for any
such currency decreases after the Fund's income has been accrued and translated
into U.S. dollars, the Fund could be required to liquidate portfolio securities
to make such distributions. Similarly, if an exchange rate for any such currency
decreases between the time the Fund incurs expenses in U.S. dollars 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 Internal
Revenue 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 actually collects such
receivables or pays such liabilities will result in foreign exchange gains or
losses that increase or decrease distributable net investment income. Similarly,
dispositions of certain debt securities (by sale, at maturity or otherwise) at a
U.S. dollar amount 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 distributable net investment income. Gains and losses on security and
currency
B-4
<PAGE>
transactions cannot be predicted. This fact coupled with the different tax and
accounting treatment of certain currency gains and losses increases the
likelihood of distributions in whole or in part constituting a return of capital
to shareholders.
The Fund's interest income from foreign government securities issued in
local markets may, in some cases, be subject to applicable withholding taxes
imposed by governments in such markets. The Fund may sell a foreign security it
owns prior to maturity in order to avoid foreign withholding taxes on dividend
and interest income and buy back the same security for a future settlement date.
Interest on foreign government securities is not generally subject to foreign
withholding taxes. See "Taxes, Dividends and Distributions."
Returns available from foreign currency denominated debt instruments can be
adversely affected by changes in exchange rates. The Fund's investment adviser
believes that the use of foreign currency hedging techniques, including
"cross-currency hedges" may assist, under certain conditions, in helping to
protect against declines in the U.S. dollar value of income available for
distribution to shareholders and declines in the U.S. dollar value of income
available for distribution to shareholders and declines in the net asset value
of the Fund's shares resulting from adverse changes in currency exchange rates.
For example, the return available from securities denominated in a particular
foreign currency would diminish in the event the value of the U.S. dollar
increased against such currency. Such a decline could be partially or completely
offset by an increase in value of cross-currency hedges involving a forward
contract to sell a different foreign currency, where such contract is available
on terms more advantageous to the Fund than a contract to sell the currency in
which the position being hedged is denominated. Cross-currency hedges can,
therefore, under certain conditions, provide protection of net asset value in
the event of a general rise in the U.S. dollar against foreign currencies.
However, there can be no assurance that the Fund will be able to engage in
cross-currency hedging or that foreign exchange rate relationships will be
sufficiently predictable to enable the investment adviser to employ
cross-currency hedging techniques successfully. A cross-currency hedge cannot
protect against exchange rate risks perfectly, and if the investment adviser is
incorrect in its judgment of future exchange rate relationships, the Fund could
be in a less advantageous position than if such a hedge had not been
established.
RISK FACTORS AND SPECIAL CONSIDERATIONS OF INVESTING IN EURO-DENOMINATED
SECURITIES
On January 1, 1999, 11 of the 15 member states of the European Monetary
Union introduced the "euro" as a common currency. During a three year
transitional period, the euro will coexist with each participating state's
currency and on July 1, 2002, the euro is expected to become the sole currency
of the participating states. During the transition period, the Fund will treat
the euro as a separate currency from that of any participating state.
The conversion may adversely affect the Fund if the euro does not take
effect as planned; if a participating state withdraws from the European Monetary
Union; or if the computing, accounting and trading systems used by the Fund's
service providers, or by entities with which the Fund or its service providers
do business, are not capable of recognizing the euro as a distinct currency at
the time of, and following, euro conversion. In addition, the conversion could
cause markets to become more volatile.
The overall effect of the transition of member states' currencies to the
euro is not known at this time. It is likely that more general short- and
long-term ramifications can be expected, such as changes in the economic
environment and change in the behavior of investors, which would affect the
Fund's investments and its net asset value. In addition, although U.S. Treasury
regulations generally provide that the euro conversion will not, in itself,
cause a U.S. taxpayer to realize gain or loss, other changes that may occur at
the time of the conversion, such as accrual periods, holiday conventions,
indices, and other features may require the realization of a gain or loss by the
Fund as determined under existing tax law.
The Fund's Manager has taken steps: (1) that it believes will reasonably
address euro-related changes to enable the Fund and its service providers to
process transactions accurately and completely with minimal disruption to
business activities and (2) to obtain reasonable assurances that appropriate
steps have been taken by the Fund's other service providers to address the
conversion. The Fund has not borne any expense relating to these actions.
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
B-5
<PAGE>
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 at 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.
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, Dividends and Distributions."
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
B-6
<PAGE>
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 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
B-7
<PAGE>
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.
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.
B-8
<PAGE>
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.
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
B-9
<PAGE>
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.
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
B-10
<PAGE>
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 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.
B-11
<PAGE>
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.
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
B-12
<PAGE>
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.
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.
B-13
<PAGE>
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
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
B-14
<PAGE>
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.
If the Fund were to exceed this limit, the Subadviser would take reasonable
measures to reduce the Fund's holding in illiquid securities to no more than 15%
of its net assets within seven days, including the sale of such securities.
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.
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.
B-15
<PAGE>
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 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."
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.
(C) DEFENSIVE STRATEGY AND SHORT-TERM INVESTMENTS
When conditions dictate a defensive strategy, the Fund may temporarily
invest without limit in securities denominated in U.S. dollars or U.S. Treasury
securities or hold cash.
(D) PORTFOLIO TURNOVER
The Fund's portfolio turnover rate is not expected to exceed 100%. The
portfolio turnover rates for the Fund for the fiscal years ended September 30,
1999 and 1998 were 8% and 20%, respectively. The portfolio turnover rate is
generally the percentage computed by dividing the lesser of portfolio purchases
or sales (excluding all securities, including options, whose maturities or
expiration date at acquisition were one year or less) by the monthly average
value of the long-term portfolio. High portfolio turnover (100% or more)
involves correspondingly greater brokerage commissions and other transaction
costs, which are borne directly by the Fund. In addition, high portfolio
turnover may also mean that a proportionately greater amount of distributions to
shareholders will be taxed as ordinary income rather than long-term capital
gains compared to investment companies with lower portfolio turnover. See
"Brokerage Allocations and Other Practices" and "Taxes, Dividends and
Distributions."
B-16
<PAGE>
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. The Fund's fundamental
policies cannot be changed without the approval of a majority of the Fund's
outstanding voting securities. A "majority of the Fund's outstanding voting
securities" when used in this Statement of Additional Information means the
lesser of (1) 67% or more of the voting securities of the Fund represented at a
meeting at which more than 50% of the outstanding voting securities of the Fund
are present in person or represented by proxy or (2) more than 50% of the
outstanding voting securities of the Fund.
The Fund may not:
(1) Purchase any security if, as a result thereof, 25% or more of its total
assets would be invested in the securities of issuers having their principal
business activities in the same industry, other than the utility industries,
except for temporary emergency purposes, and except that this limitation does
not apply to securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
(2) Purchase the securities of any issuer if, as a result, the Fund would
fail to be a diversified company within the meaning of the 1940 Act, and the
rules and regulations promulgated thereunder, as such statute, rules, and
regulations are amended from time to time or are interpreted from time to time
by the SEC staff (collectively, the "1940 Act Laws and Interpretations") or to
the extent that the Fund may be permitted to do so by exemptive order or similar
relief (collectively, with the 1940 Act Laws and Interpretations, the "1940 Act
Laws, Interpretations and Exemptions"). The Fund is a "diversified company" as
defined in the 1940 Act.
(3) Issue senior securities or borrow money, except as permitted by the
1940 Act Laws, Interpretations and Exemptions.
(4) Purchase or sell physical commodities, but the Fund may purchase, sell
or enter into financial options and futures, forward and spot currency
contracts, swap transactions and other financial contracts or derivative
instruments.
(5) Purchase or sell real estate, except that investments in securities of
issuers that invest in real estate and investments in mortgage-backed
securities, mortgage participations or other instruments supported by interests
in real estate are not subject to this limitation, and except that the Fund may
exercise rights under agreements relating to such securities, including the
right to enforce security interests and to hold real estate acquired by reason
of such enforcement until that real estate can be liquidated in an orderly
manner.
(6) Make loans, except through loans of assets of the Fund or through
repurchase agreements, provided that for purposes of this restriction, the
acquisition of bonds, debentures, other debt securities or instruments, or
participations or other interests therein and investments in government
obligations, commercial paper, certificates of deposit, bankers' acceptances or
similar instruments will not be considered the making of a "loan."
(7) Act as an underwriter except to the extent that, in connection with the
disposition of portfolio securities, the Fund may be deemed to be an underwriter
under certain federal securities laws.
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of the Fund's assets, it is intended that if the percentage
limitation is met at the time the investment is made, a later change in
percentage resulting from changing total or net asset values will not be
considered a violation of such policy. However, in the event that the Fund's
asset coverage for borrowings falls below 300%, the Fund will take prompt action
to reduce its borrowings, as required by applicable law.
The Fund is also subject to the following nonfundamental restriction.
Nonfundamental restrictions may be changed without shareholder approval, in
compliance with applicable law and regulatory policy.
(1) The Fund will not purchase securities on margin, provided that the Fund
may obtain short-term credits as may be necessary for the clearance of purchases
and sales of securities, and further provided that the Fund may make margin
deposits in connection with its use of financial options and futures, forward
and spot currency contracts, swap transactions and other futures contracts or
derivative instruments.
B-17
<PAGE>
MANAGEMENT OF THE FUND
<TABLE>
<CAPTION>
NAME, ADDRESS+ POSITION(S) HELD PRINCIPAL OCCUPATIONS
AND AGE WITH THE FUND DURING PAST FIVE YEARS
- ------- ------------- ----------------------
<S> <C> <C>
Eugene C. Dorsey (72) 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, Target Funds and Prudential Diversified Funds.
*Robert F. Gunia (52) Director Chief Administrative Officer (since June 1999) of Prudential
Investments; Vice President (since September 1997) of The
Prudential Insurance Company of America (Prudential);
Executive Vice President and Treasurer (since December 1996)
of Prudential Investments Fund Management LLC (PIFM);
Senior Vice President (since March 1987) of Prudential
Securities Incorporated (Prudential Securities); formerly Chief
Administrative Officer (July 1990-September 1996), Director
(January 1989-September 1996) and Executive Vice President,
Treasurer and Chief Financial Officer (June 1987-September
1996) of Prudential Mutual Fund Management, Inc.; Vice
President and Director of The Asia Pacific Fund, Inc. (since May
1989); Director of The High Yield Income Fund, Inc.; Director or
Trustee of 45 funds within the Prudential mutual funds.
Robert E. LaBlanc (65) Director President of Robert E. LaBlanc Associates, Inc.
(telecommunications) since 1981; formerly General Partner at
Salomon Brothers; formerly Vice Chairman of Continental
Telecom; Director of Salient 3 Communications; Storage
Technology Corporation, Titan Corporation,
TIE/communications, Inc., The Tribune Company, Chartered
Semiconductor Manufacturing, Ltd., Prudential Europe Growth
Fund, Inc., Prudential Global Genesis Fund, Inc., Prudential
Institutional Liquidity Portfolio, Inc., Prudential MoneyMart
Assets, Inc., Prudential Natural Resources Fund, Inc., Prudential
Pacific Growth Fund, Inc., Prudential Special Money Market
Fund, Inc., Prudential Tax-Free Money Fund, Inc. and Prudential
World Fund, Inc.; Trustee of Cash Accumulation Trust,
Command Government Fund, Command Money Fund,
Command Tax-Free Fund, Prudential Developing Markets Fund,
The Target Portfolio Trust, Prudential Diversified Funds, Target
Funds and Manhattan College.
Douglas H. McCorkindale (60) 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, Target Funds and Prudential
Diversified Funds.
</TABLE>
B-18
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS+ POSITION(S) HELD PRINCIPAL OCCUPATIONS
AND AGE WITH THE FUND DURING PAST FIVE YEARS
- ------- ------------- ----------------------
<S> <C> <C>
Thomas T. Mooney (58) Director President of the Greater Rochester Metro Chamber of Commerce;
55 St. Paul Street former Rochester City Manager; Trustee of Center for
Rochester, NY 14604 Governmental Research, Inc.; Director of Blue Cross of
Rochester, 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 of First
Financial Fund, Inc. and The High Yield Plus Fund, Inc.;
Trustee of The Target Portfolio Trust, Target Funds and
Prudential Diversified Funds.
*David R. Odenath, Jr. (42) Director Officer in Charge, President, Chief Executive Officer and Chief
Operating Officer (since June 1999), PIFM; Senior Vice
President (since June 1999), Prudential; Senior Vice President
(August 1993-May 1999), PaineWebber Group, Inc.; Director or
Trustee of 44 funds within the Prudential mutual funds.
Stephen Stoneburn (56) Director President and Chief Executive Officer, Quadrant Media Corp.
(publishing) (since June 1996); formerly Senior Vice President
and Managing Director, Cowles Business Media (January
1993-1995); prior thereto, Senior Vice President (January
1991-1992) and Publishing Vice President (May
1989-December 1990) of Gralla Publications (a division of
United Newspapers, U.K.); formerly Senior Vice President of
Fairchild Publications, Inc.; Director of Prudential Europe
Growth Fund, Inc., Prudential Global Genesis Fund, Inc.,
Prudential Institutional Liquidity Portfolio, Inc., Prudential
MoneyMart Assets, Inc., Prudential Natural Resources Fund,
Inc., Prudential Pacific Growth Fund, Inc., Prudential Special
Money Market Fund, Inc., Prudential Tax-Free Money Fund, Inc.
and Prudential World Fund, Inc.; Trustee of Cash Accumulation
Trust, Command Government Fund, Command Money Fund,
Command Tax-Free Fund, Prudential Developing Markets Fund,
The Target Portfolio Trust, Prudential Diversified Funds and
Target Funds.
*John R. Strangfeld, Jr. (45) Director and Chief Executive Officer, Chairman, President and Director of The
President Prudential Investment Corporation (since January 1990);
Executive Vice President of Prudential Global Asset Management
Group of Prudential (since February 1998); Chairman of Pricoa
Capital Group (since August 1989); Chief Executive Officer of
Private Asset Management Group of Prudential (November
1994-December 1998); President and Director or Trustee of 45
funds within the Prudential mutual funds.
Clay T. Whitehead (61) Director President of National Exchange Inc. (new business development
firm) (since May 1983); Director or Trustee of 33 funds within
the Prudential mutual funds.
David F. Connor (36) Secretary Assistant General Counsel (since March 1998) of Prudential
Investment Fund Management LLC (PIFM); Associate Attorney,
Drinker Biddle & Reath LLP prior thereto.
</TABLE>
B-19
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS+ POSITION(S) HELD PRINCIPAL OCCUPATIONS
AND AGE WITH THE FUND DURING PAST FIVE YEARS
- ------- ------------- ----------------------
<S> <C> <C>
Grace C. Torres (40) Treasurer First Vice President (since December 1996) of PIFM; First Vice
and Principal President (since March 1994) of Prudential Securities; formerly
Financial and First Vice President (March 1994-September 1996) of Prudential
Accounting Officer Mutual Fund Management, Inc.
Stephen M. Ungerman (46) Assistant Tax Director (since March 1996) of Prudential Investments and the
Treasurer 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.
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 75.
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 $5,000, in addition to certain out-of-pocket
expenses. The amount of annual compensation paid to each Director may change as
a result of the introduction of additional funds on the boards of which the
Director will be asked to serve.
Directors may receive their Director's fees pursuant to a deferred fee
agreement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of Director's fees in installments which accrue interest at a
rate equivalent to the prevailing rate applicable to 90-day U.S. Treasury Bills
at the beginning of each calendar quarter or, pursuant to an 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.
B-20
<PAGE>
The following table sets forth the aggregate compensation paid by the Fund
to the Directors who are not affiliated with the Manager for the fiscal year
ended September 30, 1999 and the aggregate compensation paid to such Director
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, 1998.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM FUND
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL AND FUND
COMPENSATION AS PART OF FUND BENEFITS UPON COMPLEX PAID TO
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)**
Robert F. Gunia+, Director $ 0 None N/A ---
Robert E. LaBlanc, Director $ 0 None N/A $ 45,000 (14/17)**
Douglas H. McCorkindale*, Director $5,750 None N/A $115,000 (20/35)**
Thomas T. Mooney*, Director $5,750 None N/A $ 70,000 (31/64)**
David R. Odenath, Jr.+, Director $ 0 None N/A ---
Stephen Stoneburn, Director $ 0 None N/A $ 45,000 (14/17)**
John R. Strangfeld+, Director and President None None N/A ---
Clay T. Whitehead, Director $ 0 None N/A $ 45,000 (18/24)**
</TABLE>
- ----------
* Total compensation from all of the funds in the Fund Complex for the calendar
year ended December 31, 1998 includes amounts deferred at the election of
Directors under the funds' deferred compensation plan. Including accrued
interest, total compensation amounted to approximately $85,445, $71,145, and
$119,740 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.
+ Messrs. Gunia, Odenath and Strangfeld, who are interested Directors, did not
receive compensation from the Fund or any fund in the Fund Complex.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of November 5, 1999, the Directors and officers of the Fund, as a group,
owned beneficially less than 1% of the outstanding shares of beneficial interest
of the Fund, for Classes A, B, C and Z shares.
As of November 5, 1999, the only entity owning more than 5% of the
outstanding voting securities of any class was Nelag Partners, 37791 Halper Lake
Drive, Rancho Mirage, CA 92270, which held 5.87% of the Fund's Class C shares.
As of November 5, 1999, Prudential Securities was record holder of
5,056,897 Class A shares (or 66.6% of the outstanding Class A shares), 4,637,610
Class B shares (or 63.9% of the outstanding Class B shares), 49,134 Class C
shares (or 75.2% of the outstanding Class C shares) and 17,486 Class Z shares
(or 4.8% of the outstanding Class Z shares) of the Fund. In the event of any
meetings of shareholders, Prudential Securities will forward, or cause to be
forwarded, proxy material to the beneficial owners for which it is the record
holder.
B-21
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
(A) MANAGER AND SUBADVISER
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. The Manager serves as manager to all of the other investment
companies that, together with the Fund, comprise the Prudential mutual funds.
See "How the Fund Is Managed-Manager" in the Prospectus. As of August 31, 1999,
the Manager managed and/or administered open-end and closed-end management
investment companies with assets of approximately $71.8 billion. According to
the Investment Company Institute, as of November 30, 1999, the Prudential mutual
funds were the 20th 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 (the
Transfer Agent), a wholly-owned subsidiary of the Manager, serves as the
transfer agent and dividend distribution 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), the Manager, subject to the supervision of the Fund's Directors and
in conformity with the stated policies of the Fund, manages both the investment
operations of the Fund and the composition of the Fund's portfolio, including
the purchase, retention, disposition and loan of securities. In connection
therewith, the Manager is obligated to keep certain books and records of the
Fund. The Manager also administers the Fund's business affairs and, in
connection therewith, furnishes the Fund with office facilities, together with
those ordinary clerical and bookkeeping services which are not being furnished
by State Street Bank and Trust Company (the Custodian), the Fund's custodian,
and the Fund's Transfer Agent and dividend disbursing agent. The management
services of the Manager for the Fund are not exclusive under the terms of the
Management Agreement and the Manager 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 business affairs of the Fund, the
Manager 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 the Manager
or Subadviser;
(b) all expenses incurred by the Manager or by the Fund in connection with
managing the ordinary course of the Fund's business, other than those assumed by
the Fund as described below; and
(c) the subadvisory agreement between the Manager and the Subadviser (the
Subadvisory Agreement).
Under the terms of the Management Agreement, the Fund is responsible for
the payment of the following expenses: (a) the fees payable to the Manager, (b)
the fees and expenses of Directors who are not affiliated persons of the Manager
or the Subadviser, (c) the fees and certain expenses of the Custodian and
Transfer Agent, including the cost of providing records to the Manager in
connection with its obligation of maintaining required records of the Fund and
of pricing the Fund's shares, (d) the charges and expenses of legal counsel and
independent accountants for the Fund, (e) brokerage commissions and any issue or
transfer taxes chargeable to the Fund in connection with its securities
transactions, (f) all taxes and corporate fees payable by the Fund to
governmental agencies, (g) the fees of any trade associations of which the Fund
may be a member, (h) the cost of share certificates representing shares of the
Fund, (i) the cost of fidelity and liability insurance, (j) certain organization
expenses of the Fund and the fees and expenses involved in registering and
maintaining registration of the Fund and of its shares with the Commission,
including the preparation and printing of the Fund's registration statements and
B-22
<PAGE>
prospectuses for such purposes, (k) allocable communications expenses with
respect to investor services and all expenses of shareholders' and Directors'
meetings and of preparing, printing and mailing reports, proxy statements and
prospectuses to shareholders in the amount necessary for distribution to the
shareholders, (l) litigation and indemnification expenses and other
extraordinary expenses not incurred in the ordinary course of the Fund's
business and (m) distribution fees.
The Management Agreement provides that the Manager 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.
Wellington Management Company, LLP (Wellington Management or the
Subadviser), 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' or 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 1940 Act) of any such party, on May 26,
1999, and by shareholders of the Fund on December 30, 1991.
For the fiscal years ended September 30, 1999,1998 and 1997, the Fund paid
$2,021,652, $2,050,958 and $2,040,052, respectively, to PIFM under the
Management Agreement and PIFM paid subadvisory fees of $1,422,870, $1,441,519
and $1,434,579, respectively, to Wellington Management under the Subadvisory
Agreement.
(B) PRINCIPAL UNDERWRITER, DISTRIBUTOR AND RULE 12B-1 PLANS
Prudential Investment Management Services LLC (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. The
Distributor and Prudential Securities are subsidiaries of Prudential.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the Fund
under Rule 12b-1 under the 1940 Act and a distribution agreement (the
Distribution Agreement), the Distributor incurs the expenses of distributing the
Fund's Class A, Class B and Class C shares. The Distributor also incurs the
expenses of distributing the Fund's Class Z shares under a Distribution
Agreement, none of which are reimbursed by or paid for by the Fund.
The expenses incurred under the Plans include commissions and account
servicing fees paid to, or on account of brokers or financial institutions which
have entered into agreements with the Distributor, advertising expenses, the
cost of printing and mailing prospectuses to potential investors and indirect
and overhead costs of the Distributor associated with the sale of Fund shares,
including lease, utility, communications and sales promotion expenses.
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
B-23
<PAGE>
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 brokers in consideration for the distribution,
marketing, administrative and other services and activities provided by brokers
with respect to the promotion of the sale of the Fund's shares and the
maintenance of related shareholder accounts.
Prior to February 4, 1991, the Fund operated as a closed-end fund and
offered only one class of shares (the existing Class A shares). On October 15,
1990, the Board of Directors, including a majority of the Directors who are not
interested persons of the Fund and who have no direct or indirect financial
interest in the operation of the Plans or in any agreement related to the Plans
(the Rule 12b-1 Directors), at a meeting called for the purpose of voting on the
Class A Plan, adopted a plan of distribution for the Class A shares of the Fund.
On November 13, 1990, the Board of Directors, including the Rule 12b-1
Directors, at a meeting called for the purpose of voting on the Class B Plan,
adopted a plan of distribution for the Class B shares of the Fund. On February
10, 1993, the Board of Directors, including a majority of the Rule 12b-1
Directors, at a meeting called for the purpose of voting on each Plan, approved
modifications to the Fund's Class A and Class B Plans and Distribution
Agreements to conform them to recent amendments to the National Association of
Securities Dealers, Inc. (NASD) maximum sales charge rule described below. As
modified, the Class A Plan provides that (i) up to .25 of 1% of the average
daily net assets of the Class A shares may be used to pay for personal service
and the maintenance of shareholder accounts (service fee) and (ii) total
distribution fees (including the service fee of .25 of 1%) may not exceed .30 of
1%. As modified, the Class B Plan provides that (i) up to .25 of 1% of the
average daily net assets of the Class B shares may be paid as a service fee and
(ii) up to .75 of 1% (not including the service fee) of the average daily net
assets of the Class B shares (asset-based sales charge) may be used as
reimbursement for distribution-related expenses with respect to the Class B
shares. On May 5, 1993, the Board of Directors, including a majority of the Rule
12b-1 Directors, at a meeting called for the purpose of voting on each Plan,
adopted a plan of distribution for the Class C shares of the Fund and approved
further amendments to the plans of distribution for the Fund's Class A and Class
B shares changing them from reimbursement type plans to compensation type plans.
The Plans, as amended and restated, were last approved by the Board of
Directors, including a majority of the Rule 12b-1 Directors, on May 26, 1999.
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, 1999, the Distributor
received payments of approximately $341,700 under the Class A Plan and spent
approximately $320,800 in distributing the Class A shares. This amount was
primarily expended for payments of account servicing fees to financial advisers
and other persons who sell Class A shares. For the fiscal year ended September
30, 1999, the Distributor also received approximately $27,400 in initial sales
charges.
CLASS B PLAN. For the fiscal year ended September 30, 1999, the Distributor
received $1,546,400 from the Fund under the Class B Plan and spent approximately
$516,860 in distributing the Fund's Class B shares. It is estimated that of the
amount spent approximately 0% ($0) was spent on printing and mailing of
prospectuses to other than current shareholders; 14.6% ($75,100) was spent on
compensation to broker-dealers for commissions to representatives and other
expenses, including an allocation of overhead and other branch office
distribution-related expenses, incurred for distribution of Fund shares; and
85.4% ($441,700) on the aggregate of (1) payments of commissions and account
servicing fees to financial advisers (72.0% or $372,400) and (2) an allocation
of overhead and other branch office distribution-related expenses for payments
of related expenses (13.4% or $69,300). The term "overhead and other branch
office distribution-related expenses" represents (a) the expenses of operating
Prudential Securities' and Pruco Securities Corporation's (Prusec's) branch
offices in connection with the sale of Fund shares, including lease costs, the
salaries and employee benefits of operations and sales support personnel,
utility costs, communications costs and the costs of stationery and supplies,
(b) the costs of client sales seminars, (c) expenses of mutual fund sales
coordinators to promote the sale of Fund shares and (d) other incidental
expenses relating to branch promotion of Fund sales.
The Distributor also receives the proceeds of contingent deferred sales
charges paid by investors upon certain redemptions of Class B shares. For the
fiscal year ended September 30, 1999, the Distributor received approximately
$151,000 in contingent deferred sales charges attributable to Class B shares.
B-24
<PAGE>
CLASS C PLAN. For the fiscal year ended September 30, 1999, the Distributor
received $12,100 under the Class C Plan and spent approximately $11,100 in
distributing Class C shares. It is estimated that of the amount spent,
approximately 0%, ($0) was spent on printing and mailing of prospectuses to
other than current shareholders; 3.2% ($360) on compensation to broker-dealers
for commissions to representatives and other expenses, including an allocation
of overhead and other branch office distribution-related expenses, incurred for
distribution of Fund shares; and 96.8%, ($10,700) on the aggregate of (1)
payments of commissions and account servicing fees to financial advisers (77.0%
or $8,500) and (2) an allocation of overhead and other branch office
distribution-related expenses for payments of related expenses (19.7% or
$2,200).
The Distributor also receives the proceeds of contingent deferred sales
charges paid by investors upon certain redemptions of Class C shares. For the
fiscal year ended September 30, 1999, the Distributor received approximately $30
in contingent deferred sales charges attributable to Class C shares.
Distribution expenses attributable to the sale of Class A, Class B and
Class C shares of the Fund are allocated to each such class based upon the ratio
of sales of each such class to the sales of Class A, Class B and Class C shares
of the Fund other than expenses allocable to a particular class. The
distribution fee and sales charge of one class will not be used to subsidize the
sale of another class.
The Class A, Class B and Class C Plans continue in effect from year to
year, provided that each such continuance is approved at least annually by a
vote of the 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. A Plan 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 of the Fund on not
more than 30 days' written notice to any other party to the Plan. The Plans may
not be amended to increase materially the amounts to be spent for the services
described therein without approval by the shareholders of the applicable class
(by both Class A and Class B shareholders, voting separately, in the case of
material amendments to the Class A Plan), and all material amendments are
required to be approved by the Directors in the manner described above. Each
Plan will automatically terminate in the event of its assignment. The Fund will
not be contractually obligated to pay expenses incurred under any Plan if it is
terminated or not continued.
Pursuant to each Plan, the 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.
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 to dealers (including Prudential Securities) 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.
FEE WAIVERS/SUBSIDIES
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 fees as described
above. These voluntary waivers may be terminated at any time. Fee waivers and
subsidies will increase the Fund's total return.
NASD MAXIMUM SALES CHARGE RULE
Pursuant to rules of the NASD, the Distributor is required to limit
aggregate initial sales charges, deferred sales charges and asset-based sales
charges to 6.25% of total gross sales of each class of shares. Interest charges
on unreimbursed distribution expenses equal to the prime rate plus one percent
per annum may be added to the 6.25% limitation. Sales from the reinvestment of
dividends and distributions are not included in the calculation of the 6.25%
limitation. The annual asset-based sales charge on shares of the Fund may not
exceed .75 of 1% per class. The 6.25% limitation applies to each class of the
Fund rather than on a per shareholder basis. If aggregate sales charges were to
exceed 6.25% of total gross sales of any class, all sales charges on shares of
that class would be suspended.
B-25
<PAGE>
(C) OTHER SERVICE PROVIDERS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and, in that capacity, maintains certain financial and accounting books and
records pursuant to an agreement with the Fund. Subcustodians provide custodial
services for the Fund's foreign assets held outside the United States.
The Transfer Agent, Raritan Plaza One, Edison, New Jersey 08837, serves as
the transfer and dividend disbursing agent of the Fund. The Transfer Agent is a
wholly-owned subsidiary of the Manager. The Transfer Agent 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, the Transfer Agent receives an annual fee
of $13.00 per shareholder account, a new account set-up fee of $2.00 for each
manually established account and a monthly inactive zero balance account fee of
$0.20 per shareholder account. The Transfer Agent is also reimbursed for its
out-of-pocket expenses, including but not limited to postage, stationery,
printing, allocable communication expenses and other costs.
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036, serves as the Fund's independent accountant 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 "Fund Distributions and Tax Issues" and "How to Buy,
Sell and Exchange Shares of the Fund" in the Prospectus).
BROKERAGE ALLOCATION AND OTHER PRACTICES
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 1940 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
B-26
<PAGE>
services. The Fund has no obligation to deal with any broker or group of brokers
in the execution of transactions. The Fund contemplates that, consistent with
the policy of obtaining the best net results, the Fund may use Prudential
Securities and its affiliates for brokerage transactions. In order for
Prudential Securities or its affiliates to effect any such transaction for the
Fund, the commissions, fees or other remuneration received by Prudential
Securities or its affiliates must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other brokers in connection with
comparable transactions involving similar securities, futures or options on
futures being purchased or sold on an exchange during a comparable period of
time. The Fund's Board of Directors has adopted procedures designed to ensure
that all brokerage commissions, fees or other remuneration paid to such firm or
its affiliates are reasonable and fair.
Investment decisions for the Fund and for other investment accounts managed
by the Subadviser are made independently of each other in the light of differing
considerations for the various accounts. However, the same investment decision
may occasionally be made for two or more such accounts. In such cases,
simultaneous transactions are inevitable. Purchases or sales are then averaged
as to price and allocated to accounts according to a formula deemed equitable to
each account. While in some cases this practice could have a detrimental effect
upon the price or value of the security as far as the Fund is concerned, in
other cases it is believed to be beneficial to the Fund.
The Fund's brokerage transactions involving securities of companies
headquartered in countries other than the United States will be conducted
primarily on the markets and principal exchanges of such countries. Foreign
markets are generally not as developed as those located in the United States,
which may result in higher transaction costs, delayed settlement and less
liquidity for trades effected in foreign markets. Transactions on foreign
exchanges are usually subject to fixed commissions that generally are higher
than negotiated commissions on U.S. transactions. There is generally less
government supervision and regulation of exchanges and brokers in foreign
countries than in the United States.
In accordance with Section 11(a) under the Securities Exchange Act of 1934,
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, 1999.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
--------------------------------------
1999 1998 1997
---------- ----------- -----------
<S> <C> <C> <C>
Total brokerage commissions paid by the Fund ......... $89,946 $140,952 $174,648
</TABLE>
The Fund effected no transactions that involved the payment of commissions
through Prudential Securities during the fiscal year ended September 30, 1999.
CAPITAL SHARES, OTHER SECURITIES AND ORGANIZATION
The Fund is authorized to issue 2 billion shares of common stock, $.001 per
share divided into four classes, designated Class A, Class B, Class C and Class
Z shares, initially all of one series. Each class of common stock represents an
interest in the same assets of the Fund and is identical in all respects except
that (1) each class is subject to different sales charges and distribution
and/or service fees (except for Class Z shares, which are not subject to any
sales charges and distribution and/or service fees), which may affect
performance, (2) each class has exclusive voting rights on any matter submitted
to shareholders that relates solely to its arrangement and has separate voting
rights on any matter submitted to shareholders in which the interests of one
class differ from the interests of any other class, (3) each class has a
different exchange privilege, (4) only Class B shares have a conversion feature
and (5) Class Z shares are offered exclusively for sale to a limited group of
investors. In accordance with the Fund's Articles of Incorporation, the
Directors may authorize the creation of additional series and classes within
such series, with such preferences, privileges, limitations and voting and
dividend rights as the Directors may determine. The voting rights of the
shareholders of a series or class can be modified only by the majority vote of
shareholders of that series or class.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances. Each share of
each class is equal as to earnings, assets and voting privileges, except as
noted above, and each class of shares (with the exception of Class Z
B-27
<PAGE>
shares, which are not subject to any distribution or service fees) bears the
expenses related to the distribution of its shares. Except for the conversion
feature applicable to the Class B shares, there are no conversion, preemptive or
other subscription rights. In the event of liquidation, each share of the Fund
is entitled to its portion of all of the Fund's assets after all debt and
expenses of the Fund have been paid. Since Class B and Class C shares generally
bear higher distribution expenses than Class A shares, the liquidation proceeds
to shareholders of those classes are likely to be lower than to Class A
shareholders and to Class Z shareholders, whose shares are not subject to any
distribution and/or service fees.
The Fund does not intend to hold annual meetings of shareholders unless
otherwise required by law. The Fund will not be required to hold meetings of
shareholders unless, for example, the election of Directors is required to be
acted on by shareholders under the 1940 Act. Shareholders have certain rights,
including the right to call a meeting upon the vote of 10% of the Fund's
outstanding shares for the purpose of voting on the removal of one or more
Directors or to transact any other business.
Under the Articles of Incorporation, the Directors may authorize the
creation of additional series of shares (the proceeds of which would be invested
in separate, independently managed portfolios with distinct investment
objectives and policies and share purchase, redemption and net asset value
procedures) with such preferences, privileges, limitations and voting and
dividend rights as the Directors may determine. All consideration received by
the Fund for shares of any additional series, and all assets in which such
consideration is invested, would belong to that series (subject only to the
rights of creditors of that series) and would be subject to the liabilities
related thereto. Under the 1940 Act, shareholders of any additional series of
shares would normally have to approve the adoption of any advisory contract
relating to such series and of any changes in the investment policies related
thereto. The Directors do not intend to authorize additional series at the
present time.
The Directors have the power to alter the number and the terms of office of
the Directors and they may at any time lengthen their own terms or make their
terms of unlimited duration and appoint their own successors, provided that
always at least a majority of the Directors have been elected by the
shareholders of the Fund. The voting rights of shareholders are not cumulative,
so that holders of more than 50 percent of the shares voting can, if they
choose, elect all Directors being selected, while the holders of the remaining
shares would be unable to elect any Directors.
PURCHASE, REDEMPTION AND PRICING OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value (NAV) per share plus a sales charge which, at the election of
the investor, may be imposed either (1) at the time of purchase (Class A or
Class C shares) and/or (2) on a deferred basis (Class B or Class C shares).
Class Z shares of the Fund are offered to a limited group of investors at NAV
without any sales charges. See "How to Buy, Sell and Exchange 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 "Shareholder
Investment Account- Exchange Privilege."
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, an
investor must complete an application and telephone the Transfer Agent at (800)
225-1852 (toll-free) to receive an account number. The following information
will be requested: the investor's name, address, tax identification number, fund
and class elections, dividend distribution election, amount being wired and
wiring bank. Instructions should then be given by the investor to his/her bank
to transfer funds by wire to the Fund's Custodian, 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 the Transfer Agent and the investor's name and identifying the class
in which the investor is eligible to invest (Class A, Class B, Class C or Class
Z shares).
If an investor arranges for receipt by the Custodian of Federal Funds prior
to the calculation of NAV (4:15 P.M., New York time), on a business day, the
investor may purchase shares of the Fund as of that day.
In making a subsequent purchase order by wire, an investor should wire the
Custodian directly and should be sure that the wire specifies Global Utility
Fund, Inc., Class A, Class B, Class C or Class Z shares and the investor's name
and individual account number. It is not necessary to call the Transfer Agent to
make subsequent purchase orders utilizing federal funds. The minimum amount
which may be invested by wire is $1,000.
B-28
<PAGE>
ISSUANCE OF FUND SHARES FOR SECURITIES
Transactions involving the issuance of Fund shares for securities (rather
than cash) will be limited to (1) reorganizations, (2) statutory mergers, or (3)
other acquisitions of portfolio securities that: (a) meet the investment
objective and policies of the Fund, (b) are liquid and not subject to
restrictions on resale, (c) have a value that is readily ascertainable via
listing on or trading in a recognized United States or international exchange or
market, and (d) are approved by the Fund's investment adviser.
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares of the Fund are sold at a maximum sales charge of
5%, Class C* shares are sold with a 1% sales charge, and Class B* and Class Z
shares of the Fund are sold at NAV. Using the NAV at September 30, 1999, the
maximum offering price of the Fund's shares is as follows:
<TABLE>
<S> <C>
CLASS A
Net asset value and redemption price per Class A share ................. $ 17.95
Maximum sales charge (5% of offering price) ............................ .94
--------
Maximum offering price to public ....................................... $ 18.89
========
CLASS B
Net asset value, redemption price and offering price per Class B share* $ 17.96
========
CLASS C
Net asset value and redemption price per Class C share* ................ $ 17.96
Sales Charge (1% of offering price) .................................... .18
--------
Offering price to public ............................................... $ 18.14
========
CLASS Z
Net asset value, redemption price and offering price per Class Z share.. $ 17.97
========
</TABLE>
- ----------
* Class B and Class C shares are subject to a contingent deferred sales charge
on certain redemptions.
SELECTING A PURCHASE ALTERNATIVE
The following is provided to assist investors in determining which method
of purchase best suits their individual circumstances and is based on current
fees and expenses being charged to the Fund:
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 more than 4 years, but less than
5 years, you may consider purchasing Class B or Class C shares because: (1) the
contingent-deferred sales load plus the cumulative annual distribution-related
fee on Class B shares; and (ii) the maximum 1% initial sales charge plus the
cumulative annual distribution-related fee on Class C shares would be lower than
the maximum 5% initial sales charge plus the cumulative annual
distribution-related fee on Class A shares. 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 the cumulative
annual distribution-related fee on Class B shares and less than the initial
sales charge plus the cumulative annual distribution-related fee on 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 or how long you intend to hold you 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.
B-29
<PAGE>
REDUCTION AND WAIVER OF INITIAL SALES CHARGE-CLASS A SHARES
BENEFIT PLANS. Certain group retirement and savings plans may purchase
Class A shares without the initial sales charge if they meet the required
minimum for amount of assets, average account balance or number of eligible
employees. For more information about these requirements, call Prudential at
(800) 353-2847.
OTHER WAIVERS. In addition, Class A shares may be purchased at NAV,
through the Distributor or the Transfer Agent, by:
o officers of the Prudential mutual funds (including the Fund);
o employees of the Distributor, Prudential Securities, the Manager and
their subsidiaries and members of the families of such persons who
maintain an "employee related" account at Prudential Securities or the
Transfer Agent;
o employees of subadvisers of the Prudential mutual funds provided that
purchases at NAV are permitted by such person's employer;
o 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;
o real estate brokers, agents and employees of real estate brokerage
companies affiliated with the Prudential Real Estate Affiliates who
maintain an account at Prudential Securities, Prusec or with the
Transfer Agent;
o members of the Board of Directors of The Prudential Insurance Company of
America;
o registered representatives and employees of brokers who have entered
into a selected dealer agreement with the Distributor provided that
purchases at NAV are permitted by such person's employer;
o investors who have a business relationship with a financial adviser who
joined Prudential Securities from another investment firm, provided that
(1) the purchase is made within 180 days of the commencement of the
financial adviser's employment at Prudential Securities, or within one
year in the case of benefit plans, (2) the purchase is made with
proceeds of a redemption of shares of any open-end non-money market fund
sponsored by the financial adviser's previous employer (other than a
fund which imposes a distribution or service fee of .25 of 1% or less)
and (3) the financial adviser served as the client's broker on the
previous purchase;
o investors in Individual Retirement Accounts, provided the purchase is
made in a directed rollover to such Individual Retirement Account or
with the proceeds of 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 distribution;
o 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 (for
example, mutual fund "wrap" or asset allocation programs); and
o 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 (for example, mutual fund "supermarket programs").
Broker-dealers, investment advisers or financial planners sponsoring
fee-based programs (such as mutual fund "wrap" or asset allocation programs and
mutual fund "supermarket" programs) may offer their clients more than one class
of shares in the Fund in connection with different pricing options for their
programs. Investors should consider carefully any separate transaction and other
fees charged by these programs in connection with investing in each available
share class before selecting a share class.
For an investor to obtain any reduction or waiver of the initial sales
charges, at the time of the sale either the Transfer Agent must be notified
directly by the investor or the Distributor must be notified by the broker
facilitating the transaction that the purchase qualifies for the reduced or
waived sales charge. The reduction or waiver will be granted subject to
confirmation of your entitlement. No initial sales charges are imposed upon
Class A shares acquired upon the reinvestment of dividends and distributions.
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other Prudential mutual funds, the purchases
may be combined to take advantage of the reduced sales charges applicable to
larger purchases. See "How to Buy, Sell and Exchange Shares of the Fund-How to
Buy Shares-Reducing or Waiving Class A's Initial Sales Charge" in the
Prospectus.
B-30
<PAGE>
An eligible group of related Fund investors includes any combination of the
following:
o an individual;
o the individual's spouse, their children and their parents;
o the individual's and spouse's Individual Retirement Account (IRA);
o any company controlled by the individual (a person, entity or group that
holds 25% or more of the outstanding voting securities of a company will
be deemed to control the company, and a partnership will be deemed to be
controlled by each of its general partners); o a trust created by the
individual, the beneficiaries of which are the individual, his or her
spouse, parents or children; o a Uniform Gifts to Minors Act/Uniform
Transfers to Minors Act account created by the individual or the
individual's spouse; and
o one or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that employer).
The Transfer Agent, the Distributor or a broker 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. The Combined Purchase and Cumulative Purchase Privilege does not apply
to individual participants in any retirement or group plan.
LETTERS OF INTENT. Reduced sales charges are also available to investors
(or an eligible group of related investors) 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. Retirement and group plans
no longer qualify to purchase Class A shares at NAV by entering into a Letter of
Intent .
For purposes of the Letter of Intent, all shares of the Fund and shares of
other Prudential mutual funds (excluding money market funds other than those
acquired pursuant to the exchange privilege) which were previously purchased and
are still owned are also included in determining the applicable reduction.
However, the value of shares held directly with the Transfer Agent, Prudential
or its affiliates and through your broker will not be aggregated to determine
the reduced sales charge.
A Letter of Intent permits a purchaser to establish a total investment goal
to be achieved by any number of investments over a thirteen-month period. Each
investment made during the period will receive the reduced sales charge
applicable to the amount represented by the goal, as if it were a single
investment. Escrowed Class A shares totaling 5% of the dollar amount of the
Letter of Intent will be held by the Transfer Agent in the name of the
purchaser. The effective date of a Letter of Intent may be back-dated up to 90
days, in order that any investments made during this 90-day period, valued at
the purchaser's cost, can be applied to the fulfillment of the Letter of Intent
goal.
The Letter of Intent does not obligate the investor to purchase, nor the
Fund to sell, the indicated amount. In the event the Letter of Intent goal is
not achieved within the thirteen-month period, the purchaser is required to pay
the difference between the sales charge otherwise applicable to the purchases
made during this period and the sales charge actually paid. Such payment may be
made directly to the Distributor or, if not paid, the Distributor will liquidate
sufficient escrowed shares to obtain such difference. Investors electing to
purchase Class A shares of the Fund pursuant to a Letter of Intent should
carefully read such Letter of Intent.
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will be granted
subject to confirmation of the investor's holdings.
CLASS B SHARES
The offering price of Class B shares for investors choosing one of the
deferred sales charge alternatives is the NAV next determined following receipt
of an order in proper form by the Transfer Agent, a broker or the Distributor.
Although there is no sales charge imposed at the time of purchase, redemptions
of Class B shares may be subject to a CDSC. See "Sale of Shares-Contingent
Deferred Sales Charge," below.
The Distributor will pay, from its own resources, sales commissions of up
to 4% of the purchase price of Class B shares to brokers, financial advisers and
other persons who sell Class B shares at the time of sale. This facilitates the
ability of the
B-31
<PAGE>
Fund to sell the Class B shares without an initial sales charge being deducted
at the time of purchase. The Distributor anticipates that it will recoup its
advancement of sales commissions from the combination of the CDSC and the
distribution fee.
CLASS C SHARES
The offering price of Class C shares is the next determined NAV plus a 1%
sales charge. In connection with the sale of Class C shares, the Distributor
will pay, from its own resources, brokers, financial advisers and other persons
which distribute Class C shares a sales commission of up to 2% of the purchase
price at the time of the sale.
WAIVER OF INITIAL SALES CHARGE-CLASS C SHARES
BENEFIT PLANS. Certain group retirement plans may purchase Class C shares
without the initial sales charge. For more information, call Prudential at
(800) 353-2847.
INVESTMENT 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: (1) investors purchasing shares
through an account at Prudential Securities, (2) investors purchasing shares
through an ADVANTAGE Account or an Investor Account with Prusec, and (3)
investors purchasing shares through other brokers. This waiver is not available
to investors who purchase shares directly from the Transfer Agent. You must
notify your broker if you are entitled to this waiver and provide such
supporting documents as it may deem appropriate.
CLASS Z SHARES
BENEFIT PLANS. Certain group retirement plans may purchase Class Z shares
if they meet the required minimum for amount of assets, average account balance
or number of eligible employees. For more information about these requirements,
call Prudential at (800) 353-2847.
MUTUAL FUND PROGRAMS. Class Z shares can also be purchased by participants
in any fee-based program or trust program sponsored by Prudential or an
affiliate that includes the Fund as an available option. Class Z shares can also
be purchased by investors in certain programs sponsored by broker-dealers,
investment advisers and financial planners who have agreements with Prudential
Investments Advisory Group relating to:
o Mutual fund "wrap" or asset allocation programs, where the sponsor
places Fund trades, links it clients' accounts to a master account in
the sponsor's name and charges its clients a management, consulting or
other fee for its services; or
o Mutual fund "supermarket" programs, where the sponsor links its clients'
accounts to a master account in the sponsor's name and the sponsor
charges a fee for its services.
Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in
the Fund in connection with different pricing options for their programs.
Investors should consider carefully any separate transaction and other fees
charged by these programs in connection with investing in each available share
class before selecting a share class.
OTHER TYPES OF INVESTORS. Class Z shares of the Fund currently are
available for purchase by the following categories of investors:
o 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;
o current and former Directors/Trustees of the Prudential Mutual Funds
(including the Fund),
o Prudential, with an investment of $10 million or more.
In connection with the sale of Class Z shares, the Manager, the Distributor
or one of their affiliates may pay brokers, 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.
RIGHTS OF ACCUMULATION
Reduced sales charges also are 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.
Rights of accumulation may be applied across the classes of shares of the
Prudential mutual funds. However, the value of shares held directly with the
Transfer Agent and through your broker will not be aggregated to determine the
reduced sales charge. The value of existing holdings for purposes of determining
the reduced sales charge is calculated using the maximum offering price (NAV
plus maximum sales charge) as of the previous business day.
B-32
<PAGE>
The Distributor or the Transfer Agent must be notified at the time of
purchase that the shareholder 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.
SALE OF SHARES
You can redeem 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 the investor's broker. In certain cases,
however, redemption proceeds will be reduced by the amount of any applicable
CDSC, as described below. See "Contingent Deferred Sales Charge" below. If you
are redeeming your shares through a broker, the broker must receive your sell
order before the Fund computes its NAV for that day (that is, 4:15 p.m., New
York time) in order to receive that day's NAV. Your broker will be responsible
for furnishing all necessary documentation to the Distributor and may charge you
for its services in connection with redeeming shares of the Fund.
If you hold shares of the Fund through Prudential Securities, you must
redeem the shares through Prudential Securities. Please contact your Prudential
Securities Financial Advisor.
In order to redeem shares, a written request for redemption signed by you
exactly as the account is registered is required. If you hold certificates, the
certificates must be received by the Transfer Agent, the Distributor or your
broker in order for the redemption request to be processed. If redemption is
requested by a corporation, partnership, trust or fiduciary, written evidence of
authority acceptable to the Transfer Agent must be submitted before such request
will be accepted. All correspondence and documents concerning redemptions should
be sent to the Fund in care of its Transfer Agent, Prudential Mutual Fund
Services LLC, attention: Redemption Services, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010, the Distributor or to the investor's broker.
SIGNATURE GUARANTEE. If the proceeds of the redemption (1) exceed $100,000
(2) are to be paid to a person other than shareholder(s), (3) are to be sent to
an address other than the address on the Transfer Agent's records, or (4) are to
be paid to a corporation, partnership, trust or fiduciary, and your shares are
held directly with the Transfer Agent, the signature(s) on the redemption
request or stock power must be guaranteed by an "eligible guarantor
institution." An "eligible guarantor institution" includes any bank, broker,
dealer or credit union. The Transfer Agent reserves the right to request
additional information from, and make reasonable inquiries of, any eligible
guarantor institution. For clients of Prusec, a signature guarantee may be
obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices. In the case of redemptions
from a PruArray Plan, if the proceeds of the redemption are invested in another
investment option of the plan in the name of the record holder and at the same
address as reflected in the Transfer Agent's records, a signature guarantee is
not required.
Payment for shares presented for redemption will be made by check within
seven days after receipt of the written request, and certificates if applicable
by the Transfer Agent, the Distributor or the broker of the certificate and/or
written request, except as indicated below. If an investor holds shares through
Prudential Securities, payment for shares presented for redemption will be
credited to the investor's account at his or her broker, unless the investor
indicates otherwise. Such payment may be postponed or the right of redemption
suspended at times (1) when the New York Stock Exchange is closed for other than
customary weekends and holidays, (2) when trading on such Exchange is
restricted, (3) when an emergency exists as a result of which disposal by the
Fund of securities owned by it is not reasonably practicable or it is not
reasonably practicable for the Fund fairly to determine the value of its net
assets, or (4) during any other period when the Commission, by order, so
permits; provided that applicable rules and regulations of the Securities and
Exchange Commission shall govern as to whether the conditions prescribed in (2),
(3) or (4) exist.
REDEMPTION IN KIND. If the Directors determine that it would be detrimental
to the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Fund, in lieu of cash, in conformity with applicable rules of the Securities
and Exchange Commission. Securities will be readily marketable and will be
valued in the same manner as in a regular redemption. If your shares are
redeemed in kind, you would incur transaction costs in converting the assets
into cash. The Fund, however, has elected to be governed by Rule 18f-1 under the
Investment Company Act, under which the Fund is obligated to redeem shares
solely in cash up to the lesser of $250,000 or 1% of the NAV of the Fund during
any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the
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.
B-33
<PAGE>
90-DAY REPURCHASE PRIVILEGE. If a shareholder redeems shares and has not
previously exercised the repurchase privilege, the shareholder may reinvest any
portion or all of the proceeds of such redemption in shares of the same 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 the shareholder's account. (If less
than a full repurchase is made, the credit will be on a pro rata basis.) The
shareholder must notify the Transfer Agent, either directly or through the
Distributor or the shareholder's broker, at the time the repurchase privilege is
exercised to adjust 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 Charge" below. Exercise of the
repurchase privilege will generally not affect federal tax treatment of any gain
realized upon redemption. However, if the redemption was made within a 30 day
period of the repurchase and if the redemption resulted in a loss, some or all
of the loss, depending on the amount reinvested, may not be allowed for federal
income tax purposes.
CONTINGENT DEFERRED SALES CHARGE
Redemptions of Class B shares will be subject to a contingent deferred
sales charge or CDSC declining from 5% to zero over a six-year period. Class C
shares redeemed within 18 months of purchase will be subject to a 1% CDSC (one
year for Class C Shares purchased before November 2, 1998). The CDSC will be
deducted from the redemption proceeds and reduce the amount received by the
shareholder. The CDSC will be imposed on any redemption by a shareholder which
reduces the current value of the Class B or Class C shares to an amount which is
lower than the amount of all payments by the shareholder for shares during the
preceding four years, in the case of Class B shares and 18 months in the case of
Class C shares (one year for Class C shares purchased before November 2, 1998).
A CDSC will be applied on the lesser of the original purchase price or the
current value of the shares being redeemed. Increases in the value of shares or
shares acquired through reinvestment of dividends or distributions are not
subject to a CDSC. The amount of any CDSC will be paid to and retained by the
Distributor.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of the purchase of shares until the time of redemption of such
shares. Solely for purposes of determining the number of years from the purchase
of shares, all purchases 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.
The following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEARS SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------------- -------------------------
First .......................... 5.0%
Second ......................... 4.0%
Third .......................... 3.0%
Fourth ......................... 2.0%
Fifth .......................... 1.0%
Sixth .......................... 1.0%
Seventh and thereafter ......... 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
purchases of Fund shares made during the preceding four years for Class B shares
and 18 months for Class C shares (one year for Class C shares bought before
November 2, 1998); then of amounts representing the cost of shares held beyond
the applicable CDSC period; and finally, of amounts representing the cost of
shares held for the longest period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
B-34
<PAGE>
For federal income tax purposes, the amount of the CDSC will reduce the
gain or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE-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
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. For more information, call Prudential at (800) 353-2847.
Finally, the CDSC will be waived to the extent that the proceeds from
shares redeemed are invested in Prudential mutual funds, the Guaranteed
Investment Account, the Guaranteed Insulated Separate Account or units of the
Stable Value Fund.
SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12% of
the total dollar amount subject to the CDSC may be redeemed without charge. The
Transfer Agent will calculate the total amount available for this waiver
annually on the anniversary date of your purchase or, for shares purchased prior
to March 1, 1997, on March 1 of the current year. The CDSC will be waived (or
reduced) on redemptions until this threshold 12% is reached.
In addition, the CDSC will be waived on redemptions of shares held by
Directors of the Fund.
Shareholders must notify the Fund's Transfer Agent either directly or
through their broker at the time of redemption that they 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.
In connection with these waivers, the Transfer Agent will require you to
submit the supporting documentation set forth below.
<TABLE>
<S> <C>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
Death A certified copy of the shareholder's death
certificate or, in the case of a trust, a certified
copy of the grantor's death certificate, plus a
certified copy of the trust agreement identifying the
grantor.
Disability--An individual will be considered disabled if he or A copy of the Social Security Administration award letter or
she is unable to engage in any substantial gainful activity by a letter from a physician on the physician's letterhead stating
reason of any medically determinable physical or mental that the shareholder (or, in the case of a trust, the grantor
impairment which can be expected to result in death or to (a copy of the trust agreement identifying the grantor will be
be of long-continued and indefinite duration. required aswell)) is permanently disabled. The letter must also
indicate the date of disability. In the case of a trust, the
Transfer Agent will also require a certified copy of the trust.
Distribution from an IRA or 403(b) Custodial Account A copy of the distribution form from the custodial firm
indicating (i) the date of birth of the shareholder and (ii) that
the shareholder is over age 591|M/2 and is taking a
normal distribution-signed by the shareholder.
Distribution from Retirement Plan A letter signed by the plan administrator/trustee indicating
the reason for the distribution.
Excess Contributions A letter from the shareholder (for an IRA) or the plan
administrator/trustee on company letterhead indicating
the amount of the excess and whether or not taxes have
been paid.
</TABLE>
The Transfer Agent reserves the right to request such additional documents
as it may deem appropriate.
QUANTITY DISCOUNT-SHARES PURCHASED PRIOR TO AUGUST 1, 1994
While a quantity discount is not available for Class B shares of the Fund,
a quantity discount may apply to Class B shares of another Prudential mutual
fund acquired pursuant to the exchange of Class B shares of the Fund. The
applicable quantity discount, if any, will be that applicable to the shares
acquired as a result of the exchange of Class B shares of the Fund.
B-35
<PAGE>
WAIVER OF CONTINGENT DEFERRED SALES CHARGE-CLASS C SHARES
BENEFIT PLANS. The CDSC will be waived for redemptions by certain group
retirement plans for which Prudential or brokers not affiliated with Prudential
provide administrative or recordkeeping services. The CDSC will also be waived
for certain redemptions by benefit plans sponsored by Prudential and its
affiliates. For more information, call Prudential at (800) 353-2847.
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: (1)
the ratio of (a) the amounts paid for Class B shares purchased at least five
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (2) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (I.E., $1,000
divided by $2,100 (47.62%), multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share NAV of the Class A shares may be higher than that
of the Class B shares at the time of conversion. Thus, although the aggregate
dollar value will be the same, you may receive fewer Class A shares than Class B
shares converted.
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been made
on the last day of the month, or for Class B shares acquired through exchange,
or a series of exchanges, on the last day of the month in which the original
payment for purchases of such Class B shares was made. For Class B shares
previously exchanged for shares of a money market fund, the time period during
which such shares were held in the money market fund will be excluded. For
example, Class B shares held in a money market fund for one year would not
convert to Class A shares until approximately eight years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase of
such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (1) that the
dividends and other distributions paid on Class A, Class B, Class C and Class Z
shares will not constitute "preferential dividends" under the Internal Revenue
Code and (2) that the conversion of shares does not constitute a taxable event.
The conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Fund will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which the shares are held for the
investor by the Transfer Agent. If a share certificate is desired, it must be
requested in writing for each transaction. Certificates are issued only for full
shares and may be redeposited in the Account at any time. There is no charge to
the investor for issuance of a certificate. The Fund makes available to its
shareholders the following privileges and plans.
B-36
<PAGE>
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund at net asset
value per share. An investor may direct the Transfer Agent in writing not less
than five full business days prior to the record date to have subsequent
dividends and/or distributions sent in cash rather than reinvested. In the case
of recently purchased shares for which registration instructions have not been
received on the record date, cash payment will be made directly to the broker.
Any shareholder who receives dividends or distributions in cash may subsequently
reinvest any such dividends or distributions at NAV within 30 days after the
payment date. The reinvestment will be made at the NAV next determined after
receipt of the check by the Transfer Agent. Shares purchased with reinvested
dividends and/or distributions will not be subject to any CDSC upon redemption.
EXCHANGE PRIVILEGE
The Fund makes available to its shareholders the privilege of exchanging
shares of the Fund for shares of certain other Prudential mutual funds,
including one or more specified money market funds, subject in each case to the
minimum investment requirements of such funds. Shares of such other Prudential
mutual funds may also be exchanged for shares of the Fund. All exchanges are
made on the basis of the relative NAV next determined after receipt of an order
in proper form. An exchange will be treated as a redemption and purchase for tax
purposes. Shares may be exchanged for shares of another fund only if shares of
such fund may legally be sold under applicable state laws. For retirement and
group plans having a limited menu of Prudential mutual funds, the exchange
privilege is available for those funds eligible for investment in the particular
program.
It is contemplated that the exchange privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
In order to exchange shares by telephone, a shareholder must authorize
telephone exchanges on his or her initial application form or by written notice
to the Transfer Agent and hold shares in non-certificate form. Thereafter, a
shareholder 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 8:00
P.M., New York time. For the shareholder's protection and to prevent fraudulent
exchanges, telephone calls will be recorded and the shareholder will be asked to
provide his or her personal identification number. A written confirmation of the
exchange transaction will be sent to the shareholder. 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 a shareholder holds shares through Prudential Securities, the shares
must be exchanged by contacting the shareholder's Prudential Securities
financial adviser.
If a shareholder holds 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.
A shareholder may also exchange shares by mail by writing to the Fund's
Transfer Agent, 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. A shareholder should then make
exchanges by mail by writing to the Transfer Agent at the address noted above.
CLASS A. Shareholders of the Fund may exchange their Class A shares for
Class A shares of certain other Prudential mutual funds, shares of Prudential
Government Securities Trust (Short-Intermediate Term Series) and shares of the
money market funds specified below. No fee or CDSC 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)
B-37
<PAGE>
(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, respectively, of
certain other Prudential mutual funds and shares of Prudential Special Money
Market Fund, Inc. No CDSC will be assessed upon such exchange, but a CDSC may be
assessed upon the redemption of the Class B and Class C shares acquired as a
result of the exchange. The applicable sales charge will be that imposed by the
fund in which shares were initially purchased and the purchase date will be
deemed to be the first day of the month after the initial purchase, rather than
the date of the exchange.
Class B and Class C shares of the Fund may also be exchanged for shares of
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, respectively, without subjecting such shares to any CDSC.
Shares of any fund participating in the Class B or Class C exchange privilege
that were acquired through reinvestment of dividends or distributions may be
exchanged for Class B or Class C shares of other funds, respectively, without
being subject to any CDSC.
CLASS Z. Class Z shares may be exchanged for Class Z shares of other
Prudential mutual funds.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV and for shareholders
who qualify to purchase Class Z shares. Under this exchange privilege, amounts
representing any Class B and Class C shares which are not subject to a CDSC held
in such a shareholder's account will be automatically exchanged for Class A
shares for shareholders who qualify to purchase Class A shares at NAV on a
quarterly basis, unless the shareholder elects otherwise.
Shareholders who qualify to purchase Class Z shares will have their Class B
and Class C shares which are not subject to a CDSC and their Class A shares
exchanged for Class Z shares on a quarterly basis. Eligibility for this exchange
privilege will be calculated on the business day prior to the date of the
exchange. Amounts representing Class B or Class C shares which are not subject
to a CDSC include the following: (1) amounts representing Class B or Class C
shares acquired pursuant to the automatic reinvestment of dividends and
distributions, (2) amounts representing the increase in the net asset value
above the total amount of payments for the purchase of Class B or Class C shares
and (3) amounts representing Class B or Class C shares held beyond the
applicable CDSC period. Class B and Class C shareholders must notify the
Transfer Agent either directly or through Prudential Securities, Prusec or
another broker that they are eligible for this special exchange privilege.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares when
they elect to have those assets become a part of the fee-based program. Upon
leaving the program (whether voluntarily or not), such Class Z shares (and, to
the extent provided for in the program, Class Z shares acquired through
participation in the program) will be exchanged for Class A shares at net asset
value. Similarly, participants in Prudential Securities' 401(k) Plan for which
the Fund's Class Z shares is an available option and who wish to transfer their
Class Z shares out of the Prudential Securities 401(k) Plan following separation
from service (that is, voluntary or involuntary termination of employment or
retirement) will have their Class Z shares exchanged for Class A shares at NAV.
B-38
<PAGE>
Additional details about the exchange privilege and prospectuses for each
of the Prudential mutual funds are available from the Fund's Transfer Agent, the
Distributor or your broker. The exchange privilege may be modified, terminated
or suspended on sixty days' notice, and any fund, including the Fund, or the
Distributor, has the right to reject any exchange application relating to such
fund's shares.
DOLLAR COST AVERAGING
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. A shareholder buys more
shares when the price is low and fewer shares when the price is high. The
average cost per share is lower than it would be if a constant number of shares
were bought at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure such as the purchase of a home or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected for the freshman class beginning in 2011, the cost of four years at a
private college could reach $210,000 and over $90,000 at a public university.(1)
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(2)
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
- -------------------------- ---------- ---------- ---------- ---------
25 Years ............... $ 105 $ 158 $ 210 $ 263
20 Years ............... 170 255 340 424
15 Years ............... 289 433 578 722
10 Years ............... 547 820 1,093 1,366
5 Years ................ 1,361 2,041 2,721 3,402
See "Automatic Investment Plan."
- ----------
(1) Source information concerning the costs of education at public and private
universities is available from The College Board Annual Survey of Colleges,
1993. Average costs for private institutions include tuition, fees, room and
board for the 1993-1994 academic year.
(2) The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not intended
to reflect the performance of an investment in shares of the Fund. The
investment return and principal value of an investment will fluctuate so that an
investor's shares when redeemed may be worth more or less than their original
cost.
AUTOMATIC INVESTMENT PLAN (AIP)
Under AIP, a shareholder 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 for specified dollar amounts to be invested in shares of the Fund. The
shareholder's bank must be a member of the Automatic Clearing House System.
Share certificates are not issued to AIP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, the Distributor or your broker.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders through the
Transfer Agent, the Distributor or a shareholder's broker. Such withdrawal plan
provides for monthly, quarterly, semi-annual or annual redemption 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.
In the case of shares held through the Transfer Agent (1) a $10,000 minimum
account value applies, (2) withdrawals may not be for less than $100 and (3) all
dividends and/or distributions must be automatically reinvested in order for the
shareholder to participate in this plan.
B-39
<PAGE>
The Transfer Agent, the Distributor or the shareholder's broker acts as
agent for the shareholder in redeeming sufficient full and fractional shares to
provide the amount of the systematic withdrawal payment. The systematic
withdrawal plan may be terminated at any time, and the Distributor reserves the
right to initiate a fee of up to $5 per withdrawal, upon 30 days' written notice
to the shareholder.
Withdrawal payments should not be considered as dividends, yield or income.
If systematic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must generally be recognized for federal income tax
purposes. In addition, withdrawals made concurrently with purchases of
additional shares are inadvisable because of the sales charges applicable to (1)
the purchase of Class A and Class C shares and (2) the redemption of Class B and
Class C shares. Each shareholder should consult his or her own tax adviser with
regard to the tax consequences of the systematic withdrawal plan, particularly
if used in connection with a retirement plan.
TAX-DEFERRED RETIREMENT PLANS
Various tax-deferred retirement plans, including a 401(k) plan,
self-directed individual retirement accounts and "tax-deferred accounts" under
Section 403(b)(7) of the Internal Revenue Code are available through the
Distributor. These plans are for use by both self-employed individuals and
corporate employers. These plans permit either self-direction of accounts by
participants, or a pooled account arrangement. Information regarding the
establishment of these plans, the administration, custodial fees and other
details are available from 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 COMPOUNDING(1)
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
- --------------- ----------- ----------
10 years $ 26,165 $ 31,291
15 years 44,675 58,649
20 years 68,109 98,846
25 years 97,780 157,909
30 years 135,346 244,692
- ----------
(1) The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated. Earnings in
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, such as pursuit of greater diversification,
protection from interest rate movements or access to different management
styles. In the event such a program is instituted, there may be a minimum
investment requirement for the program as a whole. The Fund may waive or reduce
the minimum initial investment requirements in connection with such a program.
The mutual funds in the program may be purchased individually or as part of
a program. Since the allocation of portfolios included in the program may not be
appropriate for all investors, individuals should consult their financial
adviser concerning
B-40
<PAGE>
the appropriate blend of portfolios for them. If investors elect to purchase the
individual mutual funds that constitute the program in an investment ratio
different from that offered by the program, the standard minimum investment
requirements for the individual mutual funds will apply.
NET ASSET VALUE
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
Directors have fixed the specific time of day for the computation of the Fund's
net asset value to be as of 4:15 P.M., New York time. The Fund will compute its
NAV at 4:15 P.M., New York time, on each day the New York Stock Exchange is open
for trading except on days on which no orders to purchase, sell or redeem Fund
shares have been received or days on which changes in the value of the Fund's
portfolio securities do not affect NAV. In the event the New York Stock Exchange
closes early on any business day, the NAV of the Fund's shares shall be
determined at the time between such closing and 4:15 P.M., New York time. The
New York Stock Exchange is closed on the following holidays: New Year's Day,
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Under the 1940 Act, the Directors are responsible for determining in good
faith the fair value of securities of the Fund. In accordance with procedures
adopted by the Directors, the value of investments listed on a securities
exchange and NASDAQ National Market System securities (other than options on
stock and stock indices) are valued at the last sale price of such exchange
system on the day of valuation or, if there was no sale on such day, the mean
between the last bid and asked prices on such day, or at the bid price on such
day in the absence of an asked price. Corporate bonds (other than convertible
debt securities) and U.S. Government securities that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed by the Manager in consultation with the Subadviser to be
over-the-counter, are valued on the basis of valuations provided by an
independent pricing agent or principal market maker which uses information with
respect to transactions in bonds, quotations from bond dealers, agency ratings,
market transactions in comparable securities and various relationships between
securities in determining value. Convertible debt securities that are actively
traded in the over-the-counter market, including listed securities for which the
primary market is believed by the Manager in consultation with the Subadviser to
be over-the-counter, are valued at the mean between the last reported bid and
asked prices provided by principal market makers. Options on stock and stock
indices traded on an exchange are valued at the mean between the most recently
quoted bid and asked prices on the respective exchange and futures contracts and
options thereon are valued at their last sale prices as of the close of trading
on the applicable commodities exchange or board of trade or, if there was no
sale on the applicable commodities exchange or board of trade on such day, at
the mean between the most recently quoted bid and asked prices on such exchange
or board of trade. Quotations of foreign securities in a foreign currency are
converted to U.S. dollar equivalents at the current rate obtained from a
recognized bank or dealer, and foreign currency forward contracts are valued at
the current cost of covering or offsetting such contacts. Should an
extraordinary event, which is likely to affect the value of the security, occur
after the close of an exchange on which a portfolio security is traded, such
security will be valued at fair value considering factors determined in good
faith by the investment adviser under procedures established by and under the
general supervision of the Fund's Board of Directors.
Securities or other assets for which reliable market quotations are not
readily available or for which the pricing agent or principal market maker does
not provide a valuation or methodology or provides a valuation or methodology
that, in the judgment of the Manager or Subadviser (or Valuation Committee or
Board of Directors) does not represent fair value, are valued by the Valuation
Committee or Board of Directors in consultation with the Manager or Subadviser,
including its portfolio manager, traders, and its research and credit analysts,
on the basis of the following factors: cost of the security, transactions in
comparable securities, relationships among various securities and such other
factors as may be determined by the Manager, Subadviser, Board of Directors or
Valuation Committee to materially affect the value of the security. Short-term
debt securities are valued at cost, with interest accrued or discount amortized
to the date of maturity, if their original maturity was 60 days or less, unless
this is determined by the Directors not to represent fair value. Short-term
securities with remaining maturities of more than 60 days, for which market
quotations are readily available, are valued at their current market quotations
as supplied by an independent pricing agent or principal market maker.
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
NAVs and dividends. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A shares as a result of the larger
distribution-related fee to which Class B and Class C shares are subject. The
NAV of Class Z shares will generally be higher than the NAV of Class A, Class B
or Class C shares as a result of the fact that the Class Z shares are not
subject to any distribution or service fee. It is expected, however, that the
NAV of the four classes will tend to converge immediately after the recording of
dividends, if any, which will differ by approximately the amount of the
distribution and/or service fee expense accrual differential among the classes.
B-41
<PAGE>
TAXES, DIVIDENDS AND DISTRIBUTIONS
The Fund has elected to qualify and intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code.
Qualification of the Fund as a regulated investment company requires, among
other things, that (a) the Fund derive at least 90% of its annual gross income
(without reduction for losses from the sale or other disposition of securities
or foreign currencies) from dividends, interest, payments with respect to
securities loans and gains from the sale or other disposition of securities or
options thereon or foreign currencies, or other income (including, but not
limited to, gains from options, futures or forward contracts) derived with
respect to its business of investing in such securities or currencies; (b) the
Fund diversify its holdings so that, at the end of each quarter of the taxable
year, (i) at least 50% of the value of the Fund's assets is represented by cash,
U.S. Government securities and other securities limited in respect of any one
issuer to an amount not greater than 5% of the value of the Fund's assets and
10% of the outstanding voting securities of such issuer, and (ii) not more than
25% of the value of its assets is invested in the securities of any one issuer
(other than U.S. Government securities); and (c) the Fund distribute to its
shareholders at least 90% of its net investment income and net short-term gains
(I.E., the excess of net short-term capital gains over net long-term capital
losses) in each year.
Gains or losses on sales of securities by the Fund will be treated as
long-term capital gains or losses if the securities have been held by it for
more than one year, except in certain cases where the Fund acquires a put or
writes a call thereon or otherwise holds an offsetting position with respect to
the securities. Other gains or losses on the sale of securities will be
short-termcapital gains or losses. Gains and losses on the sale, lapse or other
termination of options on securities will be treated as gains and losses from
the sale of securities. If an option written by the Fund on securities lapses or
is terminated through a closing transaction, such as a repurchase by the Fund of
the option from its holder, the Fund will generally realize short-term capital
gain or loss. If securities are sold by the Fund pursuant to the exercise of a
call option written by it, the Fund will include the premium received in the
sale proceeds of the securities delivered in determining the amount of gain or
loss on the sale. Certain of the Fund's transactions may be subject to wash
sale, short sale, constructive sale, anti-conversion and straddle provisions of
the Internal Revenue Code which may, among other things, require the Fund to
defer recognition of losses. In addition, debt securities acquired by the Fund
may be subject to original issue discount and market discount rules which,
respectively, may cause the Fund to accrue income in advance of the receipt of
cash with respect to interest or cause gains to be treated as ordinary income.
Special rules apply to most options on stock indices, futures contracts and
options thereon, and foreign currency forward contracts in which the Fund may
invest. See "Description of the Fund, Its Investments and Risks." These
investments will generally constitute Section 1256 contracts and will be
required to be "marked to market" for federal income tax purposes at the end of
the Fund's taxable year; that is, treated as having been sold at market value.
Except with respect to certain foreign currency forward contracts, sixty percent
of any gain or loss recognized on such deemed sales and on actual dispositions
will be treated as long-term capital gain or loss, and the remainder will be
treated as short-term capital gain or loss.
Gain or loss on the sale, lapse or other termination of options on stock
and on narrowly-based stock indices will be capital gain or loss and will be
long-term or short-term depending on the holding period of the option. In
addition, positions which are part of a "straddle" will be subject to certain
wash sale, short sale and constructive sale provisions of the Internal Revenue
Code. In the case of a straddle, the Fund may be required to defer the
recognition of losses on positions it holds to the extent of any unrecognized
gain on offsetting positions held by the Fund.
Gains or losses attributable to fluctuations in exchange rates which occur
between the time the Fund accrues interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time the
Fund actually collects such receivables or pays such liabilities are treated as
ordinary income or ordinary loss. Similarly, gains or losses on foreign currency
forward contracts or dispositions of debt securities denominated in a foreign
currency attributable to fluctuations in the value of the foreign currency
between the date of acquisition of the security and the date of disposition also
are treated as ordinary gain or loss. These gains, referred to under the
Internal Revenue Code as "Section 988" gains or losses, increase or decrease the
amount of the Fund's investment company taxable income available to be
distributed to its shareholders as ordinary income, rather than increasing or
decreasing the amount of the Fund's net capital gain. If Section 988 losses
exceed other investment company taxable income during a taxable year, the Fund
would not be able to make any ordinary dividend distributions, or distributions
made before the losses were realized would be recharacterized as a return of
capital to shareholders, rather than as an ordinary dividend, reducing each
shareholder's basis in his or her Fund shares.
Shareholders electing to receive dividends and distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the net asset value of a share of the Fund on the
reinvestment date.
Any dividend or distribution paid shortly after a purchase by an investor
may have the effect of reducing the per share net asset value of the investor's
shares by the per share amount of the dividends or distributions. Furthermore,
such dividend
B-42
<PAGE>
or distribution, although in effect a return of capital, is subject to federal
income taxes. Therefore, prior to purchasing shares of the Fund, the investor
should carefully consider the impact of dividends or capital gains distributions
which are expected to be or have been announced.
Any loss realized on a sale, redemption or exchange of shares of the Fund
by a shareholder will be disallowed to the extent the shares are replaced within
a 61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of the Fund.
Dividends of net investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a nominee
or fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends unless the
dividends are effectively connected with a U.S. trade or business conducted by
the foreign shareholder. Net capital gain distributions paid to a foreign
shareholder are generally not subject to withholding tax. A foreign shareholder
will, however, be required to pay U.S. income tax on any dividend and capital
gain distribution which is effectively connected with a U.S. trade or business
of the foreign shareholder.
Dividends received by corporate shareholders are eligible for a
dividends-received deduction of 70% to the extent a 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 (described above) and
income from certain other sources will not constitute qualified dividends.
Individual shareholders are not eligible for the dividends-received deduction.
The per share dividends on Class B and Class C shares will be lower than
the per share dividends on Class A and Class Z shares as a result of the higher
distribution-related fee applicable to Class B and Class C shares and lower on
Class A shares in relation to Class Z shares. The per share distributions of net
capital gains, if any, will be paid in the same amount for Class A, Class B,
Class C and Class Z shares. See "Net Asset Value."
The Fund is required to distribute 98% of its ordinary income in the same
calendar year in which it is earned. The Fund is also required to distribute
during the calendar year 98% of the capital gain net income it earned during the
twelve months ending on October 31 of such calendar year. In addition, the Fund
must distribute during the calendar year all undistributed ordinary income and
undistributed capital gain net income from the prior year or the twelve-month
period ending on October 31 of such prior calendar year, respectively. To the
extent it does not meet these distribution requirements, the Fund will be
subject to a non-deductible 4% excise tax on the undistributed amount. For
purposes of this excise tax, income on which the Fund pays income tax is treated
as distributed.
The Fund may, from time to time, invest in Passive Foreign Investment
Companies (PFICs). PFICs are foreign corporations that, in general, satisfy
either of the following tests: (a) at least 75% of its gross income is passive
or (b) an average of at least 50% of its assets produce, or are held for the
production of, passive income. If the Fund acquires and holds stock in a PFIC
beyond the end of the year of its acquisition, the Fund will be subject to
federal income tax on a portion of any "excess distribution" received on the
stock or of any gain from disposition of the stock (collectively, PFIC income),
plus interest thereon, even if the Fund distributes the PFIC income as a taxable
dividend to its shareholders. The balance of the PFIC income will be included in
the Fund's investment company taxable income and, accordingly, will not be
taxable to it to the extent that income is distributed to its shareholders. 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, the
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 applicable to
the Fund described above.
Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Income tax
treaties between certain countries and the United States may reduce or eliminate
such taxes. It is impossible to determine in advance the effective rate of
foreign tax to which the Fund will be subject, since the amount of the Fund's
assets to be invested in various countries will vary. The Fund does not expect
to meet the requirements of the Internal Revenue Code for "passing-through" to
its shareholders any foreign income taxes paid.
B-43
<PAGE>
Foreign shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in a Fund.
Dividends and distributions may also be subject to state and local taxes.
PERFORMANCE INFORMATION
AVERAGE ANNUAL TOTAL RETURN. The Fund may from time to time advertise its
average annual total return. Average annual total return is determined
separately for Class A, Class B, Class C and Class Z shares.
Average annual total return is computed according to the following formula:
P(1 + T)(n) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
(n) = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the 1, 5 or 10 year periods at the end of the 1, 5 or 10
year periods (or fractional portion thereof).
Average annual total return takes into account any applicable initial or
contingent deferred sales charges but does not take into account any federal or
state income taxes that may be payable upon redemption.
The average annual total returns for Class A shares for the one year, five
year and since inception (January 2, 1990) periods ended September 30, 1999 were
9.59%, 14.28% and 13.10%, respectively. The average annual total returns for
Class B shares for the one year, five year and since inception (March 18, 1991)
periods ended September 30, 1999 were 9.49%, 14.48% and 12.98%, respectively.
The average annual total returns for Class C shares for the one year, five year
and since inception (August 1, 1994) periods ended September 30, 1999 were
12.34%, 14.36% and 13.58%, respectively. The average annual total returns for
the Class Z shares for the one year and since inception (December 16, 1996)
periods ended September 30, 1999 were 15.62% and 17.48%, respectively.
AGGREGATE TOTAL RETURN. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B,
Class C and Class Z shares.
Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed according to the following formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of $1,000.
ERV = ending redeemable value at the end of the 1, 5 or 10 year periods
(or fractional portion thereof) of a hypothetical $1,000 payment
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 returns for Class A shares for the one year, five year
and since inception (January 2, 1990) periods ended on September 30, 1999 were
15.36%, 15.45% and 13.69%, respectively. The aggregate total returns for Class B
shares for the one year, five year and since inception (March 18, 1991) periods
ended on September 30, 1999 were 14.49%, 14.59% and 12.98%, respectively. The
aggregate total returns for Class C shares for the one year, five year, and
since inception (August 1, 1994) periods ended September 30, 1999 were 14.49%,
14.59% and 13.80%, respectively. The aggregate total returns for the Class Z
shares for the one year and since inception (December 16, 1996) periods ended
September 30, 1999 were 15.62% and 17.48%, respectively.
YIELD. The Fund may from time to time advertise its yield as calculated
over a 30-day period. Yield is calculated separately for Class A, Class B, Class
C and Class Z shares. The yield will be computed by dividing the Fund's net
investment income per share earned during this 30-day period by the maximum
offering price per share on the last day of this period. Yield is calculated
according to the following formula:
a - b
YIELD = 2[(----- + 1)(6)-1]
cd
B-44
<PAGE>
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period
Yield fluctuates and an annualized yield quotation is not a representation
by the Fund as to what an investment in the Fund will actually yield for any
given period.
The Fund's 30-day yields for the 30 days ended September 30, 1999 were
2.00%, 1.36%, 1.31% and 2.36% for the Class A, Class B, Class C and Class Z
shares, respectively.
From time to time, the performance of the Fund may be measured against
various indices. Such performance information may include data from Lipper,
Inc., Morningstar Publications, Inc., other industry publications, business
periodicals and market indices. Set forth below is a chart which compares the
performance of different types of investments over the long-term and the rate of
inflation.(1)
[BAR CHART OMITTED]
PERFORMANCE
COMPARISON OF DIFFERENT
TYPES OF INVESTMENTS
OVER THE LONG TERM
(12/31/25-12/31/98)
Common Stocks 11.2%
Long-Term Gov't Bonds 5.3%
Inflation 3.1%
(1) SOURCE: IBBOTSON ASSOCIATES. 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-45
<PAGE>
PORTFOLIO OF INVESTMENTS AS
OF SEPTEMBER 30, 1999 GLOBAL UTILITY FUND, INC.
- ------------------------------------------------------------------
US$ VALUE
SHARES DESCRIPTION (NOTE 1)
- ------------------------------------------------------------------
LONG-TERM INVESTMENTS--95.1%
COMMON STOCKS--73.7%
- ------------------------------------------------------------------
ELECTRICAL UTILITIES--17.5%
180,000 COPEL. (ADR-Preferred B Shares) (Brazil) $ 1,181,250
300,000 DPL, Inc. 5,287,500
130,000 DQE, Inc. 5,086,250
100,000 DTE Energy Co. 3,612,500
200,000 Endesa S.A. (ADR) (Spain) 3,825,000
187,800 Espoon Sahko (ADR) (Finland) 4,240,092
150,000 Huaneng Power International, Inc.(a)
(ADR) (China) 1,865,625
140,000 Korea Electric Power Corp. (ADR)
(South Korea) 2,248,750
60,000 Montana Power Co. 1,826,250
100,000 Nisource, Inc. 2,212,500
70,000 Pinnacle West Capital Corp. 2,546,250
850,000 Scottish Power PLC (United Kingdom) 7,710,442
277,300 Shandong Huaneng Power Ltd.
(ADR) (China) 1,213,188
90,000 Texas Utilities Holding Co. 3,358,125
50,000 VEBA AG (Germany) 2,738,555
-----------
48,952,277
- ------------------------------------------------------------------
GAS UTILITIES--9.4%
350,000 Australian Gas Light Co. (Australia) 2,069,078
125,000 El Paso Energy Corp. 4,976,562
160,000 Enron Corp. 6,600,000
20,000 Equitable Resources, Inc. 756,250
50,000 MCN Energy Group, Inc. 859,375
200,000 TransCanada Pipelines Ltd. (Canada) 2,621,009
250,000 Westcoast Energy, Inc. (Canada) 4,671,863
100,000 Williams Companies, Inc. 3,743,750
-----------
26,297,887
- ------------------------------------------------------------------
TELECOMMUNICATIONS--38.1%
195,000 AT&T Corp. 8,482,500
120,000 BCE, Inc. (Canada) 5,977,500
75,000 BCT Telus Communications, Inc.
(Canada) (Voting) $ 1,564,947
25,000 BCT Telus Communications, Inc.
(Canada) (Non-Voting) 514,841
140,000 Bell Atlantic Corp. 9,423,750
18,000 British Telecommunications PLC
(United Kingdom) 2,788,875
101,096 Cia Telecom de Chile, S.A. (ADR)
(Chile) 1,826,047
111,222 Hellenic Telecom Org. (Greece) 2,593,679
160,000 MCI WorldCom, Inc.(a) 11,500,000
60,200 Mcleodusa, Inc. 2,562,263
54,426 NTL, Inc. 5,229,998
40,000 Portugal Telecom, S.A. (ADS)
(Portugal) 1,652,500
225,000 SBC Communications, Inc. 11,489,062
140,000 Sprint Corp. 7,595,000
35,000 Sprint Corp., PCS Group 2,609,687
40,000 Telecom Corp. New Zealand Ltd. (ADR)
(New Zealand) 1,280,000
700,000 Telecom Italia S.p.A. (Italy) 3,517,273
136,194 Telefonica, S.A. (ADR) (Spain) 6,537,312
40,000 Telefonos de Mexico, S.A. (ADR -
Class L Shares) (Mexico) 2,850,000
331,100 Telekomunikacja Polska, S.A.
(GDR)(a) (Poland) 1,630,668
220,000 Videsh Sanchar Nigam Ltd. (GDR)
(India) 3,096,500
50,000 Vodafone Group PLC (ADR)
(United Kingdom) 11,887,500
-----------
106,609,902
- ------------------------------------------------------------------
WATER UTILITIES & OTHER--8.7%
28,000 Alcatel Alsthom (France) 3,857,078
167,800 American Water Works Co., Inc. 4,855,713
280,000 Anglian Water PLC (United Kingdom) 3,332,768
41,000 ENI S.p.A. (ADR) (Italy) 2,583,000
- ------------------------------------------------------------------
See Notes to Financial Statements.
B-46
<PAGE>
PORTFOLIO OF INVESTMENTS AS
OF SEPTEMBER 30, 1999 GLOBAL UTILITY FUND, INC.
- ------------------------------------------------------------------
US$ VALUE
SHARES DESCRIPTION (NOTE 1)
- ------------------------------------------------------------------
WATER UTILITIES & OTHER (CONT'D.)
80,000 Lucent Technologies, Inc. $ 5,190,000
15,000 Suez Lyonnaise des Eaux. (France) 2,427,174
60,000 Suncor Energy, Inc. (Canada) 2,295,000
-----------
24,540,733
Total common stocks
(cost $118,895,660) 206,400,799
-----------
- ------------------------------------------------------------------
PREFERRED STOCKS--1.4%
Philippine Long Distance Telephone
Co. (The Philippines)
43,700 $3.50 Conv. Ser. III (GDS) 1,813,550
92,216 5.75% Conv. Ser. II (GDS) 1,995,383
-----------
Total preferred stocks
(cost $4,189,000) 3,808,933
-----------
- ------------------------------------------------------------------
MOODY'S PRINCIPAL
RATING AMOUNT
(UNAUDITED) (000)
DEBT OBLIGATIONS--20.0%
CORPORATE BONDS--19.3%
- ------------------------------------------------------------------
ELECTRICAL UTILITIES--12.7%
Ba3 $ 1,000 AES Corp.,
8.375%, 8/15/07 910,000
A2 1,000 Alabama Power Co.,
5.35%, 11/15/03 947,880
Baa1 1,000 Appalachian Power Co.,
6.60%, 5/1/09, Ser. C 936,170
Baa2 1,000 Arizona Public Service
Co.,
6.25%, 1/15/05 957,580
A2 1,000 Carolina Power & Light
Co.,
5.95%, 3/1/09 917,540
Ba1 1,000 Cleveland Elec. Illum.
Co.,
7.43%, 11/1/09 978,410
Ba3 1,000 CMS Energy Corp.,
8.125%, 5/15/02 1,002,330
NR $ 1,000(b) Compania De Transporte
Energia,
9.25%, 4/1/08 (Brazil) $ 835,000
A1 1,000 Consolidated Edison Co. of
NY, Inc.,
7.625%, 3/1/04 1,032,570
Aa3 1,000 Duke Energy Corp.,
5.875%, 6/1/01 991,980
Baa1 1,000(b) Eastern Energy Limited,
6.75%, 12/1/06
(Australia) 958,600
Ba1 1,000 El Paso Electric Co.,
8.25%, 2/1/03, Ser. C 1,035,300
Ba2 1,000(b) Empresa Electrica del
Norte Grande S.A.,
7.75%, 3/15/06 (Chile) 530,000
Aa3 500 Florida Power Corp.,
6.00%, 7/1/03 489,450
A1 650 6.75%, 2/1/28 583,791
Baa3 1,000 Gulf States Utilities Co.,
8.25%, 4/1/04 1,035,260
Baa1 1,000(b) Hyder PLC,
6.875%, 12/15/07 (United
Kingdom) 973,100
NR 1,000(b) Inversora Electrica Buenos
Aires S.A.,
9.00%, 9/16/04
(Argentina) 630,000
A1 1,500 Monongahela Power Co.,
7.375%, 7/1/02 1,528,140
Aa3 1,000 Northern States Power Co.,
6.50%, 3/1/28 870,380
Baa3 1,000 NRG Energy, Inc.,
7.50%, 6/15/07 964,140
A1 640 Oklahoma Gas & Electric
Co.,
6.50%, 4/15/28 562,925
A2 1,000 Pennsylvania Electric Co.,
Ser. B
6.125%, 4/1/09 924,320
- ------------------------------------------------------------------
See Notes to Financial Statements.
B-47
<PAGE>
Portfolio of Investments as
of September 30, 1999 GLOBAL UTILITY FUND, INC.
- ------------------------------------------------------------------
MOODY'S PRINCIPAL
RATING AMOUNT US$ VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- ------------------------------------------------------------------
ELECTRICAL UTILITIES (CONT'D.)
Baa2 $ 1,000 PP&L Capital Funding Inc.,
6.79%, 11/22/04 $ 993,360
Baa3 1,000 Public Service Co.,
7.10%, 8/1/05 990,510
Baa1 1,000 Puget Sound Energy Inc.,
6.46%, 3/9/09 937,580
A2 1,000(b) Quebec Hydro.,
7.50%, 4/1/16 (Canada) 1,004,370
Baa1 1,000(b) Southern Investments PLC,
6.80%, 12/1/06
(United Kingdom) 958,990
Aa2 1,000 Southwestern Public Service Co.,
7.25%, 7/15/04 1,016,820
Baa3 1,000 System Energy Resources,
Inc.,
7.71%, 8/1/01 1,013,670
Aa2 1,000 Tampa Electric Co.,
7.75%, 11/1/22 967,110
Baa3 1,000 Texas-New Mexico Power
Co.,
10.75%, 9/15/03 1,028,490
A2 1,000(b) United Utilities PLC,
6.45%, 4/1/08
(United Kingdom) 929,770
A2 2,000 Virginia Electric & Power
Co.,
6.625%, 4/1/03 1,996,180
Baa3 918 W3A Funding Corp.,
8.09%, 1/2/17 903,555
Aa3 1,000 Wisconsin Electric Power
Co.,
6.625%, 11/15/06 979,370
Aa3 500 Wisconsin Power & Light
Co.,
5.70%, 10/15/08 460,640
Baa2 1,000(b) Yorkshire Power Finance
Ltd.,
6.496%, 2/25/08
(United Kingdom) 904,580
-----------
35,679,861
GAS DISTRIBUTION & OTHER INDUSTRIES--1.4%
Baa2 $ 1,000 El Paso Natural Gas Co.,
7.50%, 11/15/26 $ 943,020
Baa2 1,000 Enron Corp.,
7.00%, 8/15/23 866,250
A2 1,600 Michigan Consolidated Gas
Co.,
8.25%, 5/1/14 1,641,472
Aa2 535 Wisconsin Gas Co.,
5.50%, 1/15/09 487,487
------------
3,938,229
- ------------------------------------------------------------------
TELECOMMUNICATIONS, MEDIA & RELATED INDUSTRIES--5.2%
A1 1,000 AT&T Corp.,
7.75%, 3/1/07 1,049,600
Aaa 2,000 BellSouth Telecommunications,
7.00%, 10/1/25 1,891,760
Baa1 1,000 Century Telephone
Enterprises, Inc.,
6.30%, 1/15/08 927,100
Baa1 1,000 GTE Corp.,
7.51%, 4/1/09 1,028,700
A2 1,000 GTE Florida, Inc.,
7.25%, 10/15/25 911,520
Aa1 1,000 Indiana Bell Telephone
Co., Inc.,
7.30%, 8/15/26 979,070
Aa2 1,000 New Jersey Bell Telephone
Co.,
8.00%, 6/1/22 1,050,340
A2 1,000 New York Telephone Co.,
6.00%, 4/15/08 936,090
A1 2,000 Pacific Bell.,
6.625%, 11/1/09 1,936,000
Ba2 1,000(b) Philippine Long Distance
Telephone Co.,
9.25%, 6/30/06
(The Philippines) 950,000
- ------------------------------------------------------------------
See Notes to Financial Statements.
B-48
<PAGE>
PORTFOLIO OF INVESTMENTS AS
OF SEPTEMBER 30, 1999 GLOBAL UTILITY FUND, INC.
- ------------------------------------------------------------------
MOODY'S PRINCIPAL
RATING AMOUNT US$ VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- ------------------------------------------------------------------
TELECOMMUNICATIONS, MEDIA & RELATED INDUSTRIES (CONT'D.)
Baa1 $ 1,000 Sprint Capital Corp.,
5.70%, 11/15/03 $ 954,920
Baa2 1,000 Telecomunicaciones de
Puerto,
6.65%, 5/15/06 951,200
A3 1,000 Worldcom, Inc.,
6.40%, 8/15/05 966,230
------------
14,532,530
Total corporate bonds
(cost $57,449,741) 54,150,620
------------
- ------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES--0.7%
Aaa 2,000 United States Treasury Notes.,
5.75%, 8/15/03
(cost $2,042,188) 1,993,740
------------
Total debt obligations
(cost $59,491,929) 56,144,360
------------
Total long-term
investments
(cost $182,576,589) 266,354,092
------------
SHORT-TERM INVESTMENTS--2.9%
CORPORATE BONDS--0.4%
Northern States Power Co.,
Aa3 $ 1,000 5.75%, 12/1/00
(cost $998,988) $ 993,470
- ------------------------------------------------------------------
REPURCHASE AGREEMENT--2.5%
7,197 Warburg Dillon Read LLC,
5.30%, due 10/01/99 in
the amount of $7,198,060
(cost $7,197,000;
collateralized by
$7,406,000 U.S. Treasury
Bonds, 6.125%, due
11/15/27, value of
collateral including
interest $7,341,198) 7,197,000
------------
Total short-term investments
(cost $8,195,988) 8,190,470
------------
- ------------------------------------------------------------
TOTAL INVESTMENTS--98.0%
(cost $190,772,577; Note 4) 274,544,562
Other assets in excess of
liabilities--2.0% 5,479,259
-------------
Net Assets--100% $ 280,023,821
=============
- ---------------
(a)--Non-income-producing security.
(b)--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-49
<PAGE>
Statement of Assets and Liabilities GLOBAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
------------------
<S> <C>
ASSETS
Investments, at value (cost $190,772,577) ............................................ $274,544,562
Foreign currency, at value (cost $128,640) ........................................... 127,767
Cash ................................................................................. 1,653
Receivable for investments sold ...................................................... 4,346,127
Dividends and interest receivable .................................................... 2,081,595
Receivable for Fund shares sold ...................................................... 895,223
Other assets ......................................................................... 7,064
------------
Total assets ...................................................................... 282,003,991
------------
LIABILITIES
Payable for investments purchased .................................................... 729,625
Payable for Fund shares reacquired ................................................... 696,657
Accrued expenses ..................................................................... 184,102
Management fee payable ............................................................... 158,416
Distribution fee payable ............................................................. 141,314
Withholding taxes payable ............................................................ 54,686
Deferred director's fee .............................................................. 15,370
------------
Total liabilities ................................................................. 1,980,170
------------
NET ASSETS ........................................................................... $280,023,821
============
Net assets were comprised of:
Common stock, at par .............................................................. $15,596
Paid-in capital in excess of par .................................................. 168,536,654
------------
168,552,250
Undistributed net investment income ............................................... 594,864
Accumulated net realized gains on investments and foreign currency transactions ... 27,097,239
Net unrealized appreciation on investments and foreign currencies ................. 83,779,468
------------
Net assets, September 30, 1999 ....................................................... $280,023,821
============
Class A:
Net asset value and redemption price per share
($139,373,794 / 7,763,014 shares of common stock issued and outstanding) ....... $17.95
Maximum sales charge (5.00% of offering price) .................................... .94
Maximum offering price to public .................................................. $18.89
======
Class B:
Net asset value, offering price and redemption price per share
($132,583,421 / 7,383,893 shares of common stock issued and outstanding) ....... $17.96
======
Class C:
Net asset value and redemption price per share
($1,453,904 / 80,947 shares of common stock issued and outstanding) ............ $17.96
Sales charge (1.00% of offering price) ............................................ .18
Offering price to public .......................................................... $18.14
======
Class Z:
Net asset value, offering price and redemption price per share
($6,612,702 / 368,006 shares of common stock issued and outstanding) ........... $17.97
======
- ----------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
B-50
<PAGE>
GLOBAL UTILITY FUND, INC.
STATEMENT OF OPERATIONS
- ------------------------------------------------------------------
YEAR ENDED
NET INVESTMENT INCOME SEPTEMBER 30, 1999
------------------
Income
Dividends (net of foreign withholding
taxes of $338,116) ....................... $ 5,362,862
Interest .................................... 4,811,192
------------
Total income ............................. 10,174,054
------------
Expenses
Management fee .............................. 2,021,652
Distribution fee--Class A ................... 341,724
Distribution fee--Class B ................... 1,546,431
Distribution fee--Class C ................... 12,118
Transfer agent's fees and expenses .......... 376,000
Custodian's fees and expenses ............... 184,000
Reports to shareholders ..................... 62,000
Registration fees ........................... 34,000
Audit fee and expenses ...................... 33,000
Legal fees and expenses ..................... 23,000
Directors' fees and expenses ................ 15,000
Insurance ................................... 4,000
Miscellaneous ............................... 7,815
------------
Total expenses ........................... 4,660,740
------------
Net investment income .......................... 5,513,314
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCY
TRANSACTIONS
Net realized gain on:
Investment transactions ..................... 29,135,718
Foreign currency transactions ............... 52,678
------------
29,188,396
------------
Net change in unrealized appreciation
(depreciation) on:
Investments ................................. 6,996,766
Foreign currencies .......................... (2,826)
------------
6,993,940
------------
Net gain on investments and foreign
currencies .................................. 36,182,336
------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ...................... $ 41,695,650
============
GLOBAL UTILITY FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------
INCREASE (DECREASE) YEAR ENDED SEPTEMBER 30,
IN NET ASSETS ------------------------------
1999 1998
------------- -------------
Operations
Net investment income ....... $ 5,513,314 $ 6,265,657
Net realized gain on
investment and foreign
currency transactions .... 29,188,396 33,945,593
Net change in unrealized
appreciation
(depreciation) of
investments and foreign
currencies ............... 6,993,940 (4,314,139)
------------- -------------
Net increase in net assets
resulting from
operations ............... 41,695,650 35,897,111
------------- -------------
Dividends and distributions
(Note 1)
Dividends from net
investment income
Class A .................. (2,818,425) (2,991,973)
Class B .................. (1,980,640) (3,134,288)
Class C .................. (16,127) (17,223)
Class Z .................. (155,936) (122,173)
------------- -------------
(4,971,128) (6,265,657)
------------- -------------
Distributions in excess of
net investment income
Class A .................. -- (180,906)
Class B .................. -- (266,336)
Class C .................. -- (1,178)
Class Z .................. -- (114)
------------- -------------
-- (448,534)
------------- -------------
Distributions from net
realized gains
Class A .................. (13,406,633) (10,062,149)
Class B .................. (15,777,009) (14,813,745)
Class C .................. (109,977) (65,425)
Class Z .................. (641,421) (6,437)
------------- -------------
(29,935,040) (24,947,756)
------------- -------------
Fund share transactions (net of
share conversions) (Note 5)
Net proceeds from shares
sold ..................... 37,013,685 34,214,868
Net asset value of shares
issued in reinvestment of
dividends and
distributions ............ 29,276,900 26,214,007
Cost of shares reacquired ... (78,296,960) (80,331,082)
------------- -------------
Net decrease in net assets from
Fund share transactions ..... (12,006,375) (19,902,207)
------------- -------------
Total decrease ................. (5,216,893) (15,667,043)
Net Assets
Beginning of year .............. 285,240,714 300,907,757
------------- -------------
End of year(a) ................. $ 280,023,821 $ 285,240,714
============= =============
-------------
(a) Includes undistributed net
investment income of ....... $ 594,864 --
------------- -------------
- ------------------------------------------------------------------
See Notes to Financial Statements.
B-51
<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-52
<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 by $314,740,
decrease accumulated net realized gains on investments by $3,826,204 and
increase paid-in-capital by $3,511,464 relating to net realized foreign currency
gains, an overdistribution of taxable income and for redemptions utilized as
distributions for federal income tax purposes during the fiscal year ended
September 30, 1999. 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 has a distribution agreement with Prudential Investment Management
Services LLC ('PIMS') which acts as the distributor of the Class A, Class B,
Class C and Class Z shares of the Fund. The Fund compensates 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 compensates 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, 1999.
PIMS has advised the Fund that it received approximately $27,400 and $2,100 in
front-end sales charges resulting from sales of Class A and Class C shares
during the fiscal year ended September 30, 1999. From these fees PIMS paid such
sales charges to affiliated broker-dealers which in turn paid commissions to
salespersons and incurred other distribution costs.
PIMS has advised the Fund that for the fiscal year ended September 30, 1999 it
received approximately $151,000 and $26 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PIMS and PIFM are wholly owned subsidiaries of The Prudential Insurance Company
of America.
As of March 11, 1999, the Fund, along with other affiliated registered
investment companies (the 'Funds'), entered into a syndicated credit agreement
('SCA') with an unaffiliated lender. The maximum commitment under the SCA is $1
billion. The Funds pay a commitment fee at an annual rate of .065 of 1% on the
unused portion of the credit facility, which is accrued and paid quarterly on a
pro rata basis by the Funds. The SCA expires on March 9, 2000. Prior to March
11, 1999, the Funds had a credit agreement with a maximum commitment of
$200,000,000. The commitment fee was .055 of 1% on the unused portion of the
credit
- --------------------------------------------------------------------------------
B-53
<PAGE>
NOTES TO FINANCIAL STATEMENTS GLOBAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
facility. The Fund did not borrow any amounts pursuant to either agreement
during the fiscal period ended September 30, 1999. The purpose of the agreements
is to serve as an alternative source of funding for capital share redemptions.
- --------------------------------------------------------------------------------
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, 1999, the Fund incurred fees of approximately $311,000 for the services of
PMFS. As of September 30, 1999, approximately $24,000 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, 1999 were $22,170,660 and $65,390,144,
respectively.
The cost basis of investments for federal income tax purposes is substantially
the same for financial reporting purposes and, accordingly, as of September 30,
1999 net unrealized appreciation for federal income tax purposes was $83,771,985
(gross unrealized appreciation--$96,839,256; gross unrealized depreciation --
$13,067,271).
- --------------------------------------------------------------------------------
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%. 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:
Class A SHARES AMOUNT
- ------- ------ ------
Year ended September 30, 1999:
Shares sold .......................... 874,576 $ 16,047,074
Shares issued in reinvestment of
dividends and distributions ........ 708,621 12,158,388
Shares reacquired .................... (1,520,250) (27,731,764)
------------ ------------
Net increase in shares outstanding
before conversion .................. 62,947 473,698
Shares issued upon conversion from
Class B ............................ 715,401 13,239,554
------------ ------------
Net increase in shares
outstanding ........................ 778,348 $ 13,713,252
============ ============
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
============ ============
Class B
------------
Year ended September 30, 1999:
Shares sold .......................... 661,124 $ 12,049,586
Shares issued in reinvestment of
dividends and distributions ........ 946,862 16,199,281
Shares reacquired .................... (2,278,722) (41,623,502)
------------ ------------
Net decrease in shares outstanding
before conversion .................. (670,736) (13,374,635)
Shares reacquired upon conversion
into Class A ....................... (716,563) (13,239,554)
------------ ------------
Net decrease in shares
outstanding ........................ (1,387,299) $(26,614,189)
============ ============
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)
============ ============
- --------------------------------------------------------------------------------
B-54
<PAGE>
NOTES TO FINANCIAL STATEMENTS GLOBAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
Class C SHARES AMOUNT
- ------- ------ ------
Year ended September 30, 1999:
Shares sold ........................ 408,004 $ 7,449,727
Shares issued in reinvestment of
dividends and distributions ...... 7,015 120,147
Shares reacquired .................. (388,275) (7,080,380)
----------- -----------
Net increase in shares
outstanding ...................... 26,744 $ 489,494
=========== ===========
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
=========== ===========
Class Z
-----------
Year ended September 30, 1999:
Shares sold ........................ 80,233 $ 1,467,298
Shares issued in reinvestment of
dividends and distributions ...... 46,480 799,084
Shares reacquired .................. (101,821) (1,861,314)
----------- -----------
Net increase in shares
outstanding ...................... 24,892 $ 405,068
=========== ===========
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
=========== ===========
- --------------------------------------------------------------------------------
B-55
<PAGE>
FINANCIAL HIGHLIGHTS GLOBAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year........................... $ 17.66 $ 17.52 $ 15.03 $ 14.72 $ 13.66
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income........................................ .41(b) .46(b) .49 .51 .49
Net realized and unrealized gain (loss) on investment and
foreign currency transactions............................. 2.15 1.67 3.34 .73 1.35
-------- -------- -------- -------- --------
Total from investment operations.......................... 2.56 2.13 3.83 1.24 1.84
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment income......................... (.38) (.46) (.49) (.51) (.48)
Distributions in excess of net investment income............. -- (.02) (.02) -- --
Distributions from net realized gains........................ (1.89) (1.51) (.83) (.42) (.30)
-------- -------- -------- -------- --------
Total distributions....................................... (2.27) (1.99) (1.34) (.93) (.78)
-------- -------- -------- -------- --------
Net asset value, end of year................................. $ 17.95 $ 17.66 $ 17.52 $ 15.03 $ 14.72
======== ======== ======== ======== ========
TOTAL RETURN(a).............................................. 15.36% 12.90% 26.90% 8.65% 14.23%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................................ $139,374 $123,346 $120,825 $112,800 $124,423
Average net assets (000)..................................... $136,690 $122,384 $116,303 $120,122 $122,837
Ratios to average net assets:
Expenses, including distribution fees..................... 1.17% 1.18% 1.21% 1.30% 1.31%
Expenses, excluding distribution fees..................... .92% .93% .96% 1.05% 1.06%
Net investment income..................................... 2.23% 2.49% 3.00% 3.38% 3.58%
For Class A, B, C and Z shares:
Portfolio turnover rate................................... 8% 20% 13% 13% 15%
</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-56
<PAGE>
FINANCIAL HIGHLIGHTS GLOBAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B
------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year........................... $ 17.66 $ 17.52 $ 15.03 $ 14.71 $ 13.66
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income........................................ .27(b) .32(b) .37 .40 .39
Net realized and unrealized gain (loss) on investment and
foreign currency transactions............................. 2.16 1.67 3.34 .74 1.34
-------- -------- -------- -------- --------
Total from investment operations.......................... 2.43 1.99 3.71 1.14 1.73
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment income......................... (.24) (.32) (.37) (.40) (.38)
Distributions in excess of net investment income............. -- (.02) (.02) -- --
Distributions from net realized gains........................ (1.89) (1.51) (.83) (.42) (.30)
-------- -------- -------- -------- --------
Total distributions....................................... (2.13) (1.85) (1.22) (.82) (.68)
-------- -------- -------- -------- --------
Net asset value, end of year................................. $ 17.96 $ 17.66 $ 17.52 $ 15.03 $ 14.71
======== ======== ======== ======== ========
TOTAL RETURN(a).............................................. 14.49% 12.06% 25.96% 7.90% 13.32%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................................ $132,583 $154,873 $179,270 $187,557 $227,189
Average net assets (000)..................................... $154,643 $177,326 $185,693 $210,305 $237,983
Ratios to average net assets:
Expenses, including distribution fees..................... 1.92% 1.93% 1.96% 2.05% 2.06%
Expenses, excluding distribution fees..................... .92% .93% .96% 1.05% 1.06%
Net investment income..................................... 1.48% 1.74% 2.25% 2.62% 2.83%
</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-57
<PAGE>
FINANCIAL HIGHLIGHTS GLOBAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS C
---------------------------------------------------
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------
1999 1998 1997 1996 1995
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year........................... $ 17.66 $17.52 $15.03 $14.71 $13.66
------- ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income........................................ .27(b) .32(b) .37 .40 .39
Net realized and unrealized gain (loss) on investment and
foreign currency transactions............................. 2.16 1.67 3.34 .74 1.34
------- ------ ------ ------ ------
Total from investment operations.......................... 2.43 1.99 3.71 1.14 1.73
------- ------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends from net investment income......................... (.24) (.32) (.37) (.40) (.38)
Distributions in excess of net investment income............. (.02) (.02) -- --
Distributions from net realized gains........................ (1.89) (1.51) (.83) (.42) (.30)
------- ------ ------ ------ ------
Total distributions....................................... (2.13) (1.85) (1.22) (.82) (.68)
------- ------ ------ ------ ------
Net asset value, end of year................................. $ 17.96 $17.66 $17.52 $15.03 $14.71
======= ====== ====== ====== ======
TOTAL RETURN(a).............................................. 14.49% 12.06% 25.96% 7.90% 13.32%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................................ $ 1,454 $ 957 $ 760 $ 661 $ 563
Average net assets (000)..................................... $ 1,212 $ 969 $ 727 $ 608 $ 410
Ratios to average net assets:
Expenses, including distribution fees..................... 1.92% 1.93% 1.96% 2.05% 2.06%
Expenses, excluding distribution fees..................... .92% .93% .96% 1.05% 1.06%
Net investment income..................................... 1.50% 1.74% 2.25% 2.66% 2.83%
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions.
(b) Calculated based upon weighted average shares outstanding during the year.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-58
<PAGE>
Financial Highlights GLOBAL UTILITY FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS Z
---------------------------------------
DECEMBER 16,
YEAR ENDED SEPTEMBER 1996(D)
30, THROUGH
--------------------- SEPTEMBER 30,
1999 1998 1997
-------- -------- -------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year........................... $ 17.68 $ 17.54 $ 15.02
-------- -------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income........................................ .45(b) .50(b) .34
Net realized and unrealized gain (loss) on investment and
foreign currency transactions............................. 2.16 1.68 2.59
-------- -------- ------
Total from investment operations.......................... 2.61 2.18 2.93
-------- -------- ------
Less distributions
Dividends from net investment income......................... (.43) (.50) (.34)
Distributions in excess of net investment income............. -- (.03) (.07)
Distributions from net realized gains........................ (1.89) (1.51) --
-------- -------- ------
Total distributions....................................... (2.32) (2.04) (.41)
-------- -------- ------
Net asset value, end of year................................. $ 17.97 $ 17.68 $ 17.54
======== ======== =======
TOTAL RETURN(a).............................................. 15.62% 13.18% 19.70%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................................ $ 6,613 $ 6,065 $ 53
Average net assets (000)..................................... $ 6,847 $ 4,041 $ 16
Ratios to average net assets:
Expenses, including distribution fees..................... .92% .93% .96%(c)
Expenses, excluding distribution fees..................... .92% .93% .96%(c)
Net investment income..................................... 2.47% 2.74% 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 Z shares.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-59
<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, 1999, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the three 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, 1999 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above. The accompanying financial
highlights for each of the two years 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 19, 1999
- --------------------------------------------------------------------------------
B-60
<PAGE>
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE
BOND RATINGS
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
I.E., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa to B. The modifier 1 indicates that the company ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
SHORT-TERM DEBT RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted.
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obliqations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
o Leading market positions in well-established industries.
o High rates of return on funds employed.
o Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
o Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
o Well-established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This normally will
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
A-1
<PAGE>
STANDARD & POOR'S RATINGS GROUP
DEBT RATINGS
Aaa: An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
Aa: An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A: An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB: An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
BB, B, CCC AND CC: Obligations rated BB, B, CCC and CC are regarded as
having significant speculative characteristics. BB indicates the least degree of
speculation and CC the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
COMMERCIAL PAPER RATINGS
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-1: This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-2
<PAGE>
APPENDIX I-GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk and providing balance.
Asset allocation among different types of securities within an overall
investment portfolio helps reduce risk and potentially provide stable returns,
while enabling investors to work toward their financial goal(s). Asset
allocation is also a strategy to gain exposure to better performing asset
classes while maintaining investment in other asset classes.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable returns.
Owning a portfolio of securities mitigates the individual risks (and returns) of
any one security. Additionally, diversification among types of securities
reduces the risks (and general returns) of any one type of security.
DURATION
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to changes
in interest rates. When interest rates fall, bond prices generally rise.
Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, I.E., principal and interest
rate payments. Duration is expressed as a measure of time in years-the longer
the duration of a bond (or a bond portfolio), the greater the impact of interest
rate changes on the bond's (or the bond portfolio's) price. Duration differs
from effective maturity in that duration takes into account call provisions,
coupon rates and other factors. Duration measures interest rate risk only and
not other risks, such as credit risk and, in the case of non-U.S. dollar
denominated securities, currency risk. Effective maturity measures the final
maturity dates of a bond (or a bond portfolio).
MARKET TIMING
Market timing-buying securities when prices are low and selling them when
prices are relatively higher-may not work for many investors because it is
impossible to predict with certainty how the price of a security will fluctuate.
However, owning a security for a long period of time may help investors offset
short-term price volatility and realize positive returns.
POWER OF COMPOUNDING
Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth of
assets. The long-term investment results of compounding may be greater than that
of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.
STANDARD DEVIATION
Standard deviation is an absolute (non-relative) measure of volatility
which, for a mutual fund, depicts how widely the returns varied over a certain
period of time. When a fund has a high standard deviation, its range of
performance has been very wide, implying greater volatility potential. Standard
deviation is only one of several measures of a fund's volatility.
I-1
<PAGE>
APPENDIX II-HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
The following chart shows the long-term performance of various asset
classes and the rate of inflation.
[LINE CHART OMITTED]
Value of $1.00 invested on
1/1/26 through 12/31/98
Small Stocks $116.95
Common Stocks $2,350.89
Long-Term Bonds $44.18
Treasury Bills $14.94
Inflation $9.16
Source: Ibbotson Associates. Used with permission. All rights reserved. This
chart is for illustrative purposes only and is not indicative of the past,
present, or future performance of any asset class or any Prudential Mutual
Fund.
Generally, stock returns are due to capital appreciation and the reinvestment of
any gains. Bond returns are due to reinvesting interest. Also, stock prices
usually are more volatile than bond prices over the long-term. Small stock
returns for 1926-1980 are those of stocks comprising the 5th quintile of the New
York Stock Exchange. Thereafter, returns are those of the Dimensional Fund
Advisors (DFA) Small Company Fund. Common stock returns are based on the S&P
Composite Index, a market-weighted, unmanaged index 500 stocks (currently) in a
variety of industries. It is often used as a broad measure of stock market
performance.
Long-term government bond returns are measured using a constant one-bond
portfolio with a maturity of roughly 20 years. Treasury bill returns are for a
one-month bill. Treasuries are guaranteed by the government as to the timely
payment of principal and interest; equities are not. Inflation is measured by
the consumer price index (CPI).
II-1
<PAGE>
Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1988
through 1998. 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 "Risk/Return Summary-Fees and 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>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT
TREASURY
BONDS(1) 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 18.4% 2.7% 9.6% 10.0%
- ---------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT
MORTGAGE
SECURITIES(2) 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8% 5.4% 9.5% 7.0%
- ---------------------------------------------------------------------------------------------------------------------------------
U.S. INVESTMENT GRADE
CORPORATE
BONDS(3) 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3% 3.3% 10.2% 8.6%
- ---------------------------------------------------------------------------------------------------------------------------------
U.S.
HIGH YIELD
CORPORATE
BONDS(4) 12.5% 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2% 11.4% 12.8% 1.6%
- ---------------------------------------------------------------------------------------------------------------------------------
WORLD
GOVERNMENT
BONDS(5) 2.3% (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1% (4.3)% 5.3%
=================================================================================================================================
DIFFERENCE BETWEEN
HIGHEST AND LOWEST
RETURN PERCENT 10.2% 18.8% 24.9% 30.9% 11.0% 10.3% 9.9% 5.5% 8.7% 17.1% 8.4%
</TABLE>
- ----------
1 LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over 150
public issues of the U.S. Treasury having maturities of at least one year.
2 LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of
the Government National Mortgage Association (GNMA), Federal National
Mortgage Association (FNMA), and the Federal Home Loan Mortgage Corporation
(FHLMC).
3 LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign
governments, municipalities, governmental agencies or international agencies.
All bonds in the index have maturities of at least one year.
4 LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or
Fitch Investors Service). All bonds in the index have maturities of at least
one year. Source: Lipper, Inc.
5 SALOMON SMITH BARNEY 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 12/31/85 through 12/31/98. It does not represent the performance of
any Prudential Mutual Fund.
AVERAGE ANNUAL TOTAL RETURNS OF MAJOR WORLD STOCK MARKETS 12/31/85-12/31/98 (IN
U.S. DOLLARS)
[This is a tabular representation of a chart in the printed document]
Belgium 22.7%
Spain 22.5
The Netherlands 20.8
Sweden 19.9
Switzerland 18.3
USA 18.1
Hong Kong 17.8
France 17.4
UK 16.7
Germany 13.4
Austria 8.9
Japan 6.5
Source: Morgan Stanley Capital International (MSCI) and Lipper, Inc. as of
12/31/98. 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.
[This is a tabular representation of a chart in the printed document]
Capital Appreciation and Reinvesting Dividends $391,707
Capital Appreciation only $133,525
Source: Lipper, Inc. 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.
----------------------------------------
WORLD STOCK MARKET CAPITALIZATION BY REGION
WORLD TOTAL: $15.8 TRILLION
[This is a tabular representation of a chart in the printed document]
U.S. 51.0%
Europe 34.7%
Pacific Basin 12.5%
Canada 1.8%
Source: Morgan Stanley Capital International, December 31, 1998. Used with
permission. This chart represents the capitalization of major world stock
markets as measured by the Morgan Stanley Capital International (MSCI) World
Index. The total market capitalization is based on the value of approximately
1577 companies in 22 countries (representing approximately 60% of the aggregate
market value of the stock exchanges). This chart is for illustrative purposes
only and does not represent the allocation of any Prudential Mutual Fund.
II-3
<PAGE>
This chart below shows the historical volatility of general interest rates
as measured by the long U.S. Treasury Bond.
LONG U.S. TREASURY BOND YIELD IN PERCENT (1926-1997)
Long Term U.S. Treasury Bond Yield in Percent (1926-1998)
[LINE CHART OMITTED]
- ----------------------------------------
Source: Ibbotson Associates. Used with permission. All rights reserved. The
chart illustrates the historical yield of the long-term U.S. Treasury Bond from
1926-1998. Yields represent that of an annually renewed one-bond portfolio with
a remaining maturity of approximately 20 years. This chart is for illustrative
purposes and should not be construed to represent the yields of any Prudential
Mutual Fund.
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 "How the Fund is Managed-Manager" in the
Prospectus. The data will be used in sales materials relating to the Prudential
Mutual Funds. Unless otherwise indicated, the information is as of December 31,
1997 and is subject to change thereafter. All information relies on data
provided by The Prudential Investment Corporation (PIC) or from other sources
believed by the Manager to be reliable. Such information has not been verified
by the Fund.
INFORMATION ABOUT PRUDENTIAL
The Manager and PIC(1) are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December 31,
1997. Principal products and services include life and health insurance, other
healthcare products, property and casualty insurance, securities brokerage,
asset management, investment advisory services and real estate brokerage.
Prudential (together with its subsidiaries) employs more than 79,000 persons
worldwide, and maintains a sales force of approximately 10,100 agents and 6,500
domestic and international financial advisors. Prudential is a major issuer of
annuities, including variable annuities. Prudential seeks to develop innovative
products and services to meet consumer needs in each of its business areas.
Prudential uses the rock of Gibraltar as its symbol. The Prudential rock is a
recognized brand name throughout the world.
INSURANCE. Prudential has been engaged in the insurance business since
1875. It insures or provides financial services to nearly 40 million people
worldwide. Long one of the largest issuers of life insurance, Prudential has 25
million life insurance policies in force today with a face value of almost $1
trillion. Prudential has the largest capital base ($12.1 billion) of any life
insurance company in the United States. Prudential provides auto insurance for
more than 1.5 million cars and insures more than 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 INSTITUTIONAL INVESTOR, July 1998, Prudential
was ranked eighth in terms of total assets under management as of December 31,
1997.
REAL ESTATE. The Prudential Real Estate Affiliates is one of the leading
real estate residential and commercial brokerage networks in North America, and
has more than 37,000 real estate brokers and agents with over 1,400 offices
across the United States.(2)
FINANCIAL SERVICES. The Prudential Savings Bank FSB, a wholly-owned
subsidiary of Prudential, has nearly $1 billion in assets and serves nearly 1.5
million customers across 50 states.
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
As of July 31, 1999 Prudential Investments Fund Management was the
twentieth 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.
- ----------
1 PIC serves as the Subadviser to substantially all of the Prudential Mutual
Funds. Wellington Management Company serves as the subadviser to Global
Utility Fund, Inc., Nicholas-Applegate Capital Management as the subadviser
to Nicholas-Applegate Fund, Inc., Jennison Associates LLC as one of the
subadvisers to Prudential Diversified Funds, Prudential 20/20 Focus Fund,
Prudential Sector Funds, Inc., The Prudential Series Fund, Inc. and The
Prudential Investment Portfolios, Inc. and Mercator Asset Management LP as
the subadviser to International Stock Series, a portfolio of Prudential World
Fund, Inc. There are multiple subadvisers for The Target Portfolio Trust and
Target Funds.
2 As of December 31, 1997.
III-1
<PAGE>
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. Prudential Equity Fund is managed with a "value" investment
style by PIC. In 1995, Prudential Securities introduced Prudential Jennison
Growth 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.(4) 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. Investment grade bond analysts monitor the financial
viability of 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 trades billions in U.S. and foreign government
securities a year. PIC seeks information from government policy makers.
Prudential's portfolio managers meet 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.
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, 1998, assets held by Prudential Securities for its
clients approximated $268 billion. During 1998, over 31,000 new customer
accounts were opened each month at Prudential Securities.(5)
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 and financial
planning areas.
In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial Architects(SM), a state-of-the-art asset allocation software program
which helps Financial Advisors to evaluate a client's objectives and overall
financial plan, and a comprehensive mutual fund information and analysis system
that compares different mutual funds.
For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
- ----------
4 As of December 31, 1997. The number of bonds and the size of the Fund are
subject to change.
5 As of December 31, 1998.
III-2
