As filed with the Securities and Exchange Commission
on March 4, 1997
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 25 [X]
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 26 [X]
(Check appropriate box or boxes)
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PRUDENTIAL UTILITY FUND, INC.
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(Exact name of registrant as specified in charter)
GATEWAY CENTER THREE
NEWARK, NEW JERSEY 07102
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (201) 367-7530
S. Jane Rose, Esq.
Gateway Center Three
Newark, New Jersey 07102
(Name and Address of Agent for Service)
Approximate date of proposed public offering:
As soon as practicable after the effective
date of the Registration Statement.
It is proposed that this filing will become effective
(check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
if appropriate, check the following box:
[ ] this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, Registrant has previously registered an indefinite number of shares of its Common Stock, par value $.01 per share. The Registrant filed a notice under such Rule for its fiscal year ended December 31, 1996 on or about February 27, 1997.
CROSS REFERENCE SHEET
(as required by Rule 495)
N-1A Item No. Location
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Part A
Item 1. Cover Page .......................................................... Cover Page
Item 2. Synopsis ............................................................ Fund Expenses; Fund Highlights
Item 3. Condensed Financial Information ..................................... Fund Expenses; Financial Highlights;
............................................................................. How the Fund Calculates Performance
Item 4. General Description of Registrant ................................... Cover Page; Fund Highlights; How the
Fund Invests; General Information
Item 5. Management of the Fund .............................................. Financial Highlights; How the Fund
is Managed
Item 5A. Management's Discussion of .......................................... Financial Highlights
Fund Performance
Item 6. Capital Stock and Other Securities .................................. Taxes, Dividends and Distributions;
General Information
Item 7. Purchase of Securities Being Offered ................................ Shareholder Guide; How the Fund
Values its Shares
Item 8. Redemption or Repurchase ............................................ Shareholder Guide; How the Fund
Values its Shares; General Information
Item 9. Pending Legal Proceedings ........................................... Not Applicable
Part B
Item 10. Cover Page .......................................................... Cover Page
Item 11. Table of Contents ................................................... Table of Contents
Item 12. General Information and History ..................................... General Information
Item 13. Investment Objectives and Policies .................................. Investment Objective and Policies;
Investment Restrictions
Item 14. Management of the Fund .............................................. Directors and Officers; Manager;
Distributor
Item 15. Control Persons and Principal Holders of Securities ................. Not Applicable
Item 16. Investment Advisory and Other Services .............................. Manager; Distributor; Custodian,
Transfer and Dividend Disbursing
Agent and Independent Accountants
Item 17. Brokerage Allocation and Other Practices ............................ Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities .................................. Not Applicable
Item 19. Purchase, Redemption and Pricing of Securities Being Offered ........ Purchase and Redemption of Fund
Shares; Shareholder Investment
Account; Net Asset Value
Item 20. Tax Status .......................................................... Taxes
Item 21. Underwriters ........................................................ Distributor
Item 22. Calculation of Performance Data ..................................... Performance Information
Item 23. Financial Statements ................................................ Financial Statements
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Part C
Information required to be included in Part C is set forth under the appropriate Item, so numbered, in Part C to this Post-Effective Amendment to the Registration Statement.
Prudential Utility Fund, Inc.
Prospectus dated March 5, 1997
Prudential Utility Fund, Inc. (the Fund) is an open-end, diversified, management investment company. Its investment objective is to seek total return through a combination of current income and capital appreciation. The Fund seeks to achieve its objective through investment in equity and debt securities of utility companies, which include electric, gas, gas pipeline, telephone, telecommunications, water, cable, airport, seaport and toll road companies. In normal circumstances, the Fund intends to invest at least 80% of its assets in such securities. The Fund also may purchase and sell certain derivatives, including options on equity securities and stock index options, futures contracts and options thereon, forward foreign currency exchange contracts, and options on foreign currencies pursuant to limits described herein. There can be no assurance that the Fund's investment objective will be achieved. See "How the Fund Invests--Investment Objective and Policies." The Fund's address is Gateway Center Three, Newark, New Jersey 07102, and its telephone number is (800) 225-1852.
This Prospectus sets forth concisely the information about the Fund that a prospective investor should know before investing. Additional information about the Fund has been filed with the Securities and Exchange Commission in a Statement of Additional Information, dated March 5, 1997, which information is incorporated herein by reference (is legally considered a part of this Prospectus) and is available without charge upon request to the Fund at the address or telephone number noted above.
Investors are advised to read this Prospectus and retain it for future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The following summary is intended to highlight certain information contained in this Prospectus and is qualified in its entirety by the more detailed information appearing elsewhere herein.
WHAT IS PRUDENTIAL UTILITY FUND, INC.?
Prudential Utility Fund, Inc. is a mutual fund. A mutual fund pools the resources of investors by selling its shares to the public and investing the proceeds of such sale in a portfolio of securities designed to achieve its investment objective. Technically, the Fund is an open-end, diversified, management investment company.
WHAT IS THE fUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is to seek total return through a combination of current income and capital appreciation. It seeks to achieve this objective by investing primarily in equity and debt securities of utility companies, which include electric, gas, gas pipeline, telephone, telecommunications, water, cable, airport, seaport and toll road companies. There can be no assurance that the Fund's objective will be achieved. See "How the Fund Invests--Investment Objective and Policies" at page 9.
WHAT ARE THE FUND'S RISK FACTORS AND SPECIAL CHARACTERISTICS?
The Fund may invest up to 30% of its total assets in foreign securities. Investing in securities of foreign companies and countries involves certain considerations and risks not typically associated with investing in securities of domestic companies. See "How the Fund Invests--Investment Objective and Policies--Foreign Securities" at page 9.
In addition, the Fund may engage in various hedging and return enhancement strategies, including purchasing and selling options on equity securities, stock index options, futures contracts and options thereon, forward foreign currency exchange contracts, and options on foreign currencies pursuant to limits described herein. These activities may be considered speculative and may result in higher risks and costs to the Fund. See "How the Fund Invests--Hedging and Return Enhancement Strategies--Risks of Hedging and Return Enhancement Strategies" at page 14. As with an investment in any mutual fund, an investment in this Fund can decrease in value and you can lose money.
WHO MANAGES THE FUND?
Prudential Mutual Fund Management LLC (PMF or the Manager) is the Manager of the Fund and is currently compensated for its services at an annual rate of .60 of 1% of the Fund's average daily net assets up to and including $250 million, .50 of 1% of the next $500 million, .45 of 1% of the next $750 million, .40 of 1% of the next $500 million, .35 of 1% of the next $2 billion, .325 of 1% of the next $2 billion and .30 of 1% of the excess over $6 billion of the Fund's average daily net assets. As of January 31, 1997, PMF served as manager or administrator to 62 investment companies, including 40 mutual funds, with aggregate assets of approximately $55.8 billion. The Prudential Investment Corporation, doing business as Prudential Investments (PI, the Subadviser or the investment adviser), furnishes investment advisory services in connection with the management of the Fund under a Subadvisory Agreement with PMF. See "How the Fund is Managed--Manager" at page 16.
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Securities Incorporated (Prudential Securities or PSI), a major securities underwriter and securities and commodities broker, acts as the Distributor of the Fund's Class A, Class B, Class C and Class Z shares and is paid an annual distribution and service fee which is currently being charged at the rate of .25 of 1% of the average daily net assets of the Class A shares and is paid a distribution and service fee with respect to Class B and Class C shares at an annual rate of 1% of the average daily net assets of each of the Class B and Class C shares. Prudential Securities incurs the expense of distributing the Fund's Class Z shares under a Distribution Agreement with the Fund, none of which is reimbursed or paid for by the Fund. See "How the Fund is Managed--Distributor" at page 16.
WHAT IS THE MINIMUN INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000 per class and $5,000 for Class C shares. The minimum subsequent investment is $100 for Class A, Class B and Class C shares. Class Z shares are not subject to any minimum investment requirements. There is no minimum investment requirement for certain retirement and employee savings plans or custodial accounts for the benefit of minors. For purchases made through the Automatic Savings Accumulation Plan, the minimum initial and subsequent investment is $50. See "Shareholder Guide-How to Buy Shares of the Fund" at page 22 and "Shareholder Guide-Shareholder Services" at page 32.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through Prudential Securities, Pruco Securities Corporation (Prusec) or directly from the Fund, through its transfer agent, Prudential Mutual Fund Services LLC (PMFS or the Transfer Agent) at the net asset value per share (NAV) next determined after receipt of your purchase order by the Transfer Agent or Prudential Securities plus a sales charge which may be imposed either (i) at the time of purchase (Class A shares) or (ii) on a deferred basis (Class B or Class C shares). Class Z shares are offered to a limited group of investors at net asset value without any sales charge. See "How the Fund Values its Shares" at page 19 and "Shareholder Guide-How to Buy Shares of the Fund" at page 22.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers four classes of shares through this Prospectus:
* Class A Shares: Sold with an initial sales charge of up to 5% of the offering price.
* Class B Shares: Sold without an initial sales charge but are subject to a contingent deferred sales charge or CDSC (declining from 5% to zero of the lower of the amount invested or the redemption proceeds) which will be imposed on certain redemptions made within six years of purchase. Although Class B shares are subject to higher ongoing distribution-related expenses than Class A shares, Class B shares will automatically convert to Class A shares (which are subject to lower ongoing distribution-related expenses) approximately seven years after purchase.
* Class C Shares: Sold without an initial sales charge and, for one year after purchase, are subject to a 1% CDSC on redemptions. Like Class B shares, Class C shares are subject to higher ongoing distribution-related expenses than Class A shares but do not convert to another class.
* Class Z Shares: Sold without either an initial or contingent deferred sales charge to a limited group of investors. Class Z shares are not subject to any ongoing service or distribution expenses.
See "Shareholder Guide-Alternative Purchase Plan" at page 23.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after Prudential Securities or the Transfer Agent receives your sell order. However, the proceeds from redemptions of Class B and Class C shares may be subject to a CDSC. See "Shareholder Guide-How to Sell Your Shares" at page 27.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Fund expects to pay dividends of net investment income, if any, quarterly and make distributions of any net capital gains at least annually. Dividends and distributions will be automatically reinvested in additional shares of the Fund at NAV without a sales charge unless you request that they be paid to you in cash. See "Taxes, Dividends and Distributions" at page 20.
Shareholder Transaction Expenses+ Class A Shares Class B Shares Class C Shares Class Z Shares
-------------- -------------- -------------- --------------
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) .......... 5% None None None
Maximum Sales Load Imposed on
Reinvested Dividends ......................... None None None None
Maximum Deferred Sales Load (as a percentage
of original purchase price or redemption
proceeds, whichever is lower) ................ None 5% during the first year, 1% on None
decreasing by 1% annually redemptions
to 1% in the fifth and sixth made within
and 0% the seventh year* one year of
purchase
Redemption Fees ................................ None None None None
Exchange Fee ................................... None None None None
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Annual Fund Operating Expenses
(as a percentage of average net assets) Class A Shares Class B Shares Class C Shares Class Z Shares**
-------------- -------------- -------------- --------------
Management Fees .................................. .41% .41% .41% .41%
12b-1 Fees (After Reduction) ................... .25++ 1.00 1.00 None
Other Expenses ................................... .20 .20 .20 .20
--- ---- ---- ---
Total Fund Operating Expenses
(After Reduction) .............................. .86% 1.61% 1.61% .61%
=== ==== ==== ---
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Example 1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of
each time period:
Class A .......................................................... $58 $76 $95 $151
Class B .......................................................... $66 $81 $98 $162
Class C .......................................................... $26 $51 $88 $191
Class Z** ........................................................ $ 6 $20 $34 $ 76
You would pay the following expenses on the same investment,
assuming no redemption:
Class A .......................................................... $58 $76 $95 $151
Class B .......................................................... $16 $51 $88 $162
Class C .......................................................... $16 $51 $88 $191
Class Z** ........................................................ $ 6 $20 $34 $ 76
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The above example is based on data for the Fund's fiscal year ended December 31, 1996. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist investors in understanding the various costs and expenses that an investor in the Fund will bear, whether directly or indirectly. For more complete descriptions of the various costs and expenses, see "How the Fund is Managed." "Other Expenses" include operating expenses of the Fund, such as Directors' and professional fees, registration fees, reports to shareholders and transfer agency and custodian fees.
*Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide-Conversion Feature-Class B
Shares."
**Estimated based on expenses expected to have been incurred if Class Z shares
had been in existence throughout the fiscal year ended December 31, 1996.
+Pursuant to rules of the National Association of Securities Dealers, Inc., the
aggregate initial sales charges, deferred sales charges and asset-based sales
charges on shares of the Fund may not exceed 6.25% of total gross sales,
subject to certain exclusions. This 6.25% limitation is imposed on each class
of the Fund rather than on a per shareholder basis. Therefore, long-term
shareholders of the Fund may pay more in total sales charges than the economic
equivalent of 6.25% of such shareholders' investment in such shares. See "How
the Fund is Managed-Distributor."
++Although the Class A Distribution and Service Plan provides that the Fund may
pay a distribution fee of up to .30 of 1% per annum of the average daily net
assets of the Class A shares, the Distributor has agreed to limit its
distribution fees with respect to Class A shares of the Fund to no more than
.25 of 1% of the average daily net assets of the Class A shares for the fiscal
year ending December 31, 1997. Total Fund Operating Expenses of Class A shares
without such limitation would be .91%. See "How the Fund is
Managed-Distributor."
The following financial highlights for each of the five years in the period ended December 31, 1996 have been audited by Price Waterhouse LLP, independent accountants, whose report thereon was unqualified. This information should be read in conjunction with the financial statements and the notes thereto, which appear in the Statement of Additional Information. The financial highlights contain selected data for a share of Class A common stock outstanding, total return, ratios to average net assets and other supplemental data for each of the periods indicated. The information is based on data contained in the financial statements. Further performance information is contained in the annual report, which may be obtained without charge. See "Shareholder Guide-Shareholder Services-Reports to Shareholders."
January 22,
1990(a)
Year Ended December 31, Through
---------------------------------------------------------------- December 31,
1996(d) 1995 1994 1993 1992 1991 1990
PER SHARE OPERATING ------- ---- ---- ---- ---- ---- ------------
PERFORMANCE:
Net asset value, beginning of period ........... $9.87 $8.27 $9.72 $ 8.97 $ 8.72 $ 7.63 $ 8.65
----- ----- ----- ------ ------ ------ ------
Income from investment operations
Net investment income .......................... .32 .30 .31 .33 .38 .39 .36
Net realized and unrealized gains (losses)
on investment and foreign currency
transactions ................................. 1.80 1.79 (1.06) 1.12 .45 1.10 (.38)
----- ----- ----- ------ ------ ------ ------
Total from investment operations ........... 2.12 2.09 (.75) 1.45 .83 1.49 (.02)
----- ----- ----- ------ ------ ------ ------
Less distributions
Dividends from net investment income ........... (.32) (.30) (.32) (.29) (.34) (.39) (.40)
Distributions from net realized gains .......... (.79) (.19) (.36) (.41) (.24) (.01) (.60)
Distributions in excess of net realized
gains ........................................ - - (.02) - - - -
----- ----- ----- ------ ------ ------ ------
Total distributions ........................ (1.11) (.49) (.70) (.70) (.58) (.40) (1.00)
----- ----- ----- ------ ------ ------ ------
Net asset value, end of period ................. $10.88 $ 9.87 $ 8.27 $ 9.72 $ 8.97 $ 8.72 $ 7.63
====== ====== ====== ====== ====== ====== ======
TOTAL RETURN(c): ............................... 22.09% 25.74% (7.89)% 16.28% 9.88% 19.95% (0.11)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000,000) ............ $2,023 $1,709 $254 $337 $201 $111 $73
Average net assets (000,000) ................... $1,786 $1,440 $294 $287 $149 $ 85 .51
Ratios to average net assets:
Expenses, including distribution fees ........ .86% .88% .88% .80% .81% .87% .97%(b)
Expenses, excluding distribution fees ........ .61% .63% .63% .60% .61% .67% .77%(b)
Net investment income ........................ 3.10% 3.12% 3.37% 3.16% 4.14% 4.69% 4.78%(b)
Portfolio turnover rate ........................ 17% 14% 15% 24% 24% 38% 53%
Average commission rate paid per share ......... $.0332 $.0302 N/A N/A N/A N/A N/A
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(a)Commencement of offering of Class A shares.
(b)Annualized.
(c)Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than one full year are not
annualized.
(d)Calculated based upon weighted average shares outstanding during the year.
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The following financial highlights for each of the five years in the period ended December 31, 1996 have been audited by Price Waterhouse LLP, independent accountants, whose report thereon was unqualified. This information should be read in conjunction with the financial statements and the notes thereto, which appear in the Statement of Additional Information. The financial highlights contain selected data for a share of Class B common stock outstanding, total return, ratios to average net assets and other supplemental data for each of the years indicated. The information is based on data contained in the financial statements. Further performance information is contained in the annual report, which may be obtained without charge. See "Shareholder Guide-Shareholder Services-Reports to Shareholders."
Year Ended December 31,
-----------------------------------------------------------------------------------------
1996(f) 1995 1994 1993 1992 1991 1990 1989(d) 1988(a) 1987
---- ---- ---- ---- ---- ---- ---- ------- ------- ----
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of year ....... $ 9.87 $ 8.26 $ 9.69 $ 8.96 $ 8.71 $ 7.63 $ 9.17 $ 7.31 $ 6.29 $ 7.39
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment operations
Net investment income .................... .24 .22 .24 .24 .31 .32 .31 .36 .33 .33
Net realized and unrealized gains
(losses) on investment and foreign
currency transactions .................. 1.80 1.80 (1.05) 1.12 .46 1.10 (.91) 2.30 1.07 (.93)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations ..... 2.04 2.02 (.81) 1.36 .77 1.42 (.60) 2.66 1.40 (.60)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions
Dividends from net investment income ..... (.24) (.22) (.24) (.22) (.28) (.33) (.34) (.36) (.33) (.33)
Distributions from net realized gains .... (.79) (.19) (.36) (.41) (.24) (.01) (.60) (.44) (.05)(c) (.17)
Distributions in excess of net
realized gains ......................... - (.02) - - - - - - -
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions .................. (1.03) (.41) (.62) (.63) (.52) (.34) (.94) (.80) (.38) (.50)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of year ............. $10.88 $ 9.87 $ 8.26 $ 9.69 $ 8.96 $ 8.71 $ 7.63 9.17 7.31 6.29
====== ====== ====== ====== ====== ====== ====== ==== ==== ====
TOTAL RETURN(e): ......................... 21.16% 24.80% (8.51)% 15.27 9.02% 19.01% (6.48)% 37.17% 22.74% (8.65)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000,000) ........ $2,137 $2,355 $3,526 $4,756 $3,438 $2,818 $2,395 $2,306 $1,584 $1,390
Average net assets (000,000) ............. $2,184 $2,450 $4,152 $4,308 $3,027 $2,529 2,315 2,037 1,495 1,630
Ratios to average net assets:
Expenses, including taxes (b) .......... 1.61% 1.63% 1.63% 1.60% 1.61% 1.67% 1.73% 1.46% 1.56% 1.53%
Expenses, excluding taxes and
interest (b) ......................... 1.61% 1.63% 1.63% 1.60% 1.61% 1.67% 1.73% 1.46% 1.56% 1.63%
Expenses, excluding distribution
fees and taxes (b) ................... .61% .63% .63% .60% .61% .67% .74% .73% .76% .80%
Net investment income .................. 2.35% 2.37% 2.62% 2.36% 3.34% 3.89% 3.94% 4.19% 4.44% 4.69%
Portfolio turnover rate .................. 17% 14% 15% 24% 24% 38% 53% 75% 66% 65%
Average commission rate
paid per share ......................... $.0332 $.0302 N/A N/A N/A N/A N/A N/A N/A N/A
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(a)Prudential Mutual Fund Management, Inc. succeeded Prudential Securities
Incorporated as manager of the Fund on May 2, 1988.
(b)Because of the adoption of a plan of distribution effective on July 1, 1985
and an amended and restated plan of distribution effective January 22, 1990,
and the changes noted in footnote (a), historical expenses and ratios of
expenses to average net assets are not necessarily indicative of future
expenses and related ratios. See "How the Fund is Managed-Distributor."
(c)Full amount of 1988 distribution represents a distribution from paid-in
capital.
(d) Based on average month-end shares outstanding.
(e)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.
(f)Calculated based upon weighted average shares outstanding during the year.
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The following financial highlights have been audited by Price Waterhouse LLP, independent accountants, whose report thereon was unqualified. This information should be read in conjunction with the financial statements and the notes thereto, which appear in the Statement of Additional Information. The financial highlights contain selected data for a share of Class C common stock outstanding, total return, ratios to average net assets and other supplemental data for the period indicated. The information is based on data contained in the financial statements. Further performance information is contained in the annual report, which may be obtained without charge. See "Shareholder Guide-Shareholder Services-Reports to Shareholders."
August 1, 1994(a)
Year Ended December 31, Through
1996(d) 1995 December 31, 1994
------------ ------------ -----------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .................................. $ 9.87 $ 8.26 $ 9.30
------ ------ ------
Income from investment operations
Net investment income ................................................. .24 .22 .11
Net realized and unrealized gains (losses) on investment and
foreign currency transactions ....................................... 1.80 1.80 (69)
------ ------ ------
Total from investment operations .................................. 2.04 2.02 (.58)
------ ------ ------
Less distributions
Dividends from net investment income .................................. (.24) (.22) (.13)
Distributions from net realized gains ................................. (.79) (.19) (.31)
Distributions in excess of net realized gains ......................... - - (.02)
------ ------ ------
Total distributions ............................................... (1.03) (.41) (.46)
------ ------ ------
Net asset value, end of period ........................................ $10.88 $ 9.87 $ 8.26
====== ====== ======
TOTAL RETURN(c): ...................................................... 21.16% 24.80% (6.27)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) ....................................... $6,001 $3,455 $787
Average net assets (000) .............................................. $4,517 2,181 433
Ratios to average net assets:
Expenses, including distribution fees ............................... 1.61% 1.63% 1.70%(b)
Expenses, excluding distribution fees ............................... .61% .63% .70%(b)
Net investment income ............................................... 2.35% 2.37% 2.65%(b)
Portfolio turnover rate ............................................... 17% 14% 15%
Average commission rate paid per share ................................ $.0332 $.0302 N/A
- ------------
(a) Commencement of offering of Class C shares.
(b) Annualized.
(c)Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of the period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than one full year are not
annualized.
(d)Calulated based upon weighted average shares outstanding during the year.
|
The following financial highlights have been audited by Price Waterhouse LLP, independent accountants, whose report thereon was unqualified. This information should be read in conjunction with the financial statements and the notes thereto, which appear in the Statement of Additional Information. The financial highlights contain selected data for a share of Class Z common stock outstanding, total return, ratios to average net assets and other supplemental data for the period indicated. The information is based on data contained in the financial statements. Further performance information is contained in the annual report, which may be obtained without charge. See "Shareholder Guide-Shareholder Services-Reports to Shareholders."
March 1,
1996(a)
Through
December 31,
1996(d)
-------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ............................................................. $10.05
------
Income from investment operations
Net investment income ............................................................................ .29
Net realized and unrealized gains (losses) on investment and foreign currency transactions ....... 1.67
------
Total from investment operations ............................................................. 1.96
------
Less distributions
Dividends from net investment income ............................................................. (.34)
Distributions from net realized gains ............................................................ (.79)
------
Total distributions .......................................................................... (1.13)
------
Net asset value, end of period ................................................................... $10.88
======
TOTAL RETURN(c): ................................................................................. 20.11%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) ................................................................. $34,446
Average net assets (000) ......................................................................... 34,291
Ratios to average net assets: (b)
Expenses, including distribution fees .......................................................... .61%
Expenses, excluding distribution fees ........................................................ .61%
Net investment income ........................................................................ 3.35%
Portfolio turnover rate ......................................................................... 17%
Average commission rate paid per share ........................................................ $.0332
- ------------
(a) Commencement of offering of Class Z shares.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of the period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(d) Calculated based upon weighted average shares outstanding during the period.
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INVESTMENT OBJECTIVE AND POLICIES
THE FUND'S INVESTMENT OBJECTIVE IS TO SEEK TOTAL RETURN THROUGH A COMBINATION OF CURRENT INCOME AND CAPITAL APPRECIATION. THE FUND SEEKS TO ACHIEVE ITS OBJECTIVE THROUGH INVESTMENT IN EQUITY AND DEBT SECURITIES OF UTILITY COMPANIES, WHICH INCLUDE ELECTRIC, GAS, GAS PIPELINE, TELEPHONE, TELECOMMUNICATIONS, WATER, CABLE, AIRPORT, SEAPORT AND TOLL ROAD COMPANIES. IN NORMAL CIRCUMSTANCES, THE FUND INTENDS TO INVEST AT LEAST 80% OF ITS ASSETS IN SUCH SECURITIES. THERE CAN BE NO ASSURANCE THAT SUCH OBJECTIVE WILL BE ACHIEVED. It is anticipated that the Fund will invest primarily in common stocks of utility companies that the investment adviser believes have the potential for total return; however, the Fund may invest primarily in preferred stocks and debt securities of utility companies when it appears that the Fund will be better able to achieve its investment objective through investments in such securities, or when the Fund is temporarily in a defensive position. The remaining 20% of its assets may be invested in other securities, including stocks, debt obligations and money market instruments, as well as certain derivative instruments. Moreover, should extraordinary conditions affecting such sectors or securities markets as a whole warrant, the Fund may temporarily be primarily invested in money market instruments.
As with an investment in any mutual fund, an investment in this Fund can decrease in value and you can lose money.
THE FUND'S INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE FUND'S OUTSTANDING VOTING SECURITIES, AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED (THE INVESTMENT COMPANY ACT). FUND POLICIES THAT ARE NOT FUNDAMENTAL
MAY BE MODIFIED BY THE BOARD OF DIRECTORS.
The Fund may invest in debt securities of utility companies when the Fund is temporarily in a defensive position or when it appears that the Fund will be better able to achieve its investment objective through investment in such securities. The Fund may invest in debt securities rated investment grade by a nationally recognized statistical rating organization (NRSRO), such as Standard & Poor's Ratings Group (S&P) or Moody's Investors Service (Moody's) or, if unrated, determined by the investment adviser to be of comparable quality. The term "investment grade" refers to securities rated within the four highest quality grades by S&P, Moody's or another NRSRO. Securities rated Baa by Moody's, although considered to be investment grade, lack outstanding investment characteristics and, in fact, have speculative characteristics. Lower rated securities are subject to greater risk of loss of principal and interest. Debt securities may 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).
THE FUND MAY INVEST UP TO 30% OF ITS TOTAL ASSETS IN SECURITIES OF FOREIGN ISSUERS, WHICH MAY INVOLVE ADDITIONAL RISKS. See "Foreign Securities" below. The Fund may also invest in American Depositary Receipts, which are receipts issued by an American bank or trust company evidencing ownership of underlying securities issued by a foreign issuer. American Depositary Receipts are not considered foreign securities for purposes of the 30% limitation.
AS A RESULT OF THE FUND'S CONCENTRATION OF ITS INVESTMENTS, IT IS SUBJECT TO RISKS ASSOCIATED WITH THE UTILITY INDUSTRY. Among these are inflationary and other cost increases in fuel and other operating expenses, high interest costs on borrowings needed for capital construction programs, including compliance with environmental regulations, and changes in the regulatory climate.
FOREIGN SECURITIES
THE FUND MAY INVEST UP TO 30% OF ITS TOTAL ASSETS IN FOREIGN SECURITIES. In many instances, foreign debt securities may provide higher yields but may be subject to greater fluctuations in price than securities of domestic issuers which have similar maturities and quality. Under certain market conditions, these investments may be less liquid than the securities of U.S. corporations and are certainly less liquid than securities issued or guaranteed by the U.S. Government, its instrumentalities or agencies.
FOREIGN SECURITIES INVOLVE CERTAIN RISKS WHICH SHOULD BE CONSIDERED CAREFULLY BY AN INVESTOR IN THE FUND. These risks include exchange rate fluctuations, political, social or economic instability of the country of issue, diplomatic developments which could affect the assets of the Fund held in foreign countries, and the possible imposition of exchange controls, withholding taxes on dividends or interest payments, confiscatory taxes or expropriation. There may be less government supervision and regulation of foreign securities exchanges, brokers and listed companies than exists in the United States, foreign brokerage commissions and custody fees are generally higher than those in the United States, and foreign security settlements will in some instances be subject to delays and related administrative uncertainties. The Fund will probably have greater difficulty in obtaining or enforcing a court judgment abroad than it would have doing so within the United States. Less information may be publicly available about a foreign company than about a domestic company, and foreign companies may not be subject to uniform accounting, auditing and financial reporting standards comparable to those applicable to domestic companies. In addition, foreign securities markets have substantially less volume than the New York Stock Exchange and securities of some foreign companies are less liquid and more volatile than securities of comparable U.S. companies.
Although the foreign companies in which the Fund may invest will be providing products and services substantially similar to domestic companies in which the Fund has and may invest, the utility companies of many major countries, such as the United Kingdom, Spain and Mexico, have only recently substantially increased investor ownership (including ownership by U.S. investors) and, as a result, have only recently become subject to adversarial rate-making procedures. In addition, certain foreign utilities are experiencing demand growth at rates greater than economic expansion in their countries or regions. These factors as well as those associated with foreign issuers generally may affect the future values of foreign securities held by the Fund.
HEDGING AND RETURN ENHANCEMENT STRATEGlES
THE FUND MAY ALSO ENGAGE IN VARIOUS PORTFOLIO STRATEGIES, INCLUDING USING
DERIVATIVES, TO REDUCE CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO
ENHANCE RETURN. THESE STRATEGIES INCLUDE (1) THE PURCHASE AND WRITING (I.E.,
SALE) OF PUT AND CALL OPTIONS ON EQUITY SECURITIES AND ON STOCK INDICES, (2) THE
PURCHASE AND SALE OF LISTED STOCK AND BOND INDEX FUTURES AND OPTIONS THEREON AND
(3) THE PURCHASE AND SALE OF OPTIONS ON FOREIGN CURRENCIES AND FUTURES CONTRACTS
ON FOREIGN CURRENCIES AND OPTIONS THEREON. THE FUND MAY ENGAGE IN THESE
TRANSACTIONS ON U.S. OR FOREIGN SECURITIES EXCHANGES OR, IN THE CASE OF EQUITY
AND STOCK INDEX OPTIONS, IN THE OVER-THE-COUNTER MARKET. THE FUND MAY ALSO
PURCHASE AND SELL FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. THE FUND, AND
THUS THE INVESTOR, MAY LOSE MONEY THROUGH ANY UNSUCCESSFUL USE OF THESE
STRATEGIES. The Fund's ability to use these strategies may be limited by market
conditions, regulatory limits and tax considerations and there can be no
assurance that any of these strategies will succeed. New financial products and
risk management techniques continue to be developed and the Fund may use these
new investments and techniques to the extent they are consistent with its
investment objective and policies. See "Investment Objective and Policies" in
the Statement of Additional Information.
OPTIONS TRANSACTIONS
OPTIONS ON EQUITY SECURITIES. THE FUND MAY PURCHASE AND WRITE (I.E., SELL) PUT AND CALL OPTIONS ON EQUITY SECURITIES THAT ARE TRADED ON SECURITIES EXCHANGES, ON NASDAQ (NASDAQ OPTIONS) OR IN THE OVER-THE-COUNTER MARKET (OTC OPTIONS).
A CALL OPTION IS A SHORT-TERM CONTRACT WHICH GIVES THE PURCHASER, IN RETURN FOR A PREMIUM PAID, THE RIGHT TO BUY THE SECURITY SUBJECT TO THE OPTION AT A SPECIFIED EXERCISE PRICE AT ANY TIME DURING THE TERM OF THE OPTION. The writer of the call option, in return for the premium, has the obligation, upon exercise of the option, to deliver, depending on the terms of the option contract, the underlying securities to the purchaser upon receipt of the exercise price. When the Fund writes a call option, the Fund gives up the potential for gain on the underlying securities in excess of the exercise price of the option during the period that the option is open. There is no limitation on the amount of call options the Fund may write.
A PUT OPTION GIVES THE PURCHASER, IN RETURN FOR A PREMIUM, THE RIGHT, FOR A SPECIFIED PERIOD OF TIME, TO SELL THE SECURITIES SUBJECT TO THE OPTION TO THE WRITER OF THE PUT AT THE SPECIFIED EXERCISE PRICE. The writer of the put, in return for the premium, has the obligation, upon exercise of the option, to acquire the securities underlying the option at the exercise price. The Fund as the writer of a put option might, therefore, be obligated to purchase underlying securities for more than their current market price.
THE FUND WILL WRITE ONLY "COVERED" CALL OPTIONS. A call option on debt or equity securities written by the Fund is "covered" if the Fund owns the security underlying the option or has an absolute and immediate right to acquire that security without additional consideration (or for additional consideration held in a segregated account by its Custodian) upon conversion or exchange of other securities held in its portfolio. A call option is also covered if the Fund holds, on a share-for-share basis, a call on the same security as the call written by the Fund where the exercise price of the call held is equal to or less than the exercise price of the call written, or greater than the exercise price of the call written if the difference is maintained by the Fund in cash, U.S. Government securities, equity securities or other liquid, unencumbered assets, marked-to-market daily, in a segregated account with its Custodian. The premium paid by the purchaser of an option will reflect, among other things, the relationship of the exercise price to the market price and volatility of the underlying security, the remaining term of the option, supply and demand and interest rates.
THE FUND MAY ALSO PURCHASE A "PROTECTIVE PUT," I.E., A PUT OPTION ACQUIRED FOR THE PURPOSE OF PROTECTING A PORTFOLIO SECURITY FROM A DECLINE IN MARKET VALUE. In exchange for the premium paid for the put option, the Fund acquires the right to sell the underlying security at the exercise price of the put regardless of the extent to which the underlying security declines in value. The loss to the Fund is limited to the premium paid for, and transaction costs in connection with, the put plus the initial excess, if any, of the market price of the underlying security over the exercise price. However, if the market price of the security underlying the put rises, the profit the Fund realizes on the sale of the security will be reduced by the premium paid for the put option less any amount (net of transaction costs) for which the put may be sold. Similar principles apply to the purchase of puts on stock indices as described below.
OPTIONS ON STOCK INDICES. THE FUND MAY ALSO PURCHASE AND WRITE (I.E., SELL)
PUT AND CALL OPTIONS ON STOCK INDICES TRADED ON SECURITIES EXCHANGES, ON NASDAQ OR IN THE OTC MARKET. Such options may include options on non-utility companies. Options on stock indices are similar to options on stock except that, rather than the right to take or make delivery of a stock at a specified price, an option on a stock index gives the holder the right in return for premium paid to receive, upon exercise of the option, an amount of cash if the closing level of the index upon which the option is based is greater than, in the case of a call, or less than, in the case of a put, the exercise price of the option. The writer of the index option, in return for a premium, is obligated to pay the amount of cash due upon exercise of the option. Unlike stock options, all settlements are in cash, and gain or loss depends on price movements in the underlying market generally (or in a particular industry or segment of the market) rather than price movements in individual securities.
THE FUND'S SUCCESSFUL USE OF OPTIONS ON INDICES DEPENDS UPON THE INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET AND IS SUBJECT TO VARIOUS ADDITIONAL RISKS. The correlation between movements in the index and the price of the securities being written against is imperfect and the risk from imperfect correlation increases as the composition of the Fund's portfolio diverges from the composition of the relevant index. Accordingly, a decrease in the value of the securities being written against may not be wholly offset by a gain on the exercise of a stock index put option held by the Fund. Likewise, if a stock index call option written by the Fund is exercised, the Fund may incur a loss on the transaction which is not offset, in whole or in part, by an increase in the value of the securities being written against, which securities may, depending on market circumstances, decline in value. For additional discussion of risks associated with these transactions, see "Investment Objective and Policies-Limitations on Purchase and Sale of Stock Options, Options on Indices, and Stock and Bond Index Futures and Options Thereon" in the Statement of Additional Information.
OPTIONS ON FOREIGN CURRENCIES. THE FUND IS PERMITTED TO PURCHASE AND WRITE PUT AND CALL OPTIONS ON FOREIGN CURRENCIES AND ON FUTURES CONTRACTS ON FOREIGN CURRENCIES TRADED ON SECURITIES EXCHANGES OR BOARDS OF TRADE (FOREIGN AND DOMESTIC) FOR HEDGING PURPOSES IN A MANNER SIMILAR TO THAT IN WHICH FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS AND FUTURES CONTRACTS ON FOREIGN CURRENCIES WILL BE EMPLOYED. Options on foreign currencies and on futures
contracts on foreign currencies are similar to options on stock, except that the Fund has the right to take or make delivery of a specified amount of foreign currency, rather than stock.
THE FUND MAY PURCHASE AND WRITE OPTIONS TO HEDGE THE FUND'S PORTFOLIO SECURITIES DENOMINATED IN FOREIGN CURRENCIES. If there is a decline in the dollar value of a foreign currency in which the Fund's portfolio securities are denominated, the dollar value of such securities will decline even though the foreign currency value remains the same. To hedge against the decline of the foreign currency, the Fund may purchase put options on futures contracts on such foreign currency. If the value of the foreign currency declines, the gain realized on the put option would offset, in whole or in part, the adverse effect such decline would have on the value of the portfolio securities. Alternatively, the Fund may write a call option on a futures contract on the foreign currency. If the value of the foreign currency declines, the option would not be exercised and the decline in the value of the portfolio securities denominated in such foreign currency would be offset in part by the premium the Fund received for the option.
If, on the other hand, the investment adviser anticipates purchasing a foreign security and also anticipates a rise in the value of such foreign currency (thereby increasing the cost of such security), the Fund may purchase call options on the foreign currency. The purchase of such options could offset, at least partially, the effects of the adverse movements of the exchange rates. Alternatively, the Fund could write a put option on the currency and, if the exchange rates move as anticipated, the option would expire unexercised.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
THE FUND MAY ENTER INTO FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS TO PROTECT THE VALUE OF ITS PORTFOLIO AGAINST FUTURE CHANGES IN THE LEVEL OF CURRENCY EXCHANGE RATES. A forward contract on foreign currency is an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days agreed upon by the parties from the date of the contract at a price set on the date of the contract. These contracts are traded in the interbank market conducted directly between currency traders (typically large commercial banks) and their customers. A forward contract generally has no deposit requirements, and no commissions are charged for such trades.
The Fund may not use forward contracts to generate income, although the use of such contracts may incidentally generate income. There is no limitation on the value of forward contracts into which the Fund may enter. However, the Fund's dealings in forward contracts will be limited to hedging involving either specific transactions or portfolio positions. Transaction hedging is the purchase or sale of a forward contract with respect to specific receivables or payables of the Fund generally arising in connection with the purchase or sale of its portfolio securities and accruals of interest or dividends receivable and Fund expenses. Position hedging is the sale of a foreign currency with respect to portfolio security positions denominated or quoted in that currency or in a different foreign currency (cross-hedge). The Fund will not speculate in forward contracts. The Fund may not position hedge (including cross-hedges) with respect to a particular currency for an amount greater than the aggregate market value (determined at the time of making any sale of foreign currency) of the securities being hedged.
When the Fund enters into a contract for the purchase or sale of a security denominated in a foreign currency, or when the Fund anticipates the receipt in a foreign currency of dividends or interest payments on a security which it holds, the Fund may desire to "lock in" the U.S. dollar price of the security or the U.S. dollar equivalent of such dividend or interest payment, as the case may be. By entering into a forward contract for a fixed amount of dollars for the purchase or sale of the amount of foreign currency involved in the underlying transaction, the Fund will be able to protect itself against possible loss resulting from an adverse change in the relationship between the U.S. dollar and the subject foreign currency during the period between the date on which the security is purchased or sold, or on which the dividend or interest payment is declared, and the date on which such payments are made or received. Additionally, when the investment adviser believes that the currency of a particular foreign country may suffer a substantial decline against the U.S. dollar, the Fund may enter into a forward contract, for a fixed amount of dollars, to sell the amount of foreign currency approximating the value of some or all of the portfolio securities of the Fund denominated in such foreign currency. Requirements under the Internal Revenue Code of 1986, as amended (Internal Revenue Code) for qualification
as a regulated investment company may limit the Fund's ability to engage in transactions in forward contracts. See "Taxes" in the Statement of Additional Information.
FUTRUES TRANSACTIONS
STOCK AND BOND INDEX FUTURES. THE FUND MAY USE LISTED STOCK AND BOND INDEX FUTRUES TRADED ON A COMMODITIES EXCHANGE OR BOARD OF TRADE FOR CERTAIN HEDGING AND RISK MANAGEMENT PURPOSES AND TO ATTEMPT TO ENHANCE RETURN IN ACCORDANCE WITH REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION. THE FUND, AND THUS THE INVESTOR, MAY LOSE MONEY THROUGH ANY UNSUCCESSFUL USE OF THESE STRATEGIES.
A STOCK OR BOND INDEX FUTURES CONTRACT IS AN AGREEMENT IN WHICH ONE PARTY AGREES TO DELIVER TO THE OTHER AN AMOUNT OF CASH EQUAL TO A SPECIFIC DOLLAR AMOUNT TIMES THE DIFFERENCE BETWEEN THE VALUE OF A SPECIFIC STOCK OR BOND INDEX AT THE CLOSE OF THE LAST TRADING DAY OF THE CONTRACT AND THE PRICE AT WHICH THE AGREEMENT IS MADE. No physical delivery of the underlying stocks in the indes is made. See "Investment Objective and Policies-Futures Contracts and Options Thereon" in the Statement of Additional Information.
UNDER REGULATIONS OF THE COMMODITY EXCHANGE ACT, INVESTMENT COMPANIES REGISTERED UNDER THE INVESTMENT COMPANY ACT ARE EXEMPT FROM THE DEFINITION OF "COMMODITY POOL OPERATOR", SUBJECT TO COMPLIANCE WITH CERTAIN CONDITIONS. THE EXEMPTION IS CONDITIONED UPON THE FUND'S PURCHASING AND SELLING FUTURES CONTRACTS AND OPTIONS THEREON FOR BONA FIDE HEDGING TRANSACTIONS, EXCEPT THAT THE FUND MAY PURCHASE AND SELL FUTURES CONTRACTS AND OPTIONS THEREON FOR ANY OTHER PURPOSE TO THE EXTENT THAT THE AGGREGATE INITIAL MARGIN AND OPTION PREMIUMS DO NOT EXCEED 5% OF THE LIQUIDATION VALUE OF THE FUND'S TOTAL ASSETS.
OPTIONS ON STOCK AND BOND INDEX FUTURES. THE FUND MAY ALSO PURCHASE AND WRITE OPTIONS ON STOCK AND BOND INDEX FUTURES FOR CERTAIN HEDGING AND RISK
MANAGEMENT PURPOSES AND TO ATTEMPT TO ENHANCE RETURN. In the case of options on stock or bond index futures, the holder of the option pays a premium and receives the right, upon exercise of the option at a specified price during the option period, to assume a position in a stock or bond index futures contract (a long position if the option is a call and a short position if the option is a put). If the option is exercised by the holder before the last trading day during the option period, the option writer delivers the futures position, as well as any balance in the writer's futures margin account, which represents the amount by which the market price of the stock or bond index 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 stock or bond index future. If it is exercised on the last trading day, the option writer delivers to the option holder cash in an amount equal to the difference between the option exercise price and the closing level of the relevant index on the date the option expires.
FUTURES CONTRACTS ON FOREIGN CURRENCIES. THE FUND IS PERMITTED TO BUY AND SELL FUTURES CONTRACTS ON FOREIGN CURRENCIES (FUTURES CONTRACTS) SUCH AS THE EUROPEAN CURRENCY UNIT, AND PURCHASE AND WRITE OPTIONS THEREON FOR HEDGING PURPOSES. A European Currency Unit is a basket of specified amounts of the currencies of certain member states of the European Union, a Western European economic cooperative organization including, inter alia, France, Germany, The Netherlands and the United Kingdom. The Fund will engage in transactions in only those futures contracts and options thereon that are traded on a commodities exchange or a board of trade. A "sale" of a futures contract on foreign currency means the assumption of a contractual obligation to deliver the specified amount of foreign currency at a specified price in a specified future month. A "purchase" of a futures contract means the assumption of a contractual obligation to acquire the currency called for by the contract at a specified price in a specified future month. At the time a futures contract is purchased or sold, the Fund must allocate cash or securities as a deposit payment (initial margin). Thereafter, the futures contract is valued daily and the payment of "variation margin" may be required, resulting in the Fund's paying or receiving cash that reflects any decline or increase, respectively, in the contract's value, a process known as "mark to market."
THE FUND'S SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON DEPENDS
UPON THE INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET AND IS SUBJECT TO VARIOUS ADDITIONAL RISKS. The correlation between movements in the price of a futures contract and the price of the securities being hedged is imperfect and there is a risk
that the value of the securities being hedged may increase or decrease at a greater rate than the related futures contract, resulting in losses to the Fund. The use of these instruments will hedge only the currency risks associated with investments in foreign securities, not market risks. Certain futures exchanges or boards of trade have established daily limits on the amount that the price of a futures contract or option thereon may vary, either up or down, from the previous day's settlement price. These daily limits may restrict the Fund's ability to purchase or sell certain futures contracts or options thereon on any particular day. In addition, if the Fund purchases futures to hedge against market advances before it can invest in stocks or bonds in an advantageous manner and the market declines, the Fund might incur a loss on the futures contract. In addition, the ability of the Fund to close out a futures position or an option depends on a liquid secondary market. There is no assurance that liquid secondary markets will exist for any particular futures contract or option thereon at any particular time. See "Investment Objective and Policies-Limitations on the Purchase and Sale of Stock Options, Options on Indices, and Stock and Bond Index Futures and Options Thereon" in the Statement of Additional Information.
THE FUND'S ABILITY TO ENTER INTO OR CLOSE OUT FUTURES CONTRACTS AND OPTIONS THEREON MAY ALSO BE LIMITED BY THE REQUIREMENTS OF THE INTERNAL REVENUE CODE FOR QUALIFICATION AS A REGULATED INVESTMENT COMPANY.
RISKS OF HEDGING AND RETURN ENHANCEMENT STRATEGIES
PARTICIPATION IN THE OPTIONS OR FUTURES MARKETS AND IN CURRENCY EXCHANGE
TRANSACTIONS INVOLVES INVESTMENT RISKS AND TRANSACTION COSTS TO WHICH THE FUND
WOULD NOT BE SUBJECT ABSENT THE USE OF THESE STRATEGIES. The Fund, and thus the
investor, may lose money through any unsuccessful use of these strategies. If
the investment adviser's prediction of movements in the direction of the
securities, foreign currency and interest rate markets are inaccurate, the
adverse consequences to the Fund may leave the Fund in a worse position than if
such strategies were not used. Risks inherent in the use of options, foreign
currency and futures contracts and options on futures contracts include (1)
dependence on the investment adviser's ability to predict correctly movements in
the direction of interest rates, securities prices and currency markets; (2)
imperfect correlation between the price of options and futures contracts and
options thereon and movements in the prices of the securities or currencies
being hedged; (3) the fact that skills needed to use these strategies are
different from those needed to select portfolio securities; (4) the possible
absence of a liquid secondary market for any particular instrument at any time;
(5) the possible need to defer closing out certain hedged positions to avoid
adverse tax consequences; and (6) the possible inability of the Fund to purchase
or sell a portfolio security at a time that otherwise would be favorable for it
to do so or the possible need for the Fund to sell a portfolio security at a
disadvantageous time, due to the need for the Fund to maintain "cover" or to
segregate securities in connection with hedging transactions. See "Investment
Objective and Policies" and "Taxes" in the Statement of Additional Information.
OTHER INVESTMENTS AND POLICIES
BORROWING
The Fund may also borrow an amount equal to no more than 20% of the value of its total assets (calculated when the loan is made) for temporary, extraordinary or emergency purposes or for the clearance of transactions. The Fund may pledge up to 20% of its total assets to secure these borrowings.
SECURITIES LENDING
The Fund may lend its portfolio securities to brokers or dealers, banks or other recognized institutional borrowers of securities, provided that the borrower at all times maintains cash or other liquid assets or secures an irrevocable letter of credit in favor of the Fund in an amount equal to at least 100%, determined daily, of the market value of the securities loaned which are maintained in a segregated account pursuant to applicable regulations. During the time portfolio securities are on loan, the borrower will pay the Fund an amount equivalent to any dividend or interest paid on such
securities and the Fund may invest the cash collateral and earn additional income, or it may receive an agreed-upon amount of interest income from the borrower. As a matter of policy, the Fund cannot lend more than 33% of the value of its total assets. The Fund may pay reasonable administration and custodial fees in connection with a loan. See "Investment Objective and Policies-Lending of Securities" in the Statement of Additional Information.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase or sell securities on a when-issued or delayed delivery basis. When-issued or delayed delivery transactions arise when securities are purchased or sold by the Fund with payment and delivery taking place in the future in order to secure what is considered to be an advantageous price and yield to the Fund at the time of entering into the transaction. The Fund's Custodian will maintain, in a segregated account of the Fund, 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 Fund's purchase commitments. The securities so purchased are subject to market fluctuation and no interest accrues to the purchaser during the period between purchase and settlement. At the time of delivery of the securities the value may be more or less than the purchase price and an increase in the percentage of the Fund's assets committed to the purchase of securities on a when-issued or delayed delivery basis may increase the volatility of the Fund's net asset value.
REPURCHASE AGREEMENTS
The Fund may on occasion enter into repurchase agreements whereby the seller of a security agrees to repurchase that security from the Fund at a mutually agreed-upon time and price. The period of maturity is usually quite short, possibly overnight or a few days, although it may extend over a number of months. The resale price is in excess of the purchase price, reflecting an agreed-upon rate of return effective for the period of time the Fund's money is invested in the repurchase agreement. The Fund's repurchase agreements will at all times be fully collateralized in an amount at least equal to the resale price. The instruments held as collateral are valued daily, and if the value of instruments declines, the Fund will require additional collateral. If the seller defaults and the value of the collateral securing the repurchase agreement declines, the Fund may incur a loss. The Fund participates in a joint repurchase account with other investment companies managed by PMF pursuant to an order of the Securities and Exchange Commission (SEC). See "Investment Objective and Policies-Repurchase Agreements" in the Statement of Additional Information.
ILLIQUID SECURITIES
The Fund may hold up to 10% of its net assets in illiquid securities, including repurchase agreements which have a maturity of longer than seven days, securities with legal or contractual restrictions on resale (restricted securities) and securities that are not readily marketable in securities markets either within or outside of the United States. Restricted securities eligible for resale pursuant to Rule 144A under the Securities Act of 1933, as amended (the Securities Act), and privately placed commercial paper that have a readily available market are not considered illiquid for purposes of this limitation. The investment adviser will monitor the liquidity of such restricted securities under the supervision of the Board of Directors. The Fund's investment in Rule 144A securities could have the effect of increasing illiquidity to the extent that qualified institutional buyers become, for a limited time, uninterested in purchasing Rule 144A securities. Repurchase agreements subject to demand are deemed to have a maturity equal to the applicable notice period.
PORTFOLIO TURNOVER
As a result of the Fund's investment policies, the Fund anticipates that its portfolio turnover rate may exceed 100%, although the rate is not expected to exceed 200%. See "Investment Objective and Policies-Portfolio Turnover" in the Statement of Additional Information.
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions which, like its investment objective, constitute fundamental policies. Fundamental policies cannot be changed without the approval of the holders of a majority of the Fund's
outstanding voting securities, as defined in the Investment Company Act. See "Investment Restrictions" in the Statement of Additional Information.
THE FUND HAS A BOARD OF DIRECTORS WHICH, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDES UPON MATTERS OF GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS OPERATIONS OF THE FUND. THE FUND'S SUBADVISER
FURNISHES DAILY INVESTMENT ADVISORY SERVICES.
For the fiscal year ended December 31, 1996, the Fund's total expenses as a percentage of average net assets for Class A, Class B, Class C and Class Z shares were .86%, 1.61%, 1.61%, and .61% (annualized), respectively. See "Financial Highlights."
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT LLC (PMF OR THE MANAGER), GATEWAY CENTER THREE, NEWARK, NEW JERSEY 07102, IS THE MANAGER OF THE FUND AND IS COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF .60 OF 1% OF THE FUND'S AVERAGE DAILY NET ASSETS UP TO AND INCLUDING $250 MILLION, .50 OF 1% OF THE NEXT $500 MILLION, .45 OF 1% OF THE NEXT $750 MILLION, .40 OF 1% OF THE NEXT $500 MILLION, .35 OF 1% OF THE NEXT $2 BILLION, .325 OF 1% OF THE NEXT $2 BILLION AND .30 OF 1% OF THE EXCESS OVER $6 BILLION OF THE FUND'S AVERAGE DAILY NET ASSETS. PMF is organized in New York as a limited liability company. It is the successor to Prudential Mutual Fund Management, Inc., which transferred its assets to PMF in September 1996. For the fiscal year ended December 31, 1996, the Fund paid management fees to PMF of .41% of the Fund's average daily net assets. See "Manager" in the Statement of Additional Information.
As of January 31, 1997, PMF served as the manager to 40 open-end investment companies, constituting all of the Prudential Mutual Funds, and as manager or administrator to 22 closed-end investment companies with aggregate assets of approximately $55.8 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF THE FUND AND ALSO ADMINISTERS THE FUND'S CORPORATE AFFAIRS. See
"Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC), DOING BUSINESS AS PRUDENTIAL INVESTMENTS (PI, THE SUBADVISER OR THE INVESTMENT ADVISER), PI FURNISHES INVESTMENT ADVISORY SERVICES IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PMF FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the Management Agreement, PMF continues to have responsibility for all investment advisory services and supervises PI's performance of such services.
The current portfolio manager of the Fund is David A. Kiefer, CFA. Mr. Kiefer is a Senior Portfolio Manager of Prudential Investments. Mr. Kiefer is responsible for day-to-day management and stock selection for the Fund. Mr. Kiefer joined Prudential Investments in 1992 as an equity analyst for the Fund. Prior thereto, he attended business school and worked as a utility analyst for a Prudential subsidiary for two years.
PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance Company of America (Prudential), a major diversified insurance and financial services company.
DISTRIBUTOR
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), ONE SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE SHARES OF THE FUND. IT IS AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE DISTRIBUTION AGREEMENT), PRUDENTIAL SECURITIES (THE DISTRIBUTOR) INCURS THE EXPENSES OF DISTRIBUTING THE FUND'S CLASS A, CLASS B AND CLASS C SHARES. Prudential Securities also incurs the expenses of distributing the Fund's Class Z shares under the Distribution Agreement, none of which is reimbursed by or paid for by the Fund. These expenses include commissions and account servicing fees paid to, or on account of, financial advisers of Prudential Securities and representatives of Pruco Securities Corporation (Prusec), an affiliated broker-dealer, commissions and account servicing fees paid to, or on account of, other broker-dealers or other financial institutions (other than national banks) which have entered into agreements with the Distributor, advertising expenses, the cost of printing and mailing prospectuses to potential investors and indirect and overhead costs of Prudential Securities and Prusec associated with the sale of Fund shares, including lease, utility, communications and sales promotion expenses.
Under the Plans, the Fund is obligated to pay distribution and/or service fees to the Distributor as compensation for its distribution and service activities, not as reimbursement for specific expenses incurred. If the Distributor's expenses exceed its distribution and service fees, the Fund will not be obligated to pay any additional expenses. If the Distributor's expenses are less than such distribution and service fees, it will retain its full fees and realize a profit.
UNDER THE CLASS A PLAN, THE FUND MAY PAY PRUDENTIAL SECURITIES FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE OF UP TO .30 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES. The Class A Plan provides that (i) up to .25 of 1% of the average daily net assets of the Class A shares may be used to pay for personal service and/or the maintenance of shareholder accounts (service fee) and (ii) total distribution fees (including the service fee of up to .25 of 1%) may not exceed .30 of 1% of the average daily net assets of the Class A shares. Prudential Securities has agreed to limit its distribution-related fees payable under the Class A Plan to .25 of 1% of the average daily net assets of the Class A shares for the fiscal year ending December 31, 1997.
UNDER THE CLASS B AND CLASS C PLANS, THE FUND PAYS PRUDENTIAL SECURITIES FOR
ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C SHARES
AT AN ANNUAL RATE OF UP TO 1% OF THE AVERAGE DAILY NET ASSETS OF EACH OF THE
CLASS B AND CLASS C SHARES. The Class B and Class C Plans provide for the
payment to Prudential Securities of (i) an asset-based sales charge of .75 of 1%
of the average daily net assets of each of the Class B and Class C shares and
(ii) a service fee of .25 of 1% of the average daily net assets of each of the
Class B and Class C shares. The service fee is used to pay for personal service
and/or the maintenance of shareholder accounts. Prudential Securities also
receives contingent deferred sales charges from certain redeeming shareholders.
See "Shareholder Guide-How to Sell Your Shares-Contingent Deferred Sales
Charges."
For the fiscal year ended December 31, 1996, the Fund paid distribution expenses of .25%, 1.00% and 1.00% of the average net assets of the Class A, Class B and Class C shares, respectively. The Fund records all payments made under the Plans as expenses in the calculation of net investment income. See "Distributor" in the Statement of Additional Information.
Distribution expenses attributable to the sale of Class A, Class B or Class C shares of the Fund will be allocated to each 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.
Each Plan provides that it shall continue in effect from year to year provided that a majority of the Board of Directors of the Fund, including a majority of the Directors who are not "interested persons" of the Fund (as defined in the Investment Company Act) and who have no direct or indirect financial interest in the operation of the Plan or any agreement related to the Plan (the Rule 12b-1 Directors), vote annually to continue the Plan. Each Plan may be terminated at any time by vote of a majority of the Rule 12b-1 Directors or of a majority of the outstanding shares of the applicable class of the Fund. The Fund will not be obligated to pay distribution and service fees incurred under any Plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Fund under the Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may make payments out of its own resources to dealers (including Prudential Securities) and other persons who distribute shares of the Fund (including Class Z shares). Such payments may be calculated by reference to the net asset value of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of Securities Dealers, Inc. (NASD) governing maximum sales charges. See "Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC, state securities regulators (with the exception of the Texas Securities Commissioner who joined the settlement on January 18, 1994) and the NASD to resolve allegations that from 1980 through 1990 PSI sold certain limited partnership interests in violation of securities laws to persons for whom such securities were not suitable and misrepresented the safety, potential returns and liquidity of these investments. Without admitting or denying the allegations asserted against it, PSI consented to the entry of an SEC Administrative Order which stated that PSI's conduct violated the federal securities laws, directed PSI to cease and desist from violating the federal securities laws, pay civil penalties, and adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a $10,000,000 civil penalty, established a settlement fund in the amount of $330,000,000 and procedures to resolve legitimate claims for compensatory damages by purchasers of the partnership interests. PSI has agreed to provide additional funds, if necessary, for the purposes of the settlement fund. PSI's settlement with the state securities regulators included an agreement to pay a penalty of $500,000 per jurisdiction. PSI consented to a censure and to the payment of a $5,000,000 fine in settling the NASD action.
In October 1994, a criminal complaint was filed with the United States Magistrate for the Southern District of New York alleging that PSI committed fraud in connection with the sale of certain limited partnership interests in violation of federal securities laws. An agreement was simultaneously filed to defer prosecution of these charges for a period of three years from the signing of the agreement, provided that PSI complies with the terms of the agreement. If, upon completion of the three year period, PSI has complied with the terms of the agreement, no prosecution will be instituted by the United States for the offenses charged in the complaint. If on the other hand, during the course of the three year period, PSI violates the terms of the agreement, the U.S. Attorney can then elect to pursue these charges. Under the terms of the agreement, PSI agreed, among other things, to pay an additional $330,000,000 into the fund established by the SEC to pay restitution to investors who purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see "Distributor" in the Statement of Additional Information, a copy of which may be obtained at no cost by calling (800) 225-1852.
The Fund is not affected by PSI's financial condition and is an entirely separate legal entity from PSI, which has no beneficial ownership therein and the Fund's assets which are held by State Street Bank and Trust Company, an independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant for the Fund, provided that the commissions, fees or other remuneration it receives are fair and reasonable. See "Portfolio Transactions and Brokerage" in the Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy, Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and cash and, in that capacity, maintains certain financial and accounting books and records pursuant to an agreement with the Fund. Its mailing address is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent, and in those capacities, maintains certain books and records for the Fund. PMFS is a wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New Brunswick, New Jersey 08906-5005.
THE FUND'S NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE BOARD OF DIRECTORS HAS FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE FUND'S NET ASSET VALUE TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not readily available, at fair value as determined in good faith under procedures established by the Fund's Board of Directors. See "Net Asset Value" in the Statement of Additional Information.
The Fund will compute its NAV once daily on days that the New York Stock Exchange is open for trading except on days on which no orders to purchase, sell or redeem shares have been received by the Fund or days on which changes in the value of the Fund's portfolio securities do not materially affect the NAV. The New York Stock Exchange is closed on the following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Although the legal rights of each class of shares are substantially identical, the different expenses borne by each class will result in different NAVs and dividends. The NAV of Class B and Class C shares will generally be lower than the NAV of Class A shares as a result of the larger distribution-related fee to which Class B and Class C shares are subject. The NAV of Class Z shares will generally be higher than the NAV of the other three classes because Class Z shares are not subject to any distribution and/or service fees. It is expected, however, that the NAV per share of the four classes will tend to converge immediately after the recording of dividends, if any, which will differ by approximately the amount of the distribution and/or service fee expense accrual differential among the classes.
FROM TIME TO TIME THE FUND MAY ADVERTISE ITS "TOTAL RETURN" (INCLUDING "AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE" TOTAL RETURN) AND "YIELD" IN ADVERTISEMENTS OR SALES LITERATURE. TOTAL RETURN AND YIELD ARE CALCULATED SEPARATELY FOR CLASS A, CLASS B, CLASS C AND CLASS Z SHARES. These figures are based on historical earnings and are not intended to indicate future performance. The "total return" shows how much an investment in the Fund would have increased (decreased) over a specified period of time (i.e., one, five or ten years or since inception of the Fund) assuming that all distributions and dividends by the Fund were reinvested on the reinvestment dates during the period and less all recurring fees. The "aggregate" total return reflects actual performance over a stated period of time. "Average annual" total return is a hypothetical rate of return that, if achieved annually, would have produced the same aggregate total return if performance had been constant over the entire period. "Average annual" total return smooths out variations in performance and takes into account any applicable initial or contingent deferred sales charges. Neither "average annual" total return nor "aggregate" total return takes into account any federal or state income taxes which may be payable upon redemption. The "yield" refers to the income generated by an investment in the Fund over a one-month or 30-day period. This income is then "annualized"; that is, the amount of income generated by the investment during that 30-day period is assumed to be generated each 30-day period for twelve periods and is shown as a percentage of the investment. The income earned on the investment is also assumed to be reinvested at the end of the sixth 30-day period. The Fund also may include comparative performance information in advertising or marketing the Fund's shares. Such performance information may include data from Lipper Analytical Services, Inc., Morningstar Publications, Inc., other
industry publications, business periodicals, and market indices. See "Performance Information" in the Statement of Additional Information. Further performance information is contained in the Fund's annual and semi-annual reports to shareholders, which may be obtained without charge. See "Shareholder Guide-Shareholder Services-Reports to Shareholders."
TAXATION OF THE FUND
THE FUND HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE INTERNAL REVENUE CODE). ACCORDINGLY, THE FUND WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME AND CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. See "Taxes" in the Statement of Additional Information.
TAXATION OF SHAREHOLDERS
Any dividends out of net investment income, together with distributions of net short-term gains (i.e., the excess of net short-term capital gains over net long-term capital losses), will be taxable as ordinary income to the shareholder whether or not reinvested. Any net capital gains (i.e., the excess of net long-term capital gains over net short-term capital losses), distributed to shareholders will be taxable as long-term capital gains to shareholders, whether or not reinvested and regardless of the length of time a shareholder has owned his or her shares. The maximum long-term capital gains rate for individual shareholders is 28% and the maximum tax for ordinary income is 39.6%. The maximum long-term capital gains rate for corporate shareholders is currently the same as the maximum tax rate for ordinary income.
Dividends and distributions are currently taxable to shareholders in the year in which received. However, certain dividends declared by the Fund will be treated as received by shareholders on December 31 of the calendar year in which such dividends are declared. This rule applies to dividends declared by the Fund in October, November or December of a calendar year, payable to shareholders of record on a date in any such month, if such dividends are paid during January of the following calendar year.
Dividends received by corporate shareholders are eligible for a dividends-received deduction of 70% to the extent the Fund's income is derived from qualified dividends received by the Fund from domestic corporations. Dividends attributable to foreign dividends, interest income, capital gain and net income and gain or loss from other sources are not eligible for the corporate dividends-received deduction. See "Taxes" in the Statement of Additional Information. Corporate shareholders should consult their tax advisers regarding other requirements applicable to the dividends received deduction.
Any gain or loss realized upon a sale or redemption of Fund shares by a shareholder who is not a dealer in securities will generally be treated as long-term capital gain or loss if the shares have been held for more than one year and otherwise as short-term capital gain or loss. Any such loss with respect to shares that are held for six months or less, however, will be treated as long-term capital loss to the extent of any capital gain distributions received by the shareholder.
The Fund has obtained opinions of counsel to the effect that neither (i) the conversion of Class B shares into Class A shares nor (ii) the exchange of any class of the Fund's shares for any other class of its shares constitutes a taxable event for federal income tax purposes. However, such opinions are not binding on the Internal Revenue Service.
Shareholders are advised to consult their own tax advisers regarding specific questions as to federal, state or local taxes. See "Taxes" in the Statement of Additional Information.
WITHHOLDING TAXES
Under the Internal Revenue Code, the Fund is required to withhold and remit to the U.S. Treasury 31% of dividends, capital gain income and redemption proceeds payable to individuals and certain non corporate shareholders who fail to furnish their tax identification numbers on IRS Form W-9 (or IRS Form W-8 in the case of certain foreign shareholders) with the required certifications regarding the shareholder's status under the federal income tax law. Withholding at this rate is also required from dividends and capital gains distributions (but not redemption proceeds) payable to shareholders who are otherwise subject to backup withholding. Dividends of net investment income and short-term capital gains paid to a foreign shareholder will generally be subject to U.S. withholding tax at the rate of 30% (or lower treaty rate).
DIVIDENDS AND DISTRIBUTIONS
THE FUND EXPECTS TO PAY DIVIDENDS OF NET INVESTMENT INCOME, IF ANY, QUARTERLY AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY NET CAPITAL GAINS. Dividends paid by the Fund with respect to each class of shares, to the extent any dividends are paid, will be calculated in the same manner, at the same time, on the same day and will be in the same amount except that each class will bear its own distribution charges, generally resulting in lower dividends for Class B and Class C shares in relation to Class A and Class Z shares and lower dividends for Class A shares in relation to Class Z shares. Distributions of net capital gains, if any, will be paid in the same amount for each class of shares. See "How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES BASED ON THE NAV OF EACH CLASS ON THE RECORD DATE, OR SUCH OTHER DATE AS THE BOARD OF DIRECTORS MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE RECORD DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election should be submitted to Prudential Mutual Fund Services LLC, Attention: Account Maintenance, P.O. Box 15015, New Brunswick, New Jersey 08906-5015. The Fund will notify each shareholder after the close of the Fund's taxable year both of the dollar amount and the taxable status of that year's dividends and distributions on a per share basis. To the extent that, in a given year, distributions to shareholders exceed recognized net investment income and recognized short-term and long-term capital gains for the year, shareholders will have received a return of capital in respect of such year and, in an annual statement, will be notified of the amount of any return of capital for such year. If you hold shares through Prudential Securities, you should contact your financial adviser to elect to receive dividends and distributions in cash.
WHEN THE FUND GOES "EX-DIVIDEND," THE NAV OF EACH CLASS IS REDUCED BY THE AMOUNT OF THE DIVIDEND OR DISTRIBUTION ALLOCABLE TO EACH CLASS. IF YOU BUY SHARES JUST PRIOR TO THE EX-DIVIDEND DATE (WHICH GENERALLY OCCURS FOUR BUSINESS DAYS PRIOR TO THE RECORD DATE), THE PRICE YOU PAY WILL INCLUDE THE DIVIDEND OR DISTRIBUTION AND A PORTION OF YOUR INVESTMENT WILL BE RETURNED TO YOU AS A TAXABLE DIVIDEND OR DISTRIBUTION. YOU SHOULD, THEREFORE, CONSIDER THE TIMING OF DIVIDENDS AND DISTRIBUTIONS WHEN MAKING YOUR PURCHASES.
DESCRIPTION OF COMMON STOCK
THE FUND WAS INCORPORATED IN MARYLAND ON APRIL 29, 1981. THE FUND IS AUTHORIZED TO ISSUE 2 BILLION SHARES OF COMMON STOCK, $.01 PAR VALUE PER SHARE, DIVIDED INTO FOUR CLASSES, DESIGNATED CLASS A, CLASS B, CLASS C AND CLASS Z COMMON STOCK, CONSISTING OF 500 MILLION SHARES OF CLASS A COMMON STOCK, 700 MILLION SHARES OF CLASS B COMMON STOCK, 400 MILLION SHARES OF CLASS C COMMON STOCK AND 400 MILLION SHARES OF CLASS Z COMMON STOCK. Each class represents an interest in the same assets of the Fund and is identical in all respects except that (i) each class is subject to different sales charges and distribution and/or service fees (except for Class Z shares, which are not subject to any sales charges and distribution and/or service fees), which may affect performance, (ii) each class has exclusive voting rights on any matter submitted to shareholders that relates solely to its arrangement and has separate voting rights on any matter submitted to shareholders in which the interests of one class differ from the interests of any other class, (iii) each
class has a different exchange privilege, (iv) only Class B shares have a conversion feature and (v) Class Z shares are offered exclusively for sale to a limited group of investors. See "How the Fund is Managed-Distributor." In accordance with the Fund's Articles of Incorporation, the Board of Directors may authorize the creation of additional series and classes within such series, with such preferences, privileges, limitations and voting and dividend rights as the Directors may determine.
The Board of Directors may increase or decrease the number of authorized shares without approval by the shareholders. Shares of the Fund, when issued, are fully paid, nonassessable, fully transferable and redeemable at the option of the holder. Shares are also redeemable at the option of the Fund under certain circumstances as described under "Shareholder Guide-How to Sell Your Shares." Each share of each class of common stock is equal as to earnings, assets and voting privileges, except as noted above, and each class of shares (with the exception of Class Z shares, which are not subject to any distribution or service fees) bears the expenses related to the distribution of its shares. Except for the conversion feature applicable to Class B shares, there are no conversion, preemptive or other subscription rights. In the event of liquidation, each share of common stock of the Fund is entitled to its portion of all of the Fund's assets after all debt and expenses of the Fund have been paid. Since Class B and Class C shares generally bear higher distribution expenses than Class A shares, the liquidation proceeds to shareholders of those classes are likely to be lower than to Class A shareholders and to Class Z shareholders, whose shares are not subject to any distribution and/or service fees. The Fund's shares do not have cumulative voting rights for the election of Directors.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF DIRECTORS IS REQUIRED TO BE ACTED ON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR MORE DIRECTORS OR TO TRANSACT ANY OTHER BUSINESS.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has been incorporated by reference herein, does not contain all of the information set forth in the Registration Statement filed by the Fund with the SEC under the Securities Act. Copies of the Registration Statement may be obtained at a reasonable charge from the SEC or may be examined, without charge, at the office of the SEC in Washington, D.C.
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, PRUSEC OR DIRECTLY FROM THE FUND THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND SERVICES LLC (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES, P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. Participants in programs sponsored by Prudential Retirement Services should contact their client representative for more information about Class Z shares. The purchase price is the NAV per share next determined following receipt of an order by the Transfer Agent or Prudential Securities plus a sales charge which, at your option, may be imposed either (i) at the time of purchase (Class A shares) or (ii) on a deferred basis (Class B or Class C shares). Class Z shares are offered to a limited group of investors at net asset value without any sales charge. See "Alternative Purchase Plan" below. See also "How the Fund Values its Shares."
The minimum initial investment is $1,000 for Class A and Class B shares and $5,000 for Class C shares, except that the minimum initial investment for Class C shares may be waived from time to time. There is no minimum initial investment requirement for Class Z shares. The minimum subsequent investment is $100 for all classes, except for Class Z shares, for which there is no such minimum. All minimum investment requirements are waived for certain retirement and employee savings plans or custodial accounts for the benefit of minors. For purchases made through the Automatic Savings Accumulation Plan, the minimum initial and subsequent investment is $50. See "Shareholder Services" below.
Application forms can be obtained from PMFS, Prudential Securities or Prusec. If a stock certificate is desired, it must be requested in writing for each transaction. Certificates are issued only for full shares. Shareholders who hold their shares through Prudential Securities will not receive stock certificates.
The Fund reserves the right to reject any purchase order (including an exchange into the Fund) or to suspend or modify the continuous offering of its shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The Distributor reserves the right to cancel any purchase order for which payment has not been received by the third business day following the investment.
Transactions in Fund shares may be subject to postage and handling charges imposed by your dealer.
Purchase by Wire. For an initial purchase of shares of the Fund by wire, you must first telephone PMFS at (800) 225-1852 (toll-free) to receive an account number. The following information will be requested: your name, address, tax identification number, class election, dividend distribution election, amount being wired and wiring bank. Instructions should then be given by you to your bank to transfer funds by wire to State Street Bank and Trust Company (State Street), Boston, Massachusetts, Custody and Shareholder Services Division, Attention: Prudential Utility Fund, Inc., specifying on the wire the account number assigned by PMFS and your name and identifying the sales charge alternative (Class A, Class B, Class C or Class Z shares).
If you arrange for receipt by State Street of Federal Funds prior to the calculation of NAV (4:15 P.M., New York time), on a business day, you may purchase shares of the Fund as of that day. See "Net Asset Value" in the Statement of Additional Information.
In making a subsequent purchase order by wire, you should wire State Street directly and should be sure that the wire specifies Prudential Utility Fund, Inc., Class A, Class B, Class C or Class Z shares and your name and individual account number. It is not necessary to call PMFS to make subsequent purchase orders utilizing Federal Funds. The minimum amount which may be invested by wire is $1,000.
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS THROUGH THIS PROSPECTUS FOUR CLASSES OF SHARES (CLASS A, CLASS B, CLASS C AND CLASS Z SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES (ALTERNATIVE PURCHASE PLAN).
Annual 12b-1 Fees
(as a % of average daily
Sales Charge net assets) Other Information
---------------------------------- ------------------------- ------------------------------
Class A Maximum initial sales charge of 5% .30 of 1% (Currently Initial sales charge waived or
of the public offering price being charged at reduced for certain purchases
a rate of .25 of 1%)
Class B Maximum contingent deferred sales 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser approximately seven years after of
the amount invested or the purchase
redemption proceeds; declines to
zero after six years
Class C Maximum CDSC of 1% of the lesser 1% Shares do not convert to another
of the amount invested or the class
redemption proceeds on
redemptions made within one year
of purchase
Class Z None None Sold to a limited group of investors
|
The four classes of shares represent an interest in the same portfolio of investments of the Fund and have the same rights, except that (i) each class (with the exception of Class Z shares, which are not subject to any distribution or service fees) is subject to different sales charges and distribution and/or service fees, which may affect performance), ii) each class has exclusive voting rights on any matter submitted to shareholders that relates solely to its arrangement and has separate voting rights on any matter submitted to shareholders in which the interests of one class differ from the interests of any other class, and (iii) only Class B shares have a conversion feature. The four classes also have separate exchange privileges. See "How to Exchange Your Shares" below. The income attributable to each class and the dividends payable on the shares of each class will be reduced by the amount of the distribution fee (if any) of each class. Class B and Class C shares bear the expenses of a higher distribution fee which will generally cause them to have higher expense ratios and to pay lower dividends than the Class A and Class Z shares.
Financial advisers and other sales agents who sell shares of the Fund will receive different compensation for selling Class A, Class B, Class C and Class Z shares and will generally receive more compensation initially for selling Class A and Class B shares than for selling Class C or Class Z shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS, (1) the length of time you expect to hold your investment, (2) the amount of any applicable sales charge (whether imposed at the time of purchase or redemption) and distribution-related fees, as noted above, (3) whether you qualify for any reduction or waiver of any applicable sales charge, (4) the various exchange privileges among the different classes of shares (see "How to Exchange Your Shares" below) and (5) the fact that Class B shares automatically convert to Class A shares approximately seven years after purchase (see "Conversion Feature-Class B Shares" below).
The following is provided to assist you in determining which method of purchase best suits your individual circumstances and is based on current fees and expenses being charged to the Fund:
If you intend to hold your investment in the Fund for less than 7 years and do not qualify for a reduced sales charge on Class A shares, since Class A shares are subject to a maximum initial sales charge of 5% and Class B shares are subject to a CDSC of 5% which declines to zero over a 6 year period, you should consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for 7 years or more and do not qualify for a reduced sales charge on Class A shares, since Class B shares convert to Class A shares approximately 7 years after purchase and because all of your money would be invested initially in the case of Class B shares, you should consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more advantageous for you to purchase Class A shares over either Class B or Class C shares regardless of how long you intend to hold your investment. However, unlike Class B and Class C shares, you would not have all of your money invested initially because the sales charge on Class A shares is deducted at the time of purchase.
If you do not qualify for a reduced sales charge on Class A shares and you purchase Class B or Class C shares, you would have to hold your investment for more than 6 years in the case of Class B and Class C shares for the higher cumulative annual distribution-related fees on those shares to exceed the initial sales charge plus cumulative annual distribution-related fees on Class A shares. This does not take into account the time value of money, which further reduces the impact of the higher Class B or Class C distribution-related fees on the investment, fluctuations in net asset value, the effect of the return on the investment over this period of time or redemptions when the CDSC is applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES UNLESS THE PURCHASER IS ELIGIBLE TO PURCHASE CLASS Z SHARES. See "Reduction and Waiver of Initial Sales Charges" and "Class Z Shares" below.
Class A Shares
The offering price of Class A shares for investors choosing the initial
sales charge alternative is the next determined NAV plus a sales charge
(expressed as a percentage of the offering price and of the amount invested) as
shown in the following table:
Sales Charge as Sales Charge as Dealer Concession
Percentage of Percentage of as Percentage of
Amount of Purchase Offering Price Amount Invested Offering Price
- ------------------ --------------- --------------- ----------------
Less than $25,000 ........ 5.00% 5.26% 4.75%
$25,000 to $49,999 ....... 4.50 4.71 4.25
$50,000 to $99,999 ....... 4.00 4.17 3.75
$100,000 to $249,999 ..... 3.25 3.36 3.00
$250,000 to $499,999 ..... 2.50 2.56 2.40
$500,000 to $999,999 ..... 2.00 2.04 1.90
$1,000,000 and above ..... None None None
|
The Distributor may reallow the entire initial sales charge to dealers. Selling dealers may be deemed to be underwriters, as that term is defined in the Securities Act.
In connection with the sale of Class A shares at NAV (without payment of an initial sales charge), the Manager, the Distributor or one of their affiliates will pay dealers, financial advisers and other persons which distribute shares a finders' fee based on a percentage of the net asset value of shares sold by such person.
Reduction and Waiver of Initial Sales Charges. Reduced sales charges are available through Rights of Accumulation and Letters of Intent. Shares of the Fund and shares of other Prudential Mutual Funds (excluding money market funds other than those acquired pursuant to the exchange privilege) may be aggregated to determine the applicable reduction. See "Purchase and Redemption of Fund Shares-Reduction and Waiver of Initial Sales Charges-Class A Shares" in the Statement of Additional Information.
Benefit Plans. Class A shares may be purchased at NAV, without payment of an initial sales charge, by pension, profit-sharing or other employee benefit plans qualified under Section 401 of the Internal Revenue Code and deferred compensation and annuity plans under Sections 457 and 403(b)(7) of the Internal Revenue Code (collectively, Benefit Plans), provided that the Benefit Plan has existing assets of at least $1 million invested in shares of Prudential Mutual Funds (excluding money market funds other than those acquired pursuant to the exchange privilege) or 250 eligible employees or participants. In the case of Benefit Plans whose accounts are held directly with the Transfer Agent or Prudential Securities and for which the Transfer Agent or Prudential Securities does individual account recordkeeping (Direct Account Benefit Plans) and Benefit Plans sponsored by PSI or its subsidiaries (PSI or Subsidiary Prototype Benefit Plans), Class A shares may be purchased at NAV by participants who are repaying loans made from such plans to the participant.
PruArray and SmartPath Plans. Class A shares may be purchased at NAV by certain savings, retirement and deferred compensation plans, qualified or non-qualified under the Internal Revenue Code, including pension, profit-sharing, stock-bonus or other employee benefit plans under Section 401 of the Internal Revenue Code and deferred compensation and annuity plans under Sections 457 and 403(b)(7) of the Internal Revenue Code that participate in the Transfer Agent's PruArray or SmartPath Programs (benefit plan recordkeeping services) (hereafter referred to as a PruArray or SmartPath Plan); provided that the plan has at least $1 million in existing assets or 250 eligible employees or participants. The term "existing assets" for this purpose includes stock issued by a PruArray or SmartPath Plan sponsor, shares of non-money market Prudential Mutual Funds and shares of certain unaffiliated non-money market mutual funds that participate in the PruArray or SmartPath Programs (Participating Funds). "Existing assets" also include shares of money market funds acquired by exchange from a Participating Fund, monies invested in The Guaranteed Interest Account (GIA), a group annuity insurance product issued by Prudential, and units of The Stable Value Fund (SVF), an unaffiliated bank collective fund. Class A shares may also be purchased at NAV by plans that have
monies invested in GIA and SVF, provided (i) the purchase is made with the proceeds of a redemption from either GIA or SVF and (ii) Class A shares are an investment option of the plan.
PruArray Association Benefit Plans. Class A shares are also offered at net asset value to Benefit Plans or non-qualified plans sponsored by employers which are members of a common trade, professional or membership association (Association) that participate in the PruArray Program, provided that the Association enters into a written agreement with Prudential. Such Benefit Plans or non-qualified plans may purchase Class A shares at net asset value without regard to the assets or number of participants in the individual employer's qualified Plan(s) or non-qualified Plans so long as the employers in the Association (i) have retirement plan assets in the aggregate of at least $1 million or 250 participants in the aggregate and (ii) maintain their accounts with the Fund's transfer agent.
PruArray Savings Program. Class A shares are also offered at net asset value to employees of companies that enter into a written agreement with Prudential Retirement Services to participate in the PruArray Savings Program. Under this Program, a limited number of Prudential Mutual Funds are available for purchase at net asset value by Individual Retirement Accounts and Savings Accumulation Plans of the company's employees. The Program is available only to (i) employees who open an IRA or Savings Accumulation Plan account with the Fund's transfer agent and (ii) spouses of employees who open an IRA account with the Fund's transfer agent. The program is offered to companies that have at least 250 eligible employees.
Special Rules Applicable to Retirement Plans. After a Benefit Plan or PruArray or SmartPath Plan qualifies to purchase Class A shares at NAV, all subsequent purchases will be made at NAV.
Other Waivers. In addition, Class A shares may be purchased at NAV, through
Prudential Securities or the Transfer Agent, by the following persons: (a)
officers and current and former Directors/Trustees of the Prudential Mutual
Funds (including the Fund), (b) employees of Prudential Securities and PMF and
their subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer Agent, (c)
employees of subadvisers of the Prudential Mutual Funds provided that purchases
at NAV are permitted by such person's employer, (d) Prudential, employees and
special agents of Prudential and its subsidiaries and all persons who have
retired directly from active service with Prudential or one of its subsidiaries,
(e) registered representatives and employees of dealers who have entered into a
selected dealer agreement with Prudential Securities, provided that purchases at
NAV are permitted by such person's employer and (f) investors who have a
business relationship with a financial adviser who joined Prudential Securities
from another investment firm, provided that (i) the purchase is made within 180
days of the commencement of the financial adviser's employment at Prudential
Securities, or within one year in the case of Benefit Plans, (ii) the purchase
is made with proceeds of a redemption of shares of any open-end, non-money
market fund sponsored by the financial adviser's previous employer (other than a
fund which imposes a distribution or service fee of .25 of 1% or less) and (iii)
the financial adviser served as the client's broker on the previous purchase.
You must notify the Transfer Agent either directly or through Prudential Securities or Prusec that you are entitled to the reduction or waiver of the sales charge. The reduction or waiver will be granted subject to confirmation of your entitlement. No initial sales charges are imposed upon Class A shares acquired upon the reinvestment of dividends and distributions. See "Purchase and Redemption of Fund Shares-Reduction and Waiver of Initial Sales Charges-Class A Shares" in the Statement of Additional Information.
Class B and Class C Shares
The offering price of Class B and Class C shares for investors choosing one of the deferred sales charge alternatives is the NAV per share next determined following receipt of an order by the Transfer Agent or Prudential Securities. Although there is no sales charge imposed at the time of purchase, redemptions of Class B and Class C shares may be subject to a CDSC. See "How to Sell Your Shares-Contingent Deferred Sales Charges." The Distributor will pay sales commissions of up to 4% of the purchase price of Class B shares to dealers, financial advisers and other persons who sell Class B shares at the time of sale from its own resources. This facilitates the ability of the Fund to sell the Class B
shares without an initial sales charge being deducted at the time of purchase. The Distributor anticipates that it will recoup its advancement of sales commissions from the combination of the CDSC and the distribution fee. See "How the Fund is Managed-Distributor." In connection with the sale of Class C shares, the Distributor will pay dealers, financial advisers and other persons which distribute Class C shares a sales commission of up to 1% of the purchase price at the time of the sale.
Class Z Shares
Class Z shares of the Fund are available for purchase by the following categories of investors:
(i) pension, profit-sharing or other employee benefit plans qualified under
Section 401 of the Internal Revenue Code, deferred compensation and annuity
plans under Sections 457 and 403(b)(7) of the Internal Revenue Code and
non-qualified plans for which the Fund is an available option (collectively,
Benefit Plans), provided such Benefit Plans (in combination with other plans
sponsored by the same employer or group of related employers) have at least $50
million in defined contribution assets; (ii) participants in any fee-based
program sponsored by Prudential Securities or its affiliates which includes
mutual funds as investment options and for which the Fund is an available
option; and (iii) investors who are, or have executed a letter of intent to
become, shareholders of any series of Prudential Dryden Fund (formerly The
Prudential Institutional Fund (Dryden Fund)) on or before one or more series of
Dryden Fund reorganized or who on that date had investments in certain products
for which Dryden Fund provided exchangeability. After a Benefit Plan qualifies
to purchase Class Z shares, all subsequent purchases will be for Class Z shares.
In connectlon with the sale of Class Z shares, the Manager, the Distributor or one of their affiliates may pay dealers, financial advisers and other persons which distribute shares a finders' fee based on a percentage of the net asset value of shares sold by such persons.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES AT ANY TIME FOR CASH AT THE NAV NEXT DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE TRANSFER AGENT OR PRUDENTIAL SECURITIES. See "How the Fund Values its Shares." In certain cases, however, redemption proceeds will be reduced by the amount of any applicable contingent deferred sales charge, as described below. See "Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM YOUR SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION
SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD
CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE
CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION
REQUEST TO BE PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION,
PARTNERSHIP, TRUST OR FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE
TRANSFER AGENT MUST BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All
correspondence and documents concerning redemptions should be sent to the Fund
in care of its Transfer Agent, Prudential Mutual Fund Services LLC, Attention:
Redemption Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a person other than the record owner, (c) are to be sent to an address other than the address on the Transfer Agent's records, or (d) are to be paid to a corporation, partnership, trust or fiduciary, the signature(s) on the redemption request and on the certificates, if any, or stock power must be guaranteed by an "eligible guarantor institution." An "eligible guarantor institution" includes any bank, broker, dealer or credit union. The Transfer Agent reserves the right to request additional information from, and make reasonable inquiries of, any eligible guarantor institution. For clients of Prusec, a signature guarantee may be obtained from the agency or office manager of most Prudential Insurance and Financial Services or Preferred Services offices. In the case of redemptions from a PruArray or SmartPath Plan, if the proceeds of the redemption are invested in another investment option of the plan in the name of the record holder and at the same address as reflected in the Transfer Agent's records, a signature guarantee is not required.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN REQUEST, EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH
PRUDENTIAL SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE
CREDITED TO YOUR PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE.
Such payment may be postponed or the right of redemption suspended at times (a)
when the New York Stock Exchange is closed for other than customary weekends and
holidays, (b) when trading on such Exchange is restricted, (c) when an emergency
exists as a result of which disposal by the Fund of securities owned by it is
not reasonably practicable or it is not reasonably practicable for the Fund
fairly to determine the value of its net assets, or (d) during any other period
when the SEC, by order, so permits, provided that applicable rules and
regulations of the SEC shall govern as to whether the conditions described in
(b), (c) or (d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR BY CERTIFIED OR OFFICIAL BANK CHECK.
Redemption in Kind. If the Board of Directors determines that it would be detrimental to the best interests of the remaining shareholders of the Fund to make payment wholly or partly in cash, the Fund may pay the redemption price in whole or in part by a distribution in kind of securities from the investment portfolio of the Fund, in lieu of cash, in conformity with applicable rules of the SEC. Securities will be readily marketable and will be valued in the same manner as a regular redemption. See "How the Fund Values its Shares." If your shares are redeemed in kind, you would incur transaction costs in converting the assets into cash. The Fund, however, has elected to be governed by Rule 18f-1 under the Investment Company Act, under which the Fund is obligated to redeem shares solely in cash up to the lesser of $250,000 or 1% of the net asset value of the Fund during any 90-day period for any one shareholder.
Involuntary Redemption. In order to reduce expenses of the Fund, the Board of Directors may redeem all of the shares of any shareholder, other than a shareholder which is an IRA or other tax-deferred retirement plan, whose account has a net asset value of less than $500 due to a redemption. The Fund will give such shareholders 60 days' prior written notice in which to purchase sufficient additional shares to avoid such redemption. No contingent deferred sales charge will be imposed on any such involuntary redemption.
90-day Repurchase Privilege. If you redeem your shares and have not previously exercised the repurchase privilege, you may reinvest any portion or all of the proceeds of such redemption in shares of the Fund at the NAV next determined after the order is received, which must be within 90 days after the date of the redemption. Any CDSC paid in connection with such redemption will be credited (in shares) to your account. If less than a full repurchase is made, the credit will be on a pro rata basis. You must notify the Fund's Transfer Agent, either directly or through Prudential Securities, at the time the repurchase privilege is exercised to adjust your account for the CDSC you previously paid. Thereafter, any redemptions will be subject to the CDSC applicable at the time of the redemption. See "Contingent Deferred Sales Charges" below. Exercise of the repurchase privilege may affect the federal tax treatment of any gain realized upon redemption. For more information on the rule which disallows a loss on the sale or exchange of shares of the Fund which are replaced, see "Taxes" in the Statement of Additional Information.
Contingent Deferred Sales Charges
Redemptions of Class B shares will be subject to a contingent deferred sales charge or CDSC declining from 5% to zero over a six-year period. Class C shares redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC will be deducted from the redemption proceeds and reduce the amount paid to you. The CDSC will be imposed on any redemption by you which reduces the current value of your Class B or Class C shares of the Fund to an amount which is lower than the amount of all payments by you for shares during the preceding six years, in the case of Class B shares, and one year, in the case of Class C shares. A CDSC will be applied on the lesser of the original purchase price or the current value of the shares being redeemed. Increases in the value of your shares or shares acquired through reinvestment of dividends or distributions are not subject to a CDSC. The amount of any CDSC will be paid to and retained by the Distributor. See "How the Fund is Managed-Distributor" and "Waiver of the Contingent Deferred Sales Charges-Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years from the time of payment for the purchase of shares until the time of redemption of such shares. Solely for purposes of determining the number of years from the time of any payment for the purchase of shares, all payments during a month will be aggregated and deemed to have been made on the last day of the month. The CDSC will be calculated from the first day of the month after the initial purchase, excluding the time shares were held in a money market fund. See "How to Exchange Your Shares" below.
The following table sets forth the rates of the CDSC applicable to redemptions of Class B shares:
Contingent Deferred
Sales
Charge as a Percentage
Year 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 ................................................ None
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In determining whether a CDSC is applicable to a redemption, the calculation will be made in a manner that results in the lowest possible rate. It will be assumed that the redemption is made first of amounts representing shares acquired pursuant to the reinvestment of dividends and distributions; then of amounts representing the increase in net asset value above the total amount of payments for the purchase of Fund shares made during the preceding six years (five years for shares purchased prior to January 22, 1990); then of amounts representing the cost of shares held beyond the applicable CDSC period; then of amounts representing the cost of shares acquired prior to July 1, 1985; and finally, of amounts representing the cost of shares held for the longest period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a cost of $1,000. Subsequently, you acquired 5 additional Class B shares through dividend reinvestment. During the second year after the purchase you decided to redeem $500 of your investment. Assuming at the time of the redemption the NAV had appreciated to $12 per share, the value of your Class B shares would be $1,260 (105 shares at $12 per share). The CDSC would not be applied to the value of the reinvested dividend shares and the amount which represents appreciation ($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would be charged at a rate of 4% (the applicable rate in the second year after purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain or increase the loss, as the case may be, on the amount recognized on the redemption of shares.
Waiver of the Contingent Deferred Sales Charges-Class B Shares. The CDSC will be waived in the case of a redemption following the death or disability of a shareholder or, in the case of a trust account, following the death or disability of the grantor. The waiver is available for total or partial redemptions of shares owned by a person, either individually or in joint tenancy (with rights of survivorship), at the time of death or initial determination of disability, provided that the shares were purchased prior to death or disability.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include: (i) in the case of a
tax-deferred retirement plan, a lump-sum or other distribution after retirement;
(ii) in the case of an IRA or Section 403(b) custodial account, a lump-sum or
other distribution after attaining age 59-1/2; and (iii) a tax-free return of an
excess contribution or plan distributions following the death or disability of
the shareholder, provided that the shares were purchased prior to death or
disability. The waiver
does not apply in the case of a tax-free rollover or transfer of assets, other than one following a separation from service (i.e., following voluntary or involuntary termination of employment or following retirement). Under no circumstances will the CDSC be waived on redemptions resulting from the termination of a tax-deferred retirement plan, unless such redemptions otherwise qualify for a waiver as described above. In the case of Direct Account and PSI or Subsidiary Prototype Benefit Plans, the CDSC will be waived on redemptions which represent borrowings from such plans. Shares purchased with amounts used to repay a loan from such plans on which a CDSC was not previously deducted will thereafter be subject to a CDSC without regard to the time such amounts were previously invested. In the case of a 401(k) plan, the CDSC will also be waived upon the redemption of shares purchased with amounts used to repay loans made from the account to the participant and from which a CDSC was previously deducted.
Systematic Withdrawal Plan. The CDSC will be waived (or reduced) on certain redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12% of the total dollar amount subject to the CDSC may be redeemed without charge.
In addition, the CDSC will be waived on redemptions of shares held by Directors of the Fund.
You must notify the Fund's Transfer Agent either directly or through Prudential Securities or Prusec, at the time of redemption, that you are entitled to waiver of the CDSC and provide the Transfer Agent with such supporting documentation as it may deem appropriate. The waiver will be granted subject to confirmation of your entitlement. See "Purchase and Redemption of Fund Shares-Waiver of the Contingent Deferred Sales Charge-Class B Shares" in the Statement of Additional Information.
A quantity discount may apply to redemptions of Class B shares purchased prior to August 1, 1994. See "Purchase and Redemption of Fund Shares-Quantity Discount-Class B Shares Purchased Prior to August 1, 1994" in the Statement of Additional Information.
Waiver of Contingent Deferred Sales Charges-Class C Shares. PruArray or SmartPath Plans. The CDSC will be waived on redemptions from certain qualified and non-qualified retirement and deferred compensation plans that participate in the Transfer Agent's PruArray and SmartPath Programs, provided that the investment options of the plan include shares of Prudential Mutual Funds and shares of non-affiliated mutual funds.
CONVERSION FEATURE-CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly basis approximately seven years after purchase. Conversions will be effected at relative net asset value without the imposition of any additional sales charge. The first conversion of Class B shares occurred in February 1995, when the conversion feature was first implemented.
Since the Fund tracks amounts paid rather than the number of shares bought on each purchase of Class B shares, the number of Class B shares eligible to convert to Class A shares (excluding shares acquired through the automatic reinvestment of dividends and other distributions) (the Eligible Shares) will be determined on each conversion date in accordance with the following formula: (i) the ratio of (a) the amounts paid for Class B shares purchased at least seven years prior to the conversion date to (b) the total amount paid for all Class B shares purchased and then held in your account (ii) multiplied by the total number of Class B shares purchased and then held in your account. Each time any Eligible Shares in your account convert to Class A shares, all shares or amounts representing Class B shares then in your account that were acquired through the automatic reinvestment of dividends and other distributions will convert to Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B shares in your account on any conversion date are the result of multiple purchases at different net asset values per share, the number of Eligible Shares calculated as described above will generally be either more or less than the number of shares actually purchased approximately 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 for Class B shares, the per share net asset value of the Class A shares may be higher than that of the Class B shares at the time of conversion. Thus, although the aggregate dollar value will be the same, you may receive fewer Class A shares than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all payments for Class B shares during a month will be deemed to have been made on the last day of the month, or for Class B shares acquired through exchange, or a series of exchanges, on the last day of the month in which the original payment for purchases of such Class B shares was made. For Class B shares previously exchanged for shares of a money market fund, the time period during which such shares were held in the money market fund will be excluded. For example, Class B shares held in a money market fund for one year will not convert to Class A shares until approximately eight years from purchase. For purposes of measuring the time period during which shares are held in a money market fund, exchanges will be deemed to have been made on the last day of the month. Class B shares acquired through exchange will convert to Class A shares after expiration of the conversion period applicable to the original purchase of such shares.
The conversion feature may be subject to the continuing availability of opinions of counsel or rulings of the Internal Revenue Service that (i) the dividends and other distributions paid on Class A, Class B, Class C and Class Z shares will not constitute "preferential dividends" under the Internal Revenue Code and (ii) the conversion of shares does not constitute a taxable event. The conversion of Class B shares into Class A shares may be suspended if such opinions or rulings are no longer available. If conversions are suspended, Class B shares of the Fund will continue to be subject, possibly indefinitely, to their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE FUND, YOU HAVE AN EXCHANGE PRIVILEGE WITH CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A, CLASS B, CLASS C AND CLASS Z SHARES OF THE FUND MAY BE EXCHANGED FOR CLASS A, CLASS B, CLASS C AND CLASS Z SHARES, RESPECTIVELY, OF ANOTHER FUND ON THE BASIS OF THE RELATIVE NAV. No sales charge will be imposed at the time of the exchange. Any applicable CDSC payable upon the redemption of shares exchanged will be calculated from the first day of the month after the initial purchase, excluding the time that shares were held in a money market fund. Class B and Class C shares may not be exchanged into money market funds other than the Prudential Special Money Market Fund. For purposes of calculating the holding period applicable to the Class B conversion feature, the time period during which Class B shares were held in a money market fund will be excluded. See "Conversion Feature-Class B Shares" above. An exchange will be treated as a redemption and purchase for tax purposes. See "Shareholder Investment Account-Exchange Privilege" in the Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund at (800) 225-1852 to execute a telephone exchange of shares, on weekdays, except holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your protection and to prevent fraudulent exchanges, your telephone call will be recorded and you will be asked to provide your personal identification number. A written confirmation of the exchange transaction will be sent to you. NEITHER THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the relative NAV of the two funds next determined after the request is received in good order. The Exchange Privilege is available only in states where the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE OF SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC AT THE ADDRESS NOTED ABOVE.
Special Exchange Privileges. A special exchange privilege is available for shareholders who qualify to purchase Class A shares at NAV (see "Alternative Purchase Plan-Class A Shares-Reduction and Waiver of Initial Sales Charges" above) and for shareholders who qualify to purchase Class Z shares (see "Alternative Purchase Plan-Class Z shares" above). Under this exchange privilege, amounts representing any Class B and Class C shares (which are not subject to a CDSC) held in such a shareholder's account will be automatically exchanged for Class A shares for shareholders who qualify to purchase Class A shares at NAV on a quarterly basis, unless the shareholder elects otherwise. Similarly, shareholders who qualify to purchase Class Z shares will have their Class B and Class C shares which are not subject to a CDSC and their Class A shares exchanged for Class Z shares on a quarterly basis. Eligibility for this exchange privilege will be calculated on the business day prior to the date of the exchange. Amounts representing Class B or Class C shares which are not subject to a CDSC include the following: (1) amounts representing Class B or Class C shares acquired pursuant to the automatic reinvestment of dividends and distributions, (2) amounts representing the increase in the net asset value above the total amount of payments for the purchase of Class B or Class C shares and (3) amounts representing Class B or Class C shares held beyond the applicable CDSC period. Class B and Class C shareholders must notify the Transfer Agent either directly or through Prudential Securities or Prusec that they are eligible for this special exchange privilege.
Participants in any fee-based program for which the Fund is an available option will have their Class A shares, if any, exchanged for Class Z shares when they elect to have those assets become a part of the fee-based program. Upon leaving the program (whether voluntarily or not), such Class Z shares (and, to the extent provided for in the program, Class Z shares acquired through participation in the program) will be exchanged for Class A shares at net asset value. Similarly, participants in PSI's 401(k) Plan for which the Fund's Class Z shares is an available option and who wish to transfer their Class Z shares out of the PSI 401(k) Plan following separation from service (i.e., voluntary or involuntary termination of employment or retirement) will have their Class Z shares exchanged for Class A shares at NAV.
The Fund reserves the right to reject any exchange order including exchanges (and market timing transactions) which are of size and/or frequency engaged in by one or more accounts acting in concert or otherwise, that have or may have an adverse effect on the ability of the Subadviser to manage the portfolio. The determination that such exchanges or activity may have an adverse effect and the determination to reject any exchange order shall be in the discretion of the Manager and the Subadviser.
The Exchange Privilege is not a right and may be suspended, modified or terminated on 60 days' notice to shareholders.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder of the Fund, you can take advantage of the following additional services and privileges:
* Automatic Reinvestment of Dividends and/or Distributions Without a Sales Charge. For your convenience, all dividends and distributions are automatically reinvested in full and fractional shares of the Fund at NAV without a sales charge. You may direct the Transfer Agent in writing not less than 5 full business days prior to the record date to have subsequent dividends and/or distributions sent in cash rather than reinvested. If you hold shares through Prudential Securities, you should contact your financial adviser.
* Automatic Savings Accumulation Plan (ASAP). Under ASAP, you may make regular purchases of the Fund's shares in amounts as little as $50 via an automatic debit to a bank account or Prudential Securities account (including a Command Account). For additional information about this service, you may contact your Prudential Securities financial adviser, Prusec representative or the Transfer Agent directly.
* Tax-Deferred Retirement Plans. Various tax-deferred retirement plans, including a 401(k) plan, self-directed individual retirement accounts and "tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code are
available through the Distributor. These plans are for use by both self-employed individuals and corporate employers. These plans permit either self-direction of accounts by participants, or a pooled account arrangement. Information regarding the establishment of these plans, the administration, custodial fees and other details is available from Prudential Securities or the Transfer Agent. If you are considering adopting such a plan, you should consult with your own legal or tax adviser with respect to the establishment and maintenance of such a plan.
* Systematic Withdrawal Plan. A systematic withdrawal plan is available to shareholders which provides for monthly or quarterly checks. Withdrawals of Class B and Class C shares may be subject to a CDSC. See "How to Sell Your Shares-Contingent Deferred Sales Charges" above.
* Reports to Shareholders. The Fund will send you annual and semi-annual reports. The financial statements appearing in annual reports are audited by independent accountants. In order to reduce duplicate mailing and printing expenses, the Fund will provide one annual and semi-annual shareholder report and prospectus per household. You may request additional copies of such reports by calling (800) 225-1852 or by writing to the Fund at Gateway Center Three, Newark, New Jersey 07102. In addition, monthly unaudited financial data is available upon request from the Fund.
* Shareholder Inquiries. Inquiries should be addressed to the Fund at Gateway Center Three, Newark, New Jersey 07102, or by telephone at (800) 225-1852 (toll-free) or, from outside the U.S.A., at (908) 417-7555 (collect).
For additional information regarding the services and privileges described above, see "Shareholder Investment Account" in the Statement of Additional Information.
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Fund at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
(left column)
Taxable Bond Funds
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
The BlackRock Government Income Trust
Tax-Exempt Bond Funds
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
Global Funds
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
The Global Government Plus Fund, Inc.
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.
(right column)
Equity Funds
Prudential Allocation Fund
Balanced Portfolio
Strategy Portfolio
Prudential Distressed Securities Fund, Inc.
Prudential Dryden Fund
Prudential Active Balanced Fund
Prudential Stock Index Fund
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Jennison Series Fund, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Multi-Sector Fund, Inc.
Prudential Small Companies Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
Money Market Funds
* Taxable Money Market Funds
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
* Tax-Free Money Market Funds
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
* Command Funds Command Money Fund Command Government Fund Command Tax-Free Fund
* Institutional Money Market Funds Prudential Institutional Liquidity Portfolio, Inc. Institutional Money Market Series
(left column)
No dealer, sales representative or any other person has been authorized to give any information or to make any representations, other than those contained in this Prospectus, in connection with the offer contained herein, and, if given or made, such other information or representations must not be relied upon as having been authorized by the Fund or the Distributor. This Prospectus does not constitute an offer by the Fund or by the Distributor to sell or a solicitation of an offer to buy any of the securities offered hereby in any jurisdiction to any person to whom it is unlawful to make such offer in such jurisdiction.
TABLE OF CONTENTS
Page
----
FUND Highlights ................................... 2
What are the Fund's Risk Factors and
Special Characteristics? ...................... 2
FUND EXPENSES ..................................... 4
FINANCIAL HIGHLIGHTS .............................. 5
HOW THE FUND INVESTS .............................. 9
Investment Objective and Policies ............... 9
Hedging and
Return Enhancement Strategies ................. 10
Other Investments and Policies .................. 14
Investment Restrictions ......................... 15
HOW THE FUND IS MANAGED ........................... 16
Manager ......................................... 16
Distributor ..................................... 16
Portfolio Transactions .......................... 18
Custodian and Transfer and
Dividend Disbursing Agent ..................... 18
HOW THE FUND VALUES ITS SHARES .................... 19
HOW THE FUND CALCULATES PERFORMANCE ............... 19
TAXES, DIVIDENDS AND DISTRIBUTIONS ................ 20
GENERAL INFORMATION ............................... 21
Description of Common Stock ..................... 21
Additional Information .......................... 22
SHAREHOLDER GUIDE ................................. 22
How to Buy Shares of the Fund ................... 22
Alternative Purchase Plan ....................... 23
How to Sell Your Shares ......................... 27
Conversion Feature - Class B Shares ............. 30
How to Exchange Your Shares ..................... 31
Shareholder Services ............................ 32
THE PRUDENTIAL MUTUAL FUND FAMILY ................. A-1
MF105A 440133D
- -------------------------------------------------------
Class A: 743911-208
Class B: 743911-109
CUSIP Nos.: Class C: 743911-307
Class Z: 443911-406
- -------------------------------------------------------
(right column)
Prudential
Utility Fund, Inc.
|
PROSPECTUS
March 5, 1997
PRUDENTIAL UTILITY FUND, INC.
Statement of Additional Information
March 5, 1997
Prudential Utility Fund, Inc. (the Fund), is an open-end, diversified, management investment company. Its investment objective is to seek total return through a combination of current income and capital appreciation. The Fund seeks to achieve its objective through investment in equity and debt securities of utility companies, which include electric, gas, gas pipeline, telephone, telecommunications, water, cable, airport, seaport and toll road companies. In normal circumstances, the Fund intends to invest at least 80% of its assets in such securities. It is anticipated that the Fund will invest primarily in common stocks of utility companies that the Subadviser believes have the potential for total return; however, the Fund may invest primarily in preferred stocks and debt securities of utility companies when it appears that the Fund will be better able to achieve its investment objective through investments in such securities, or when the Fund is temporarily in a defensive position. The remaining 20% of its assets may be invested in other securities, including stocks, debt obligations and money market instruments, as well as certain derivative instruments. Moreover, should extraordinary conditions affecting such sectors or securities markets as a whole warrant, the Fund may temporarily be primarily invested in money market instruments. There can be no assurance that the Fund's investment objective will be achieved. See "Investment Objective and Policies."
The Fund's address is Gateway Center Three, Newark, New Jersey 07102, 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 March 5, 1997, a copy of which may be obtained from the Fund upon request.
TABLE OF CONTENTS
Cross-reference
to page in
Page Prospectus
---- ---------------
General Information ...................................................................... B-2 20
Investment Objective and Policies ........................................................ B-2 9
Investment Restrictions .................................................................. B-11 15
Directors and Officers ................................................................... B-12 16
Manager .................................................................................. B-15 16
Distributor .............................................................................. B-17 16
Portfolio Transactions and Brokerage ..................................................... B-19 18
Purchase and Redemption of Fund Shares ................................................... B-20 22
Shareholder Investment Account ........................................................... B-23 22
Net Asset Value .......................................................................... B-27 19
Taxes .................................................................................... B-27 20
Performance Information .................................................................. B-28 19
Custodian and Transfer and Dividend Disbursing Agent and Independent Accountants ......... B-30 18
Financial Statements ..................................................................... B-31 -
Report of Independent Accountants ........................................................ B-42 -
Appendix I-General Investment Information ................................................ I-1 -
Appendix II-Historical Performance Data .................................................. II-1 -
Appendix III-Information Relating to The Prudential ...................................... III-1 -
- ------------------------------------------------------------------------------------------------------------------
MF105B
|
GENERAL INFORMATION
At a special meeting held on July 19, 1994, shareholders approved an amendment to the Fund's Articles of Incorporation to change the Fund's name from Prudential-Bache Utility Fund, Inc. to Prudential Utility Fund, Inc.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to seek total return through a combination of current income and capital appreciation. The Fund seeks to achieve its objective through investment in equity and debt securities of utility companies, which include electric, gas, gas pipeline, telephone, telecommunications, water, cable, airport, seaport and toll road companies. In normal circumstances, the Fund intends to invest at least 80% of its assets in such securities. There can be no assurance that the Fund's investment objective will be achieved. It is anticipated that the Fund will invest primarily in common stocks of utility companies that the Subadviser believes have the potential for total return; however, the Fund may invest primarily in preferred stocks and debt securities of utility companies when it appears that the Fund will be better able to achieve its investment objective through investments in such securities, or when the Fund is temporarily in a defensive position. The remaining 20% of its assets may be invested in other securities, including stocks, debt obligations and money market instruments, as well as certain derivative instruments. Moreover, should extraordinary conditions affecting such sectors or securities markets as a whole warrant, the Fund may temporarily be primarily invested in money market instruments. There can be no assurance that the Fund's investment objective will be achieved. See "How the Fund Invests-Investment Objective and Policies" in the Prospectus.
Borrowing
The Fund may borrow money for temporary, extraordinary or emergency purposes or for the clearance of transactions. Such borrowings may not exceed 20% of the value of the Fund's total assets when the loan is made. The Fund may pledge up to 20% of its total assets to secure such borrowings.
Options on Equity Securities
The Fund may purchase put options only on equity securities held in its portfolio and write call options on such securities only if they are covered, and such call options must remain covered so long as the Fund is obligated as a writer.
The Fund may purchase put and call options and write covered call options on equity securities traded on securities exchanges, on NASDAQ or in the over-the-counter market (OTC options).
The Fund may purchase and write put and call options on stock indices traded on securities exchanges, on NASDAQ or in the over-the-counter market.
Call Options on Stock. The Fund may, from time to time, write call options on its portfolio securities. The Fund may write only call options which are "covered," meaning that the Fund either owns the underlying security or has an absolute and immediate right to acquire that security, without additional consideration (or for additional consideration held in a segregated account by its Custodian), upon conversion or exchange of other securities currently held in its portfolio. In addition, the Fund will not permit the call to become uncovered prior to the expiration of the option or termination through a closing purchase transaction as described below. If the Fund writes a call option, the purchaser of the option has the right to buy (and the Fund has the obligation to sell) the underlying security at the exercise price throughout the term of the option. The amount paid to the Fund by the purchaser of the option is the "premium." The Fund's obligation to deliver the underlying security against payment of the exercise price would terminate either upon expiration of the option or earlier if the Fund were to effect a "closing purchase transaction" through the purchase of an equivalent option on an exchange. There can be no assurance that a closing purchase transaction can be effected.
The Fund would not be able to effect a closing purchase transaction after it had received notice of exercise. In order to write a call option, the Fund is required to comply with the rules of The Options Clearing Corporation and the various exchanges with respect to collateral requirements. The Fund may not purchase call options on individual stocks except in connection with a closing purchase transaction. It is possible that the cost of effecting a closing purchase transaction may be greater than the premium received by the Fund for writing the option.
Put Options on Stock. The Fund may also purchase put and call options. If the Fund purchases a put option, it has the option to sell a given security at a specified price at any time during the term of the option. If the Fund purchases a call option, it has the option to buy a security at a specified price at any time during the term of the option.
Purchasing put options may be used as a portfolio investment strategy when the investment adviser perceives significant short-term risk but substantial long-term appreciation for the underlying security. The put option acts as an insurance policy, as it protects against significant downward price movement while it allows full participation in any upward movement. If the Fund is holding a security which it feels has strong fundamentals, but for some reason may be weak in the near term, it may purchase a put on such security, thereby giving itself the right to sell such security at a certain strike price throughout the term of the option. Consequently, the Fund will exercise the put only if the price of such security falls below the strike price of the put. The difference
between the put's strike price and the market price of the underlying security on the date the Fund exercises the put, less transaction costs, will be the amount by which the Fund will be able to hedge against a decline in the underlying security. If during the period of the option the market price for the underlying security remains at or above the put's strike price, the put will expire worthless, representing a loss of the price the Fund paid for the put, plus transaction costs. If the price of the underlying security increases, the profit the Fund realizes on the sale of the security will be reduced by the premium paid for the put option less any amount for which the put may be sold prior to its expiration.
Stock Index Options
Except as described below, the Fund will write call options on indices only if on such date it holds a portfolio of stocks at least equal to the value of the index times the multiplier times the number of contracts. When the Fund writes a call option on a broadly-based stock market index, the Fund will segregate or put into escrow with its Custodian, or pledge to a broker as collateral for the option, any combination of cash, other liquid assets or "qualified securities" with a market value at the time the option is written of not less than 100% of the current index value times the multiplier times the number of contracts.
If the Fund has written an option on an industry or market segment index, it will segregate or put into escrow with its Custodian, or pledge to a broker as collateral for the option, one or more "qualified securities," all of which are stocks of issuers in such industry or market segment, with a market value at the time the option is written of not less than 100% of the current index value times the multiplier times the number of contracts.
If at the close of business on any day the market value of such qualified securities so segregated, escrowed or pledged falls below 100% of the current index value times the multiplier times the number of contracts, the Fund will so segregate, escrow or pledge an amount in cash, U.S. Government securities, equity securities or other liquid, unencumbered assets, equal in value to the difference. In addition, when the Fund writes a call on an index which is in-the-money at the time the call is written, the Fund will segregate with its Custodian or pledge to the broker as collateral cash, U.S. Government securities, equity securities or other liquid, unencumbered assets, marked-to-market daily, equal in value to the amount by which the call is in-the-money times the multiplier times the number of contracts. Any amount segregated pursuant to the foregoing sentence may be applied to the Fund's obligation to segregate additional amounts in the event that the market value of the qualified securities falls below 100% of the current index value times the multiplier times the number of contracts. A "qualified security" is an equity security which is listed on a securities exchange or listed on NASDAQ against which the Fund has not written a stock call option and which has not been hedged by the Fund by the sale of stock index futures. However, if the Fund holds a call on the same index as the call written where the exercise price of the call held is equal to or less than the exercise price of the call written or greater than the exercise price of the call written if the difference is maintained by the Fund in cash or other liquid assets in a segregated account with its Custodian, it will not be subject to the requirements described in this paragraph.
Futures Contracts and Options Thereon
Stock and Bond Index Futures. The Fund will purchase and sell stock and bond index futures contracts as a hedge against changes resulting from market conditions in the values of securities which are held in the Fund's portfolio or which it intends to purchase or when they are economically appropriate for the reduction of risks inherent in the ongoing management of the Fund or for return enhancement. In instances involving the purchase of stock or bond index futures contracts by the Fund, an amount of cash or other liquid assets equal to the market value of the futures contracts, will be deposited in a segregated account with the Fund's Custodian and/or in a margin account with a broker or futures commission merchant to collateralize the position and thereby insure that the use of such futures is unleveraged.
Pursuant to the requirements of the Commodity Exchange Act, all futures contracts and options thereon must be traded on an exchange. Therefore, as with exchange-traded options, a clearing corporation is technically the counterparty on every futures contract and option thereon.
Options on Stock and Bond Index Futures Contracts. In the case of options on stock or bond index futures, the holder of the option pays a premium and receives the right, upon exercise of the option at a specified price during the option period, to assume a position in a stock or bond index futures contract (a long position if the option is a call and a short position if the option is a put). If the option is exercised by the holder before the last trading day during the option period, the option writer delivers the futures position, as well as any balance in the writer's futures margin account, which represents the amount by which the market price of the stock or bond index 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 stock or bond index future. If it is exercised on the last trading day, the option writer delivers to the option holder cash in an amount equal to the difference between the option exercise price and the closing level of the relevant index on the date the option expires.
Limitations on the Purchase and Sale of Stock Options, Options on Indices, and Stock and Bond Index Futures and Options Thereon
Under regulations of the Commodity Exchange Act, investment companies registered under the Investment Company Act of 1940, as amended (the Investment Company Act), are exempt from the definition of "commodity pool operator", subject to compliance with certain conditions. The exemption is conditioned upon the Fund's purchasing and selling futures contracts and options thereon for bona fide hedging transactions, except that the Fund may purchase and sell futures and options thereon for any other purpose to the extent that the aggregate initial margin and option premiums do not exceed 5% of the liquidation value of the Fund's total assets.
Risks of Transactions in Stock Options. Writing of options involves the risk that there will be no market in which to effect a closing transaction. An exchange traded option may be closed out only on an exchange, board of trade or other trading facility which provides a secondary market for an option of the same series. Although the Fund will generally purchase or write only those exchange-traded options for which there appears to be an active secondary market, there is no assurance that a liquid secondary market on an exchange will exist for any particular option, or at any particular time, and for some options no secondary market on an exchange may exist. In such event it might not be possible to effect closing transactions in particular exchange-traded options, with the result that the Fund would have to exercise its options in order to realize any profit and would incur brokerage commissions upon the exercise of call options and upon the subsequent disposition of underlying securities acquired through the exercise of call options or upon the purchase of underlying securities for the exercise of put options. If the Fund as a covered call option writer is unable to effect a closing purchase transaction in a secondary market, it will not be able to sell the underlying security until the option expires or it delivers the underlying security upon exercise.
In the case of OTC options, it is not possible to effect a closing transaction in the same manner as exchange-traded options because a clearing corporation is not interposed between the buyer and seller of the option. 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 with which the Fund originally wrote the OTC option. Any such cancellation, if agreed to, may require the Fund to pay a premium to the counterparty. 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. Alternatively, the Fund could write an OTC call option to, in effect, close an existing OTC call option or write an OTC put option to close its position on an OTC put option. However, the Fund would remain exposed to each counterparty's credit risk on the put or call until such option is exercised or expires. There is no guarantee that the Fund will be able to write put or call options, as the case may be, that would effectively close an existing position. In the event of insolvency of the counterparty, the Fund may be unable to liquidate an OTC option.
The Fund may also purchase a "protective put," i.e., a put option acquired for the purpose of protecting a portfolio security from a decline in market value. In exchange for the premium paid for the put option, the Fund acquires the right to sell the underlying security at the exercise price of the put regardless of the extent to which the underlying security declines in value. The loss to the Fund is limited to the premium paid for, and transaction costs in connection with, the put plus the initial excess, if any, of the market price of the underlying security over the exercise price. However, if the market price of the security underlying the put rises, the profit the Fund realizes on the sale of the security will be reduced by the premium paid for the put option less any amount (net of transaction costs) for which the put may be sold. Similar principles apply to the purchase of puts on stock or bond indices in the over-the-counter market.
As discussed above, an OTC option is a direct contractual relationship with another party. Consequently, in entering into OTC options, the Fund will be exposed to the risk that the counterparty will default on, or be unable to complete, due to bankruptcy or otherwise, its obligation on the option. In such an event, the Fund may lose the benefit of the transaction. The value of an OTC option to the Fund is dependent upon the financial viability of the counterparty. If the Fund decides to enter into transactions in OTC options, the Subadviser will take into account the credit quality of counterparties in order to limit the risk of default by the counterparty.
The staff of the Securities and Exchange Commission (SEC) has taken the position that purchased OTC options and the assets used as "cover" for written OTC options are illiquid securities unless the Fund and the counterparty have provided for the Fund, at the Fund's election, to unwind the OTC option. The exercise of such an option ordinarily would involve the payment by the Fund of an amount designed to reflect the counterparty's economic loss from an early termination, but does allow the Fund to treat the assets used as "cover" as "liquid."
Risks of Options on Indices. The Fund's purchase and sale of options on indices will be subject to risks described above under "Risks of Transactions in Stock Options." In addition, the distinctive characteristics of options on indices create certain risks that are not present with stock options.
Because the value of an index option depends upon movements in the level of the index rather than the price of a particular security, whether the Fund will realize a gain or loss on the purchase or sale of an option on an index depends upon movements in the level of prices in the market in which the securities comprising the index are traded generally or in an industry or market segment rather than movements in the price of a particular security. Accordingly, successful use by the Fund of options on indices would be subject to the investment adviser's ability to predict correctly movements in the direction of the market generally or of a particular industry. This requires different skills and techniques than predicting changes in the price of individual securities. The investment adviser currently uses such techniques in conjunction with the management of other mutual funds.
Index prices may be distorted if trading of certain securities included in the index is interrupted. Trading in index options also may be interrupted in certain circumstances, such as if trading were halted in a substantial number of securities included in the index. If this occurred, the Fund would not be able to close out options which it had purchased or written and, if restrictions on exercise were imposed, may be unable to exercise an option it holds, which could result in substantial losses to the Fund. It is the Fund's policy to purchase or write options only on indices which include a number of securities sufficient to minimize the likelihood of a trading halt in the index, such as the S&P 100 or S&P 500 index option.
Although the markets for certain index option contracts have developed rapidly, the markets for other index options are still relatively illiquid. The ability to establish and close out positions on such options will be subject to the development and maintenance of a liquid secondary market. It is not certain that this market will develop in all index option contracts. The Fund will not purchase or sell any index option contract unless and until, in the investment adviser's opinion, the market for such options has developed sufficiently that the risk in connection with these transactions is no greater than the risk in connection with options on stocks.
Special Risks of Writing Calls on Indices. Because exercises of index options are settled in cash, a call writer such as the Fund cannot determine the amount of its settlement obligations in advance and, unlike call writing on specific stocks, cannot provide in advance for, or cover, its potential settlement obligations by acquiring and holding the underlying securities. However, the Fund will write call options on indices only under the circumstances described above under "Stock Index Options."
Price movements in the Fund's portfolio probably will not correlate precisely with movements in the level of a particular index and, therefore, the Fund bears the risk that the price of the securities held by the Fund may not increase as much as the index. In such an event, the Fund would bear a loss on the call which is not completely offset by movements in the price of the Fund's portfolio. It is also possible that the index may rise when the price of the Fund's portfolio does not rise. If this occurred, the Fund would experience a loss on the call which is not offset by an increase in the value of its portfolio and might also experience a loss in its portfolio. However, because the value of a diversified portfolio will, over time, tend to move in the same direction as the market, movements in the value of the Fund in the opposite direction as the market would be likely to occur for only a short period or to a small degree.
Unless the Fund has other liquid assets which are sufficient to satisfy the exercise of a call, the Fund would be required to liquidate portfolio securities in order to satisfy the exercise. Because an exercise must be settled within hours after receiving the notice of exercise, if the Fund fails to anticipate an exercise, it may have to borrow from a bank (in amounts not exceeding 20% of the Fund's total assets) pending settlement of the sale of securities in its portfolio and would incur interest charges thereon.
When the Fund has written a call, there is also a risk that the market may decline between the time the Fund has a call exercised against it, at a price which is fixed as of the closing level of the index on the date of exercise, and the time the Fund is able to sell securities in its portfolio. As with stock options, the Fund will not learn that an index option has been exercised until the day following the exercise date but, unlike a call on stock where the Fund would be able to deliver the underlying securities in settlement, the Fund may have to sell part of its portfolio in order to make settlement in cash, and the price of such securities might decline before they can be sold. This timing risk makes certain strategies involving more than one option substantially more risky with index options than with stock or bond options. For example, even if an index call which the Fund has written is "covered" by an index call held by the Fund with the same strike price, the Fund will bear the risk that the level of the index may decline between the close of trading on the date the exercise notice is filed with the clearing corporation and the close of trading on the date the Fund exercises the call it holds or the time the Fund sells the call which in either case would occur no earlier than the day following the day the exercise notice was filed.
Special Risks of Purchasing Puts and Calls on Indices. If the Fund holds an index option and exercises it before final determination of the closing index value for that day, it runs the risk that the level of the underlying index may change before closing. If such a change causes the exercised option to fall out-of-the-money, the Fund will be required to pay the difference between the closing index value and the exercise price of the option (times the applicable multiple) to the assigned writer. Although the Fund may be able to minimize this risk by withholding exercise instructions until just before the daily cutoff time or by selling rather than exercising an option when the index level is close to the exercise price, it may not be possible to eliminate this risk entirely because the cutoff times for index options may be earlier than those fixed for other types of options and may occur before definitive closing index values are announced.
Risks of Transactions in Options on Stock and Bond Index Futures. There are several risks in connection with the use of options on stock and bond index futures contracts as a hedging device. The correlation between the price of the futures contract and the movements in the index may not be perfect. Therefore, a correct forecast of interest rates and other factors affecting markets for securities may still not result in a successful hedging transaction.
Futures prices often are extremely volatile so successful use of options on stock or bond index futures contracts by the Fund is also subject to the ability of the Fund's investment adviser to predict correctly movements in the direction of markets, changes in supply and demand, interest rates, international political and economic policies, and other factors affecting the stock and bond markets generally. For example, if the Fund has hedged against the possibility of a decrease in an index which would adversely affect the price of securities in its portfolio and the price of such securities increases instead, then 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 need to sell securities to meet such requirements at a time when it is disadvantageous to do so. Such sales of securities may be, but will not necessarily be, at increased prices which reflect the rising market.
The hours of trading of options on stock or bond index futures contracts may not conform to the hours during which the Fund may trade the underlying securities. To the extent the futures markets close before the securities markets, significant price and rate movements can take place in the securities markets that cannot be reflected in the futures markets.
Options on stock and bond index futures contracts are highly leveraged and the specific market movements of the contract underlying an option cannot be predicted. Options on futures must be bought and sold on exchanges. Although the exchanges provide a means of selling an option previously purchased or of liquidating an option previously written by an offsetting purchase, there can be no assurance that a liquid market will exist for a particular option at a particular time. If such a market does not exist, the Fund, as the holder of an option on futures contracts, would have to exercise the option and comply with the margin requirements for the underlying futures contract to realize any profit, and if the Fund were the writer of the option, its obligation would not terminate until the option expired or the Fund was assigned an exercise notice.
Forward Foreign Currency Exchange Contracts
Since investments in foreign companies will usually involve currencies of foreign countries, and since the Fund may hold funds in bank deposits in foreign currencies, the value of the assets of the Fund as measured in U.S. dollars may be affected favorably or unfavorably by changes in foreign currency rates and exchange control regulations, and the Fund may incur costs in connection with conversions between various currencies. The Fund will conduct its foreign currency exchange transactions on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency exchange market, or through entering into forward contracts to purchase or sell foreign currencies. A forward foreign currency exchange contract involves an obligation to purchase or sell a specific 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 of the contract. A forward contract generally has no deposit requirement, and no commissions are charged at any stage for such trades.
Forward foreign currency exchange contracts are traded in the interbank market conducted directly between currency traders (usually large commercial banks) and their customers. They are not traded on exchanges regulated by the CFTC or SEC. As a result, many of the protections afforded to exchange participants will not be available.
The Fund may enter into forward foreign currency exchange contracts in several circumstances. When the Fund enters into a contract for the purchase or sale of a security denominated in a foreign currency, or when the Fund anticipates the receipt in a foreign currency of dividends or interest payments on a security which it holds, the Fund may desire to "lock-in" the U.S. dollar price of the security or the U.S. dollar equivalent of such dividend or interest payment, as the case may be. By entering into a forward contract for a fixed amount of dollars for the purchase or sale of the amount of foreign currency involved in the underlying transactions, the Fund will be able to protect itself against a possible loss resulting from an adverse change in the relationship between the U.S. dollar and the subject foreign currency during the period between the date on which the security is purchased or sold, or on which the dividend or interest payment is declared, and the date on which such payments are made or received.
Additionally, when the investment adviser believes that the currency of a particular foreign country may suffer a substantial decline against the U.S. dollar, the Fund may enter into a forward contract for a fixed amount of dollars, to sell the amount of foreign currency approximating the value of some or all of the Fund's portfolio securities denominated in such foreign currency. The precise matching of the forward contract amounts and the value of the securities involved will not generally be possible since the future value of securities in foreign currencies will change as a consequence of market movements in the value of those securities between the date on which the forward contract is entered into and the date it matures. The projection of short-term currency market movement is extremely difficult and the successful execution of a short-term hedging strategy is highly uncertain. The Fund will not enter into such forward contracts or maintain a net exposure to such contracts where the
consummation of the contracts would obligate the Fund to deliver an amount of foreign currency in excess of the value of the Fund's portfolio securities or other assets denominated in that currency. Under normal circumstances, consideration of the prospect for currency parities will be incorporated into the long-term investment decisions made with regard to overall diversification strategies. However, the Fund believes that it is important to have the flexibility to enter into such forward contracts when it determines that the best interests of the Fund will thereby be served. If the Fund enters into a position hedging transaction, the transaction will be covered by the position being hedged, or the Fund's Custodian will place cash, U.S. Government securities, equity securities or other liquid, unencumbered assets into a segregated account of the Fund (less the value of the "covering" positions, if any) in an amount equal to the value of the Fund's total assets committed to the consummation of the given forward contract. The assets placed in the segregated account will be marked-to-market daily, and if the value of the securities placed in the segregated account declines, additional cash or securities will be placed in the account so that the value of the account will equal the amount of the Fund's net commitments with respect to such contracts.
The Fund generally will not enter into a forward contract with a term of greater than one year. At the maturity of a forward contract, the Fund may either sell the portfolio security and make delivery of the foreign currency, or it may retain the security and terminate its contractual obligation to deliver the foreign currency by purchasing an "offsetting" contract with the same currency trader obligating it to purchase, on the same maturity date, the same amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of a particular portfolio security at the expiration of the contract. Accordingly, it may be necessary for the Fund to purchase additional foreign currency on the spot market (and bear the expense of such purchase) if the market value of the security is less than the amount of foreign currency that the Fund is obligated to deliver and if a decision is made to sell the security and make delivery of the foreign currency.
If the Fund retains the portfolio security and engages in an offsetting transaction, the Fund will incur a gain or a loss (as described below) to the extent that there has been movement in forward contract prices. Should forward prices decline during the period between the Fund's entering into a forward contract for the sale of a foreign currency and the date it enters into an offsetting contract for the purchase of the foreign currency, the Fund will realize a gain to the extent that the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to purchase. Should forward contract prices increase, the Fund will suffer a loss to the extent that the price of the currency it has agreed to purchase exceeds the price of the currency it has agreed to sell.
The Fund's dealing in forward foreign currency exchange contracts will be limited to the transactions described above. Of course, the Fund is not required to enter into such transactions with regard to its foreign currency-denominated securities. It also should be realized that this method of protecting the value of the Fund's portfolio securities against a decline in the value of a currency does not eliminate fluctuations in the underlying prices of the securities which are unrelated to exchange rates. It simply establishes a rate of exchange which one can achieve at some future point in time. Additionally, although such contracts tend to minimize the risk of loss due to a decline in the value of the hedged currency, at the same time, they tend to limit any potential gain which might result should the value of such currency increase. The Fund's ability to enter into forward foreign currency exchange contracts may be limited by certain requirements for qualification as a regulated investment company under the Internal Revenue Code. See "Taxes."
Although the Fund values its assets daily in terms of U.S. dollars, it does not intend physically to convert its holdings of foreign currencies into U.S. dollars on a daily basis. It will do so from time to time, and investors should be aware of the costs of currency conversion. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based on the difference (the spread) between the prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at one rate, while offering a lesser rate of exchange should the Fund desire to resell that currency to the dealer.
Options on Foreign 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 over-the-counter markets or by writing put options or covered call options on currencies. A put option gives the Fund the right to sell 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.
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 currrency 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.
Risk of Transactions in Exchange Traded Options
An option position may be closed out only on an exchange, board of trade or other trading facility which provides a secondary market for an option of the same series. Although the Fund will generally purchase or write only those options for which there appears to be an active secondary market, there is no assurance that a liquid secondary market on an exchange will exist for any particular option, or at any particular time, and for some options no secondary market on an exchange or otherwise may exist. In such event it might not be possible to effect closing transactions in particular options, with the result that the Fund would have to exercise its options in order to realize any profits and would incur brokerage commissions upon the exercise of call options and upon the subsequent disposition of underlying currencies acquired through the exercise of call options or upon the purchase of underlying currencies for the exercise of put options. If the Fund, as a covered call option writer, is unable to effect a closing purchase transaction in a secondary market, it will not be able to sell the underlying currency until the option expires or it delivers the underlying currency upon exercise.
Reasons for the absence of a liquid secondary market on an exchange include the following: (i) there may be insufficient trading interest in certain options; (ii) restrictions may be imposed by an exchange on opening transactions or closing transactions or both; (iii) trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options; (iv) unusual or unforeseen circumstances may interrupt normal operations on an exchange; (v) the facilities of an exchange or a clearing corporation may not at all times be adequate to handle current trading or volume; or (vi) one or more exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options), in which event the secondary market on that exchange (or in the class or series of options) would cease to exist, although outstanding options on that exchange that had been issued by a clearing corporation as a result of trades on that exchange would continue to be exercisable in accordance with their terms. There is no assurance that higher than anticipated trading activity or other unforeseen events might not, at times, render certain of the facilities of any of the clearing corporations inadequate, and thereby result in the institution by an exchange of special procedures which may interfere with the timely execution of customers' orders. The Fund intends to purchase and sell only those options which are cleared by a clearinghouse whose facilities are considered to be adequate to handle the volume of options transactions.
Risks of Options on Foreign Currencies
Options on foreign currencies involve the currencies of two nations and, therefore, developments in either or both countries can affect the values of options on foreign currencies. Risks include those described in the Prospectus under "How the Fund Invests -Hedging and Return Enhancement Strategies," including government actions affecting currency valuation and the movements of currencies from one country to another. The quantity of currency underlying option contracts represents odd lots in a market dominated by transactions between banks; this can mean extra transaction costs upon exercise. Options markets may be closed while round-the-clock interbank currency markets are open. This can create price and rate discrepancies.
Risks of Transactions in Futures Contracts on Foreign Currencies
There are several risks in connection with the use of futures contracts as a hedging device. Due to the imperfect correlation between the price of futures contracts and movements in the currency or group of currencies, the price of a futures contract may move more or less than the price of the currencies being hedged. Therefore, a correct forecast of currency rates, market trends or international political trends by the Manager or Subadviser may still not result in a successful hedging transaction.
Although the Fund will purchase or sell futures contracts only on exchanges where there appears to be an adequate secondary market, there is no assurance that a liquid secondary market on an exchange will exist for any particular contract or at any particular time. Accordingly, there can be no assurance that it will be possible, at any particular time, to close a futures position. In the event the Fund could not close a futures position and the value of such position declined, the Fund would be required to continue to make daily cash payments of variation margin. There is no guarantee that the price movements of the portfolio securities denominated in foreign currencies will, in fact, correlate with the price movements in the futures contracts and thus provide an offset to losses on a futures contract. Currently, futures contracts are available on the Australian Dollar, British Pound, Canadian Dollar, French Franc, Japanese Yen, Swiss Franc, German Mark and Eurodollar.
Successful use of futures contracts by the Fund is also subject to the ability of the Fund's Manager or Subadviser to predict correctly movements in the direction of markets and other factors affecting currencies generally. For example, if the Fund has
hedged against the possibility of an increase in 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 need 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.
The hours of trading of futures contracts may not conform to the hours during which the Fund may trade the underlying securities. To the extent that the futures markets close before the securities markets, significant price and rate movements can take place in the securities markets that cannot be reflected in the futures markets.
Options on Futures Contracts on Foreign Currencies
An option on a futures contract gives the purchaser the right, but not the obligation, 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 an offsetting futures position (a short position if the option is a call and a long 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. Currently options are available with futures contracts on the Australian Dollar, British Pound, Canadian Dollar, French Franc, Japanese Yen, Swiss Franc, German Mark and Eurodollar.
The holder or writer of an option may terminate its position by selling or purchasing an option of the same series. There is no guarantee that such closing transactions can be effected.
Limitations on Purchase and Sale of Options on Foreign Currencies and Futures Contracts on Foreign Currencies
The Fund will write put options on foreign currencies and futures contracts on foreign currencies only if they are covered by segregating with the Fund's Custodian an amount of cash or other liquid assets equal to the aggregate exercise price of the puts.
The Fund intends to engage in futures contracts and options on futures contracts as a hedge against changes in the value of the currencies to which the Fund is subject or to which the Fund expects to be subject in connection with futures purchases. The Fund also intends to engage in such transactions when they are economically appropriate for the reduction of risks inherent in the ongoing management of the Fund.
Position Limits
Transactions by the Fund in futures contracts and options will be subject to limitations, if any, established by each of the exchanges, boards of trade or other trading facilities (including NASDAQ) governing the maximum number of options in each class which may be written or purchased by a single investor or group of investors acting in concert, regardless of whether the options are written on the same or different exchanges, boards of trade or other trading facilities or are held or written in one or more accounts or through one or more brokers. Thus, the number of futures contracts and options which the Fund may write or purchase may be affected by the futures contracts and options written or purchased by other investment advisory clients of the investment adviser. An exchange, board of trade or other trading facility may order the liquidation of positions found to be in excess of these limits, and it may impose certain other sanctions.
Repurchase Agreements
The Fund may, on occasion, enter into repurchase agreements, wherein the seller agrees to repurchase a security from the Fund at a mutually agreed-upon time and price. The period of maturity is usually quite short, possibly overnight or a few days, although it may extend over a number of months. The resale price is in excess of the purchase price, reflecting an agreed-upon rate of return effective for the period of time the Fund's money is invested in the security. The Fund's repurchase agreements will at all times be fully collateralized in an amount at least equal to the purchase price, including accrued interest earned on the underlying securities. The instruments held as collateral are valued daily, and if the value of instruments declines, the Fund will require additional collateral. If the seller defaults and the value of the collateral securing the repurchase agreement declines, the Fund may incur a loss. The Fund participates in a joint repurchase account with other investment companies managed by Prudential Mutual Fund Management LLC (PMF) pursuant to an order of the SEC.
Defensive Strategy
When conditions dictate a defensive strategy, the Fund may invest in money market instruments, including commercial paper of domestic corporations, certificates of deposit, bankers' acceptances and other obligations of domestic banks (including foreign branches), and obligations issued or guaranteed by the U.S. Government, its instrumentalities or its agencies. Investments in foreign branches of domestic banks may be subject to certain risks, including future political and economic developments, the possible imposition of withholding taxes on interest income, the seizure or nationalization of foreign deposits and foreign exchange controls or other restrictions. The Fund may also invest in short-term municipal obligations, such as tax, bond and revenue anticipation notes, construction loan and project financing notes and tax-exempt commercial paper. When cash may be available only for a few days, it may be invested by the Fund in repurchase agreements until such time as it may otherwise be invested or used for payment of obligations of the Fund. See "Repurchase Agreements" above.
Portfolio Turnover
The Fund expects that its portfolio turnover rate may exceed 100%, although such rate is not expected to exceed 200%. The portfolio's turnover rate is computed by dividing the lesser of portfolio purchases or sales (excluding all securities whose maturities at acquisition were one year or less) by the average value of the portfolio. High portfolio turnover involves correspondingly greater brokerage commissions and other transaction costs, which are borne directly by the Fund.
Lending of Securities
Consistent with applicable regulatory requirements, the Fund may lend its portfolio securities to brokers, dealers and financial institutions, provided that outstanding loans do not exceed in the aggregate 33% of the value of the Fund's total assets and provided that such loans are callable at any time by the Fund and are at all times secured by cash or equivalent collateral that is equal to at least the market value, determined daily, of the loaned securities. The advantage of such loans is that the Fund continues to receive payments in lieu of the interest and dividends on the loaned securities, while at the same time earning interest either directly from the borrower or on the collateral which will be invested in short-term obligations.
A loan may be terminated by the borrower on one business day's notice or by the Fund at any time. If the borrower fails to maintain the requisite amount of collateral, the loan automatically terminates, and the Fund could use the collateral to replace the securities while holding the borrower liable for any excess of replacement cost over collateral. As with any extensions of credit, there are risks of delay in recovery and in some cases loss of rights in the collateral should the borrower of the securities fail financially. However, these loans of portfolio securities will only be made to firms determined to be creditworthy pursuant to procedures approved by the Board of Directors of the Fund. On termination of the loan, the borrower is required to return the securities to the Fund, and any gain or loss in the market price during the loan would inure to the Fund.
Since voting or consent rights which accompany loaned securities pass to the borrower, the Fund will follow the policy of calling the loan, in whole or in part as may be appropriate, to permit the exercise of such rights if the matters involved would have a material effect on the Fund's investment in the securities which are the subject of the loan. The Fund will pay reasonable finders', administrative and custodial fees in connection with a loan of its securities or may share the interest earned on collateral with the borrower.
Illiquid Securities
The Fund may not hold more than 10% of its net assets in repurchase agreements which have a maturity of longer than seven days or in other illiquid securities, including securities that are illiquid by virtue of the absence of a readily available market (either within or outside of the United States) or legal or contractual restrictions on resale. Historically, illiquid securities have included securities subject to contractual or legal restrictions on resale because they have not been registered under the Securities Act of 1933, as amended (Securities Act), securities which are otherwise not readily marketable and repurchase agreements having a maturity of longer than seven days. Securities which have not been registered under the Securities Act are referred to as private placements or restricted securities and are purchased directly from the issuer or in the secondary market. Mutual funds do not typically hold a significant amount of restricted or other illiquid securities because of the potential for delays on resale and uncertainty in valuation. Limitations on resale may have an adverse effect on the marketability of portfolio securities and a mutual fund might be unable to dispose of restricted or other illiquid securities promptly or at reasonable prices and might thereby experience difficulty satisfying redemptions within seven days. A mutual fund might also have to register such restricted securities in order to dispose of them, resulting in additional expense and delay. Adverse market conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed for certain securities that are not registered under the Securities Act including repurchase agreements, commercial paper, foreign securities, municipal securities, convertible securities and corporate bonds and notes. Institutional investors depend on an efficient institutional market in which the unregistered security can be readily resold or on an issuer's ability to honor a demand for repayment. The fact that there are contractual or legal restrictions on resale to the general public or to certain institutions may not be indicative of the liquidity of such investments.
Rule 144A under the Securities Act allows for a broader institutional trading market for securities otherwise subject to restriction on resale to the general public. Rule 144A establishes a "safe harbor" from the registration requirements of the Securities Act for resales of certain securities to qualified institutional buyers. The investment adviser anticipates that the market for certain restricted securities such as institutional commercial paper and foreign previously government-owned utility company 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 investment adviser will monitor the liquidity of such restricted securities subject to the supervision of the Board of Directors. In reaching liquidity decisions, the investment adviser will consider, inter alia, the following factors: (1) the frequency of trades and quotes for the security; (2) the number of dealers wishing to purchase or sell the security and the number of other potential purchasers; (3) dealer undertakings to make a market in the security; and (4) the nature of the security and the nature of the marketplace trades (e.g., the time needed to dispose of the security, the method of soliciting offers and the mechanics of the transfer). In addition, in order for commercial paper that is issued in reliance on Section 4(2) of the Securities Act to be considered liquid, (i) it must be rated in one of the two highest rating categories by at least two nationally recognized statistical rating organizations (NRSRO), or if only one NRSRO rates the securities, by that NRSRO, or, if unrated, be of comparable quality in the view of the investment adviser; and (ii) it must not be "traded flat" (i.e., without accrued 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.
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. Fundamental policies are those which cannot be changed without the approval of the holders of a majority of the Fund's outstanding voting securities. A "majority of the Fund's outstanding voting securities," when used in this Statement of Additional Information, means the lesser of (i) 67% of the voting shares represented at a meeting at which more than 50% of the outstanding voting shares are present in person or represented by proxy or (ii) more than 50% of the outstanding voting shares.
The Fund may not:
1. Purchase any security (other than obligations of the U.S. Government, its agencies, or instrumentalities) if as a result with respect to 75% of the Fund's total assets, more than 5% of the Fund's total assets (taken at current value) would then be invested in securities of a single issuer; the Fund will concentrate its investments in utility stocks as described under "Investment Objective and Policies."
2. Purchase securities on margin (but the Fund may obtain such short-term credits as may be necessary for the clearance of transactions); the deposit or payment by the Fund of initial or maintenance margin in connection with options, futures contracts, options on futures contracts, forward foreign currency exchange contracts or options on currencies is not considered the purchase of a security on margin.
3. Make short sales of securities or maintain a short position, unless at all times when a short position is open it owns an equal amount of such securities or securities convertible into or exchangeable, without payment of any further consideration, for securities of the same issue as, and equal in amount to, the securities sold short, and unless not more than 25% of the Fund's net assets (taken at current value) is held as collateral for such sales at any one time.
4. Issue senior securities, borrow money or pledge its assets, except that the Fund may borrow up to 20% of the value of its total assets (calculated when the loan is made) for temporary, extraordinary or emergency purposes or for the clearance of transactions. The Fund may pledge up to 20% of the value of its total assets to secure such borrowings. For purposes of this restriction, obligations of the Fund to Directors pursuant to deferred compensation arrangements, the purchase and sale of securities on a when-issued or delayed delivery basis, the purchase and sale of options, futures contracts, options on futures contracts, forward foreign currency exchange contracts and options on currencies and collateral arrangements with respect to the purchase and sale of options, futures contracts, options on futures contracts, forward foreign currency exchange contracts and options on currencies are not deemed to be the issuance of a senior security or the pledge of assets.
5. Purchase any security if as a result the Fund would then hold more than 10% of the outstanding voting securities of an issuer.
6. Purchase any security if as a result the Fund would then have more than 5% of its total assets (taken at current value) invested in securities of companies (including predecessors) less than three years old.
7. Buy or sell commodities or commodity contracts, or real estate or interests in real estate, except that the Fund may purchase and sell options, futures contracts, options on futures contracts, forward foreign currency exchange contracts and options on currencies and securities which are secured by real estate and securities of companies which invest or deal in real estate.
8. Act as underwriter except to the extent that, in connection with the disposition of portfolio securities, it may be deemed to be an underwriter under certain federal securities laws.
9. Make investments for the purpose of exercising control or management.
10. Invest in securities of other investment companies, except by purchases in the open market involving only customary brokerage commissions and as a result of which not more than 5% of its total assets (taken at current value) would be invested in such securities, or except as part of a merger, consolidation or other acquisition.
11. Invest in interests in oil, gas or other mineral exploration or development programs, although it may invest in the common stocks of companies which invest in or sponsor such programs.
12. Make loans, except through (i) the purchase of bonds, debentures, commercial paper, corporate notes and similar evidences of indebtedness of a type commonly sold privately to financial institutions, (ii) the lending of its portfolio securities, as described under "Investment Objective and Policies-Lending of Securities" and (iii) repurchase agreements. (The purchase of a portion of an issue of securities described under (i) above distributed publicly, whether or not the purchase is made on the original issuance, is not considered the making of a loan.)
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's policy with respect to put and call options is not a fundamental policy and may be changed without shareholder approval. See "Investment Objective and Policies."
It is also a policy of the Fund, which may be changed without shareholder approval, not to purchase any voting security of any electric or gas utility company (as defined by the Public Utility Holding Company Act of 1935) if as a result the Fund would then hold 5% or more of the outstanding voting securities of such company.
DIRECTORS AND OFFICERS
Position with Principal Occupations
Name, Address and Age(1) the Fund During Past 5 Years
- ------------------------ -------------- ----------------------
Edward D. Beach (72) ............. Director President and Director of BMC Fund, Inc., a closed-end investment
company; prior thereto, Vice Chairman of Broyhill Furniture
Industries, Inc.; Certified Public Accountant; Secretary and
Treasurer of Broyhill Family Foundation, Inc.; Member of the Board
of Trustees of Mars Hill College; Director of The High Yield
Income Fund, Inc.
Delayne Dedrick Gold (58) ........ Director Marketing and Management Consultant; Director of The High Yield
Income Fund, Inc.
*Robert F. Gunia (50) ............ Director Comptroller (since May 1996) of Prudential Investments; Executive
Vice President and Treasurer (since December 1996), Prudential Mutual
Fund Management LLC (PMF); 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.
Donald D. Lennox (78) ............ Director Chairman (since February 1990) and Director (since April 1989) of
International Imaging Materials, Inc.; Retired Chairman, Chief
Executive Officer and Director of Schlegel Corporation (industrial
manufacturing) (March 1987-February 1989); Director of Gleason
Corporation, Personal Sound Technologies, Inc. and The High Yield
Income Fund, Inc.
|
Position with Principal Occupations
Name, Address and Age(1) the Fund During Past 5 Years
- ------------------------ -------------- ----------------------
Douglas H. McCorkindale (57) ..... Director Vice Chairman, Gannett Co. Inc. (publishing and media) (since
March 1984); Director of Gannett Co. Inc., Frontier Corporation
and Continental Airlines, Inc.
*Mendel A Melzer,
CFA, ChFC, CLU (35) ............ Director Chief Investment Officer (since October 1996) of Prudential Mutual
751 Broad Street Funds; formerly Chief Financial Officer (November 1995-September
Newark, NJ 07102 1996) of the Money Management Group of The Prudential Insurance
Company of America (Prudential), Senior Vice President and Chief
Financial Officer of Prudential Preferred Financial Services (April 1993-
November 1995), Managing Director of Prudential Investment Advisors
(April 1991-April 1993), and Senior Vice President of Prudential Capital
Corporation (July 1989-April 1991); Chairman and Director of Prudential
Series Fund, Inc.; Director of The High Yield Income Fund, Inc.
Thomas T. Mooney (55) ............ Director President of the Greater Rochester Metro Chamber of Commerce;
former Rochester City Manager; Trustee of Center for Governmental
Research, Inc.; Director of Blue Cross of Rochester, Monroe County
Water Authority, Rochester Jobs, Inc., Executive Service Corps of
Rochester, Monroe County Industrial Development Corporation,
Northeast Midwest Institute, The Business Council of New York, First
Financial Fund, Inc., The High Yield Plus Fund, Inc. and The High Yield
Income Fund, Inc.
Stephen P. Munn (54) ............. Director Chairman (since January 1994), Director and President and Chief
Executive Officer (1988-December 1993) of Carlisle Companies
Incorporated (manufacturer of industrial products).
*Richard A. Redeker (53) ........ President and Employee of Prudential Investments; formerly President, Chief
Director Executive Officer and Director (October 1993-September 1996),
Prudential Mutual Fund Management, Inc., Director and
Member of Operating Committee (October 1993-September 1996), Pru-
dential Securities, Director (October 1993-September 1996) of
Prudential Securities Group, Inc., Executive Vice President, The Pruden-
tial Investment Corporation (January 1994-September 1996), Director
(January 1994-September 1996), Prudential Mutual Fund Distributors,
Inc. and Prudential Mutual Fund Services, Inc., and Senior Executive Vice
President and Director of Kemper Financial Services, Inc. (September
1978-September 1993); President and Director of The High Yield
Income Fund, Inc.
Robin B. Smith (57) .............. Director Chairman and Chief Executive Officer (since August 1996) of
Publishers Clearing House; formerly President and Chief Executive
Officer (January 1988-August 1996) and President and Chief
Operating Officer (September 1981-December 1988) of Publishers
Clearing House; Director of BellSouth Corporation, The Omnicom
Group, Inc., Texaco Inc., Springs Industries Inc. and Kmart Corporation.
Louis A. Weil, III (55) .......... Director President and Chief Executive Officer (since January 1996) and
Director (since September 1991) of Central Newspapers, Inc.;
Chairman of the Board (since January 1996), Publisher and Chief
Executive Officer (August 1991-December 1995) of Phoenix
Newspapers, Inc.; formerly Publisher of Time Magazine (May 1989-
March 1991); formerly President, Publisher and Chief Executive Officer
of The Detroit News (February 1986-August 1989); formerly member of
the Advisory Board, Chase Manhattan Bank-Westchester.
Clay T. Whitehead (57) .......... Director President, National Exchange Inc. (new business development firm)
(since May 1983).
Susan C. Cote (42) ............... Vice President Executive Vice President (since February 1997) and Chief Financial
Officer (since May 1996), PMF; Managing Director, Prudential
Investments and Vice President, PIC (February 1995-May 1996); Senior
Vice President (January 1989-January 1995) of Prudential Mutual Fund
Management Inc.; Senior Vice President (January 1992-January 1995)
of Prudential Securities.
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Position with Principal Occupations
Name, Address and Age(1) the Fund During Past 5 Years
- ------------------------ -------------- ----------------------
Thomas A. Early (42) ............. Vice President Executive Vice President, Secretary and General Counsel (since
December 1996), PMF; Vice President and General Counsel, Prudential
Retirement Services (since March 1994); formerly Associate General
Counsel and Chief Financial Services Officer, Frank Russell Company
(1988-1994).
S. Jane Rose (51) ............... Secretary Senior Vice President (since December 1996) of PMF; Senior Vice
President (January 1991-September 1996) and Senior Counsel
(June 1987-September 1996) of Prudential Mutual Fund
Management, Inc.; Senior Vice President and Senior Counsel of Pruden-
tial Securities (since July 1992); formerly Vice President and Associate
General Counsel of Prudential Securities.
Marguerite E.H. Morrison (40) ..Assistant Secretary Vice President (since December 1996) of PMF; Vice President and
Associate General Counsel (June 1991-September 1996) of
Prudential Mutual Fund Management, Inc.; Vice President and
Associate General Counsel of Prudential Securitie.
Eugene S. Stark (39) ............Treasurer and First Vice President (since December 1996) of PMF; First Vice
Principal Financial President (January 1990-September 1996) of Prudential Mutual Fund
and Accounting Management, Inc.
Officer
Stephen M. Ungerman (44) ........Assistant Treasurer Tax Director of Prudential Investments and the Private Asset Group
of Prudential (since March 1996); formerly First Vice President of
Prudential Mutual Fund Management, Inc. (February 1993-September
1996); prior thereto, Senior Tax Manager of Price Waterhouse (1981-
January 1993).
- ---------
(1) Unless otherwise stated, the address is c/o Prudential Mutual Fund
Management LLC, Gateway Center Three, Newark, New Jersey 07102-4077.
* "Interested" Director, as defined in the Investment Company Act, by reason
of his affiliation with Prudential, Prudential Securities or PMF.
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Directors and officers of the Fund are also trustees, directors and officers of some or all of the other investment companies distributed by Prudential Securities.
The officers conduct and supervise the daily business operations of the Fund, while the Directors, in addition to their functions set forth under "Manager" and "Distributor," review such actions and decide on general policy.
The Directors have adopted a retirement policy which calls for the retirement of Directors on December 31 of the year in which they reach the age of 72, except that retirement is being phased in for Directors who are age 68 or older as of December 31, 1993. Under this phase-in provision, Messrs. Lennox and Beach are scheduled to retire on December 31, 1997 and 1999, respectively.
As described above, certain of the disinterested Directors of the Fund are affiliated with certain utility companies, and one Director is a financial consultant who may advise utility clients. In such capacities, these Directors may have access to non-public information regarding certain utility companies or the utility industry generally which they will be under an obligation not to disclose to the Fund. In connection with their review of the Fund's investment program, Directors will not disclose or consider non-public information relating to portfolio investments. It is also the policy of the Fund not to invest in securities of any utility company with which any Director is affiliated.
Pursuant to the Management Agreement with the Fund, the Manager pays all compensation of officers and employees of the Fund as well as the fees and expenses of all Directors of the Fund who are affiliated persons of the Manager. The Fund pays each of its Directors who is not an affiliated person of PMF annual compensation of $5000, in addition to certain out-of-pocket expenses. The amount of annual compensation paid each Director may change as a result of the introduction of additional funds upon which the Director will be asked to serve.
Directors may receive their Directors' fees pursuant to a deferred fee agreement with the Fund. Under the terms of such agreement, the Fund accrues daily the amount of Directors' fees which accrue interest at a rate equivalent to the prevailing rate applicable to 90-day U.S. Treasury bills at the beginning of each calendar quarter or, pursuant to an SEC exemptive order, at the daily rate of return of the Fund (the Fund Rate). Payment of the interest so accrued is also deferred and accruals become payable at the option of the Director. The Fund's obligation to make payments of deferred Directors' fees, together with interest thereon, is a general obligation of the Fund.
The following table sets forth the aggregate compensation paid by the Fund to the Directors who are not affiliated with the Manager for the fiscal year ended December 31, 1996 and the aggregate compensation paid to such Directors for service on the Fund's Board and the Boards of any other investment companies managed by Prudential Mutual Fund Management LLC (Fund Complex) for the calendar year ended December 31, 1996. In October 1996, shareholders elected a new Board of Directors. Below are listed all Directors who have served the Fund during its most recent fiscal year, as well as the new Directors who took office after the shareholder meeting in October.
Compensation Table
Total
Pension or Compensation
Retirement From Fund
Aggregate Benefits Accrued Estimated Annual and Fund
Compensation As Part of Fund Benefits Upon Complex Paid
Name and Position From Fund Expenses Retirement To Directors
- ----------------- ------------ ---------------- ---------------- -----------
Edward D. Beach - None N/A $166,000(21/39)*
Director
Robert R. Fortune** $9,000 None N/A $ 15,000(2/2)*
Retired Director
Delayne D. Gold $9,000 None N/A $175,308(21/42)*
Director
Robert F. Gunia(d) - None N/A -
Director
Harry A. Jacobs, Jr.(d) - None N/A -
Former Director
Donald D. Lennox - None N/A $ 90,000(10/22)*
Director
Douglas H. McCorkindale** - None N/A $ 71,208(10/13)*
Director
Mendel A. Melzer(d) - None N/A -
Director
Thomas T. Mooney** - None N/A $135,375(18/36)*
Director
Stephen P. Munn - None N/A $ 49,125(6/8)*
Director
Thomas A. Owens, Jr. $11,250 None N/A $ 86,333(9/11)*
Retired Director
Richard A. Redeker(d) - None N/A -
Director
Robin B. Smith** - None N/A $ 89,957(11/20)*
Director
Louis A. Weil, III - None N/A $ 91,250(13/18)*
Director
Merle T. Welshans $9,000 None N/A $ 15,000(2/1)*
Retired Director
Clay T. Whitehead - None N/A $ 38,292(5/7)*
Director
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*Indicates number of Funds/portfolios in Fund Complex to which aggregate compensation relates.
** Total compensation from all of the Funds in the Fund Complex for the calendar year ended December 31, 1996 includes amounts deferred at the election of Directors under the Funds' deferred compensation plans. Including accrued interest total, compensation amounted to $23,327, $71,034, $139,869 and $109,294 for Messrs. Fortune, McCorkindale and Mooney and Ms. Smith, respectively.
(d)Robert F. Gunia, Harry A. Jacobs, Jr., Mendel A. Melzer and Richard A. Redeker, who are interested Directors, do not receive compensation from the Fund or any fund in the Prudential Mutual Fund Family.
As of February 7, 1997, the Directors and officers of the Fund, as a group, owned less than 1% of the outstanding common stock of the Fund.
As of February 7, 1997, Prudential Securities was record holder of 52,576,882 Class A shares (or 28.5% of the outstanding Class A shares), 89,309,117 Class B shares (or 45.8% of the outstanding Class B shares), 499,449 Class C shares (or 80.2% of the outstanding Class C shares) and 11,456 Class Z shares (or .35% of the outstanding Class Z shares) of the Fund. In the event of any meetings of shareholders, Prudential Securities will forward, or cause the forwarding of, proxy material to the beneficial owners for which it is the record holder.
MANAGER
The manager of the Fund is Prudential Mutual Fund Management LLC (PMF or the Manager), Gateway Center Three, Newark, New Jersey 07102. PMF 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" in the Prospectus. As of January 31, 1997, PMF managed and/or administered open-end and closed-end management investment companies with assets of approximately $55.8 billion. According to the Investment Company Institute, as of December 31, 1996, the Prudential Mutual Funds were the 15th largest family of mutual funds in the United States.
PMF is a subsidiary of Prudential Securities. Prudential Mutual Fund Services LLC (PMFS or the Transfer Agent), a wholly owned subsidiary of PMF, serves as the transfer agent for the Prudential Mutual Funds and, in addition, provides customer service, recordkeeping and management and administration services to qualified plans.
Pursuant to the Management Agreement with the Fund (the Management Agreement), PMF, subject to the supervision of the Fund's Board of 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, PMF is obligated to keep certain books and records of the Fund. PMF also administers the Fund's corporate affairs and, in connection therewith, furnishes the Fund with office facilities, together with those ordinary clerical and bookkeeping services which are not being furnished by State Street Bank and Trust Company, the Fund's custodian, and PMFS, the Fund's transfer and dividend disbursing agent. The management services of PMF for the Fund are not exclusive under the terms of the Management Agreement and PMF is free to, and does, render management services to others.
For its services, PMF receives, pursuant to the Management Agreement, a fee at an annual rate of .60 of 1% of the Fund's average daily net assets up to and including $250 million, .50 of 1% of the next $500 million, .45 of 1% of the next $750 million, .40 of 1% of the next $500 million, .35 of 1% of the next $2 billion, .325 of 1% of the next $2 billion and .30 of 1% of the excess over $6 billion of the Fund's average daily net assets. The fee is computed daily and payable monthly. Prior to August 1, 1994, the management fee, with respect to net assets in excess of $2 billion, was .35 of 1% of the Fund's average daily net assets. However, for the period from October 1, 1993 through July 31, 1994, the Manager agreed to waive a portion of its management fee with respect to assets in excess of $2 billion so that the annual fee received by the Manager was as follows: .35 of 1% of the Fund's average daily net assets between $2 billion and $4 billion, .325 of 1% of average daily net assets between $4 billion and $6 billion and .30 of 1% of average daily net assets in excess of $6 billion. The Management Agreement also provides that, in the event the expenses of the Fund (including the fees of PMF, but excluding interest, taxes, brokerage commissions, distribution fees and litigation and indemnification expenses and other extraordinary expenses not incurred in the ordinary course of the Fund's business) for any fiscal year exceed the lowest applicable annual expense limitation established and enforced pursuant to the statutes or regulations of any jurisdiction in which the Fund's shares are qualified for offer and sale, the compensation due PMF will be reduced by the amount of such excess. Reductions in excess of the total compensation payable to PMF will be paid by PMF to the Fund. No such reductions were required during the fiscal year ended December 31, 1996. No jurisdiction currently limits the Fund's expenses.
In connection with its management of the corporate affairs of the Fund, PMF 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 PMF or the Fund's investment adviser;
(b) all expenses incurred by PMF or by the Fund in connection with managing the ordinary course of the Fund's business, other than those assumed by the Fund as described below; and
(c) the costs and expenses payable to The Prudential Investment Corporation, doing business as Prudential Investments (PI), pursuant to the subadvisory agreement between PMF and PI (the Subadvisory Agreement).
Under the terms of the Management Agreement, the Fund is responsible for the payment of the following expenses: (a) the fees payable to the Manager, (b) the fees and expenses of Directors who are not affiliated persons of the Manager or the Fund's investment adviser, (c) the fees and certain expenses of the Custodian and Transfer and Dividend Disbursing Agent, including the cost of providing records to the Manager in connection with its obligation of maintaining required records of the Fund and of pricing the Fund's shares, (d) the charges and expenses of legal counsel and independent accountants for the Fund, (e) brokerage commissions and any issue or transfer taxes chargeable to the Fund in connection with its securities transactions, (f) all taxes and corporate fees payable by the Fund to governmental agencies, (g) the fees of any trade associations of which the Fund may be a member, (h) the cost of stock certificates representing shares of the Fund, (i) the cost of fidelity and liability insurance, (j) the fees and expenses involved in registering and maintaining registration of the Fund and of its shares with the SEC, registering the Fund and qualifying its shares under state securities laws, including the preparation and printing of the Fund's registration statements and prospectuses for such purposes, (k) allocable communications expenses with respect to investor services and all expenses of shareholders' and Directors' meetings and of preparing, printing and mailing reports, proxy statements and prospectuses to shareholders in the amount necessary for distribution to the shareholders, (l) litigation and indemnification expenses and other extraordinary expenses not incurred in the ordinary course of the Fund's business and (m) distribution fees.
The Management Agreement provides that PMF will not be liable for any error of judgment or for any loss suffered by the Fund in connection with the matters to which the Management Agreement relates, except a loss resulting from willful misfeasance, bad faith, gross negligence or reckless disregard of duty. The Management Agreement provides that it will terminate automatically if assigned, and that it may be terminated without penalty by either party upon not more than 60 days' nor less than 30 days' written notice. The Management Agreement will continue in effect for a period of more than two years from the date of execution only so long as such continuance is specifically approved at least annually in conformity with the Investment Company Act. The Management Agreement was last approved by the Board of Directors of the Fund, including a majority of the Directors who are not parties to the contract or interested persons of any such party as defined in the Investment Company Act on April 10, 1996 and by shareholders of the Fund on July 19, 1994.
For the years ended December 31, 1996, 1995 and 1994, the Fund paid management fees to PMF of $16,378,451, $15,997,525 and $17,824,846, respectively.
PMF has entered into the Subadvisory Agreement with PI (the Subadviser), a wholly-owned subsidiary of Prudential. The Subadvisory Agreement provides that PI will furnish investment advisory services in connection with the management of the Fund. In connection therewith, PI is obligated to keep certain books and records of the Fund. PMF continues to have responsibility for all investment advisory services pursuant to the Management Agreement and supervises PI's performance of such services. PI is reimbursed by PMF for the reasonable costs and expenses incurred by PI in furnishing those services.
The Subadvisory Agreement was last approved by the Board of Directors, including a majority of the Directors who are not parties to the contract or interested persons of any such party as defined in the Investment Company Act, on April 10, 1996, and by shareholders of the Fund on April 29, 1988.
The Subadvisory Agreement provides that it will terminate in the event of its assignment (as defined in the Investment Company Act) or upon the termination of the Management Agreement. The Subadvisory Agreement may be terminated by the Fund, PMF or PI upon not more than 60 days', nor less than 30 days', written notice. The Subadvisory Agreement provides that it will continue in effect for a period of more than two years from its execution only so long as such continuance is specifically approved at least annually in accordance with the requirements of the Investment Company Act.
DISTRIBUTOR
Prudential Securities Incorporated (Prudential Securities or PSI), One Seaport Plaza, New York, New York 10292, acts as the distributor of the shares of the Fund. Prior to January 2, 1996, Prudential Mutual Fund Distributors, Inc., One Seaport Plaza, New York, New York 10292, acted as the distributor of the Class A shares of the Fund.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the Class B Plan and the Class C Plan, collectively, the Plans) adopted by the Fund under Rule 12b-1 under the Investment Company Act and a distribution agreement (the Distribution Agreement), Prudential Securities (the Distributor) incurs the expenses of distributing the Fund's Class A, Class B and Class C shares. Prudential Securities also incurs the expenses of distributing the Fund's Class Z shares under the Distribution Agreement, none of which are reimbursed by or paid for by the Fund. See "How the Fund is Managed-Distributor" in the Prospectus.
Prior to January 22, 1990, the Fund offered only one class of shares (the
then existing Class B shares). On February 8, 1989 and September 13, 1989, the
Board of Directors, including a majority of the Directors who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
operation of the Class A or Class B Plan or in any agreement related to either
Plan (the Rule 12b-1 Directors), at a meeting called for the purpose of voting
on each Plan, adopted a new plan of distribution for the Class A shares of the
Fund (the Class A Plan) and approved an amended and restated plan of
distribution with respect to the Class B shares of the Fund (the Class B Plan).
On June 9, 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
the continuance of the Plans and Distribution Agreements and approved
modifications of the Fund's Class A and Class B Plans and Distribution
Agreements to conform them with recent amendments to the National Association of
Securities Dealers, Inc. (NASD) maximum sales charge rule described below. As so
modified, the Class A Plan provides that (i) up to .25 of 1% of the average
daily net assets of the Class A shares may be used to pay for personal service
and/or the maintenance of shareholder accounts (service fee) and (ii) total
distribution fees (including the service fee of .25 of 1%) may not exceed .30 of
1%. As so modified, the Class B Plan provides that (i) up to .25 of 1% of the
average daily net assets of the Class B shares may be paid as a service fee and
(ii) up to .75 of 1% (not including the service fee) of the average daily net
assets of the Class B shares (asset-based sales charge) may be used as
reimbursement for distribution-related expenses with respect to the Class B
shares. On June 9, 1993, the Board of Directors, including a majority of the
Rule 12b-1 Directors, at a meeting called for the purpose of voting on each
Plan, adopted a plan of distribution for the Class C shares of the Fund and
approved further amendments to the plans of distribution for the Fund's Class A
and Class B shares, changing them from reimbursement type plans to compensation
type plans. The Plans were last approved by the Board of Directors, including a
majority of the Rule 12b-1 Directors, on April 10, 1996. The Class A Plan, as
amended, was approved by the Class A and Class B shareholders, and the Class B
Plan, as amended, was approved by the 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 December 31, 1996, PSI received payments of $4,464,713 under the Class A Plan. This amount was primarily expended for payment of account servicing fees to financial advisers and other persons who sell Class A shares. For the fiscal year ended December 31, 1996, PSI also received approximately $619,200 in initial sales charges.
Class B Plan. For the fiscal year ended December 31, 1996, the Distributor received $21,840,150 from the Fund under the Class B Plan and spent approximately $9,420,600 in distributing the Fund's Class B shares. It is estimated that of the latter amount, approximately 0.4% ($41,200) was spent on printing and mailing of prospectuses to other than current shareholders; 24.5% ($2,311,900) on compensation to Pruco Securities Corporation (Prusec), an affiliated broker-dealer, for commissions to its representatives and other expenses, including an allocation on account of overhead and other branch office distribution-related expenses, incurred by it for distribution of Fund shares; and 75.1% ($7,067,500) on the aggregate of (i) commission credits to Prudential Securities branch offices for payments of commissions to financial advisers (38.3% or $3,607,300) and (ii) an allocation of overhead and other branch office distribution-related expenses (36.8% or $3,460,200). The term "overhead and other branch office distribution-related expenses" represents (a) the expenses of operating Prudential Securities' and Prusec's branch offices in connection with the sale of Fund shares, including lease costs, the salaries and employee benefits of operations and sales support personnel, utility costs, communications costs and the costs of stationery and supplies, (b) the costs of client sales seminars, (c) expenses of mutual fund sales coordinators to promote the sale of Fund shares, and (d) other incidental expenses relating to branch promotion of Fund sales.
Prudential Securities also receives the proceeds of contingent deferred sales charges paid by holders of Class B shares upon certain redemptions of Class B shares. See "Shareholder Guide-How to Sell Your Shares-Contingent Deferred Sales Charges" in the Prospectus. For the fiscal year ended December 31, 1996, the Distributor received approximately $4,389,000 in contingent deferred sales charges attributable to Class B shares.
Class C Plan. For the fiscal year ended December 31, 1996, Prudential Securities received $45,173 under the Class C Plan and spent approximately $49,000 in distributing Class C shares. It is estimated that of the latter amount, approximately 1.8% ($900) was spent on printing and mailing of prospectuses to other than current shareholders; 14.0% ($6,800) on compensation to Prusec for commissions to its representatives and other expenses, including an allocation of overhead and other branch office distribution-related expenses, incurred by it for distribution of Fund shares; and 84.2% ($41,300) on the aggregate of (i) payments of commissions and account servicing fees to financial advisers ( 58.2% or $28,600) and (ii) an allocation of overhead and other branch office distribution-related expenses for payments of related expenses (26.0% or $12,700). Prudential Securities also receives the proceeds of contingent deferred sales charges paid by investors upon certain redemptions of Class C shares. For the fiscal year ended December 31, 1996, Prudential Securities received approximately $2,100 in contingent deferred sales charges attributable to Class C shares. See "Shareholder Guide-How to Sell Your Shares-Contingent Deferred Sales Charges" in the Prospectus.
The Class A, Class B and Class C Plans continue in effect from year to year, provided that each such continuance is approved at least annually by a vote of the Board of Directors, including a majority vote of the Rule 12b-1 Directors, cast in person at a meeting called for the purpose of voting on such continuance. The Plans may each be terminated at any time, without penalty, by the vote of a majority of the Rule 12b-1 Directors or by the vote of the holders of a majority of the outstanding shares of the applicable class on not more than 30 days' written notice to any other party to the Plans. The Plans may not be amended to increase materially the amounts to be spent for the services described therein without approval by the shareholders of the applicable class (by both Class A and Class B shareholders, voting separately, in the case of material amendments to the Class A Plan), and all material amendments are required to be approved by the Board of Directors in the manner described above. Each Plan will automatically terminate in the event of its assignment. The Fund will not be contractually obligated to pay expenses incurred under any Plan if it is terminated or not continued.
Pursuant to each Plan, the Board of Directors will review at least quarterly a written report of the distribution expenses incurred on behalf of each class of shares of the Fund by the Distributor. The report includes an itemization of the distribution expenses and the purposes of such expenditures. In addition, as long as the Plans remain in effect, the selection and nomination of the Rule 12b-1 Directors shall be committed to the Rule 12b-1 Directors.
Pursuant to the Distribution Agreement, the Fund has agreed to indemnify Prudential Securities to the extent permitted by applicable law against certain liabilities under the Securities Act of 1933, as amended. A restated Distribution Agreement was approved by the Board of Directors, including a majority of the Rule 12b-1 Directors, on April 10, 1996.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC, state securities regulators in 51 jurisdictions and the NASD to resolve allegations that PSI sold interests in more than 700 limited partnerships (and a limited number of other types of securities) from January 1, 1980 through December 31, 1990, in violation of securities laws to persons for whom such securities were not suitable in light of the individuals' financial condition or investment objectives. It was also alleged that the safety, potential returns and liquidity of the investments had been misrepresented. The limited partnerships principally involved real estate, oil and gas producing properties and aircraft leasing ventures. The SEC Order (i) included findings that PSI's conduct violated the federal securities laws and that an order issued by the SEC in 1986 requiring PSI to adopt, implement and maintain
certain supervisory procedures had not been complied with; (ii) directed PSI to cease and desist from violating the federal securities laws and imposed a $10 million civil penalty; and (iii) required PSI to adopt certain remedial measures including the establishment of a Compliance Committee of its Board of Directors. Pursuant to the terms of the SEC settlement, PSI established a settlement fund in the amount of $330,000,000 and procedures, overseen by a court approved Claims Administrator, to resolve legitimate claims for compensatory damages by purchasers of the partnership interests. PSI has agreed to provide additional funds, if necessary, for that purpose. PSI's settlement with the state securities regulators included an agreement to pay a penalty of $500,000 per jurisdiction. PSI consented to a censure and to the payment of a $5,000,000 fine in settling the NASD action. In settling the above referenced matters, PSI neither admitted nor denied the allegations asserted against it.
On January 18, 1994, PSI agreed to the entry of a Final Consent Order and a Parallel Consent Order by the Texas Securities Commissioner. The firm also entered into a related agreement with the Texas Securities Commissioner. The allegations were that the firm had engaged in improper sales practices and other improper conduct resulting in pecuniary losses and other harm to investors residing in Texas with respect to purchases and sales of limited partnership interests during the period of January 1, 1980 through December 31, 1990. Without admitting or denying the allegations, PSI consented to a reprimand, agreed to cease and desist from future violations, and to provide voluntary donations to the State of Texas in the aggregate amount of $1,500,000. The firm agreed to suspend the creation of new customer accounts, the general solicitation of new accounts, and the offer for sale of securities in or from PSI's North Dallas office to new customers during a period of twenty consecutive business days, and agreed that its other Texas offices would be subject to the same restrictions for a period of five consecutive business days. PSI also agreed to institute training programs for its securities salesmen in Texas.
On October 27, 1994, Prudential Securities Group, Inc. (PSG) and PSI entered into agreements with the United States Attorney deferring prosecution (providing PSI complies with the terms of the agreement for three years) for any alleged criminal activity related to the sale of certain limited partnership programs from 1983 to 1990. In connection with these agreements, PSI agreed to add the sum of $330,000,000 to the fund established by the SEC and executed a stipulation providing for a reversion of such funds to the United States Postal Inspection Service. PSI further agreed to obtain a mutually acceptable outside director to sit on the Board of Directors of PSG and the Compliance Committee of PSI. The new director will also serve as an independent "ombudsman" whom PSI employees can call anonymously with complaints about ethics and compliance. Prudential Securities shall report any allegations or instances of criminal conduct and material improprieties to the new director. The new director will submit compliance reports which shall identify all such allegations or instances of criminal conduct and material improprieties every three months for a three-year period.
NASD Maximum Sales Charge Rule. Pursuant to rules of the NASD, the Distributor is required to limit aggregate initial sales charges, deferred sales charges and asset-based sales charges to 6.25% of total gross sales of each class of shares. Interest charges on unreimbursed distribution expenses equal to the prime rate plus one percent per annum may be added to the 6.25% limitation. Sales from the reinvestment of dividends and distributions are not included in the calculation of the 6.25% limitation. The annual asset-based sales charge on Class B shares of the Fund may not exceed .75 of 1% per class. The 6.25% limitation applies to each class of the Fund rather than on a per shareholder basis. If aggregate sales charges were to exceed 6.25% of total gross sales of any class, all sales charges on shares of that class would be suspended.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for decisions to buy and sell securities for the Fund, the selection of brokers and dealers to effect the transactions and the negotiation of brokerage commissions, if any. The term "Manager" as used in this section includes the Subadviser. Purchases and sales of securities on a securities exchange are effected through brokers who charge a commission for their services. Orders may be directed to any broker including, to the extent and in the manner permitted by applicable law, Prudential Securities and its affiliates. Brokerage commissions on United States securities, options and futures exchanges or boards of trade are subject to negotiation between the Manager and the broker or futures commission merchant.
In the over-the-counter market, securities are generally traded on a "net"
basis with dealers acting as principal for their own account without a stated
commission, although the price of the security usually includes a profit to the
dealer. In underwritten offerings, securities are purchased at a fixed price
which includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. On occasion, certain money
market instruments may be purchased directly from an issuer, in which case no
commissions or discounts are paid. The Fund will not deal with Prudential
Securities or any affiliate in any transaction in which Prudential Securities or
any affilate acts as principal. Thus it will not deal in over-the-counter
securities with Prudential Securities acting as market maker, and it will not
execute a negotiated trade with Prudential Securities if execution involves
Prudential Securities acting as principal with respect to any part of the Fund's
order.
In placing orders for portfolio securities of the Fund, the Manager is
required to give primary consideration to obtaining the most favorable price and
efficient execution. This means that the Manager will seek to execute each
transaction at a price and commission, if any, which provides the most favorable
total cost or proceeds reasonably attainable in the circumstances. While the
Manager generally seeks reasonably competitive spreads or commissions, the Fund
will not necessarily be paying the lowest
spread or commission available. Within the framework of the policy of obtaining most favorable price and efficient execution, the Manager will consider research and investment services provided by brokers or dealers who effect or are parties to portfolio transactions of the Fund, the Manager or the Manager's other clients. Such research and investment services are those which brokerage houses customarily provide to institutional investors and include statistical and economic data and research reports on particular companies and industries. Such services are used by the Manager in connection with all of its investment activities, and some of such services obtained in connection with the execution of transactions for the Fund may be used in managing other investment accounts. Conversely, brokers or dealers furnishing such services may be selected for the execution of transactions of such other accounts, whose aggregate assets are far larger than those of the Fund, and the services furnished by such brokers or dealers may be used by the Manager in providing investment management for the Fund. Commission rates are established pursuant to negotiations with the broker or dealer based on the quality and quantity of execution services provided by the broker or dealer in the light of generally prevailing rates. The Manager's policy is to pay higher commission rates to brokers, other than Prudential Securities, for particular transactions than might be charged if a different broker had been selected, on occasions when, in the Manager's opinion, this policy furthers the objective of obtaining the best price and execution. The Manager is authorized to pay higher commissions on brokerage transactions for the Fund to brokers or dealers other than Prudential Securities in order to secure research and investment services described above, subject to review by the Fund's Board of Directors from time to time as to the extent and continuation of this practice. The allocation of orders among brokers and dealers and the commission rates paid are reviewed periodically by the Fund's Board of Directors. Portfolio securities may not be purchased from any underwriting or selling syndicate of which Prudential Securities (or any affiliate), during the existence of the syndicate, is a principal underwriter (as defined in the Investment Company Act), except in accordance with rules of the SEC. This limitation, in the opinion of the Fund, will not significantly affect the Fund's ability to pursue its present investment objective. However, in the future in other circumstances, the Fund may be at a disadvantage because of this limitation in comparison to other funds with similar objectives but not subject to such limitations.
Subject to the above considerations, the Manager may use Prudential Securities as a broker or futures commission merchant for the Fund. In order for Prudential Securities (or any affiliate) to effect any portfolio transactions for the Fund, the commissions, fees or other remuneration received by Prudential Securities (or any affiliate) must be reasonable and fair compared to the commissions, fees or other remuneration paid to other brokers in connection with comparable transactions involving similar securities being purchased or sold on a securities exchange during a comparable period of time. This standard would allow Prudential Securities (or any affiliate) to receive no more than the remuneration which would be expected to be received by an unaffiliated broker in a commensurate arm's-length transaction. Furthermore, the Board of Directors of the Fund, including a majority of the non-interested Directors, has adopted procedures which are reasonably designed to provide that any commissions, fees or other remuneration paid to Prudential Securities (or any affiliate) are consistent with the foregoing standard. In accordance with Section 11(a) of the Securities Exchange Act of 1934, Prudential Securities may not retain compensation for effecting transactions on a national securities exchange for the Fund unless the Fund has expressly authorized the retention of such compensation. Prudential Securities must furnish to the Fund at least annually a statement setting forth the total amount of all compensation retained by Prudential Securities from transactions effected for the Fund during the applicable period. Brokerage transactions with Prudential Securities (or any affiliate) are also subject to such fiduciary standards as may be imposed upon Prudential Securities (or such affiliate) by applicable law.
Transactions in options by the Fund will be subject to limitations established by each of the exchanges governing the maximum number of options which may be written or held by a single investor or group of investors acting in concert, regardless of whether the options are written or held on the same or different exchanges or are written or held in one or more accounts or through one or more brokers. Thus, the number of options which the Fund may write or hold may be affected by options written or held by the Manager and other investment advisory clients of the Manager. An exchange may order the liquidation of positions found to be in excess of these limits, and it may impose certain other sanctions.
The table presented below shows certain information regarding the payment of commissions by the Fund, including the amount of such commissions paid to Prudential Securities for the three-year period ended December 31, 1996.
Year Ended December 31,
---------------------------------
1996 1995 1994
Total brokerage commissions paid by the Fund. $3,574,816 $2,591,519 $3,160,381
Total brokerage commissions paid to
Prudential Securities ..................... $ 221,877 $ 88,323 $ 288,183
Percentage of total brokerage commissions
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paid to Prudential Securities ............. 6.21% 3.41% 9.12%
The Fund effected approximately 6.21% of the total dollar amount of its transactions involving the payment of commissions through Prudential Securities during the year ended December 31, 1996. Of the total brokerage commissions paid during that period, $2,375,118 (66.4%) were paid to firms which provide research, statistical or other services to PI. PMF has not separately identified the portion of such brokerage commissions as applicable to the provision of such research, statistical or other services.
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next determined net asset value per share plus a sales charge which, at the election of the investor, may be imposed either (i) at the time of purchase (the Class A shares) or (ii) on a deferred basis (the Class B or Class C shares). Class Z shares of the Fund are not subject to any sales or redemption charge and are offered exclusively for sale to a limited group of investors at net asset value. See "Shareholder Guide-How to Buy Shares of the Fund" in the Prospectus.
Each class represents an interest in the same assets of the Fund and is identical in all respects except that (i) each class is subject to different sales charges and distribution and/or service fees (except for Class Z shares, which are not subject to any sales charges and distribution and/or service fees), which may affect performance, (ii) each class has exclusive voting rights with respect to any matter submitted to shareholders that relates solely to its arrangement and has separate voting rights on any matter submitted to shareholders in which the interests of one class differ from the interests of any other class, (iii) each class has a different exchange privilege, (iv) only Class B shares have a conversion feature and (v) Class Z shares are offered exclusively for sale to a limited group of investors. See "Distributor" and "Shareholder Investment Account-Exchange Privilege."
Specimen Price Make-up
Under the current distribution arrangements between the Fund and the Distributor, Class A shares of the Fund are sold at a maximum sales charge of 5% and Class B*, Class C* and Class Z shares are sold at net asset value. Using the Fund's net asset value at December 31, 1996, the maximum offering price of the Fund's shares is as follows:
Class A
- -------
Net asset value and redemption price per Class A share ................ $10.88
Maximum sales charge (5% of offering price) ............................. .57
------
Maximum offering price to public ........................................ $11.45
======
Class B
- -------
Net asset value, offering price and redemption price per Class B share* . 10.88
======
Class C
- -------
Net asset value, offering price and redemption price per Class C share* . 10.88
======
Class Z
- -------
Net asset value, redemption price and offering price per Class Z share .. $10.88
======
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Reduction and Waiver of Initial Sales Charges-Class A Shares
Combined Purchase and Cumulative Purchase Privilege. If an investor or eligible group of related investors purchases Class A shares of the Fund concurrently with Class A shares of other Prudential Mutual Funds, the purchases may be combined to take advantage of the reduced sales charges applicable to larger purchases. See the table of breakpoints under "Shareholder Guide-Alternative Purchase Plan" in the Prospectus.
An eligible group of related Fund investors includes any combination of the following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's and spouse's Individual Retirement Account (IRA);
(d) any company controlled by the individual (a person, entity or group that holds 25% or more of the outstanding voting securities of a company will be deemed to control the company, and a partnership will be deemed to be controlled by each of its general partners);
(e) a trust created by the individual, the beneficiaries of which are the individual, his or her spouse, parents or children;
(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account created by the individual or the individual's spouse; and
(g) one or more employee benefit plans of a company controlled by an individual.
In addition, an eligible group of related Fund investors may include an employer (or group of related employers) and one or more qualified retirement plans of such employer or employers (an employer controlling, controlled by or under common control with another employer is deemed related to that employer).
The Distributor must be notified at the time of purchase that the investor is entitled to a reduced sales charge. The reduced sales charges will be granted subject to confirmation of the investor's holdings. The Combined Purchase and Cumulative Purchase Privilege does not apply to individual participants in any retirement or group plans.
Rights of Accumulation. Reduced sales charges are also available through Rights of Accumulation, under which an investor or an eligible group of related investors, as described above under "Combined Purchase and Cumulative Purchase Privilege," may aggregate the value of their existing holdings of shares of the Fund and shares of other Prudential Mutual Funds (excluding money market funds other than those acquired pursuant to the exchange privilege) to determine the reduced sales charge. However, the value of shares held directly with the Transfer Agent and through Prudential Securities will not be aggregated to determine the reduced sales charge. All shares must be held either directly with the Transfer Agent or through Prudential Securities. The value of existing holdings for purposes of determining the reduced sales charge is calculated using the maximum offering price (net asset value plus maximum sales charge) as of the previous business day. See "How the Fund Values its Shares" in the Prospectus. The Distributor must be notified at the time of purchase that the shareholder is entitled to a reduced sales charge. The reduced sales charges will be granted subject to confirmation of the investor's holdings. Rights of Accumulation are not available to individual participants in any retirement or group plans.
Letters of Intent. Reduced sales charges are available to investors (or an eligible group of related investors), including retirement and group plans, who enter into a written Letter of Intent providing for the purchase, within a thirteen-month period, of shares of the Fund and shares of other Prudential Mutual Funds (Investment Letter of Intent). Retirement and group plans may also qualify to purchase Class A shares at net asset value by entering into a Letter of Intent whereby they agree to enroll, within a thirteen-month period, a specified number of eligible employees or participants (Participant Letter of Intent).
For purposes of the Investment Letter of Intent, all shares of the Fund and shares of other Prudential Mutual Funds (excluding money market funds other than those acquired pursuant to the exchange privilege) which were previously purchased and are still owned are also included in determining the applicable reduction. However, the value of shares held directly with the Transfer Agent and through Prudential Securities will not be aggregated to determine the reduced sales charge. All shares must be held either directly with the Transfer Agent or through Prudential Securities.
A Letter of Intent permits a purchaser, in the case of an Investment Letter of Intent, to establish a total investment goal to be achieved by any number of investments over a thirteen-month period and, in the case of a Participant Letter of Intent, to establish a minimum eligible employee or participant goal over a thirteen-month period. Each investment made during the period, in the case of an Investment Letter of Intent, will receive the reduced sales charge applicable to the amount represented by the goal, as if it were a single investment. In the case of a Participant Letter of Intent, each investment made during the period will be made at net asset value. Escrowed Class A shares totaling 5% of the dollar amount of the Letter of Intent will be held by the Transfer Agent in the name of the purchaser, except in the case of retirement and group plans where the employer or plan sponsor will be responsible for paying any applicable sales charge. The effective date of an Investment Letter of Intent (except in the case of retirement and group plans) may be back-dated up to 90 days, in order that any investments made during this 90-day period, valued at the purchaser's cost, can be applied to the fulfillment of the Letter of Intent goal, except in the case of retirement and group plans.
The Investment Letter of Intent does not obligate the investor to purchase, nor the Fund to sell, the indicated amount. Similarly, the Participant Letter of Intent does not obligate the retirement or group plan to enroll the indicated number of eligible employees or participants. In the event the Letter of Intent goal is not achieved within the thirteen-month period, the purchaser (or the employer or plan sponsor, in the case of any retirement or group plan) is required to pay the difference between the sales charge otherwise applicable to the purchases made during this period and sales charges actually paid. Such payment may be made directly to the Distributor or, if not paid, the Distributor will liquidate sufficient escrowed shares to obtain such difference. Investors electing to purchase Class A shares of the Fund pursuant to a Letter of Intent should carefully read such Letter of Intent.
The Distributor must be notified at the time of purchase that the investor is entitled to a reduced sales charge. The reduced sales charge will, in the case of an Investment Letter of Intent, be granted subject to confirmation of the investor's holdings or in the case of a Participant Letter of Intent, subject to confirmation of the number of eligible employees or participants in the retirement or group plan. Letters of Intent are not available to individual participants in any retirement or group plans.
Waiver of the Contingent Deferred Sales Charge-Class B Shares
The contingent deferred sales charge is waived under circumstances described in the Prospectus. See "Shareholder Guide-How to Sell Your Shares-Waiver of the Contingent Deferred Sales Charges-Class B Shares" in the Prospectus. In connection with these waivers, the Transfer Agent will require you to submit the supporting documentation set forth below.
Category of Waiver Required Documentation
Death A copy of the shareholder's death
certificate or, in the case of a trust,
a copy of the grantor's death
certificate, plus a copy of the trust
agreement identifying the grantor.
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Disability-An individual will be A copy of the Social Security considered disabled if he or she is Administration award letter or a letter unable to engage in any substantial from a physician on the physician's gainful activity by reason of any letterhead stating that the shareholder medically determinable physical or (or, in the case of a trust, the mental impairment which can be expected grantor) is permanently disabled. The to result in death or to be of letter must also indicate the date of long-continued and indefinite duration. disability.
Distribution from an IRA or 403(b) A copy of the distribution form from
Custodial Account the custodial firm indicating (i) the
date of birth of the shareholder and
(ii) that the shareholder is over age
59-1/2 and is taking a normal
distribution-signed by the shareholder.
Distribution from Retirement Plan A letter signed by the plan
administrator/trustee indicating the
reason for the distribution.
Excess Contributions A letter from the shareholder (for an
IRA) or the plan administrator/trustee
on company letterhead indicating the
amount of the excess and whether or not
taxes have been paid.
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The Transfer Agent reserves the right to request such additional documents as it may deem appropriate.
Quantity Discount-Class B Shares Purchased Prior to August 1, 1994
The CDSC is reduced on redemptions of Class B shares of the Fund purchased prior to August 1, 1994 if immediately after a purchase of such shares, the aggregate cost of all Class B shares of the Fund owned by you in a single account exceeded $500,000. For example, if you purchase $100,000 of Class B shares of the Fund and the following year purchase an additional $450,000 of Class B shares with the result that the aggregate cost of your Class B shares of the Fund following the second purchase was $550,000, the quantity discount would be available for the second purchase of $450,000 but not for the first purchase of $100,000. The quantity discount will be imposed at the following rates depending on whether the aggregate value exceeded $500,000 or $1 million:
Contingent Deferred Sales Charge
as a Percentage of Dollars Invested
or Redemption Proceeds
Year Since Purchase ---------------------------------------
Payment Made $500,001 to $1 million Over $1 million
------------------- ---------------------- ---------------
First ........................... 3.0% 2.0%
Second .......................... 2.0% 1.0%
Third ........................... 1.0% 0%
Fourth and thereafter ........... 0% 0%
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You must notify the Fund's Transfer Agent either directly or through Prudential Securities or Prusec, at the time of redemption, that you are entitled to the reduced CDSC. The reduced CDSC will be granted subject to confirmation of your holdings.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of shares of the Fund, a Shareholder Investment Account is established for each investor under which the shares are held for the investor by the Transfer Agent. If a stock certificate is desired, it must be requested in writing for
each transaction. Certificates are issued only for full shares and may be redeposited in the Account at any time. There is no charge to the investor for issuance of a certificate. The Fund makes available to the shareholder the following privileges and plans.
Automatic Reinvestment of Dividends and/or Distributions
For the convenience of investors, all dividends and distributions are automatically reinvested in full and fractional shares of the Fund. An investor may direct the Transfer Agent in writing not less than 5 full business days prior to the record date to have subsequent dividends and/or distributions sent in cash rather than reinvested. In the case of recently purchased shares for which registration instructions have not been received on the record date, cash payment will be made directly to the dealer. Any shareholder who receives a cash payment representing a dividend or distribution may reinvest such dividend or distribution at net asset value by returning the check or the proceeds to the Transfer Agent within 30 days after the payment date. Such investment will be made at the net asset value per share next determined after receipt of the check or proceeds by the Transfer Agent. Such shareholder will receive credit for any contingent deferred sales charge paid in connection with the amount of proceeds being reinvested.
Exchange Privilege
The Fund makes available to its shareholders the privilege of exchanging their shares of the Fund for shares of certain other Prudential Mutual Funds, including one or more specified money market funds, subject in each case to the minimum investment requirements of such funds. Shares of such other Prudential Mutual Funds may also be exchanged for shares of the Fund. All exchanges are made on the basis of relative net asset value next determined after receipt of an order in proper form. An exchange will be treated as a redemption and purchase for tax purposes. Shares may be exchanged for shares of another fund only if shares of such fund may legally be sold under applicable state laws. For retirement and group plans having a limited menu of Prudential Mutual Funds, the Exchange Privilege is available for those funds eligible for investment in the particular program.
It is contemplated that the Exchange Privilege may be applicable to new mutual funds whose shares may be distributed by the Distributor.
Class A. Shareholders of the Fund may exchange their Class A shares for Class A shares of certain other Prudential Mutual Funds, shares of Prudential Government Securities Trust (Short-Intermediate Term Series) and shares of the money market funds specified below. No fee or sales load will be imposed upon the exchange. Shareholders of money market funds who acquired such shares upon exchange of Class A shares may use the Exchange Privilege only to acquire Class A shares of the Prudential Mutual Funds participating in the Exchange Privilege.
The following money market funds participate in the Class A Exchange Privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets, Inc. Prudential Tax-Free Money Fund, Inc.
Class B and Class C. Shareholders of the Fund may exchange their Class B and Class C shares for Class B and Class C shares, respectively, of certain other Prudential Mutual Funds and shares of Prudential Special Money Market Fund, Inc. No CDSC will be payable upon such exchange, but a CDSC may be payable upon the redemption of the Class B and Class C shares acquired as a result of an exchange. The applicable sales charge will be that imposed by the fund in which shares were initially purchased and the purchase date will be deemed to be the first day of the month after the initial purchase, rather than the date of the exchange.
Class B and Class C shares of the Fund may also be exchanged for shares of Prudential Special Money Market Fund, Inc. without imposition of any CDSC at the time of exchange. Upon subsequent redemption from such money market fund or after re-exchange into the Fund, such shares will be subject to the CDSC calculated by excluding the time such shares were held in the money market fund. In order to minimize the period of time in which shares are subject to a CDSC, shares exchanged out of the money market fund will be exchanged on the basis of their remaining holding periods, with the longest remaining holding periods being transferred first. In measuring the time period shares are held in a money market fund and "tolled" for purposes of calculating the CDSC holding period, exchanges are deemed to have been made on the last day of the month. Thus, if shares are exchanged into the Fund from a money market fund during the month (and are held in the Fund at the end of the month), the entire month will be included in the CDSC holding period. Conversely, if shares are exchanged into a money market fund prior to the last day of the month (and are held in the money market fund on the last day of the month), the entire
month will be excluded from the CDSC holding period. For purposes of calculating the seven-year holding period applicable to the Class B conversion feature, the time period during which Class B shares were held in a money market fund will be excluded.
At any time after acquiring shares of other funds participating in the Class B or Class C exchange privilege, the shareholder may again exchange those shares (and any reinvested dividends and distributions) for Class B or Class C shares of the Fund, respectively, without subjecting such shares to any CDSC. Shares of any fund participating in the Class B or Class C exchange privilege that were acquired through reinvestment of dividends or distributions may be exchanged for Class B or Class C shares of other funds, respectively, without being subject to any CDSC.
Class Z. Class Z shares may be exchanged for Class Z shares of other Prudential Mutual Funds.
Additional details about the Exchange Privilege and prospectuses for each of the Prudential Mutual Funds are available from the Fund's Transfer Agent, Prudential Securities or Prusec. The Exchange Privilege may be modified, terminated or suspended on sixty days' notice, and any fund, including the Fund, or the Distributor, has the right to reject any exchange application relating to such fund's shares.
Dollar Cost Averaging
Dollar cost averaging is a method of accumulating shares by investing a fixed amount of dollars in shares at set intervals. An investor buys more shares when the price is low and fewer shares when the price is high. The average cost per share is lower than it would be if a constant number of shares were bought at set intervals.
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............... $ 110 $ 165 $ 220 $ 275 20 years............... 176 264 352 440 15 years............... 296 444 592 740 10 years............... 555 833 1,110 1,388 5 years............... 1,371 2,057 2,742 3,428 |
See "Automatic Savings Accumulation Plan."
2The chart assumes an average rate of return of 8% (assuming monthly compounding). This example is for illustrative purposes only and is not intended to reflect the performance of an investment in shares of the Fund. The investment return and principal value of an investment will fluctuate so that an investor's shares when redeemed may be worth more or less than their original cost.
Automatic Savings Accumulation Plan (ASAP)
Under ASAP, an investor may arrange to have a fixed amount automatically invested in shares of the Fund monthly by authorizing his or her bank account or Prudential Securities account (including a Command Account) to be debited to invest specified dollar amounts in shares of the Fund. The investor's bank must be a member of the Automatic Clearing House System. Stock certificates are not issued to ASAP participants.
Further information about this program and an application form can be obtained from the Transfer Agent, Prudential Securities or Prusec.
Systematic Withdrawal Plan
A systematic withdrawal plan is available to shareholders through Prudential Securities or the Transfer Agent. Such withdrawal plan provides for monthly or quarterly checks in any amount, except as provided below, up to the value of the shares in
the shareholder's account. Withdrawals of Class B or Class C shares may be subject to a CDSC. See "Shareholder Guide-How to Sell Your Shares-Contingent Deferred Sales Charges" in the Prospectus.
In the case of shares held through the Transfer Agent (i) a $10,000 minimum account value applies, (ii) withdrawals may not be for less than $100 and (iii) the shareholder must elect to have all dividends and/or distributions automatically reinvested in additional full and fractional shares at net asset value on shares held under this plan. See "Shareholder Investment Account-Automatic Reinvestment of Dividends and/or Distributions."
Prudential Securities and the Transfer Agent act as agents for the shareholder in redeeming sufficient full and fractional shares to provide the amount of the periodic withdrawal payment. The systematic withdrawal plan may be terminated at any time, and the Distributor reserves the right to initiate a fee of up to $5 per withdrawal, upon 30 days' written notice to the shareholder.
Withdrawal payments should not be considered as dividends, yield or income. If periodic withdrawals continuously exceed reinvested dividends and distributions, the shareholder's original investment will be correspondingly reduced and ultimately exhausted.
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 the purchases of additional shares are inadvisable because of the sales charge applicable to (i) the purchase of Class A shares and (ii) the withdrawal of Class B and Class C shares. Each shareholder should consult his or her own tax adviser with regard to the tax consequences of the systematic withdrawal plan, particularly if used in connection with a retirement plan.
Tax-Deferred Retirement Plans
Various tax-deferred retirement plans, including a 401(k) plan,
self-directed individual retirement accounts and "tax sheltered accounts" under
Section 403(b)(7) of the Internal Revenue Code are available through the
Distributor. These plans are for use by both self-employed individuals and
corporate employers. These plans permit either self-direction of accounts by
participants, or a pooled account arrangement. Information regarding the
establishment of these plans, the administration, custodial fees and other
details are available from Prudential Securities or the Transfer Agent.
Investors who are considering the adoption of such a plan should consult with their own legal counsel or tax adviser with respect to the establishment and maintenance of any such plan.
Tax-Deferred Retirement Accounts
Individual Retirement Accounts. An individual retirement account (IRA) permits the deferral of federal income tax on income earned in the account until the earnings are withdrawn. The following chart represents a comparison of the earnings in a personal savings account with those in an IRA, assuming a $2,000 annual contribution, an 8% rate of return and a 39.6% federal income tax bracket and shows how much more retirement income can accumulate within an IRA as opposed to a taxable individual savings account.
Tax-Deferred Compounding1
Contributions Personal
Made Over: Savings IRA
---------- -------- --------
10 years $ 26,165 $ 31,291
15 years 44,675 58,649
20 years 68,109 98,846
25 years 97,780 157,909
30 years 135,346 244,692
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Mutual Fund Programs
From time to time, the Fund may be included in a mutual fund program with other Prudential Mutual Funds. Under such a program, a group of portfolios will be selected and thereafter marketed collectively. Typically, these programs are created with an investment theme, e.g., to seek greater diversification, protection from interest rate movements or access to different management styles. In the event such a program is instituted, there may be a minimum investment requirement for the program as a whole. The Fund may waive or reduce the minimum initial investment requirements in connection with such a program.
The mutual funds in the program may be purchased individually or as part of a program. Since the allocation of portfolios included in the program may not be appropriate for all investors, individuals should consult their Prudential Securities Financial Advisor or Prudential/Pruco Securities Representative concerning the appropriate blend of portfolios for them. If investors elect
to purchase the individual mutual funds that constitute the program in an investment ratio different from that offered by the program, the standard minimum investment requirements for the individual mutual funds will apply.
NET ASSET VALUE
Under the Investment Company Act, the Board of Directors is responsible for determining in good faith the fair value of securities of the Fund. In accordance with procedures adopted by the Board of Directors, the value of investments listed on a securities exchange and NASDAQ National Market System securities (other than options on stock and stock indices) are valued at the last sale price on the day of valuation or, if there was no sale on such day, the mean between the last bid and asked prices on such day, as provided by a pricing service or principal market maker. Corporate bonds (other than convertible debt securities) and U.S. Government securities that are actively traded in the over-the-counter market, including listed securities for which the primary market is believed to be over-the-counter, are valued on the basis of valuations provided by a pricing service which uses information with respect to transactions in bonds, quotations from bond dealers, agency ratings, market transactions in comparable securities and various relationships between securities in determining value. Convertible debt securities that are actively traded in the over-the-counter market, including listed securities for which the primary market is believed to be over-the-counter, are valued at the mean between the last reported bid and asked prices provided by principal market makers. Options on stock and stock indices traded on an exchange are valued at the mean between the most recently quoted bid and asked prices on the respective exchange and futures contracts and options thereon are valued at their last sale prices as of the close of the commodities 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 forward currency exchange contracts are valued at the current cost of covering or offsetting such contracts. 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 market quotations are not readily available are valued at their fair value as determined in good faith by the Board of Directors. 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 Board of 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. The Fund will compute its net asset value 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 net asset value. In the event the New York Stock Exchange closes early on any business day, the net asset value of the Fund's shares shall be determined at the time between such closing and 4:15 P.M., New York time.
Net asset value is calculated separately for each class. The net asset value of Class B and Class C shares will generally be lower than the net asset value of Class A shares as a result of the larger distribution-related fee to which Class B and Class C shares are subject. The NAV of Class Z shares will generally be higher than the NAV of Class A, Class B or Class C shares as a result of the fact that the Class Z shares are not subject to any distribution or service fee. It is expected, however, that the NAV of the four classes will tend to converge immediately after the recording of dividends, if any, which will differ by approximately the amount of the distribution and/or service fee expense accrual differential among the classes.
TAXES
The Fund is qualified and intends to remain qualified as a regulated
investment company under Subchapter M of the Internal Revenue Code. In order to
qualify as a regulated investment company, the Fund must, among other things,
(a) derive at least 90% of its annual gross income (without reduction for losses
from the sale or other disposition of securities) from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of securities or foreign currencies, or other income (including, 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)
derive less than 30% of its annual gross income from gains (without reduction
for losses) from the sale or other disposition of securities, options, futures
contracts, forward contracts and foreign currencies held less than three months,
except for foreign currencies (and options, futures and forward contracts
thereon) directly related to the Fund's business of investing in securities; (c)
diversify its holdings so that, at the end of each fiscal quarter, (i) at least
50% of the market 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 market 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 (d) 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.
As a regulated investment company, the Fund will not be subject to federal income tax on its net investment income and capital gains, if any, that it distributes to its shareholders. The Fund intends to distribute to its shareholders all such income and
any gains. The Board of Directors of the Fund will determine at least once a year whether to distribute any net long-term capital gains in excess of any net short-term capital losses. In determining amounts of capital gains to be distributed, any capital loss carryovers from prior years will be offset against capital gains.
In addition to the foregoing, a 4% nondeductible excise tax will be imposed on the Fund to the extent the Fund does not meet certain minimum distribution requirements by the end of each calendar year. For this purpose, any income or gain retained by the Fund which is subject to income tax will be considered to have been distributed by year-end. In addition, dividends declared in October, November and December payable to shareholders of record on a specified date in October, November and December and paid in the following January will be treated as having been paid by the Fund and received by each shareholder on December 31 of the calendar year in which declared. Under this rule, therefore, a shareholder may be taxed in one year on dividends or distributions actually received in January of the following year.
Gains or losses on sales of securities by the Fund will be long-term capital gains or losses if the securities have been held by it for more than one year, except in certain cases where the Fund acquires a put or writes a call thereon or otherwise holds an offsetting position with respect to the securities. Other gains or losses on the sale of securities will be short-term capital gains or losses. Gains and losses on the sale, lapse or other termination of options on stock will generally be treated as gains and losses from the sale of stock. For federal income tax purposes, when call options which the Fund has written expire unexercised, the premiums received by the Fund give rise to short-term capital gains at the time of expiration. When a call written by the Fund is exercised, the selling price of the stock is increased by the amount of the premium, and the gain or loss on the sale of stock becomes long-term or short-term depending on the stock's holding period. Certain futures contracts and options held by the Fund will be required to be "marked to market" for federal income tax purposes, that is, treated as having been sold at fair market value on the last day of the Fund's fiscal year. Any gain or loss recognized on these deemed sales of these futures contracts and options will be treated 60% as long-term capital gain or loss, and the remainder will be treated as short-term capital gain or loss. Certain of the Fund's transactions may be subject to wash sale and short sale provisions of the Internal Revenue Code that may, among other things, require the Fund to defer losses.
The "straddle" provisions of the Internal Revenue Code may affect the taxation of the Fund's transactions (including transactions in options on securities, stock index futures and options on futures) and limit the deductibility of any loss from the disposition of a position to the amount of the unrealized gain on any offsetting position. Further, any position in the straddle (e.g., a put option acquired by the Fund) may affect the holding period of the offsetting position for purposes of the 30% of gross income test described above, and accordingly, the Fund's ability to enter into straddles and dispose of the offsetting positions may be limited.
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.
If a shareholder acquires shares of the Fund and sells or otherwise disposes of such shares within 90 days of acquisition, certain sales charges incurred in acquiring such shares may not be included in the basis of such shares for purposes of calculating gain or loss realized upon such sale or disposition.
The per share dividends on Class B and Class C shares will be lower than the per share dividends on Class A and Class Z shares as a result of the higher distribution-related fee applicable to the Class B and Class C shares. The per share distributions of net capital gains, if any, will be paid in the same amount for Class A, Class B, Class C and Class Z shares. See "Net Asset Value."
Shareholders electing to receive dividends and distributions in the form of additional shares will have a cost basis for federal income tax purposes in each share so received equal to the net asset value of a share of the Fund on the reinvestment date.
Any dividends or distributions paid shortly after a purchase by an investor may have the effect of reducing the per share net asset value of the investor's shares by the per share amount of the dividends or distributions. Furthermore, such dividends or distributions, although in effect a return of capital, are subject to federal income taxes. Prior to purchasing shares of the Fund, therefore, the investor should carefully consider the impact of dividends or capital gains distributions which are expected to be or have been announced.
Dividends and distributions may also be subject to state and local taxes.
PERFORMANCE INFORMATION
Average Annual Total Return. The Fund may from time to time advertise its average annual total return. Average annual total return is determined separately for Class A, Class B, Class C and Class Z shares. See "How the Fund Calculates Performance" in the Prospectus.
Average annual total return is computed according to the following formula:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value at the end of the 1, 5 or 10 year periods (or fractional portion thereof) of a hypothetical $1,000 payment made at the beginning of the 1, 5 or 10 year periods.
Average annual total return takes into account any applicable initial or contingent deferred sales charges but does not take into account any federal or state income taxes that may be payable upon redemption.
The average annual total returns for Class A shares for the one year, five year and since inception (January 22, 1990) periods ended December 31, 1996 were 15.98%, 11.41% and 10.95%, respectively. The average annual total returns for Class B shares for the one, five and ten year and since inception (August 10, 1981) periods ended December 31, 1996 were 16.16%, 11.57%, 11.53% and 16.43%, respectively. The average annual total returns for Class C shares for the one year and since inception (August 1, 1994) periods ended December 31, 1996 were 20.16% and 15.52%, respectively. The average annual total return for the Class Z shares for the since inception (March 1, 1996) period ended December 31, 1996 was 20.11%. See "How the Fund Calculates Performance" in the Prospectus.
Aggregate Total Return. The Fund may also advertise its aggregate total return. Aggregate total return is determined separately for Class A, Class B, Class C and Class Z shares. See "How the Fund Calculates Performance" in the Prospectus.
Aggregate total return represents the cumulative change in the value of an investment in the Fund and is computed according to the following formula:
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 investment made at the beginning of the 1, 5 or 10 year
periods.
Aggregate total return does not take into account any federal or state income taxes that may be payable upon redemption or any applicable initial or contingent deferred sales charges.
The aggregate total returns for Class A shares for the one year, five year and since inception (January 22, 1990) periods ended December 31, 1996 were 22.09%, 80.68% and 116.47%, respectively. The aggregate total returns for Class B shares for the one, five and ten year and since inception (August 10, 1981) periods ended December 31, 1996 were 21.16%, 73.95%, 197.75% and 939.83%, respectively. The aggregate total returns for Class C shares for the one year and since inception (August 1, 1994) periods ended December 31, 1996 were 21.16% and 41.73%, respectively. The aggregate total return for the Class Z shares for the since inception (March 1, 1996) period ended December 31, 1996 was 20.11%.
Yield. The Fund may from time to time advertise its yield as calculated over a 30-day period. Yield is calculated separately for Class A, Class B, Class C and Class Z shares. This yield will be computed by dividing the Fund's net investment income per share earned during this 30-day period by the maximum offering price per share on the last day of this period. Yield is calculated according to the following formula:
a - b YIELD = 2 [ (------- + 1)6 - 1 ]
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
Yield fluctuates and an annualized yield quotation is not a representation by the Fund as to what an investment in the Fund will actually yield for any given period.
The Fund's 30-day yields for the period ended December 31, 1996 were 2.55%, 1.96%, 1.96% and 2.93% for Class A, Class B, Class C and Class Z shares, respectively.
From time to time, the performance of the Fund may be measured against various indices. Set forth below is a chart which compares the performance of different types of investments over the long-term and the rate of inflation.1
CHART
Performance Comparison of Different Types of Investments Over the Long Term
(1/1926 - 12/1994)
Common Stocks - 10.2%
Long-Term Govt. Bonds - 4.8%
Inflation - 3.1%
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
AND INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, One Heritage Drive, North Quincy, Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and cash and in that capacity maintains certain financial and accounting books and records pursuant to an agreement with the Fund. See "How the Fund is Managed-Custodian and Transfer and Dividend Disbursing Agent" in the Prospectus.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of the Fund. It is a wholly-owned subsidiary of PMF. PMFS provides customary transfer agency services to the Fund, including the handling of shareholder communications, the processing of shareholder transactions, the maintenance of shareholder account records, the payment of dividends and distributions and related functions. For these services, PMFS receives an annual fee per shareholder account, in addition to a new account set-up fee for each manually-established account and a monthly inactive zero balance account fee per shareholder account. PMFS is also reimbursed for its out-of-pocket expenses, including but not limited to postage, stationery, printing, allocable communications expenses and other costs. For the year ended December 31, 1996, the Fund incurred fees of approximately $4,616,000 for the services of PMFS.
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York 10036, serves as the Fund's independent accountants and in that capacity audits the Fund's annual financial statements.
Shares Description Value (Note 1)
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--96.8%
COMMON STOCKS--91.0%
- ------------------------------------------------------------
Communications--13.7%
1,152,200 AT&T Corp. $ 50,120,700
1,169,800 BCE Inc. (Canada) 55,857,950
990,500 Deutsche Telekom, A.G. (ADR)
(Germany) (a) 20,181,438
698,000 Frontier Corporation 15,792,250
774,700 Millicom International Cellular S.
A. (Luxembourg) (a) 24,887,237
1,599,200 Southern New England
Telecommunications Corp. 62,168,900
1,000,000 Sprint Corp. 39,875,000
18,575,000 Stet-Societa Finanziaria
Telefonica, S.P.A. (Italy) 84,346,163
1,991,700 Tele Danmark (ADR) (Denmark) 54,273,825
573,400 Telebras (ADR) (Brazil) 43,865,100
824,000 Telefonica de Espana, S.A. (ADR)
(Spain) 57,062,000
1,503,000 Telefonica del Peru, S.A. (ADR)
(Peru) 28,369,125
1,211,500 Telefonos de Mexico, S.A. (ADR)
(Mexico) 39,979,500
---------------
576,779,188
- ------------------------------------------------------------
Electrical Power--34.6%
1,258,927 AES Corp. (a) 58,540,105
1,045,400 Boston Edison Co. 28,095,125
1,517,700 Centerior Energy Corp. 16,315,275
981,300 Central Louisiana Electric
Company, Inc. 27,108,412
1,179,500 Central Maine Power Co. 13,711,688
2,832,685 CINergy Corporation 94,540,862
2,300,000 CMS Energy Corporation 77,337,500
948,202 Companhia Energetica de Minas
Gerais-Cemig (ADR) (Brazil) 32,001,817
787,400 DTE Energy Co. 25,492,075
803,100 Eastern Utilities Associates 13,953,863
2,415,000 Edison International 47,998,125
83,540 El Paso Electric Co. (a) 543,010
947,700 Empresa Nacional de Electricidad
S.A. (ADR) (Spain) 66,339,000
330,001 Evn Energie - Versorgung
Niederoesterreich AG (Austria) $ 49,688,387
6,300,000 Iberdrola (Spain) 89,244,746
2,798,500 Illinova Corp. 76,958,750
2,140,600 Long Island Lighting Co. 47,360,775
7,250,000 National Power PLC
(United Kingdom) 60,716,732
2,165,500 New York State Electric & Gas
Corp. 46,828,937
4,000,000 Niagara Mohawk Power Corp. (a) 39,500,000
967,000 NIPSCO Industries, Inc. 38,317,375
2,811,400 Northeast Utilities Co. 37,251,050
393,000 Oester Elektrizita (Austria) 29,423,722
2,000,000 Ohio Edison Co. 45,500,000
900,000 Pacific Gas & Electric Co. 18,900,000
2,578,600 PECO Energy Co. 65,109,650
2,303,400 Pinnacle West Capital Corp. 73,132,950
906,800 Public Service Company of Colorado 35,251,850
2,057,000 Public Service Company of
New Mexico 40,368,625
1,670,800 Rochester Gas & Electric Corp. 31,954,050
1,526,100 Texas Utilities Co. 62,188,575
1,490,740 Tucson Electric Power Co. (a) 24,783,553
1,380,500 Unicom Corp. 37,446,062
---------------
1,451,902,646
- ------------------------------------------------------------
Natural Gas--41.2%
1,000,000 Alberta Energy Co., Ltd. (Canada) 24,000,000
283,650 Bay State Gas Co. 8,013,113
2,231,600 British Gas PLC (ADR)
(United Kingdom) 85,079,750
450,000 Burlington Resources, Inc. 22,668,750
3,000,275 Coastal Corp. 146,638,441
2,500,000 Columbia Gas System, Inc. 159,062,500
407,200 Consolidated Natural Gas Co. 22,497,800
117,600 Eastern Enterprises, Inc. 4,160,100
1,299,100 El Paso Natural Gas Co. 65,604,550
500,000 Energen Corp. 15,125,000
417,900 Enron Corp. 18,021,938
|
Shares Description Value (Note 1)
------------------------------------------------------------
Natural Gas (cont'd.)
3,272,300 ENSERCH Corp. $ 75,262,900
1,500,000 Equitable Resources, Inc. 44,625,000
375,000 RAO Gazprom (ADR) (Russia) (a) 6,656,250
690,300 KN Energy, Inc. 27,094,275
703,600 MCN Corporation 20,316,450
810,600 NICOR Inc. 28,978,950
3,148,000 NorAm Energy Corp. 48,400,500
700,000 Oryx Energy Co.(a) 17,325,000
3,544,300 Pacific Enterprises 107,658,112
4,172,800 PanEnergy Corp. 187,776,000
117,600 Providence Energy Corp. 2,058,000
1,880,400 Questar Corp. 69,104,700
3,914,600 Sonat, Inc. 201,601,900
205,400 Southwest Gas Corporation 3,953,950
857,700 TPC Corp. (a) 7,719,300
6,200,000 TransCanada Pipelines, Ltd.
(Canada) 108,573,513
2,200,000 Westcoast Energy, Inc. (Canada) 36,850,000
936,200 Western Gas Resources, Inc. 18,021,850
3,813,512 Williams Cos., Inc. 143,006,681
161,150 Yankee Energy System, Inc. 3,444,581
---------------
1,729,299,854
- ------------------------------------------------------------
Realty Investment Trust--1.5%
31,200 Charles E. Smith Residential
Realty, Inc. 912,600
447,900 Crescent Real Estate Equities,
Inc. 23,626,725
969,900 Equity Residential Property Trust 40,008,375
---------------
64,547,700
---------------
Total common stocks
(cost $2,664,855,259) 3,822,529,388
---------------
PREFERRED STOCKS--1.5%
- ------------------------------------------------------------
Communications--1.3%
300,000 Compania de Inversiones,
Convertible,
7.00% (Argentina) 15,937,500
475,000 Nortel Inversora S. A.,
Convertible, 10.00% (Argentina) 19,475,000
398,000 Philippine Long Distance Telephone
Co., Convertible (GDR) (The
Philippines) $ 20,298,000
---------------
50,710,500
- ------------------------------------------------------------
Electrical Power
109,300 KENETECH Corp., Convertible, $2.18 136,625
- ------------------------------------------------------------
Natural Gas--0.2%
359,100 Enron Corp., 6.25% 8,618,400
---------------
Total preferred stocks
(cost $66,452,300) 64,465,525
---------------
Principal
Amount
(000)
BONDS--4.3%
- ------------------------------------------------------------
Electrical Power--0.7%
$ 3,055 Arkansas Power & Light Co.,
10.00%, 2/1/20 3,277,831
10,000 Cleveland Electric Illumination
Co.,
9.375%, 3/1/17 10,256,100
10,000 Niagara Mohawk Power Corp.,
9.50%, 3/1/21 9,683,200
5,000 Texas Utilities Co.,
9.75%, 5/1/21 5,658,850
---------------
28,875,981
- ------------------------------------------------------------
Natural Gas--2.5%
Arkla, Inc.,
20,000 10.00%, 11/15/19 22,000,000
Burlington Resources, Inc.,
10,000 8.50%, 10/1/01 10,668,800
15,000 9.125%, 10/1/21 17,612,400
Coastal Corp.,
5,000 8.125%, 9/15/02 5,288,400
15,000 9.625%, 5/15/12 17,886,150
|
Principal
Amount
(000) Description Value (Note 1)
- ------------------------------------------------------------
Natural Gas (cont'd.)
Columbia Gas System, Inc.,
$ 1,731 6.39%, 11/28/00 $ 1,719,783
1,730 6.61%, 11/28/02 1,716,593
1,730 6.80%, 11/28/05 1,696,905
1,730 7.05%, 11/28/07 1,706,351
1,730 7.32%, 11/28/10 1,701,455
1,730 7.42%, 11/28/15 1,684,812
1,730 7.62%, 11/28/25 1,682,062
Oryx Energy Co.,
2,000 9.50%, 11/1/99 2,121,700
1,000 7.50%, 5/15/14 971,250
Williams Cos., Inc.,
15,000 8.875%, 9/15/12 16,855,650
---------------
105,312,311
---------------
- ------------------------------------------------------------
Sovereign Bonds--1.1%
45,000 United Mexican States,
7.5625%, 8/6/01 45,108,000
---------------
Total bonds
(cost $168,922,337) 179,296,292
---------------
Total long-term investments
(cost $2,900,229,896) 4,066,291,205
---------------
SHORT-TERM INVESTMENT--3.0%
- ------------------------------------------------------------
Repurchase Agreement
124,122 Joint Repurchase Agreement
Account,
6.61%, 1/2/97
(cost $124,122,000; Note 5) 124,122,000
---------------
- ------------------------------------------------------------
Total Investments--99.8%
(cost $3,024,351,896; Note 4) 4,190,413,205
Other assets in excess of
liabilities--0.2% 10,179,143
---------------
Net Assets--100% $ 4,200,592,348
---------------
---------------
|
Assets December 31, 1996
Investments, at value (cost $3,024,351,896)............................................................. $ 4,190,413,205
Cash.................................................................................................... 1,193,421
Foreign currency, at value (cost $103,651).............................................................. 113,290
Dividends and interest receivable....................................................................... 14,623,491
Receivable for investments sold......................................................................... 14,359,045
Receivable for Fund shares sold......................................................................... 5,761,048
Deferred expenses and other assets...................................................................... 106,961
-----------------
Total assets......................................................................................... 4,226,570,461
-----------------
Liabilities
Payable for Fund shares reacquired...................................................................... 16,721,432
Payable for investments purchased....................................................................... 3,675,500
Distribution fee payable................................................................................ 2,232,118
Management fee payable.................................................................................. 1,433,010
Accrued expenses and other liabilities.................................................................. 1,253,193
Foreign withholding taxes payable....................................................................... 662,860
-----------------
Total liabilities.................................................................................... 25,978,113
-----------------
Net Assets.............................................................................................. $ 4,200,592,348
-----------------
-----------------
Net assets were comprised of:
Common stock, at par................................................................................. $ 3,861,981
Paid-in capital in excess of par..................................................................... 2,985,048,667
-----------------
2,988,910,648
Undistributed net investment income.................................................................. 557,976
Accumulated net realized gain on investments......................................................... 44,981,682
Net unrealized appreciation on investments and foreign currencies.................................... 1,166,142,042
-----------------
Net assets, December 31, 1996........................................................................... $ 4,200,592,348
-----------------
-----------------
Class A:
Net asset value and redemption price per share
($2,022,976,817 / 185,995,783 shares of common stock issued and outstanding)...................... $10.88
Maximum sales charge (5.00% of offering price)....................................................... .57
-----------------
Maximum offering price to public..................................................................... $11.45
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per share
($2,137,168,779 / 196,484,277 shares of common stock issued and outstanding)...................... $10.88
-----------------
-----------------
Class C:
Net asset value, offering price and redemption price per share
($6,001,185 / 551,735 shares of common stock issued and outstanding).............................. $10.88
-----------------
-----------------
Class Z:
Net asset value, offering price and redemption price per share
($34,445,567 / 3,166,275 shares of common stock issued and outstanding)........................... $10.88
-----------------
-----------------
|
Year Ended
Net Investment Income December 31, 1996
Income
Dividends (net of foreign withholding
taxes of $6,118,679)............... $ 141,030,867
Interest.............................. 17,714,542
-----------------
Total income....................... 158,745,409
-----------------
Expenses
Distribution fee--Class A............. 4,464,713
Distribution fee--Class B............. 21,840,150
Distribution fee--Class C............. 45,173
Management fee........................ 16,378,451
Transfer agent's fees and expenses.... 5,847,000
Reports to shareholders............... 1,353,000
Custodian's fees and expenses......... 500,000
Registration fees..................... 150,000
Insurance............................. 101,000
Audit fees............................ 72,000
Tax expense........................... 67,000
Legal fees............................ 50,000
Directors' fees....................... 36,000
Miscellaneous......................... 10,309
-----------------
Total expenses..................... 50,914,796
-----------------
Net investment income.................... 107,830,613
-----------------
Realized and Unrealized Gain (Loss)
on Investments and Foreign Currency
Transactions
Net realized gain (loss) on:
Investment transactions............... 320,997,570
Foreign currency transactions......... (761,684)
-----------------
320,235,886
-----------------
Net change in unrealized appreciation on:
Investments........................... 357,490,812
Foreign currencies.................... 81,936
-----------------
357,572,748
-----------------
Net gain on investments and foreign
currencies............................ 677,808,634
-----------------
Net Increase in Net Assets
Resulting from Operations................ $ 785,639,247
-----------------
-----------------
|
Increase (Decrease) Year Ended December 31,
in Net Assets 1996 1995
Operations
Net investment income....... $ 107,830,613 $ 103,210,192
Net realized gain on
investment and foreign
currency transactions.... 320,235,886 98,889,115
Net change in unrealized
appreciation of
investments and foreign
currencies............... 357,572,748 673,298,687
-------------- --------------
Net increase in net assets
resulting from
operations............... 785,639,247 875,397,994
-------------- --------------
Net equalization debits........ -- (164,415,069)
-------------- --------------
Dividends and distributions
(Note 1)
Dividends from net
investment income
Class A.................. (56,517,524) (51,342,292)
Class B.................. (49,728,071) (55,339,423)
Class C.................. (110,317) (56,691)
Class Z.................. (1,061,722) --
-------------- --------------
(107,417,634) (106,738,406)
-------------- --------------
Distributions from net
realized capital gains
Class A.................. (136,028,661) (32,215,260)
Class B.................. (151,218,004) (44,539,060)
Class C.................. (377,943) (61,682)
Class Z.................. (2,368,426) --
-------------- --------------
(289,993,034) (76,816,002)
-------------- --------------
Fund share transactions (net of
share conversions) (Note 6)
Proceeds from shares sold... 334,072,755 280,270,137
Net asset value of shares
issued in reinvestment of
dividends and
distributions............ 363,055,255 158,587,981
Cost of shares reacquired... (952,090,398) (680,035,423)
-------------- --------------
Net decrease in net assets
from Fund share
transactions............. (254,962,388) (241,177,305)
-------------- --------------
Total increase................. 133,266,191 286,251,212
Net Assets
Beginning of year.............. 4,067,326,157 3,781,074,945
-------------- --------------
End of year.................... $4,200,592,348 $4,067,326,157
-------------- --------------
-------------- --------------
|
Class A Shares Amount
- -------------------------------- ------------ ---------------
Year ended December 31, 1996:
Shares sold..................... 15,308,482 $ 159,264,202
Shares issued in reinvestment of
dividends and distributions... 16,527,013 175,127,592
Shares reacquired............... (41,901,121) (433,594,928)
------------ ---------------
Net decrease in shares
outstanding before
conversion.................... (10,065,626) (99,203,134)
Shares issued upon conversion
from Class B.................. 26,433,307 269,740,107
Shares reacquired upon
conversion into Class Z....... (3,501,686) (35,052,440)
------------ ---------------
Net increase in shares
outstanding................... 12,865,995 $ 135,484,533
------------ ---------------
------------ ---------------
|
Class A Shares Amount
- -------------------------------- ------------ ---------------
Year ended December 31, 1995:
Shares sold..................... 11,312,376 $ 101,904,762
Shares issued in reinvestment of
dividends and distributions... 8,160,648 75,788,292
Shares reacquired............... (35,079,569) (318,002,985)
------------ ---------------
Net decrease in shares
outstanding before
conversion.................... (15,606,545) (140,309,931)
Shares issued upon conversion
from Class B.................. 158,049,642 1,361,629,436
------------ ---------------
Net increase in shares
outstanding................... 142,443,097 $ 1,221,319,505
------------ ---------------
------------ ---------------
Class B
- --------------------------------
Year ended December 31, 1996:
Shares sold..................... 15,690,293 $ 161,351,912
Shares issued in reinvestment of
dividends and distributions... 17,344,216 184,033,919
Shares reacquired............... (48,711,671) (500,182,084)
------------ ---------------
Net decrease in shares
outstanding before
conversion.................... (15,677,162) (154,769,253)
Shares reacquired upon
conversion into Class A....... (26,471,144) (269,740,107)
------------ ---------------
Net decrease in shares
outstanding................... (42,148,306) $ (424,536,360)
------------ ---------------
------------ ---------------
Year ended December 31, 1995:
Shares sold..................... 21,935,982 $ 175,662,021
Shares issued in reinvestment of
dividends and distributions... 9,776,000 82,690,917
Shares reacquired............... (61,783,220) (361,503,031)
------------ ---------------
Net decrease in shares
outstanding before
conversion.................... (30,071,238) (103,150,093)
Shares reacquired upon
conversion into Class A....... (158,409,384) (1,361,629,436)
------------ ---------------
Net decrease in shares
outstanding................... (188,480,622) $(1,464,779,529)
------------ ---------------
------------ ---------------
Class C Shares Amount
- -------------------------------- ------------ ---------------
Year ended December 31, 1996:
Shares sold..................... 282,613 $ 2,928,285
Shares issued in reinvestment of
dividends and distributions... 43,560 463,633
Shares reacquired............... (124,537) (1,271,152)
------------ ---------------
Net increase in shares
outstanding................... 201,636 $ 2,120,766
------------ ---------------
------------ ---------------
Year ended December 31, 1995:
Shares sold..................... 300,880 $ 2,703,354
Shares issued in reinvestment of
dividends and distributions... 11,542 108,772
Shares reacquired............... (57,613) (529,407)
------------ ---------------
Net increase in shares
outstanding................... 254,809 $ 2,282,719
------------ ---------------
------------ ---------------
Class Z
- --------------------------------
March 1, 1996(a) through
December 31, 1996:
Shares sold..................... 1,002,069 $ 10,528,356
Shares issued in reinvestment of
dividends and distributions... 324,254 3,430,111
Shares reacquired............... (1,661,734) (17,042,234)
------------ ---------------
Net decrease in shares
outstanding
before conversion............. (335,411) (3,083,767)
Shares issued upon conversion
from Class A.................. 3,501,686 35,052,440
------------ ---------------
Net increase in shares
outstanding................... 3,166,275 $ 31,968,673
------------ ---------------
------------ ---------------
|
Class A
----------------------------------------------------
Year Ended December 31,
----------------------------------------------------
1996(b) 1995 1994 1993 1992
-------- ------ ------ ------ ------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................................... $ 9.87 $ 8.27 $ 9.72 $ 8.97 $ 8.72
-------- ------ ------ ------ ------
Income from investment operations
Net investment income................................................. .32 .30 .31 .33 .38
Net realized and unrealized gains (losses) on investment and foreign
currency transactions.............................................. 1.80 1.79 (1.06) 1.12 .45
-------- ------ ------ ------ ------
Total from investment operations................................... 2.12 2.09 (.75) 1.45 .83
-------- ------ ------ ------ ------
Less distributions
Dividends from net investment income.................................. (.32) (.30) (.32) (.29) (.34)
Distributions from net realized gains................................. (.79) (.19) (.36) (.41) (.24)
Distributions in excess of net realized gains......................... -- -- (.02) -- --
-------- ------ ------ ------ ------
Total distributions................................................ (1.11) (.49) (.70) (.70) (.58)
-------- ------ ------ ------ ------
Net asset value, end of year.......................................... $10.88 $ 9.87 $ 8.27 $ 9.72 $ 8.97
-------- ------ ------ ------ ------
-------- ------ ------ ------ ------
TOTAL RETURN(a)....................................................... 22.09% 25.74% (7.89)% 16.28% 9.88%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000,000)..................................... $2,023 $1,709 $254 $337 $201
Average net assets (000,000).......................................... $1,786 $1,440 $294 $287 $149
Ratios to average net assets:
Expenses, including distribution fees.............................. .86% .88% .88% .80% .81%
Expenses, excluding distribution fees.............................. .61% .63% .63% .60% .61%
Net investment income.............................................. 3.10% 3.12% 3.37% 3.16% 4.14%
For Class A, B, C and Z shares:
Portfolio turnover rate............................................ 17% 14% 15% 24% 24%
Average commission rate paid per share............................. $.0332 $.0302 N/A N/A N/A
|
Class B
----------------------------------------------------
Year Ended December 31,
----------------------------------------------------
1996(b) 1995 1994 1993 1992
-------- ------ ------ ------ ------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................................... $ 9.87 $ 8.26 $ 9.69 $ 8.96 $ 8.71
-------- ------ ------ ------ ------
Income from investment operations
Net investment income................................................. .24 .22 .24 .24 .31
Net realized and unrealized gains (losses) on investment and foreign
currency transactions.............................................. 1.80 1.80 (1.05) 1.12 .46
-------- ------ ------ ------ ------
Total from investment operations................................... 2.04 2.02 (.81) 1.36 .77
-------- ------ ------ ------ ------
Less distributions
Dividends from net investment income.................................. (.24) (.22) (.24) (.22) (.28)
Distributions from net realized gains................................. (.79) (.19) (.36) (.41) (.24)
Distributions in excess of net realized gains......................... -- -- (.02) -- --
-------- ------ ------ ------ ------
Total distributions................................................ (1.03) (.41) (.62) (.63) (.52)
-------- ------ ------ ------ ------
Net asset value, end of year.......................................... $10.88 $ 9.87 $ 8.26 $ 9.69 $ 8.96
-------- ------ ------ ------ ------
-------- ------ ------ ------ ------
TOTAL RETURN(a)....................................................... 21.16% 24.80% (8.51)% 15.27% 9.02%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000,000)..................................... $2,137 $2,355 $3,526 $4,756 $3,438
Average net assets (000,000).......................................... $2,184 $2,450 $4,152 $4,308 $3,027
Ratios to average net assets:
Expenses, including distribution fees.............................. 1.61% 1.63% 1.63% 1.60% 1.61%
Expenses, excluding distribution fees.............................. .61% .63% .63% .60% .61%
Net investment income.............................................. 2.35% 2.37% 2.62% 2.36% 3.34%
|
Class C Class Z
------------------------------------ ------------
August 1, March 1,
Year Ended December 1994(d) 1996(e)
31, Through Through
------------------- December 31, December 31,
1996(b) 1995 1994 1996(b)
-------- ------ ------------ ------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................. $ 9.87 $ 8.26 $ 9.30 $ 10.05
-------- ------ ------------ ------------
Income from investment operations
Net investment income................................................. .24 .22 .11 .29
Net realized and unrealized gains (losses) on investment and foreign
currency transactions.............................................. 1.80 1.80 (.69) 1.67
-------- ------ ------------ ------------
Total from investment operations................................... 2.04 2.02 (.58) 1.96
-------- ------ ------------ ------------
Less distributions
Dividends from net investment income.................................. (.24) (.22) (.13) (.34)
Distributions from net realized gains................................. (.79) (.19) (.31) (.79)
Distributions in excess of net realized gains......................... -- -- (.02) --
-------- ------ ------------ ------------
Total distributions................................................ (1.03) (.41) (.46) (1.13)
-------- ------ ------------ ------------
Net asset value, end of period........................................ $10.88 $ 9.87 $ 8.26 $ 10.88
-------- ------ ------------ ------------
-------- ------ ------------ ------------
TOTAL RETURN(a)....................................................... 21.16% 24.80% (6.27)% 20.11%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)....................................... $6,001 $3,455 $787 $34,446
Average net assets (000).............................................. $4,517 $2,181 $433 $34,291
Ratios to average net assets:
Expenses, including distribution fees.............................. 1.61% 1.63% 1.70%(c) .61%(c)
Expenses, excluding distribution fees.............................. .61% .63% .70%(c) .61%(c)
Net investment income.............................................. 2.35% 2.37% 2.65%(c) 3.35%(c)
|
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
February 28, 1997
APPENDIX I-GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
Asset Allocation
Asset allocation is a technique for reducing risk and providing balance. Asset allocation among different types of securities within an overall investment portfolio helps to reduce risk and to potentially provide stable returns, while enabling investors to work toward their financial goal(s). Asset allocation is also a strategy to gain exposure to better performing asset classes while maintaining investment in other asset classes.
Diversification
Diversification is a time-honored technique for reducing risk, providing "balance" to an overall portfolio and potentially achieving more stable returns. Owning a portfolio of securities mitigates the individual risks (and returns) of any one security. Additionally, diversification among types of securities reduces the risks (and general returns) of any one type of security.
Duration
Debt securities have varying levels of sensitivity to interest rates. As interest rates fluctuate, the value of a bond (or a bond portfolio) will increase or decrease. Longer term bonds are generally more sensitive to changes in interest rates. When interest rates fall, bond prices generally rise. Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond portfolio) to interest rate changes. It measures the weighted average maturity of a bond's (or a bond portfolio's) cash flows, i.e., principal and interest rate payments. Duration is expressed as a measure of time in years-the longer the duration of a bond (or a bond portfolio), the greater the impact of interest rate changes on the bond's (or the bond portfolio's) price. Duration differs from effective maturity in that duration takes into account call provisions, coupon rates and other factors. Duration measures interest rate risk only and not other risks, such as credit risk and, in the case of non-U.S. dollar denominated securities, currency risk. Effective maturity measures the final maturity dates of a bond (or a bond portfolio).
Market Timing
Market timing-buying securities when prices are low and selling them when prices are relatively higher-may not work for many investors because it is impossible to predict with certainty how the price of a security will fluctuate. However, owning a security for a long period of time may help investors off-set short-term price volatility and realize positive returns.
Power of Compounding
Over time, the compounding of returns can significantly impact investment returns. Compounding is the effect of continuous investment on long-term investment results, by which the proceeds of capital appreciation (and income distributions, if elected) are reinvested to contribute to the overall growth of assets. The long-term investment results of compounding may be greater than that of an equivalent initial investment in which the proceeds of capital appreciation and income distributions are taken in cash.
APPENDIX II-HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data obtained from statistical services, reports and other services believed by the Manager to be reliable. The information has not been independently verified by the Manager.
This following chart shows the long-term performance of various asset classes and the rate of inflation.
EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY
[CHART]
VALUE OF $1.00 INVESTED 1/1/26 THROUGH 12/31/96
Small Stocks $4,495.99 Common Stocks $1,370.95 Long-Term Bonds $33.73 Treasury Bills $13.54 Inflation $ 8.87 |
Source: Stocks, Bonds, Bills, and Inflation 1996 Yearbook, Ibbotson Associates, Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield). Used with permission. All rights reserved. This chart is for illustrative purposes only and is not indicative of the past, present, or future performance of any asset class or any Prudential Mutual Fund.
Generally, stock returns are due to capital appreciation and reinvesting any gains. Bond returns are due mainly to reinvesting interest. Also, stock prices usually are more volatile than bond prices over the long-term. Small stock returns for 1926-1980 are those of stocks comprising the 5th quintile of the New York Stock Exchange. Thereafter, returns are those of the Dimensional Fund Advisors (DFA) Small Company Fund. Common stock returns are based on the S&P Composite Index, a market-weighted, unmanaged index of 500 stocks (currently) in a variety of industries. It is often used as a broad measure of stock market performance.
Long-term government bond returns are measured using a constant one-bond portfolio with a maturity of roughly 20 years. Treasury bill returns are for a one-month bill. Treasuries are guaranteed by the government as to the timely payment of principal and interest; equities are not. Inflation is measured by the consumer price index (CPI).
II-1
Set forth below is historical performance data relating to various sectors of the fixed-income securities markets. The chart shows the historical total returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds, U.S. high yield bonds and world government bonds on an annual basis from 1987 through 1995. The total returns of the indices include accrued interest, plus the price changes (gains or losses) of the underlying securities during the period mentioned. The data is provided to illustrate the varying historical total returns and investors should not consider this performance data as an indication of the future performance of the Fund or of any sector in which the Fund invests.
All information relies on data obtained from statistical services, reports and other services believed by the Manager to be reliable. Such information has not been verified. The figures do not reflect the operating expenses and fees of a mutual fund. See "Fund Expenses" in the prospectus. The net effect of the deduction of the operating expenses of a mutual fund on the historical total returns, including the compounded effect over time, could be substantial.
Historical Total Returns of Different Bond Market Sectors
- ---------------------------------------------------------------------------------------------------------
'87 '88 '89 '90 '91 '92 '93 '94 '95
- ---------------------------------------------------------------------------------------------------------
U.S. Govemment
Treasury
Bonds1 2.0% 7.0% 14.4 % 8.5 % 15.3% 7.2% 10.7% (3.4)% 18.4%
- ---------------------------------------------------------------------------------------------------------
U.S. Government
Mortgage
Securities2 4.3% 8.7% 15.4 % 10.7 % 15.7% 7.0% 6.8% (1.6)% 16.8%
- ---------------------------------------------------------------------------------------------------------
U.S. Investment Grade
Corporate
Bonds3 2.6% 9.2% 14.1 % 7.1 % 18.5% 8.7% 12.2% (3.9)% 22.3%
- ---------------------------------------------------------------------------------------------------------
U.S.
High Yield
Corporate
Bonds4 5.0% 12.5% 0.8 % (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2%
- ---------------------------------------------------------------------------------------------------------
World
Govemment
Bonds5 35.2% 2.3% (3.4)% 15.3 % 16.2% 4.8% 15.1% 6.0 % 19.6%
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Difference between highest
and lowest return percent 33.2% 10.2 18.8 24.9 30.9 11.0 10.3 9.9 5.5
- ---------------------------------------------------------------------------------------------------------
|
1Lehman Brothers Treasury Bond Index is an unmanaged index made up of over 150 public issues of the U.S. Treasury having maturities of at least one year.
2Lehman Brothers Mortgage-Backed Securities Index is an unmanaged index that includes over 600 15- and 30-year fixed-rate mortgaged-backed securities of the Government National Mortgage Association (GNMA), Federal National Mortgage Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
3Lehman Brothers Corporate Bond Index includes over 3,000 public fixed-rate, nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated issues and include debt issued or guaranteed by foreign sovereign governments, municipalities, governmental agencies or international agencies. All bonds in the index have maturities of at least one year.
4Lehman Brothers High Yield Bond Index is an unmanaged index comprising over 750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by Moody's Investors Service (or rated BB+ or lower by S&P or Fitch Investors Service). All bonds in the index have maturities of at least one year.
5Salomon Brothers World Government Index (Non U.S.) includes 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
(left column)
This chart illustrates the performance of major world stock markets for the period from 1986 through 1995. It does not represent the performance of any Prudential Mutual Fund.
Average Annual Total Returns of Major World Stock Markets
(1986-1995) (in U.S. dollars)
CHART
Hong Kong 23.8% Belgium 20.7% Sweden 19.4% Netherland 19.3% Spain 17.9% Switzerland 17.1% France 15.3% U.K. 15.0% U.S. 14.8% Japan 12.8% Austria 10.9% Germany 10.7% |
Source: Morgan Stanley Capital International (MSCI). 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.
(right column)
This chart shows the growth of a hypothetical $10,000 investment made in the stocks representing the S&P 500 stock index with and without reinvested dividends.
CHART
1969-1995
Capital Appreciation and Reinvesting Dividends $186,203 Capital Appreciation Only - $66,913
Source: Stocks, Bonds, Bills, and Inflation 1996 Yearbook, Ibbotson Associates, Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefeld). 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.
(center column)
CHART
WORLD STOCK MARKET CAPITALIZATION
BY REGION
WORLD TOTAL - $9.2 trillion
U.S. - 40.8%
Pacific Basin - 28.7%
Europe - 28.3%
Canada - 2.2%
Source: Morgan Stanley Capital International, December 1995. 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 caprtalization is based on the value of 1579 companies in 22 countries (representing approximately 60% of the aggregate market value of the stock exchanges). This chart is for illustrative purposes only and does not represent the allocation of any Prudential Mutual Fund.
II-3
The chart below shows the historical volatility of general interest rates as measured by the long U.S. Treasury Bond.
CHART
Source: Stocks, Bonds, Bills and Inflation 1996 Yearbook, Ibbotson Associates, Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield). Used with permission. All rights reserved. This chart illustrates the historical yield of the long-term U.S. Treasury Bond from 1926-1995. Yields represent that of an annually renewed one-bond portfolio with a remaining maturity of approximately 20 years. This chart is for illustrative purposes only and should not be construed to represent the yields of any Prudential Mutual Fund.
The following chart, although not relevant to share ownership in the Fund, may provide useful information about the effects of a hypothetical investment diversified over different asset portfolios. The chart shows the range of annual total returns for major stock and bond indices for the period from December 31, 1975 through December 31, 1995. The horizontal "Best Returns Zone" band shows that a hypothetical blended portfolio constructed of one-third U.S. stock (S&P 500), one-third foreign stock (EAFE Index), and one-third U.S. bonds (Lehman Index) would have eliminated the "highest highs" and "lowest lows" of any single asset class.
[CHART]
*Source: Prudential Investment Corporation based on data from Lipper Analytical New Application (LANA). Past perfomance is not indicative of future results. The S&P 500 Index is a weighted, unmanaged index comprised of 500 stocks which provides a broad indication of stock price movements. The Morgan Stanley EAFE Index is an unmanaged index comprised of 20 overseas stock markets in Europe, Australia, New Zealand and the Far East. The Lehman Aggregate Index includes all publicly-issued investment grade debt with maturities over one year, including U.S. government and agency issues, 15 and 30 year fixed-rate government agency mortgage securities, dollar denominated SEC registered corporate and government securities, as well as asset-backed securities. Investors cannot invest directly in stock or bond market indices.
II-4
APPENDIX III-INFORMATION RELATING TO THE PRUDENTIAL
Set forth below is information relating to The Prudential Insurance Company of America (Prudential) and its subsidiaries as well as information relating to the Prudential Mutual Funds. See "Management of the Fund-Manager" in the Prospectus. The data will be used in sales materials relating to the Prudential Mutual Funds. Unless otherwise indicated, the information is as of December 31, 1995 and is subject to change thereafter. All information relies on data provided by The Prudential Investment Corporation (PIC) or from other sources believed by the Manager to be reliable. Such information has not been verified by the Fund.
Information about Prudential
The Manager and PIC1 are subsidiaries of Prudential, which is one of the largest diversified financial services institutions in the world and, based on total assets, the largest insurance company in North America as of December 31, 1995. Its primary business is to offer a full range of products and services in three areas: insurance, investments and home ownership for individuals and families; health-care management and other benefit programs for employees of companies and members of groups; and asset management for institutional clients and their associates. Prudential (together with its subsidiaries) employs more than 92,000 persons worldwide, and maintains a sales force of approximately 13,000 agents and 5,600 financial advisors. Prudential is a major issuer of annuities, including variable annuities. Prudential seeks to develop innovative products and services to meet consumer needs in each of its business areas. Prudential uses the rock of Gibraltar as its symbol. The Prudential rock is a recognized brand name throughout the world.
Insurance. Prudential has been engaged in the insurance business since 1875. It insures or provides financial services to more than 50 million people worldwide-one of every five people in the United States. Long one of the largest issuers of individual life insurance, the Prudential has 19 million life insurance policies in force today with a face value of $1 trillion. Prudential has the largest capital base ($11.4 billion) of any life insurance company in the United States. The Prudential provides auto insurance for more than 1.7 million cars and insures more than 1.4 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. In July 1996, Institutional Investor ranked Prudential the fifth largest institutional money manager of the 300 largest money management organizations in the United States as of December 31, 1995. As of December 31,1995, Prudential had more than $314 billion in assets under management. Prudential Investments, a business group of Prudential (of which Prudential Mutual Funds is a key part), manages over $190 billion in assets of institutions and individuals.
Real Estate. The Prudential Real Estate Affiliates, the fourth largest real estate brokerage network in the United States, has more than 34,000 brokers and agents and more than 1,100 offices in the United States.2
Healthcare. Over two decades ago, Prudential introduced the first federally-funded, for-profit HMO in the country. Today, almost 5 million Americans receive healthcare from a Prudential managed care membership.
Financial Services. The Prudential Bank, a wholly-owned subsidiary of 9 Prudential, has nearly $3 billion in assets and serves nearly 1.5 million customers across 50 states.
Information about the Prudential Mutual Funds
Prudential Mutual Fund Management is one of the fifteen largest mutual fund companies in the country, with over 2.5 million shareholders invested in more than 50 mutual fund portfolios and variable annuities with more than 3.7 million shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers wno 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.
2As of December 31, 1994.
III-1
From time to time, there may be media coverage of portfolio managers and other investment professionals associated with the Manager and the Subadviser in national and regional publications, on television and in other media. Additionally, individual mutual fund portfolios are frequently cited in surveys conducted by national and regional publications and media organizations such as The Wall Street Journal, The New York Times, Barron's and USA Today.
Equity Funds. Forbes magazine listed Prudential Equity Fund among twenty mutual funds on its Honor Roll in its mutual fund issue of August 28, 1995. Honorees are chosen annually among mutual funds (excluding sector funds) which are open to new investors and have had the same management for at least five years. Forbes considers, among other criteria, the total return of a mutual fund in both bull and bear markets as well as a fund's risk profile. Prudential Equity Fund is managed with a "value" investment style by PIC. In 1995, Prudential Securities introduced Prudential Jennison Fund, a growth-style equity fund managed by Jennison Associates Capital Corp., a premier institutional equity manager and a subsidiary of Prudential.
High Yield Funds. Investing in high yield bonds is a complex and research intensive pursuit. A separate team of high yield bond analysts monitor the 167 issues held in the Prudential High Yield Fund (currently the largest fund of its kind in the country) along with 100 or so other high yield bonds, which may be considered for purchase.3 Non-investment grade bonds, also known as junk bonds or high yield bonds, are subject to a greater risk of loss of principal and interest including default risk than higher-rated bonds. Prudential high yield portfolio managers and analysts meet face-to-face with almost every bond issuer in the High Yield Fund's portfolio annually, and have additional telephone contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated research organization. Fourteen investment grade bond analysts monitor the financial viability of approximately 1,750 different bond issuers in the investment grade corporate and municipal bond markets-from IBM to small municipalities, such as Rockaway Township, New Jersey. These analysts consider among other things sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services from almost 200 brokers and market service vendors. They also receive nearly 100 trade publications and newspapers-from Pulp and Paper Forecaster to Women's Wear Daily-to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to collect detailed information on which to trade. From natural gas prices in the Rocky Mountains to the results of local municipal elections, a Prudential portfolio manager or trader is able to monitor it if it's important to a Prudential mutual fund.
Prudential Mutual Funds trade approximately $31 billion in U.S. and foreign government securities a year. PIC seeks information from government policy makers. In 1995, Prudential's portfolio managers met with several senior U.S. and foreign government officials, on issues ranging from economic conditions in foreign countries to the viability of index-linked securities in the United States.
Prudential Mutual Funds' portfolio managers and analysts met with over 1,200 companies in 1995, often with the Chief Executive Officer (CEO) or Chief Financial Officer (CFO). They also attended over 250 industry conferences.
Prudential Mutual Fund global equity managers conducted many of their visits overseas, often holding private meetings with a company in a foreign language (our global equity managers speak 7 different languages, including Mandarin Chinese).
Trading Data.4 On an average day, Prudential Mutual Funds' U.S. and foreign equity trading desks traded $77 million in securities representing over 3.8 million shares with nearly 200 different firms. Prudential Mutual Funds' bond trading desks traded $157 million in government and corporate bonds on an average day. That represents more in daily trading than most bond funds tracked by Lipper even have in assets.5 Prudential Mutual Funds' money market desk traded $3.2 billion in money market securities on an average day, or over $800 billion a year. They made a trade every 3 minutes of every trading day. In 1994, the Prudential Mutual Funds effected more than 40,000 trades in money market securities and held on average $20 billion of money market securities.6
Based on complex-wide data, on an average day, over 7,250 shareholders telephoned Prudential Mutual Fund Services LLC, the Transfer Agent of the Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free number. On an annual basis, that represents approximately 1.8 million telephone calls answered.
4Trading data represents average daily transactions for portfolios of the Prudential Mutual Funds for which PIC serves as the subadviser, portfolios of the Prudential Series Fund and institutional and non-US accounts managed by Prudential Mutual Fund Investment Management, a division of PIC, for the year ended December 31, 1995.
5Based on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate U.S.
Govemment, Short Investment Grade Debt, Intermediate Investment Grade Debt,
General U.S. Treasury, General U.S. Govemment and Mortgage Funds.
6As of December 31. 1994.
III-2
Information about Prudential Securities
Prudential Securities is the fifth largest retail brokerage firm in the United States with approximately 5,600 financial advisors. It offers to its clients a wide range of products, including Prudential Mutual Funds and annuities. As of December 31, 1995, assets held by Prudential Securities for its clients approximated $168 billion. During 1994, over 28,000 new customer accounts were opened each month at PSI.7
Prudential Securities has a two-year Financial Advisor training program plus advanced education programs, including Prudential Securities "university," which provides advanced education in a wide array of investment areas. Prudential Securities is the only Wall Street firm to have its own in-house Certified Financial Planner (CFP) program. In the December 1995 issue of Registered Rep, an industry publication, Prudential Securities' Financial Advisor training programs received a grade of A- (compared to an industry average of B+).
In 1995, Prudential Securities' equity research team ranked 8th in Institutional Investor magazine's 1995 "All America Research Team" survey. Five Prudential Securities analysts were ranked as first-team finishers.8
In addition to training, Prudential Securities provides its financial advisors with access to firm economists and market analysts. It has also developed proprietary tools for use by financial advisors, including the Financial ArchitectsSFinancial 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.
8On an annual basis, Institutional Investor magazine surveys, more than 700 institutional money managers, chief investment officers and research directors, asking them to evaluate analysts in 76 industry sectors. Scores are produced by taxing the number of votes awarded to an individual analyst and weighting them based on the size of the voting institution. In total, the magazine sends its survey to approximately 2.000 institutions and a group of European and Asian institutions.
III-3
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(a) Financial Statements:
(1) Financial Statements included in the Prospectus constituting Part A of this Registration Statement:
Financial Highlights.
(2) Financial Statements included in the Statement of Additional Information constituting Part B of this Registration Statement:
Portfolio of Investments at December 31, 1996.
Statement of Assets and Liabilities at December 31, 1996.
Statement of Operations for the Year Ended December 31, 1996.
Statement of Changes in Net Assets for the Years Ended December 31, 1996 and 1995.
Notes to Financial Statements.
Financial Highlights for the Five Years Ended December 31, 1996.
Report of Independent Accountants.
(b)
Exhibits:
1. (a) Articles of Amendment to Articles of Incorporation, incorporated by reference to Exhibit 1(a) to Post-Effective Amendment No. 20 to the Registration Statement on Form N-1A (File No. 2-72097) filed via EDGAR on March 1, 1995.
(b) Articles of Restatement, incorporated by reference to Exhibit 1(b) to Post-Effective Amendment No. 20 to the Registration Statement on Form N-1A (File No. 2-72097) filed via EDGAR on March 1, 1995.
(c) Articles Supplementary, incorporated by reference to Exhibit 1(c) to Post-Effective Amendment No. 23 to the Registration Statement on Form N-1A (File No. 2-72097) filed via EDGAR on March 1, 1996.
2. (a) By-Laws, incorporated by reference to Exhibit 2 to Post-Effective Amendment No. 20 to the Registration Statement on Form N-1A (File No. 2-72097) filed via EDGAR on March 1, 1995.
4. Specimen Stock Certificate issued by the Registrant.*
5. (a) Subadvisory Agreement between Prudential Mutual Fund Management, Inc. and The Prudential Investment Corporation.*
(b) Amended Management Agreement, incorporated by reference to Exhibit 5(b) to Post-Effective Amendment No. 20 to the Registration Statement on Form N-1A (File No. 2-72097) filed via EDGAR on March 1, 1995.
6. (a) Selected Dealers Agreement (Continuous Offering).*
(b) Restated Distribution Agreement.*
8. Custodian Agreement between the Registrant and State Street Bank and Trust Company.*
9. Transfer Agency and Service Agreement between the Registrant and Prudential Mutual Fund Services, Inc.*
10. (a) Opinion of Sullivan & Cromwell dated August 7, 1981.*
(b) Opinion of Sullivan & Cromwell dated March 3, 1997.*
11. Consent of Independent Accountants.*
15. (a) Distribution and Service Plan for Class A shares, incorporated by reference to Exhibit 15(a) to Post-Effective Amendment No. 20 to the Registration Statement on Form N-1A (File No. 2-72097) filed via EDGAR on March 1, 1995.
(b) Distribution and Service Plan for Class B shares, incorporated by reference to Exhibit 15(b) to Post-Effective Amendment No. 20 to the Registration Statement on Form N-1A (File No. 2-72097) filed via EDGAR on March 1, 1995.
(c) Distribution and Service Plan for Class C Shares, incorporated by reference to Exhibit 15(c) to Post-Effective Amendment No. 20 to the Registration Statement on Form N-1A (File No. 2-72097) filed via EDGAR on March 1, 1995.
16. (a) Schedule of Computation of Performance Quotations relating to Average Annual Total Return.*
(b) Schedule of Computation of Performance Quotations relating to Aggregate Total Return.*
18. Rule 18f-3 Plan, incorporated by reference to Exhibit 18 to Post-Effective Amendment No. 21 to the Registration Statement on Form N-1A (File No. 2-72097) filed via EDGAR on October 27, 1995.
27. Financial data schedules.*
Item 25. Persons Controlled by or under Common Control with Registrant.
None.
Item 26. Number of Holders of Securities.
As of February 7, 1997 there were 180,557, 219,752, 597 and 3,605 record holders of Class A, Class B, Class C and Class Z shares of common stock, $.01 par value per share, of the Registrant, respectively.
Item 27. Indemnification.
As permitted by Sections 17(h) and (i) of the Investment Company Act of 1940
(the 1940 Act) and pursuant to Article VI of the Fund's By-Laws (Exhibit 2 to
the Registration Statement), officers, directors, employees and agents of the
Registrant will not be liable to the Registrant, any stockholder, officer,
director, employee, agent or other person for any action or failure to act,
except for bad faith, willful misfeasance, gross negligence or reckless
disregard of duties, and those individuals may be indemnified against
liabilities in connection with the Registrant, subject to the same exceptions.
Section 2-418 of Maryland General Corporation Law permits indemnification of
directors who acted in good faith and reasonably believed that the conduct was
in the best interests of the Registrant. As permitted by Section 17(i) of the
1940 Act, pursuant to Section 10 of the Distribution Agreement (Exhibit 6(b) to
the Registration Statement), the Distributor of the Registrant may be
indemnified against liabilities which it may incur, except liabilities arising
from bad faith, gross negligence, willful misfeasance or reckless disregard of
duties.
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (Securities Act) may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the 1940 Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in connection with the successful defense of any action, suit or proceeding) is asserted against the Registrant by such director, officer or controlling person in connection with the shares being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the 1940 Act and will be governed by the final adjudication of such issue.
The Registrant has purchased an insurance policy insuring its officers and directors against liabilities, and certain costs of defending claims against such officers and directors, to the extent such officers and directors are not found to have committed conduct constituting willful misfeasance, bad faith, gross negligence or reckless disregard in the performance of their duties. The insurance policy also insures the Registrant against the cost of indemnification payments to officers and directors under certain circumstances.
Section 9 of the amended Management Agreement (Exhibit 5 (b) to the
Registration Statement) and Section 4 of the Subadvisory Agreement (Exhibit 5
(a) to the Registration Statement) limit the liability of Prudential Mutual Fund
Management LLC (PMF) and The Prudential Investment Corporation (PIC),
respectively, to liabilities arising from willful misfeasance, bad faith or
gross negligence in the performance of their respective duties or from reckless
disregard by them of their respective obligations and duties under the
agreements.
The Registrant hereby undertakes that it will apply the indemnification provisions of its By-Laws and each Distribution Agreement in a manner consistent with Release No. 11330 of the Securities and Exchange Commission under the 1940 Act so long as the interpretation of Sections 17(h) and 17(i) of such Act remain in effect and are consistently applied.
Item 28. Business and other Connections of Investment Adviser
(i) Prudential Mutual Fund Management LLC (PMF)
See "How the Fund is Managed-Manager" in the Prospectus constituting Part A of this Registration Statement and "Manager" in the Statement of Additional Information constituting Part B of this Registration Statement.
The business and other connections of the officers of PMF are listed in Schedules A and D of Form ADV of PMF as currently on file with the Securities and Exchange Commission, the text of which is hereby incorporated by reference (File No. 801-31104).
The business and other connections of PMF's directors and principal executive officers are set forth below. Except as otherwise indicated, the address of each person is Gateway Center Three, Newark, New Jersey 07102.
Name and Address Position with PMF Principal Occupations
- ---------------- ----------------- ---------------------
Brian Storms Officer-in-Charge, Officer-in-Charge, Chief Executive Officer and Chief
President, Chief Operating Officer, PMF
Executive Officer and
Chief Operating Officer
Robert F. Gunia Executive Vice President Comptroller, Prudential Investments; Executive Vice President
and Treasurer and Treasurer, PMF; Senior Vice President of Prudential
Securities Incorporated (Prudential Securities)
Thomas A. Early Executive Vice President, Executive Vice President, Secretary and General Counsel,
Secretary and General PMF; Vice President and General Counsel, Prudential
Counsel Retirement Services
Susan C. Cote(acute) Executive Vice President, Executive Vice President, Chief Financial Officer, PMF
Chief Financial Officer
Neil A. McGuinness Executive Vice President Executive Vice President, PMF
Robert J. Sullivan Executive Vice President Executive Vice President, PMF
|
(ii) The Prudential Investment Corporation (PIC)
See "How the Fund is Managed-Manager" in the Prospectus constituting Part A of this Registration Statement and "Manager" in the Statement of Additional Information constituting Part B of this Registration Statement.
The business and other connections of PIC's directors and executive officers are as set forth below. The address of each person is Prudential Plaza, Newark, NJ 07102.
Name and Address Position with PIC Principal Occupations
- ---------------- ----------------- ---------------------
E. Michael Caulfield Chairman of the Board, Chief Executive Officer of Prudential Investments of The Prudential
President and Chief Insurance Company of America (Prudential)
Executive Officer and
Director
Jonathan M. Greene Senior Vice President and President-Investment Management of Prudential Investments
Director of Prudential
John R. Strangfeld Vice President and President of Private Asset Management Group of Prudential
Director
|
Item 29. Principal Underwriters
(a) Prudential Securities
Prudential Securities Incorporated is distributor for The BlackRock Government Income Trust, Command Government Fund, Command Money Fund, Command Tax-Free Fund, The Global Government Plus Fund, Inc., The Global Total Return Fund, Inc., Global Utility Fund, Inc., Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth Equity Fund), Prudential Allocation Fund, Prudential California Municipal Fund, Prudential Diversified Bond Fund, Inc., Prudential Distressed Securities Fund, Inc., Prudential Dryden Fund, Prudential Emerging Growth Fund, Inc., Prudential Equity Fund, Inc., Prudential Equity Income Fund, Prudential Europe Growth Fund, Inc., Prudential Global Genesis Fund, Inc., Prudential Global Limited Maturity Fund, Inc., Prudential Government Income Fund, Inc., Prudential Government Securities Trust, Prudential High Yield Fund, Inc., Prudential Institutional Liquidity Portfolio, Inc., Prudential Intermediate Global Income Fund, Inc., Prudential Jennison Series Fund, Inc., Prudential MoneyMart Assets, Inc., Prudential Mortgage Income Fund, Inc., Prudential Multi-Sector Fund, Inc., Prudential Municipal Bond Fund, Prudential Municipal Series Fund, Prudential National Municipals Fund, Inc., Prudential Natural Resources Fund, Inc., Prudential Pacific Growth Fund, Inc., Prudential Small Companies Fund, Inc., Prudential Special Money Market Fund, Inc., Prudential Structured Maturity Fund, Inc., Prudential Tax-Free Money Fund, Inc., Prudential Utility Fund, Inc., Prudential World Fund, Inc. and The Target Portfolio Trust.
Prudential Securities is also a depositor for the following unit investment trusts:
Corporate Investment Trust Fund Prudential Equity Trust Shares National Equity Trust Prudential Unit Trust Government Securities Equity Trust National Municipal Trust
(b)(i) Information concerning the directors and officers of Prudential Securities Incorporated is set forth below.
Positions and Positions and
Offices with Offices with
Name(1) Underwriter Registrant
- ------- ----------- ----------
Robert Golden ............... Executive Vice President and Director None
One New York Plaza
New York, NY
Alan D. Hogan ............... Executive Vice President, Chief Administrative None
Officer and Director
George A. Murray ............ Executive Vice President and Director None
Leland B. Paton ............. Executive Vice President and Director None
One New York Plaza
New York, NY
Martin Pfinsgraff ........... Executive Vice President, Chief Financial Officer None
and Director
Vincent T. Pica, II ......... Executive Vice President and Director None
One New York Plaza
New York, NY
Hardwick Simmons ............ Chief Executive Officer, President and Director None
Lee B. Spencer, Jr. ......... Executive Vice President, General Counsel, None
Secretary and Director
|
(c) Registrant has no principal underwriter who is not an affiliated person of the Registrant.
Item 30. Location of Accounts and Records
All accounts, books and other documents required to be maintained by Section 31(a) of the 1940 Act and the Rules thereunder are maintained at the offices of State Street Bank and Trust Company, One Heritage Drive, North Quincy, Massachusetts 02171, The Prudential Investment Corporation, Prudential Plaza, 745 Broad Street, Newark, New Jersey 07102 and Two Gateway Center, Newark, New Jersey, 07102, the Registrant, Gateway Center Three, Newark, New Jersey 07102 and Prudential Mutual Fund Services LLC, Raritan Plaza One, Edison, New Jersey 08837. Documents required by Rules 31a-1(b)(5), (6), (7), (9), (10) and (11) and 31a-1(f) will be kept at 751 Broad Street, documents required by Rules 31a-1(b)(4) and (11) and 31a-1(d) at One Seaport Plaza and the remaining accounts, books and other documents required by such other pertinent provisions of Section 31(a) and the Rules promulgated thereunder will be kept by State Street Bank and Trust Company and Prudential Mutual Fund Services LLC.
Item 31. Management Services
Other than as set forth under the captions "How the Fund is Managed-Manager" and "How the Fund is Managed- Distributor" in the Prospectus and the captions "Manager" and "Distributor" in the Statement of Additional Information, constituting Parts A and B, respectively, of this Registration Statement, Registrant is not a party to any management-related service contract.
Item 32. Undertakings
The Registrant hereby undertakes to furnish each person to whom a Prospectus is delivered with a copy of the Registrant's latest annual report to shareholders upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant has duly caused this Post-Effective Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Newark and State of New Jersey on the 28th day of February, 1997.
PRUDENTIAL UTILITY FUND, INC.
/s/ Richard A. Redeker
By:_____________________________________
(Richard A. Redeker, President)
|
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment to the Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
Signature Title Date
/s/ Eugene S. Stark
- --------------------------------
Eugene S. Stark Treasurer and
Principal Financial
and Accounting Officer February 28, 1997
/s/ Edward D. Beach
- --------------------------------
Edward D. Beach Director February 28, 1997
/s/ Delayne Dedrick Gold
- --------------------------------
Delayne Dedrick Gold Director February 28, 1997
/s/ Robert F. Gunia
- --------------------------------
Robert F. Gunia Director February 28, 1997
/s/ Donald D. Lennox
- --------------------------------
Donald D. Lennox Director February 28, 1997
/s/ Douglas H. McCorkindale
- --------------------------------
Douglas H. McCorkindale Director February 28, 1997
/s/ Mendel A. Melzer
- --------------------------------
Mendel A. Melzer Director February 28, 1997
/s/ Thomas T. Mooney
- --------------------------------
Thomas T. Mooney Director February 28, 1997
/s/ Stephen P. Munn
- --------------------------------
Stephen P. Munn Director February 28, 1997
/s/ Richard A. Redeker
- --------------------------------
Richard A. Redeker President and Director February 28, 1997
/s/ Robin B. Smith
- --------------------------------
Robin B. Smith Director February 28, 1997
/s/ Louis A. Weil, III
- --------------------------------
Louis A. Weil, III Director February 28, 1997
/s/ Clay T. Whitehead
- --------------------------------
Clay T. Whitehead Director February 28, 1997
|
EXHIBIT INDEX
1. (a) Articles of Amendment to Articles of Incorporation, incorporated by reference to Exhibit 1(a) to Post-Effective Amendment No. 20 to the Registration Statement on Form N-1A (File No. 2-72097) filed via EDGAR on March 1, 1995.
(b) Articles of Restatement, incorporated by reference to Exhibit 1(b) to Post-Effective Amendment No. 20 to the Registration Statement on Form N-1A (File No. 2-72097) filed via EDGAR on March 1, 1995.
(c) Articles Supplementary, incorporated by reference to Exhibit 1(c) to Post-Effective Amendment No. 23 to the Registration Statement on Form N-1A (File No. 2-72097) filed via EDGAR on March 1, 1996.
2. (a) By-Laws, incorporated by reference to Exhibit 2 to Post-Effective Amendment No. 20 to the Registration Statement on Form N-1A (File No. 2-72097) filed via EDGAR on March 1, 1995.
4. Specimen Stock Certificate issued by the Registrant.*
5. (a) Subadvisory Agreement between Prudential Mutual Fund Management, Inc. and The Prudential Investment Corporation.*
(b) Amended Management Agreement, incorporated by reference to Exhibit 5(b) to Post-Effective Amendment No. 20 to the Registration Statement on Form N-1A (File No. 2-72097) filed via EDGAR on March 1, 1995.
6. (a) Selected Dealers Agreement (Continuous Offering).*
(b) Restated Distribution Agreement.*
8. Custodian Agreement between the Registrant and State Street Bank and Trust Company.*
9. Transfer Agency and Service Agreement between the Registrant and Prudential Mutual Fund Services, Inc.*
10. (a) Opinion of Sullivan & Cromwell dated Agust 7, 1981.*
(b) Opinion of Sullivan & Cromwell dated March 3, 1997.*
11. Consent of Independent Accountants.*
15. (a) Distribution and Service Plan for Class A shares, incorporated by reference to Exhibit 15(a) to Post-Effective Amendment No. 20 to the Registration Statement on Form N-1A (File No. 2-72097) filed via EDGAR on March 1, 1995.
(b) Distribution and Service Plan for Class B shares, incorporated by reference to Exhibit 15(b) to Post-Effective Amendment No. 20 to the Registration Statement on Form N-1A (File No. 2-72097) filed via EDGAR on March 1, 1995.
(c) Distribution and Service Plan for Class C Shares, incorporated by reference to Exhibit 15(c) to Post-Effective Amendment No. 20 to the Registration Statement on Form N-1A (File No. 2-72097) filed via EDGAR on March 1, 1995.
16. (a) Schedule of Computation of Performance Quotations relating to Average Annual Total Return.*
(b) Schedule of Computation of Performance Quotations relating to Aggregate Total Return.*
18. Rule 18f-3 Plan, incorporated by reference to Exhibit 18 to Post-Effective Amendment No. 21 to the Registration Statement on Form N-1A (File No. 2-72097) filed via EDGAR on October 27, 1995.
27. Financial data schedules.*
Prudential Utility Fund, Inc.
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
THIS IS TO CERTIFY that
is the owner of
FULLY-PAID AND NON-ASSESSABLE SHARES OF THE
PAR VALUE OF $.01 EACH OF THE COMMON STOCK OF
- -----------------------PRUDENTIAL-BACHE UTILITY FUND, INC.----------------------
hereafter called the "Corporation", transferable on the books of the Corporation by the owner in person or by duly authorized attorney upon surrender of this Certificate properly endorsed.
This Certificate and the shares represented hereby are issued and shall be held subject to the provisions of the Charter and By-Laws of the Corporation and all amendments thereof, copies of which are on file at the office of the Corporation, to all of which the holder, by acceptance hereof assents.
This Certificate is not valid unless countersigned by the Transfer Agent.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be signed in its name by its proper officers and to be sealed with its Corporate Seal.
[SEAL] Dated: /s/ /s/
--------------------- -----------------------
Secretary President
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COUNTERSIGNED: PRUDENTIAL MUTUAL FUND SERVICES, INC.
(NEW JERSEY)
TRANSFER AGENT,
BY
Authorized Signature
The following abbreviations, when used in the inscription on the face of this Certificate, shall be construed as though they were written out in full according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT -- ...Custodian...
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right under Uniform Gifts to Minors Act
of survivorship and not as ......................
tenants in common (State)
|
Additional abbreviations may also be used though not in the above list.
For value received, ............................ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- -------------------------------------- _________________________________________
|
irrevocably constitute and appoint _____________________________________________
Dated, ____________________
NOTICE: The signature to this assignment must correspond with the name as written upon the face of the Certificate, in every particular, without alteration or enlargement, or any change whatsoever.
THIS SPACE MUST NOT BE COVERED IN ANY WAY
PRUDENTIAL-BACHE UTILITY FUND, INC.
SUBADVISORY AGREEMENT
Agreement made as of this 2nd day of May, 1988 between Prudential Mutual Fund Management Inc., a Delaware Corporation ("PMF" or the "Manager"), and The Prudential Investment Corporation, a New Jersey Corporation (the "Subadviser").
WHEREAS, the Manager has entered into a Management Agreement, dated May 2, 1988 (the "Management Agreement"), with Prudential-Bache Utility Fund, Inc. (the "Fund"), a Maryland corporation and a diversified open-end management investment company registered under the Investment Company Act of 1940 (the "1940 Act"), pursuant to which PMF will act as manager of the Fund.
WHEREAS, PMF desires to retain the Subadviser to provide investment advisory services to the Fund in connection with the management of the Fund and the Subadviser is willing to render such investment advisory services.
NOW, THEREFORE, the Parties agree as follows:
1. (a) Subject to the supervision of the Manager and of the Board of Directors of the Fund, the Subadviser shall manage the investment operations of the Fund and the composition of the Fund's portfolio, including the purchase, retention and disposition thereof, in accordance with the Fund's investment objectives, policies and restrictions as stated in the Prospectus, (such Prospectus and Statement of Additional Information as currently in effect and as amended or supplemented from time to time, being herein called the "Prospectus"), and subject to the following understandings:
(i) The Subadviser shall provide supervision of the Fund's investments and determine from time to time what investments and securities will be purchased, retained, sold or loaned by the Fund, and what portion of the assets will be invested or held uninvested as cash.
(ii) In the performance of its duties and obligations under this Agreement, the Subadviser shall act in conformity with the Articles of Incorporation, By-Laws and Prospectus of the Fund and with the instructions and directions of the Manager and of the Board of Directors of the Fund and will conform to and comply with the requirements of the 1940 Act, the Internal Revenue Code of 1986 and all other applicable federal and state laws and regulations.
(iii) The Subadviser shall determine the securities to be purchased or sold by the Fund and will place orders with or through such persons, brokers, or dealers (including but not limited to Prudential-Bache Securities Inc.) to carry out the
policy with respect to brokerage as set forth in the Fund's Registration Statement and Prospectus or as the Board of Directors may direct from time to time. In providing the Fund with investment supervision, it is recognized that the Subadviser will give primary consideration to securing the most favorable price and efficient execution. Within the framework of this policy, the Subadviser may consider the financial responsibility, research and investment information and other services provided by brokers, or dealers who may effect or be a party to any such transaction or other transactions to which the Subadviser's other clients may be a party. It is understood that Prudential-Bache Securities Inc. may be used as principal broker for securities transactions but that no formula has been adopted for allocation of the Fund's investment transaction business. It is also understood that it is desirable for the Fund that the Subadviser have access to supplemental investment and market research and security and economic analysis provided by brokers who may execute brokerage transactions at a higher cost to the Fund than may result when allocating brokerage to other brokers on the basis of seeking the most favorable price and efficient execution. Therefore, the Subadviser is authorized to place orders for the purchase and sale of securities for the Fund with such brokers, subject to review by the Fund's Board of Directors from time to time with respect to the extent and continuation of this practice. It is understood that the services provided by such brokers may be useful to the Subadviser in connection with the Subadviser's services to other clients.
On occasions when the Subadviser deems the purchase or sale of a security to be in the best interest of the Fund as well as other clients of the Subadviser, the Subadviser, to the extent permitted by applicable laws and regulations, may, but shall be under no obligation to, aggregate the securities or futures contracts to be sold or purchased in order to obtain the most favorable price or lower brokerage commissions and efficient execution. In such event, allocation of the securities so purchased or sold, as well as the expenses incurred in the transaction, will be made by the Subadviser in the manner the Subadviser considers to be the most equitable and consistent with its fiduciary obligations to the Fund and to such other clients.
(iv) The Subadviser shall maintain all books and records with respect to the Fund's portfolio transactions required by subparagraphs (b)(5), (6), (7), (9), (10) and (11) and paragraph (f) of Rule 31a-1 under the 1940 Act and shall render to the Fund's Directors such periodic and special reports as the Directors may reasonably request.
(v) The Subadviser shall provide the Fund's Custodian on each business day with information relating to all transactions concerning the Fund's assets and shall provide the Manager with such information upon request of the Manager.
(vi) The investment management services provided by the Subadviser hereunder are not to be deemed exclusive, and the Subadviser shall be free to render similar services to others.
(b) The Subadviser shall authorize and permit any of its directors, officers and employees who may be elected as directors or officers of the Fund to serve in the capacities in which they are elected. Services to be furnished by the Subadviser under this Agreement may be furnished through the medium of any of such directors, officers or employees.
(c) The Subadviser shall keep the Fund's books and records required to be maintained by the Subadviser pursuant to paragraph 1(a) hereof and shall timely furnish to the Manager all information relating to the Subadviser's services hereunder needed by the Manager to keep the other books and records of the Fund required by Rule 31a-1 under the 1940 Act. The Subadviser agrees that all records which it maintains for the Fund are the property of the Fund and the Subadviser will surrender promptly to the Fund any of such records upon the Fund's request, provided however that the Subadviser may retain a copy of such records. The Subadviser further agrees to preserve for the periods prescribed by Rule 31a-2 of the Commission under the 1940 Act any such records as are required to be maintained by it pursuant to paragraph 1(a) hereof.
2. The Manager shall continue to have responsibility for all services to be provided to the Fund pursuant to the Management Agreement and shall oversee and review the Subadviser's performance of its duties under this Agreement.
3. The Manager shall reimburse the Subadviser for reasonable costs and expenses incurred by the Subadviser determined in a manner acceptable to the Manager in furnishing the services described in paragraph 1 hereof.
4. The Subadviser shall not be liable for any error of judgment or for any loss suffered by the Fund or the Manager in connection with the matters to which this Agreement relates, except a loss resulting from willful misfeasance, bad faith or gross negligence on the Subadviser's part in the performance of its duties or from its reckless disregard of its obligations and duties under this Agreement.
5. This Agreement shall continue in effect for a period of more than two years from the date hereof only so long as such continuance is specifically approved at least annually in conformity with the requirements of the 1940 Act; provided, however, that this Agreement may be terminated by the Fund at any time, without the payment of any penalty, by the Board of Directors of the Fund or by vote of a majority of the outstanding voting securities (as defined in the 1940 Act) of the Fund, or by the Manager or the Subadviser at any time, without the payment of any penalty, on not more than 60 days' nor less than 30 days' written notice to the other party. This Agreement shall terminate automatically in the event of its assignment (as defined in the 1940 Act) or upon the termination of the Management Agreement.
6. Nothing in this Agreement shall limit or restrict the right of any of the Subadviser's directors, officers, or employees who may also be a director, officer or employee of the Fund to engage in any other business or to devote his or her time and attention in part to the management or other aspects of any business, whether of a similar or a dissimilar nature, nor limit or restrict the Subadviser's right to engage in any other business or to render services of any kind to any other corporation, firm, individual or association.
7. During the term of this Agreement, the Manager agrees to furnish the Subadviser at its principal office all prospectuses, proxy statements, reports to stockholders, sales literature or other material prepared for distribution to stockholders of the Fund or the public, which refer to the Subadviser in any way, prior to use thereof and not to use material if the Subadviser reasonably objects in writing five business days (or such other time as may be mutually agreed) after receipt thereof. Sales literature may be furnished to the Subadviser hereunder by first-class or overnight mail, facsimile transmission equipment or hand delivery.
8. This Agreement may be amended by mutual consent, but the consent of the Fund must be obtained in conformity with the requirements of the 1940 Act.
9. This Agreement shall be governed by the laws of the State of New York.
IN WITNESS WHEREOF, the Parties hereto have caused this instrument to be executed by their officers designated below as of the day and year first above written.
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC.
BY /s/ Michael J. Downey
--------------------------------------
President
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THE PRUDENTIAL INVESTMENT CORPORATION
BY /s/ Roger Ford
--------------------------------------
Vice President
|
BACHE HALSEY STUART SHIELDS INCORPORATED
100 Gold Street
New York, New York 10038
May 17, 1979
To:
Gentlemen:
Bache Halsey Stuart Shields Incorporated ("Bache") as the Distributor of the shares of Chancellor High Yield Fund, Inc. (the "Fund") as well as any other open-end investment company for which it is now or may become Distributor (hereinafter collectively referred to as Funds) understands that you are a member in good standing of the National Association of Securities Dealers, Inc. (your signature below shall constitute a representation of such membership, in good standing) and, on the basis of such understanding, invites you to become a Selected Dealer to distribute shares of these Funds on the following terms:
1. You and ourselves agree to abide by the Rules of Fair Practice of the National Association of Securities Dealers, Inc. ("NASD") and all other federal and state rules and regulations that are now or may become applicable to transactions hereunder. Your expulsion or suspension from the NASD will automatically terminate this Agreement without notice. Bache may terminate this Agreement at any time upon notice.
2. Orders for shares received from you and accepted by us will be at the public offering price applicable to each order, as established by the then effective prospectuses of the Funds. The procedure relating to the handling of orders shall be subject to instructions which we will forward from time to time to all Selected Dealers. All orders are subject to acceptance by us at 100 Gold Street, New York, N.Y. 10038, Attention: Chancellor Group, and we reserve the right in our sole discretion to reject any order. We also reserve the right to establish minimum orders for individual purchasers as well as for Selected Dealers.
3. Selected Dealers will be allowed the concessions from the public offering price as set forth in the then current prospectuses of the Funds, or as may be determined by Bache. The Sales Charge and Dealer Concession may be changed at our discretion and we will advise you of any such change.
4. You agree that your transactions in shares of the Funds will be limited to the purchase of shares from us for resale to your customers at the public offering price then in effect or for your own bonafide investment and to repurchases which are made in accordance with the procedures set forth in the then current prospectuses of the Funds.
5. Except for sales pursuant to plans established by the Funds with an agent bank and providing for the periodic investment of new monies, orders will not be accepted for less than the number of shares or dollar amount set forth in the then current prospectuses of the Funds.
6. You agree that you will not withhold placing customers' orders so as to profit yourself as a result of such withholding.
7. You agree to sell shares only to your customers at the applicable public offering price or to the Funds or us as Distributor for the Funds at net asset value, in each case determined as set forth in the Funds' prospectuses.
8. An investor will be entitled to a reduction in Sales Charge on purchases made under a Letter of Intent in accordance with the Funds' then current prospectuses. In such a case, your Dealer's Concession will he paid based upon the Reduced Sales Charge, but adjustment to a higher Dealer's Concession will thereafter be made to reflect actual purchases by the investor if he should fail to fulfill his Letter of Intent.
9. With respect to all Funds, settlement shall be made within five business days after our acceptance of the order. If payment is not so received or made, we reserve the right forthwith to cancel the sale, or, at our option, to sell the shares at the then prevailing net asset value in which latter case you agree to be responsible for any loss resulting to the Funds or to us from your failure to make payments as aforesaid.
10. If any shares sold to you under the terms of this Agreement are redeemed by the Funds or repurchased for the account of the Funds or are tendered to the Funds for redemption or repurchase within seven business days after the date of our confirmation to you of your original purchase order therefor, you agree to pay forthwith to us the full amount of the concession allowed to you on the original sale and we agree to pay such amount to the Funds when received by us. We also agree to pay to the Funds the amount of our share of the Sales Charge on the original sale of such shares.
11. If any shares are repurchased from you by the Funds, or by us for the account of the Funds, such shares shall be tendered in good order within ten business days. If shares are not tendered within such time period the right is reserved to cancel, at any subsequent time, the repurchase order or, at our option, to reacquire such number of shares at the net asset value next computed, in which latter case you will agree to be responsible for any loss resulting from your failure to deliver such shares.
12. All sales will be subject to receipt of shares by us from the Funds. We reserve the right in our discretion without notice to you to suspend sales or withdraw any offering of shares entirely or to change the offering prices as provided in the prospectuses or, upon notice, to amend or cancel this Agreement, which shall be construed in accordance with the laws of the State of New York. You agree that any order to purchase shares of the Funds placed by you after notice of any such amendment has been sent to you shall constitute your agreement to any such amendment.
13. No person is authorized to make any representation concerning any Fund or its shares except those contained in its effective prospectus and any such information as may be officially designated as information supplemental to the prospectus. In purchasing shares from us you shall rely solely on the representations contained in the effective prospectus and supplemental information above mentioned.
14. We will supply to Selected Dealers additional copies of the then effective prospectuses in reasonable quantities upon request. All expenses incurred in connection with your activities under this Agreement shall be borne by you.
15. In no transaction shall you have any authority whatever to act as agent of any of the Funds or of us or of any other Selected Dealer and nothing in this agreement shall constitute either of us the agent of the other or shall constitute you or any Fund the agent of the other. Except as otherwise indicated herein, all transactions in these shares between you and us are as principal, each for his own account. This Agreement shall not be assignable by you.
16. Any notice to you shall be duly given if mailed or telegraphed to you at your address as registered from time to time with the NASD. Any notice to Bache shall be sent to Box 332 / Peck Slip Station / N.Y., N.Y. 10038 / Attention: Chancellor Group.
17. This Agreement constitutes the entire agreement between Bache and the undersigned Selected Dealer and supercedes all prior oral or written agreements between the parties hereto.
Sincerely,
Bache Halsey Stuart Shields Incorporated
by: _________________________________________
The undersigned accepts your invitation to become a Selected Dealer and agrees to abide by the foregoing terms and conditions.
Signed, ______________________________ 19__
by: _________________________________________
(Authorized Signature)
PRUDENTIAL UTILITY FUND, INC.
DISTRIBUTION AGREEMENT
Agreement made as of April 10, 1996, between Prudential Utility Fund, Inc., a Maryland corporation (the Fund), and Prudential Securities Incorporated, a Delaware corporation (the Distributor).
WITNESSETH
WHEREAS, the Fund is registered under the Investment Company Act of 1940, as amended (the Investment Company Act), as a diversified, open end, management investment company and it is in the interest of the Fund to offer its shares for sale continuously;
WHEREAS, the shares of the Fund may be divided into classes and/or series (all such shares being referred to herein as Shares) and the Fund currently is authorized to offer Class A, Class B, Class C and Class Z Shares;
WHEREAS, the Distributor is a brokerdealer registered under the Securities Exchange Act of 1934, as amended, and is engaged in the business of selling shares of registered investment companies either directly or through other broker-dealers;
WHEREAS, the Fund and the Distributor wish to enter into an agreement with each other, with respect to the continuous offering of the Fund's Shares from and after the date hereof in order to promote the growth of the Fund and facilitate the distribution of its Shares; and
WHEREAS, upon approval by the holders of the respective classes and/or series of Shares of the Fund it is contemplated that the Fund will adopt a plan (or plans) of distribution pursuant to Rule 12b-l under the Investment Company Act with respect to certain of its classes and/or series of Shares (the Plans) authorizing payments by the Fund to the Distributor with respect to the distribution of such classes and/or series of Shares and the maintenance of related shareholder accounts.
NOW, THEREFORE, the parties agree as follows:
Section 1. APPOINTMENT OF THE DISTRIBUTOR
The Fund hereby appoints the Distributor as the principal underwriter and distributor of the Shares of the Fund to sell Shares to the public on behalf of the Fund and the Distributor hereby accepts such appointment and agrees to act hereunder. The Fund hereby agrees during the term of this Agreement to sell Shares
of the Fund through the Distributor on the terms and conditions set forth below.
Section 2. EXCLUSIVE NATURE OF DUTIES
The Distributor shall be the exclusive representative of the Fund to act as principal underwriter and distributor of the Fund's Shares, except that:
2.1 The exclusive rights granted to the Distributor to sell Shares of the Fund shall not apply to Shares of the Fund issued in connection with the merger or consolidation of any other investment company or personal holding company with the Fund or the acquisition by purchase or otherwise of all (or substantially all) the assets or the outstanding shares of any such company by the Fund.
2.2 Such exclusive rights shall not apply to Shares issued by the Fund pursuant to reinvestment of dividends or capital gains distributions or through the exercise of any conversion feature or exchange privilege.
2.3 Such exclusive rights shall not apply to Shares issued by the Fund pursuant to the reinstatement privilege afforded redeeming shareholders.
2.4 Such exclusive rights shall not apply to purchases made through the Fund's transfer and dividend disbursing agent in the manner set forth in the currently effective Prospectus of the Fund. The term "Prospectus" shall mean the Prospectus and Statement of Additional Information included as part of the Fund's Registration Statement, as such Prospectus and Statement of Additional Information may be amended or supplemented from time to time, and the term ''Registration Statement" shall mean the Registration Statement filed by the Fund with the Securities and Exchange Commission and effective under the Securities Act of 1933, as amended (Securities Act), and the Investment Company Act, as such Registration Statement is amended from time to time.
Section 3. PURCHASE OF SHARES FROM THE FUND
3.1 The Distributor shall have the right to buy from the Fund on behalf of investors the Shares needed, but not more than the Shares needed (except for clerical errors in transmission) to fill unconditional orders for Shares placed with the Distributor by investors or registered and qualified securities dealers and other financial institutions (selected dealers).
3.2 The Shares shall be sold by the Distributor on behalf of the Fund and delivered by the Distributor or selected dealers, as described in Section 6.4 hereof, to investors at the offering price as set forth in the Prospectus.
3.3 The Fund shall have the right to suspend the sale of any or all classes and/or series of its Shares at times when redemption is suspended pursuant to the conditions in Section 4.3 hereof or at such other times as may be determined by the Board of Directors. The Fund shall also have the right to suspend the sale of any or all classes and/or series of its Shares if a banking moratorium shall have been declared by federal or New York authorities.
3.4 The Fund, or any agent of the Fund designated in writing by the Fund, shall be promptly advised of all purchase orders for Shares received by the Distributor. Any order may be rejected by the Fund; provided, however, that the Fund will not arbitrarily or without reasonable cause refuse to accept or confirm orders for the purchase of Shares. The Fund (or its agent) will confirm orders upon their receipt, will make appropriate book entries and upon receipt by the Fund (or its agent) of payment therefor, will deliver deposit receipts for such Shares pursuant to the instructions of the Distributor. Payment shall be made to the Fund in New York Clearing House funds or federal funds. The Distributor agrees to cause such payment and such instructions to be delivered promptly to the Fund (or its agent).
Section 4. REPURCHASE OR REDEMPTION OF SHARES BY THE FUND
4.1 Any of the outstanding Shares may be tendered for redemption at any time, and the Fund agrees to repurchase or redeem the Shares so tendered in accordance with its Articles of Incorporation as amended from time to time, and in accordance with the applicable provisions of the Prospectus. The price to be paid to redeem or repurchase the Shares shall be equal to the net asset value determined as set forth in the Prospectus. All payments by the Fund hereunder shall be made in the manner set forth in Section 4.2 below.
4.2 The Fund shall pay the total amount of the redemption price as defined in the above paragraph pursuant to the instructions of the Distributor on or before the seventh day subsequent to its having received the notice of redemption in proper form. The proceeds of any redemption of Shares shall be paid by the Fund as follows: (I) in the case of Shares subject to a contingent deferred sales charge, any applicable contingent deferred sales charge shall be paid to the Distributor, and the balance shall be paid to or for the account of the redeeming shareholder, in each case in accordance with applicable provisions of the Prospectus; and (ii) in the case of all other Shares, proceeds shall be paid to or for the account of the redeeming shareholder, in each case in accordance with applicable provisions of the Prospectus.
4.3 Redemption of any class and/or series of Shares or payment may be suspended at times when the New York Stock Exchange
is closed for other than customary weekends and holidays, when trading on said Exchange is restricted, when an emergency exists as a result of which disposal by the Fund of securities owned by it is not reasonably practicable or it is not reasonably practicable for the Fund fairly to determine the value of its net assets, or during any other period when the Securities and Exchange Commission, by order, so permits.
Section 5. DUTIES OF THE FUND
5.1 Subject to the possible suspension of the sale of Shares as provided herein, the Fund agrees to sell its Shares so long as it has Shares of the respective class and/or series available.
5.2 The Fund shall furnish the Distributor copies of all information, financial statements and other papers which the Distributor may reasonably request for use in connection with the distribution of Shares, and this shall include one certified copy, upon request by the Distributor, of all financial statements prepared for the Fund by independent public accountants. The Fund shall make available to the Distributor such number of copies of its Prospectus and annual and interim reports as the Distributor shall reasonably request.
5.3 The Fund shall take, from time to time, but subject to the necessary approval of the Board of Directors and the shareholders, all necessary action to fix the number of authorized Shares and such steps as may be necessary to register the same under the Securities Act, to the end that there will be available for sale such number of Shares as the Distributor reasonably may expect to sell. The Fund agrees to file from time to time such amendments, reports and other documents as may be necessary in order that there will be no untrue statement of a material fact in the Registration Statement, or necessary in order that there will be no omission to state a material fact in the Registration Statement which omission would make the statements therein misleading.
5.4 The Fund shall use its best efforts to qualify and maintain the qualification of any appropriate number of its Shares for sales under the securities laws of such states as the Distributor and the Fund may approve; provided that the Fund shall not be required to amend its Articles of Incorporation or ByLaws to comply with the laws of any state, to maintain an office in any state, to change the terms of the offering of its Shares in any state from the terms set forth in its Registration Statement, to qualify as a foreign corporation in any state or to consent to service of process in any state other than with respect to claims arising out of the offering of its Shares. Any such qualification may be withheld, terminated or withdrawn by the Fund at any time in its discretion. As provided in Section 9 hereof, the expense of
qualification and maintenance of qualification shall be borne by the Fund. The Distributor shall furnish such information and other material relating to its affairs and activities as may be required by the Fund in connection with such qualifications.
Section 6. DUTIES OF THE DISTRIBUTOR
6.1 The Distributor shall devote reasonable time and effort to effect sales of Shares, but shall not be obligated to sell any specific number of Shares. Sales of the Shares shall be on the terms described in the Prospectus. The Distributor may enter into like arrangements with other investment companies. The Distributor shall compensate the selected dealers as set forth in the Prospectus.
6.2 In selling the Shares, the Distributor shall use its best efforts in all respects duly to conform with the requirements of all federal and state laws relating to the sale of such securities. Neither the Distributor nor any selected dealer nor any other person is authorized by the Fund to give any information or to make any representations, other than those contained in the Registration Statement or Prospectus and any sales literature approved by appropriate officers of the Fund.
6.3 The Distributor shall adopt and follow procedures for the confirmation of sales to investors and selected dealers, the collection of amounts payable by investors and selected dealers on such sales and the cancellation of unsettled transactions, as may be necessary to comply with the requirements of the National Association of Securities Dealers, Inc. (NASD).
6.4 The Distributor shall have the right to enter into selected dealer agreements with registered and qualified securities dealers and other financial institutions of its choice for the sale of Shares, provided that the Fund shall approve the forms of such agreements. Within the United States, the Distributor shall offer and sell Shares only to such selected dealers as are members in good standing of the NASD. Shares sold to selected dealers shall be for resale by such dealers only at the offering price determined as set forth in the Prospectus.
Section 7. PAYMENTS TO THE DISTRIBUTOR
7.1 With respect to classes and/or series of Shares which impose a front-end sales charge, the Distributor shall receive and may retain any portion of any front-end sales charge which is imposed on such sales and not reallocated to selected dealers as set forth in the Prospectus, subject to the limitations of Article III, Section 26 of the NASD Rules of Fair Practice. Payment of these amounts to the Distributor is not contingent upon the adoption or continuation of any applicable Plans.
7.2 With respect to classes and/or series of Shares which impose a contingent deferred sales charge, the Distributor shall receive and may retain any contingent deferred sales charge which is imposed on such sales as set forth in the Prospectus, subject to the limitations of Article III, Section 26 of the NASD Rules of Fair Practice. Payment of these amounts to the Distributor is not contingent upon the adoption or continuation of any Plan.
Section 8. PAYMENT OF THE DISTRIBUTOR UNDER THE PLAN
8.1 The Fund shall pay to the Distributor as compensation for services under any Plans adopted by the Fund and this Agreement a distribution and service fee with respect to the Fund's classes and/or series of Shares as described in each of the Fund's respective Plans and this Agreement.
8.2 So long as a Plan or any amendment thereto is in effect, the Distributor shall inform the Board of Directors of the commissions and account servicing fees with respect to the relevant class and/or series of Shares to be paid by the Distributor to account executives of the Distributor and to broker-dealers and financial institutions which have dealer agreements with the Distributor. So long as a Plan (or any amendment thereto) is in effect, at the request of the Board of Directors or any agent or representative of the Fund, the Distributor shall provide such additional information as may reasonably be requested concerning the activities of the Distributor hereunder and the costs incurred in performing such activities with respect to the relevant class and/or series of Shares.
Section 9. ALLOCATION OF EXPENSES
The Fund shall bear all costs and expenses of the continuous offering of its Shares (except for those costs and expenses borne by the Distributor pursuant to a Plan and subject to the requirements of Rule 12b-1 under the Investment Company Act), including fees anddisbursements of its counsel and auditors, in connection with the preparation and filing of any required Registration Statements and/or Prospectuses under the Investment Company Act or the Securities Act, and all amendments and supplements thereto, and preparing and mailing annual and periodic reports and proxy materials to shareholders (including but not limited to the expense of setting in type any such Registration Statements, Prospectuses, annual or periodic reports or proxy materials). The Fund shall also bear the cost of expenses of qualification of the Shares for sale, and, if necessary or advisable in connection therewith, of qualifying the Fund as a broker or dealer, in such states of the United States or other jurisdictions as shall be selected by the Fund and the Distributor pursuant to Section 5.4 hereof and the cost and expense payable to each such state for continuing qualification therein until the Fund
decides to discontinue such qualification pursuant to Section 5.4 hereof. As set forth in Section 8 above, the Fund shall also bear the expenses it assumes pursuant to any Plan, so long as such Plan is in effect.
Section 10. INDEMNIFICATION
10.1 The Fund agrees to indemnify, defend and hold the Distributor, its officers and directors and any person who controls the Distributor within the meaning of Section 15 of the Securities Act, free and harmless from and against any and all claims, demands, liabilities and expenses (including the cost of investigating or defending such claims, demands or liabilities and any reasonable counsel fees incurred in connection therewith) which the Distributor, its officers, directors or any such controlling person may incur under the Securities Act, or under common law or otherwise, arising out of or based upon any untrue statement of a material fact contained in the Registration Statement or Prospectus or arising out of or based upon any alleged omission to state a material fact required to be stated in either thereof or necessary to make the statements in either thereof not misleading, except insofar as such claims, demands, liabilities or expenses arise out of or are based upon any such untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with information furnished in writing by the Distributor to the Fund for use in the Registration Statement or Prospectus; provided, however, that this indemnity agreement shall not inure to the benefit of any such officer, director, trustee or controlling person unless a court of competent jurisdiction shall determine in a final decision on the merits, that the person to be indemnified was not liable by reason of willful misfeasance, bad faith or gross negligence in the performance of its duties, or by reason of its reckless disregard of its obligations under this Agreement (disabling conduct), or, in the absence of such a decision, a reasonable determination, based upon a review of the facts, that the indemnified person was not liable by reason of disabling conduct, by (a) a vote of a majority of a quorum of directors or trustees who are neither "interested persons" of the Fund as defined in Section 2(a)(19) of the Investment Company Act nor parties to the proceeding, or (b) an independent legal counsel in a written opinion. The Fund's agreement to indemnify the Distributor, its officers and directors or trustees and any such controlling person as aforesaid is expressly conditioned upon the Fund's being promptly notified of any action brought against the Distributor, its officers or directors or trustees, or any such controlling person, such notification to be given by letter or telegram addressed to the Fund at its principal business office. The Fund agrees promptly to notify the Distributor of the commencement of any litigation or proceedings against it or any of its officers or directors in connection with the issue and sale of any Shares.
10.2 The Distributor agrees to indemnify, defend and hold the Fund, its officers and Directors and any person who controls the Fund, if any, within the meaning of Section 15 of the Securities Act, free and harmless from and against any and all claims, demands, liabilities and expenses (including the cost of investigating or defending against such claims, demands or liabilities and any reasonable counsel fees incurred in connection therewith) which the Fund, its officers and Directors or any such controlling person may incur under the Securities Act or under common law or otherwise, but only to the extent that such liability or expense incurred by the Fund, its Directors or officers or such controlling person resulting from such claims or demands shall arise out of or be based upon any alleged untrue statement of a material fact contained in information furnished in writing by the Distributor to the Fund for use in the Registration Statement or Prospectus or shall arise out of or be based upon any alleged omission to state a material fact in connection with such information required to be stated in the Registration Statement or Prospectus or necessary to make such information not misleading. The Distributor's agreement to indemnify the Fund, its officers and Directors and any such controlling person as aforesaid, is expressly conditioned upon the Distributor's being promptly notified of any action brought against the Fund, its officers and Directors or any such controlling person, such notification being given to the Distributor at its principal business office.
Section 11. DURATION AND TERMINATION OF THIS AGREEMENT
11.1 This Agreement shall become effective as of the date first above written and shall remain in force for two years from the date hereof and thereafter, but only so long as such continuance is specifically approved at least annually by (a) the Board of Directors of the Fund, or by the vote of a majority of the outstanding voting securities of the applicable class and/or series of the Fund, and (b) by the vote of a majority of those Directors who are not parties to this Agreement or interested persons of any such parties and who have no direct or indirect financial interest in this Agreement or in the operation of any of the Fund's Plans or in any agreement related thereto (Independent Directors), cast in person at a meeting called for the purpose of voting upon such approval.
11.2 This Agreement may be terminated at any time, without the payment of any penalty, by a majority of the Independent Directors or by vote of a majority of the outstanding voting securities of the applicable class and/or series of the Fund, or by the Distributor, on sixty (60) days' written notice to the other party. This Agreement shall automatically terminate in the event of its assignment.
11.3 The terms "affiliated person," "assignment," "interested person" and "vote of a majority of the outstanding
voting securities", when used in this Agreement, shall have the respective meanings specified in the Investment Company Act.
Section 12. AMENDMENTS TO THIS AGREEMENT
This Agreement may be amended by the parties only if such amendment is specifically approved by (a) the Board of Directors of the Fund, or by the vote of a majority of the outstanding voting securities of the applicable class and/or series of the Fund, and (b) by the vote of a majority of the Independent Directors cast in person at a meeting called for the purpose of voting on such amendment.
Section 13. SEPARATE AGREEMENT AS TO CLASSES AND/OR SERIES
The amendment or termination of this Agreement with respect to any class and/or series shall not result in the amendment or termination of this Agreement with respect to any other class and/or series unless explicitly so provided.
Section 14. GOVERNING LAW
The provisions of this Agreement shall be construed and interpreted in accordance with the laws of the State of New York as at the time in effect and the applicable provisions of the Investment Company Act. To the extent that the applicable law of the State of New York, or any of the provisions herein, conflict with the applicable provisions of the Investment Company Act, the latter shall control.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year above written.
Prudential Securities Incorporated
By: /s/ Robert F. Gunia
..................................
Robert F Gunia
Senior Vice President
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Prudential Utility Fund, Inc.
By: /s/ Richard A. Redeker
..................................
Richard A. Redeker
President
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CUSTODIAN CONTRACT
Between
EACH OF THE PARTIES INDICATED ON APPENDIX A
and
STATE STREET BANK AND TRUST COMPANY
TABLE OF CONTENTS
Page
----
1. Employment of Custodian and Property to be Held By It..................... 1
2. Duties of the Custodian with Respect to Property of
the Fund Held by the Custodian in the United States....................... 2
2.1 Holding Securities................................................. 2
2.2 Delivery of Securities............................................. 3
2.3 Registration of Securities......................................... 8
2.4 Bank Accounts...................................................... 8
2.5 Availability of Federal Funds...................................... 9
2.6 Collection of Income...............................................10
2.7 Payment of Fund Monies.............................................10
2.8 Liability for Payment in Advance of
Receipt of Securities Purchased....................................13
2.9 Appointment of Agents..............................................14
2.10 Deposit of Securities in Securities System.........................14
2.10A Fund Assets Held in the Custodian's Direct
Paper System.......................................................17
2.11 Segregated Account.................................................19
2.12 Ownership Certificates for Tax Purposes............................20
2.13 Proxies............................................................20
2.14 Communications Relating to Fund
Portfolio Securities...............................................20
2.15 Reports to Fund by Independent Public
Accountants........................................................21
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3. Duties of the Custodian with Respect to Property of
the Fund Held Outside of the United States................................22
3.1 Appointment of Foreign Sub-Custodians..............................22
3.2 Assets to be Held..................................................22
3.3 Foreign Securities Depositories....................................23
3.4 Segregation of Securities..........................................23
3.5 Agreements with Foreign Banking Institutions.......................24
3.6 Access of Independent Accountants of the Fund......................24
3.7 Reports by Custodian...............................................25
3.8 Transactions in Foreign Custody Account............................25
3.9 Liability of Foreign Sub-Custodians................................26
3.10 Liability of Custodian.............................................27
3.11 Reimbursement for Advances.........................................28
3.12 Monitoring Responsibilities........................................28
3.13 Branches of U.S. Banks.............................................29
4. Payments for Repurchases or Redemptions and Sales
of Shares of the Fund.....................................................29
5. Proper Instructions.......................................................30
6. Actions Permitted Without Express Authority...............................32
7. Evidence of Authority.....................................................32
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8. Duties of Custodian with Respect to the Books of
Account and Calculations of Net Asset Value and
Net Income................................................................33
9. Records...................................................................33
10. Opinion of Fund's Independent Accountant..................................34
11. Compensation of Custodian.................................................34
12. Responsibility of Custodian...............................................34
13. Effective Period, Termination and Amendment...............................37
14. Successor Custodian.......................................................38
15. Interpretive and Additional Provisions....................................40
16. Massachusetts Law to Apply................................................40
17. Prior Contracts...........................................................40
18. The Parties...............................................................40
19. Limitation of Liability...................................................41
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CUSTODIAN CONTRACT
This Contract between State Street Bank and Trust Company, a Massachusetts trust company, having its principal place of business at 225 Franklin Street, Boston, Massachusetts, 02110, hereinafter called the "Custodian", and each Fund listed on Appendix A which evidences its agreement to be bound hereby by executing a copy of this Contract (each such Fund individually hereinafter referred to as the "Fund").
WITNESSETH: That in consideration of the mutual covenants and agreements hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of its assets, including securities it desires to be held in places within the United States ("domestic securities") and securities it desires to be held outside the United States ("foreign securities") pursuant to the provisions of the Articles of Incorporation/Declaration of Trust. The Fund agrees to deliver to the Custodian all securities and cash owned by it, and all payments of income, payments of principal or capital distributions received by it with respect to all securities owned by the Fund from time to time, and the cash consideration received by it for such new or treasury shares of capital stock, ("Shares") of the Fund as may be issued or sold from time to time. The Custodian shall not be responsible for any property of the Fund held or received by the Fund and not delivered to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article 5), the Custodian shall from time to time employ one or more sub-custodians located in the United States, but only in accordance with an applicable vote by the Board of Directors/Trustees of the Fund, and provided that the Custodian shall have the same responsibility or liability to the Fund on account of any actions or omissions of any sub-custodian so employed as any such sub-custodian has to the Custodian, provided that the Custodian agreement with any such domestic sub-custodian shall impose on such sub-custodian responsibilities and liabilities similar in nature and scope to those imposed by this Agreement with respect to the functions to be performed by such sub-custodian. The Custodian may employ as sub-custodians for the Fund's securities and other assets the foreign banking institutions and foreign securities depositories designated in Schedule "A" hereto but only in accordance with the provisions of Article 3.
2. Duties of the Custodian with Respect to Property of the Fund Held By the Custodian in the United States
2.1 Holding Securities. The Custodian shall hold and physically segregate for the account of the Fund all non-cash property, to be held by it in the United States, including all domestic securities owned by the Fund, other than (a) securities which are maintained pursuant to Section 2.10 in a clearing agency which acts as a securities depository or in a book-entry system authorized by the U.S. Department of the Treasury,
collectively referred to herein as "Securities System" and (b) commercial paper of an issuer for which State Street Bank and Trust Company acts as issuing and paying agent ("Direct Paper") which is deposited and/or maintained in the Direct Paper System of the Custodian pursuant to Section 2.10A.
2.2 Delivery of Securities. The Custodian shall release and deliver domestic securities owned by the Fund held by the Custodian or in a Securities System account of the Custodian or in the Custodian's Direct Paper book-entry system account ("Direct Paper System") only upon receipt of Proper Instructions, which may be continuing instructions when deemed appropriate by the parties, and only in the following cases:
1) Upon sale of such securities for the account of the Fund and receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase agreement related to such securities entered into by the Fund;
3) In the case of a sale effected through a Securities System, in accordance with the provisions of Section 2.10 hereof;
4) To the depository agent in connection with tender or other similar offers for portfolio securities of the Fund;
5) To the issuer thereof or its agent when such securities are called, redeemed, retired or
otherwise become payable; provided that, in any such case, the cash or other consideration is to be delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into the name of the Fund or into the name of any nominee or nominees of the Custodian or into the name or nominee name of any agent appointed pursuant to Section 2.9 or into the name or nominee name of any sub-custodian appointed pursuant to Article 1; or for exchange for a different number of bonds, certificates or other evidence representing the same aggregate face amount or number of units; provided that, in any such case, the new securities are to be delivered to the Custodian;
7) Upon the sale of such securities for the account of the Fund, to the broker or its clearing agent, against a receipt, for examination in accordance with "street delivery" custom; provided that in any such case, the Custodian shall have no responsibility or liability for any loss arising from the delivery of such securities prior to receiving payment for such securities except as may arise from the
Custodian's own negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger, consolidation, recapitalization, reorganization or readjustment of the securities of the issuer of such securities, or pursuant to provisions for conversion contained in such securities, or pursuant to any deposit agreement; provided that, in any such case, the new securities and cash, if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the surrender thereof in the exercise of such warrants, rights or similar securities or the surrender of interim receipts or temporary securities for definitive securities; provided that, in any such case, the new securities and cash, if any, are to be delivered to the Custodian;
10) For delivery in connection with any loans of securities made by the Fund, but only against receipt of adequate collateral as agreed upon from time to time by the Custodian and the Fund, which may be in the form of cash or obligations issued by the United States government, its agencies or
instrumentalities, except that in connection with any loans for which collateral is to be credited to the Custodian's account in the book-entry system authorized by the U.S. Department of the Treasury, the Custodian will not be held liable or responsible for the delivery of securities owned by the Fund prior to the receipt of such collateral;
11) For delivery as security in connection with any borrowings by the Fund requiring a pledge of assets by the Fund, but only against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any agreement among the Fund, the Custodian and a broker-dealer registered under the Securities Exchange Act of 1934 (the "Exchange Act") and a member of The National Association of Securities Dealers, Inc. ("NASD"), relating to compliance with the rules of The Options Clearing Corporation and of any registered national securities exchange, or of any similar organization or organizations, regarding escrow or other arrangements in connection with transactions by the Fund;
13) For delivery in accordance with the provisions of any agreement among the Fund,
the Custodian, and a Futures Commission Merchant registered under the Commodity Exchange Act, relating to compliance with the rules of the Commodity Futures Trading Commission and/or any Contract Market, or any similar organization or organizations, regarding account deposits in connection with transactions by the Fund;
14) Upon receipt of instructions from the transfer agent ("Transfer Agent") for the Fund, for delivery to such Transfer Agent or to the holders of shares in connection with distributions in kind, as may be described from time to time in the Fund's currently effective prospectus and statement of additional information ("prospectus"), in satisfaction of requests by holders of Shares for repurchase or redemption; and
15) For any other proper business purpose, but only upon receipt of, in addition to Proper Instructions, a certified copy of a resolution of the Board of Directors/Trustees or of the Executive Committee signed by an officer of the Fund and certified by the Secretary or an Assistant Secretary, specifying the securities to be delivered, setting forth the purpose for which such
delivery is to be made, declaring such purpose to be a proper business purpose, and naming the person or persons to whom delivery of such securities shall be made.
2.3 Registration of Securities. Domestic securities held by the Custodian (other than bearer securities) shall be registered in the name of the Fund or in the name of any nominee of the Fund or of any nominee of the Custodian which nominee shall be assigned exclusively to the Fund, unless the Fund has authorized in writing the appointment of a nominee to be used in common with other registered investment companies having the same investment adviser as the Fund, or in the name or nominee name of any agent appointed pursuant to Section 2.9 or in the name or nominee name of any sub-custodian appointed pursuant to Article 1. All securities accepted by the Custodian on behalf of the Fund under the terms of this Contract shall be in "street name" or other good delivery form. If, however, the Fund directs the Custodian to maintain securities in "street name", the Custodian shall utilize its best efforts to timely collect income due the Fund on such securities and to notify the Fund on a best efforts basis of relevant corporate actions including, without limitation, pendency of calls, maturities, tender or exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank account or accounts in the United States in
the name of the Fund, subject only to draft or order by the Custodian acting pursuant to the terms of this Contract, and shall hold in such account or accounts, subject to the provisions hereof, all cash received by it from or for the account of the Fund other than cash maintained by the Fund in a bank account established and used in accordance with Rule 17f-3 under the Investment Company Act of 1940. Funds held by the Custodian for the Fund may be deposited by it to its credit as Custodian in the Banking Department of the Custodian or in such other banks or trust companies as it may in its discretion deem necessary or desirable; provided, however, that every such bank or trust company shall be qualified to act as a custodian under the Investment Company Act of 1940 and that each such bank or trust company and the funds to be deposited with each such bank or trust company shall be approved by vote of a majority of the Board of Directors/Trustees of the Fund. Such funds shall be deposited by the Custodian in its capacity as Custodian and shall be withdrawable by the Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between the Fund and the Custodian, the Custodian shall, upon the receipt of Proper Instructions, make federal funds available to the Fund as of specified times agreed upon from time to time by the Fund and the Custodian in the amount of checks received in payment for Shares of the Fund which are deposited into the Fund's account.
2.6 Collection of Income. Subject to the provisions of Section 2.3, the Custodian shall collect on a timely basis all income and other payments with respect to registered securities held hereunder to which the Fund shall be entitled either by law or pursuant to custom in the securities business, and shall collect on a timely basis all income and other payments with respect to bearer securities if, on the date of payment by the issuer, such securities are held by the Custodian or its agent thereof and shall credit such income, as collected, to the Fund's custodian account. Without limiting the generality of the foregoing, the Custodian shall detach and present for payment all coupons and other income items requiring presentation as and when they become due and shall collect interest when due on securities held hereunder. Income due the Fund on securities loaned pursuant to the provisions of Section 2.2 (10) shall be the responsibility of the Fund. The Custodian will have no duty or responsibility in connection therewith, other than to provide the Fund with such information or data as may be necessary to assist the Fund in arranging for the timely delivery to the Custodian of the income to which the Fund is properly entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions, which may be continuing instructions when deemed appropriate by the parties, the Custodian shall pay out monies of the Fund in the following cases only:
1) Upon the purchase of securities held domestically, options, futures contracts or options on futures contracts for the account of the Fund but only (a) against the delivery of such securities, or evidence of title to such options, futures contracts or options on futures contracts, to the Custodian (or any bank, banking firm or trust company doing business in the United States or abroad which is qualified under the Investment Company Act of 1940, as amended, to act as a custodian and has been designated by the Custodian as its agent for this purpose) registered in the name of the Fund or in the name of a nominee of the Custodian referred to in Section 2.3 hereof or in proper form for transfer; (b) in the case of a purchase effected through a Securities System, in accordance with the conditions set forth in Section 2.10 hereof; (c) in the case of a purchase involving the Direct Paper System, in accordance with the conditions set forth in Section 2.10A; (d) in the case of repurchase agreements entered into between the Fund and the Custodian, or another bank, or a broker-dealer which is a member of NASD, (i) against delivery of the securities either in certificate form or
through an entry crediting the Custodian's account at the Federal Reserve Bank with such securities or (ii) against delivery of the receipt evidencing purchase by the Fund of securities owned by the Custodian along with written evidence of the agreement by the Custodian to repurchase such securities from the Fund or (e) for transfer to a time deposit account of the Fund in any bank, whether domestic or foreign; such transfer may be effected prior to receipt of a confirmation from a broker and/or the applicable bank pursuant to Proper Instructions from the Fund as defined in Article 5;
2) In connection with conversion, exchange or surrender of securities owned by the Fund as set forth in Section 2.2 hereof;
3) For the redemption or repurchase of Shares issued by the Fund as set forth in Article 4 hereof;
4) For the payment of any expense or liability incurred by the Fund, including but not limited to the following payments for the account of the Fund: interest, taxes, management, accounting, transfer agent and legal fees, and operating expenses of the
Fund whether or not such expenses are to be in whole or part capitalized or treated as deferred expenses;
5) For the payment of any dividends declared pursuant to the governing documents of the Fund;
6) For payment of the amount of dividends received in respect of securities sold short;
7) For any other proper purpose, but only upon receipt of, in addition to Proper Instructions, a certified copy of a resolution of the Board of Directors/Trustees or of the Executive Committee of the Fund signed by an officer of the Fund and certified by its Secretary or an Assistant Secretary, specifying the amount of such payment, setting forth the purpose for which such payment is to be made, declaring such purpose to be a proper purpose, and naming the person or persons to whom such payment is to be made.
2.8 Liability for Payment in Advance of Receipt of Securities Purchased. Except as specifically stated otherwise in this Contract, in any and every case where payment for purchase of securities for the account of the Fund is made by the Custodian in advance of receipt of the securities purchased in the absence of specific written
instructions from the Fund to so pay in advance, the Custodian shall be
absolutely liable to the Fund for such Securities to the same extent as if
the securities had been received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act of
1940, as amended, to act as a custodian, as its agent to carry out such of
the provisions of this Article 2 as the Custodian may from time to time
direct; provided, however, that the appointment of any agent shall not
relieve the Custodian of its responsibilities or liabilities hereunder.
2.10 Deposit of Securities in Securities Systems. The Custodian may deposit
and/or maintain domestic securities owned by the Fund in a clearing agency
registered with the Securities and Exchange Commission under Section 17A
of the Securities Exchange Act of 1934, which acts as a securities
depository, or in the book-entry system authorized by the U.S. Department
of the Treasury and certain federal agencies, collectively referred to
herein as "Securities System" in accordance with applicable Federal
Reserve Board and Securities and Exchange Commission rules and
regulations, if any, and subject to the following provisions:
1) The Custodian may keep domestic securities of the Fund in a
Securities System provided that
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such securities are represented in an account ("Account") of the Custodian in the Securities System which shall not include any assets of the Custodian other than assets held as a fiduciary, custodian or otherwise for customers;
2) The records of the Custodian with respect to domestic securities of the Fund which are maintained in a Securities System shall identify by book-entry those securities belonging to the Fund;
3) The Custodian shall pay for domestic securities purchased for the account of the Fund upon (i) receipt of advice from the Securities System that such securities have been transferred to the Account, and (ii) the making of an entry on the records of the Custodian to reflect such payment and transfer for the account of the Fund. The Custodian shall transfer domestic securities sold for the account of the Fund upon (i) receipt of advice from the Securities System that payment for such securities has been transferred to the Account, and (ii) the making of an entry on the records of the Custodian to reflect such transfer and payment for the account of the Fund. Copies
of all advices from the Securities System of transfers of domestic securities for the account of the Fund shall identify the Fund be maintained for the Fund by the Custodian and be provided to the Fund at its request. Upon request, the Custodian shall furnish the Fund confirmation of each transfer to or from the account of the Fund in the form of a written advice or notice and shall furnish promptly to the Fund copies of daily transaction sheets reflecting each day's transactions in the Securities System for the account of the Fund.
4) The Custodian shall provide the Fund with any report obtained by the Custodian on the Securities System's accounting system, internal accounting control and procedures for safeguarding securities deposited in the Securities System.
5) The Custodian shall have received the initial or annual certificate, as the case may be, required by Article 13 hereof;
6) Anything to the contrary in this Contract notwithstanding, the Custodian shall be liable to the Fund for any loss or damage to the Fund resulting from use of the Securities System by reason of any negligence,
misfeasance or misconduct of the Custodian or any of its agents or of any of its or their employees or from failure of the Custodian or any such agent to enforce effectively such rights as it may have against the Securities System; at the election of the Fund, it shall be entitled to be subrogated to the rights of the Custodian with respect to any claim against the Securities System or any other person which the Custodian may have as a consequence of any such loss or damage if and to the extent that the Fund has not been made whole for any such loss or damage.
2.10A Fund Assets Held in the Custodian's Direct Paper System
The Custodian may deposit and/or maintain securities owned by the Fund in the Direct Paper System of the Custodian subject to the following provisions:
1) No transaction relating to securities in the Direct Paper System will be effected in the absence of Proper Instructions;
2) The Custodian may keep securities of the Fund in the Direct Paper System only if such securities are represented in an account ("Account") of the Custodian in the Direct Paper System which shall not include any assets of the Custodian other than assets held as a fiduciary, custodian or otherwise for customers;
3) The records of the Custodian with respect to securities of the Fund which are maintained in the Direct Paper System shall identify by book-entry those securities belonging to the Fund;
4) The Custodian shall pay for securities purchased for the account of the Fund upon the making of an entry on the records of the Custodian to reflect such payment and transfer of securities to the account of the Fund. The Custodian shall transfer securities sold for the account of the Fund upon the making of an entry on the records of the Custodian to reflect such transfer and receipt of payment for the account of the Fund;
5) The Custodian shall furnish the Fund confirmation of each transfer to or from the account of the Fund, in the form of a written advice or notice, of Direct Paper on the next business day following such transfer and shall furnish to the Fund copies of daily transaction sheets reflecting each day's transaction in the Direct Paper System for the account of the Fund;
6) The Custodian shall provide the Fund with any report on its system of internal accounting
control as the Fund may reasonably request from time to time;
2.11 Segregated Account. The Custodian shall upon receipt of Proper
Instructions establish and maintain a segregated account or accounts for
and on behalf of the Fund, into which account or accounts may be
transferred cash and/or securities, including securities maintained in an
account by the Custodian pursuant to Section 2.10 hereof, (i) in
accordance with the provisions of any agreement among the Fund, the
Custodian and a broker-dealer registered under the Exchange Act and a
member of the NASD (or any futures commission merchant registered under
the Commodity Exchange Act), relating to compliance with the rules of The
Options Clearing Corporation and of any registered national securities
exchange (or the Commodity Futures Trading Commission or any registered
contract market), or of any similar organization or organizations,
regarding escrow or other arrangements in connection with transactions by
the Fund, (ii) for purposes of segregating cash, government securities or
liquid, high-grade debt obligations in connection with options purchased,
sold or written by the Fund or commodity futures contracts or options
thereon purchased or sold by the Fund, (iii) for the purposes of
compliance by the Fund with the procedures required by Investment Company
Act Release No. 10666, or any subsequent release or releases of the
Securities and Exchange Commission
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relating to the maintenance of segregated accounts by registered
investment companies and (iv) for other proper corporate purposes, but
only, in the case of clause (iv), upon receipt of, in addition to Proper
Instructions, a certified copy of a resolution of the Board of
Directors/Trustees or of the Executive Committee signed by an officer of
the Fund and certified by the Secretary or an Assistant Secretary, setting
forth the purpose or purposes of such segregated account and declaring
such purposes to be proper corporate purposes.
2.12 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and state
tax purposes in connection with receipt of income or other payments with
respect to domestic securities of the Fund held by it and in connection
with transfers of such securities.
2.13 Proxies. The Custodian shall, with respect to the domestic securities held
hereunder, cause to be promptly executed by the registered holder of such
securities, if the securities are registered otherwise than in the name of
the Fund or a nominee of the Fund, all proxies, without indication of the
manner in which such proxies are to be voted, and shall promptly deliver
to the Fund such proxies, all proxy soliciting materials and all notices
relating to such securities.
2.14 Communications Relating to Fund Portfolio Securities
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Subject to the provisions of Section 2.3, the Custodian
shall transmit promptly to the Fund all written information (including,
without limitation, pendency of calls and maturities of securities held
domestically and expirations of rights in connection therewith and notices
of exercise of call and put options written by the Fund and the maturity
of futures contracts purchased or sold by the Fund) received by the
Custodian from issuers of the securities being held for the Fund. With
respect to tender or exchange offers, the Custodian shall transmit
promptly to the Fund all written information received by the Custodian
from issuers of the securities whose tender or exchange is sought and from
the party (or his agents) making the tender or exchange offer. If the Fund
desires to take action with respect to any tender offer, exchange offer or
any other similar transaction, the Fund shall notify the Custodian at
least three business days prior to the date on which the Custodian is to
take such action.
2.15 Reports to Fund by Independent Public Accountants
The Custodian shall provide the Fund, at such times as the Fund may
reasonably require, with reports by independent public accountants on the
accounting system, internal accounting control and procedures for
safeguarding securities, futures contracts and options on futures
contracts, including securities deposited and/or maintained in a
Securities System, relating to the services provided by the Custodian
under this Contract; such reports shall be of sufficient scope and in
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sufficient detail, as may reasonably be required by the Fund to provide reasonable assurance that any material inadequacies would be disclosed by such examination and, if there are no such inadequacies, the reports shall so state.
3. Duties of the Custodian with Respect to Property of the Fund Held Outside of the United States
3.1 Appointment of Foreign Sub-Custodians
The Fund hereby authorizes and instructs the Custodian to employ as
sub-custodians for the Fund's securities and other assets maintained
outside the United States the foreign banking institutions and foreign
securities depositories designated on Schedule A hereto ("foreign
sub-custodians"). Upon receipt of "Proper Instructions", as defined in
Section 5 of this Contract, together with a certified resolution of the
Fund's Board of Directors/Trustees, the Custodian and the Fund may agree
to amend Schedule A hereto from time to time to designate additional
foreign banking institutions and foreign securities depositories to act as
sub-custodian. Upon receipt of Proper Instructions, the Fund may instruct
the Custodian to cease the employment of any one or more such
sub-custodians for maintaining custody of the Fund's assets.
3.2 Assets to be Held. The Custodian shall limit the securities and other assets maintained in the custody of the foreign sub-custodians to: (a) "foreign securities",
as defined in paragraph (c)(1) of Rule 17f-5 under the Investment Company Act of 1940, and (b) cash and cash equivalents in such amounts as the Custodian or the Fund may determine to be reasonably necessary to effect the Fund's foreign securities transactions.
3.3 Foreign Securities Depositories. Except as may otherwise be agreed upon in
writing by the Custodian and the Fund, assets of the Fund shall be
maintained in foreign securities depositories only through arrangements
implemented by the foreign banking institutions serving as sub-custodians
pursuant to the terms hereof. Where possible, such arrangements shall
include entry into agreements containing the provisions set forth in
Section 3.5 hereof.
3.4 Segregation of Securities
The Custodian shall identify on its books as belonging to the Fund, the foreign securities of the Fund held by each foreign sub-custodian. Each agreement pursuant to which the Custodian employs a foreign banking institution shall require that such institution establish a custody account for the Custodian on behalf of the Fund and physically segregate in that account, securities and other assets of the Fund, and, in the event that such institution deposits the Fund's securities in a foreign securities depository, that it shall identify on its books as belonging to the Custodian, as agent for the Fund, the securities so deposited.
3.5 Agreements with Foreign Banking Institutions. Each agreement with a
foreign banking institution shall be substantially in the form set forth
in Exhibit 1 hereto and shall provide that: (a) the Fund's assets will not
be subject to any right, charge, security interest, lien or claim of any
kind in favor of the foreign banking institution or its creditors or
agent, except a claim of payment for their safe custody or administration;
(b) beneficial ownership of the Fund's assets will be freely transferable
without the payment of money or value other than for custody or
administration; (c) adequate records will be maintained identifying the
assets as belonging to the Fund; (d) officers of or auditors employed by,
or other representatives of the Custodian, including to the extent
permitted under applicable law the independent public accountants for the
Fund, will be given access to the books and records of the foreign banking
institution relating to its actions under its agreement with the
Custodian; and (e) assets of the Fund held by the foreign sub-custodian or
will be subject only to the instructions of the Custodian or its agents.
3.6 Access of Independent Accountants of the Fund. Upon request of the Fund, the Custodian will use its best efforts to arrange for the independent accountants of the Fund to be afforded access to the books and records of any foreign banking institution employed as a foreign sub-custodian insofar as such books and records relate to
the performance of such foreign banking institution under its agreement with the Custodian.
3.7 Reports by Custodian. The Custodian will supply to the Fund from time to time, as mutually agreed upon, statements in respect of the securities and other assets of the Fund held by foreign sub-custodians, including but not limited to an identification of entities having possession of the Fund's securities and other assets and advices or notifications of any transfers of securities to or from each custodial account maintained by a foreign banking institution for the Custodian on behalf of the Fund indicating, as to securities acquired for the Fund, the identity of the entity having physical possession of such securities.
3.8 Transactions in Foreign Custody Account
(a) Except as otherwise provided in paragraph (b) of this Section 3.8, the provision of Sections 2.2 and 2.7 of this Contract shall apply, in their entirety to the foreign securities of the Fund held outside the United States by foreign sub-custodians.
(b) Notwithstanding any provision of this Contract to the contrary, settlement and payment for securities received for the account of the Fund and delivery of securities maintained for the account of the Fund may be effected in accordance with the customary established securities trading or securities processing practices and procedures in the jurisdiction or market in which the transaction
occurs, including, without limitation, delivering securities to the purchaser thereof or to a dealer therefor (or an agent for such purchaser or dealer) against a receipt with the expectation of receiving later payment for such securities from such purchaser or dealer.
(c) Securities maintained in the custody of a foreign sub-custodian may be maintained in the name of such entity's nominee to the same extent as set forth in Section 2.3 of this Contract, and the Fund agrees to hold any such nominee harmless from any liability as a holder of record of such securities.
3.9 Liability of Foreign Sub-Custodians. Each agreement pursuant to which the Custodian employs a foreign banking institution as a foreign sub-custodian shall require the institution to exercise reasonable care in the performance of its duties and to indemnify, and hold harmless, the Custodian and each Fund from and against any loss, damage, cost, expense, liability or claim arising out of or in connection with the institution's performance of such obligations. At the election of the Fund, it shall be entitled to be subrogated to the rights of the Custodian with respect to any claims against a foreign banking institution as a consequence of any such loss, damage, cost, expense, liability or claim if and to the extent that the Fund has not been made whole for any such loss, damage, cost, expense, liability or claim.
3.10 Liability of Custodian. The Custodian shall be liable for the acts or
omissions of a foreign banking institution to the same extent as set forth
with respect to sub-custodians generally in this Contract and, regardless
of whether assets are maintained in the custody of a foreign banking
institution, a foreign securities depository or a branch of a U.S. bank as
contemplated by paragraph 3.13 hereof, the Custodian shall not be liable
for any loss, damage, cost, expense, liability or claim resulting from
nationalization, expropriation, currency restrictions, or acts of war or
terrorism or any loss where the sub-custodian has otherwise exercised
reasonable care. Notwithstanding the foregoing provisions of this
paragraph 3.10, in delegating custody duties to State Street London Ltd.,
the Custodian shall not be relieved of any responsibility to the Fund for
any loss due to such delegation, except such loss as may result from (a)
political risk (including, but not limited to, exchange control
restrictions, confiscation, expropriation, nationalization, insurrection,
civil strife or armed hostilities) or (b) other losses (excluding a
bankruptcy or insolvency of State Street London Ltd. not caused by
political risk) due to Acts of God, nuclear incident or other losses under
circumstances where the Custodian and State Street London Ltd. have
exercised reasonable care.
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3.11 Reimbursement for Advances. If the Fund requires the Custodian to advance
cash or securities for any purpose including the purchase or sale of
foreign exchange or of contracts for foreign exchange, or in the event
that the Custodian or its nominee shall incur or be assessed any taxes,
charges, expenses, assessments, claims or liabilities in connection with
the performance of this Contract, except such as may arise from its or its
nominee's own negligent action, negligent failure to act or willful
misconduct, any property at any time held for the account of the Fund
shall be security therefor and should the Fund fail to repay the Custodian
promptly, the Custodian shall be entitled to utilize available cash and to
dispose of the Fund assets to the extent necessary to obtain
reimbursement.
3.12 Monitoring Responsibilities. The Custodian shall furnish annually to the
Fund, during the month of June, information concerning the foreign
sub-custodians employed by the Custodian. Such information shall be
similar in kind and scope to that furnished to the Fund in connection with
the initial approval of this Contract. In addition, the Custodian will
promptly inform the Fund in the event that the Custodian learns of a
material adverse change in the financial condition of a foreign
sub-custodian or any material loss of the assets of the Fund or in the
case of any foreign sub-custodian not the subject of an exemptive order
from the Securities
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and Exchange Commission is notified by such foreign sub-custodian that
there appears to be a substantial likelihood that its shareholders' equity
will decline below $200 million (U.S. dollars or the equivalent thereof)
or that its shareholders' equity has declined below $200 million (in each
case computed in accordance with generally accepted U.S. accounting
principles).
3.13 Branches of U.S. Banks
(a) Except as otherwise set forth in this Contract, the provisions of
Article 3 shall not apply where the custody of the Fund assets are
maintained in a foreign branch of a banking institution which is a "bank"
as defined by Section 2(a)(5) of the Investment Company Act of 1940
meeting the qualification set forth in Section 26(a) of said Act. The
appointment of any such branch as a sub-custodian shall be governed by
paragraph 1 of this Contract.
(b) Cash held for the Fund in the United Kingdom shall be maintained in an
interest bearing account established for the Fund with the Custodian's
London branch, which account shall be subject to the direction of the
Custodian, State Street London Ltd. or both.
4. Payments for Repurchases or Redemptions and Sales of Shares of the Fund
From such funds as may be available for the purpose but subject to the
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limitations of the Articles of Incorporation/Declaration of Trust and any applicable votes of the Board of
Directors/Trustees of the Fund pursuant thereto, the Custodian shall, upon receipt of instructions from the Transfer Agent, make funds available for payment to holders of Shares who have delivered to the Transfer Agent a request for redemption or repurchase of their Shares. In connection with the redemption or repurchase of Shares of the Fund, the Custodian is authorized upon receipt of instructions from the Transfer Agent to wire funds to or through a commercial bank designated by the redeeming shareholders. In connection with the redemption or repurchase of Shares of the Fund, the Custodian shall honor checks drawn on the Custodian by a holder of Shares, which checks have been furnished by the Fund to the holder of Shares, when presented to the Custodian in accordance with such procedures and controls as are mutually agreed upon from time to time between the Fund and the Custodian.
The Custodian shall receive from the distributor for the Fund's Shares or from the Transfer Agent of the Fund and deposit into the Fund's account such payments as are received for Shares of the Fund issued or sold from time to time by the Fund. The Custodian will provide timely notification to the Fund and the Transfer Agent of any receipt by it of payments for Shares of the Fund.
5. Proper Instructions
Proper Instructions as used herein means a writing signed or initialled by one or more person or persons as the officers of the Fund shall have from time to time authorized. Each such writing shall set forth the specific transaction or type of
transaction involved, including a specific statement of the purpose for which such action is requested. Oral instructions will be considered Proper Instructions if the Custodian reasonably believes them to have been given by a person authorized to give such instructions with respect to the transaction involved. The Fund shall cause all oral instructions to be confirmed in writing. It is understood and agreed that the Board of Directors/Directors/Trustees has authorized (i) Prudential Mutual Fund Management, Inc., as Manager of the Fund, and (ii) The Prudential Investment Corporation (or Prudential-Bache Securities Inc.), as Subadviser to the Fund, to deliver proper instructions with respect to all matters for which proper instructions are required by this Article 5. The Custodian may rely upon the certificate of an officer of the Manager or Subadviser, as the case may be, with respect to the person or persons authorized on behalf of the Manager and Subadviser, respectively, to sign, initial or give proper instructions for the purpose of this Article 5. Proper Instructions may include communications effected directly between electro-mechanical or electronic devices provided that the Fund and the Custodian are satisfied that such procedures afford adequate safeguards for the Fund's assets. For purposes of this Section, Proper Instructions shall include instructions received by the Custodian pursuant to any three-party agreement which requires a segregated asset account in accordance with Section 2.11.
6. Actions Permitted without Express Authority
The Custodian may in its discretion, without express authority from the Fund:
1) make payments to itself or others for minor expenses of handling securities or other similar items relating to its duties under this Contract, provided that all such payments shall be accounted for to the Fund;
2) surrender securities in temporary form for securities in definitive form;
3) endorse for collection, in the name of the Fund, checks, drafts and other negotiable instruments; and
4) in general, attend to all non-discretionary details in connection with the sale, exchange, substitution, purchase, transfer and other dealings with the securities and property of the Fund except as otherwise directed by the Board of Directors/Trustees of the Fund.
7. Evidence of Authority
The Custodian shall be protected in acting upon any instructions, notice, request, consent, certificate or other instrument or paper believed by it to be genuine and to have been properly executed by or on behalf of the Fund. The Custodian may receive and accept a certified copy of a vote of the Board of Directors/Trustees of the Fund as conclusive evidence (a) of the authority of any person to act in accordance with such vote or (b) of any determination or of any action by the Board of Directors/Trustees pursuant to the Articles of Incorporation/
Declaration of Trust as described in such vote, and such vote may be considered as in full force and effect until receipt by the Custodian of written notice to the contrary.
8. Duties of Custodian with Respect to the Books of Account and Calculation of Net Asset Value and Net Income
The Custodian shall cooperate with and supply necessary information to the entity or entities appointed by the Board of Directors/Trustees of the Fund to keep the books of account of the Fund and/or compute the net asset value per share of the outstanding shares of the Fund or, if directed in writing to do so by the Fund, shall itself keep such books of account and/or compute such net asset value per share. If so directed, the Custodian shall also calculate daily the net income of the Fund as described in the Fund's currently effective prospectus and shall advise the Fund and the Transfer Agent daily of the total amounts of such net income and, if instructed in writing by an officer of the Fund to do so, shall advise the Transfer Agent periodically of the division of such net income among its various components. The calculations of the net asset value per share and the daily income of the Fund shall be made at the time or times described from time to time in the Fund's currently effective prospectus.
9. Records
The Custodian shall create and maintain all records relating to its activities and obligations under this Contract in such manner as will meet the obligations of the Fund under the Investment Company Act of 1940, with particular attention to
Section 31 thereof and Rules 31a-1 and 31a-2 thereunder. All such records shall be the property of the Fund and shall at all times during the regular business hours of the Custodian be open for inspection by duly authorized officers, employees or agents of the Fund and employees and agents of the Securities and Exchange Commission. The Custodian shall, at the Fund's request, supply the Fund with a tabulation of securities owned by the Fund and held by the Custodian and shall, when requested to do so by the Fund and for such Compensation as shall be agreed upon between the Fund and the Custodian, include certificate numbers in such tabulations.
10. Opinion of Fund's Independent Accountant
The Custodian shall take all reasonable action, as the Fund may from time to time request, to obtain from year to year favorable opinions from the Fund's independent accountants with respect to its activities hereunder in connection with the preparation of the Fund's Form N-1A, Form N-2 (in the case of a closed end Fund) and Form N-SAR or other periodic reports to the Securities and Exchange Commission and with respect to any other requirements of such Commission.
11. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its services and expenses as Custodian, as agreed upon from time to time between the Fund and the Custodian.
12. Responsibility of Custodian
So long as and to the extent that it is in the exercise of reasonable care, the Custodian shall not be responsible for
the title, validity or genuineness of any property or evidence of title thereto received by it or delivered by it pursuant to this Contract and shall be held harmless in acting upon any notice, request, consent, certificate or other instrument reasonably believed by it to be genuine and to be signed by the proper party or parties, including any futures commission merchant acting pursuant to the terms of a three-party futures or options agreement. The Custodian shall be held to the exercise of reasonable care in carrying out the provisions of this Contract, but shall be kept indemnified by and shall be without liability to the Fund for any action taken or omitted by it in good faith without negligence. It shall be entitled to rely on and may act upon advice of counsel (who may be counsel for the Fund) on all matters, and shall be without liability for any action reasonably taken or omitted pursuant to such advice. Notwithstanding the foregoing, the responsibility of the Custodian with respect to redemptions effected by check shall be in accordance with a separate Agreement entered into between the Custodian and the Fund.
The Custodian shall be liable for the acts or omissions of a foreign banking institution appointed pursuant to the provisions of Article 3 to the same extent as set forth in Article 1 hereof with respect to sub-custodians located in the United States and, regardless of whether assets are maintained in the custody of a foreign banking institution, a foreign securities depository or a branch of a U.S. bank as contemplated by paragraph 3.11 hereof, the Custodian shall not be liable for
any loss, damage, cost, expense, liability or claim resulting from, or caused by, the direction of or authorization by the Fund to maintain custody or any securities or cash of the Fund in a foreign country including, but not limited to, losses resulting from nationalization, expropriation, currency restrictions, or acts of war or terrorism.
If the Fund requires the Custodian to take any action with respect to securities, which action involves the payment of money or which action may, in the opinion of the Custodian, result in the Custodian or its nominee assigned to the Fund being liable for the payment of money or incurring liability of some other form, the Fund, as a prerequisite to requiring the Custodian to take such action, shall provide indemnity to the Custodian in an amount and form satisfactory to it.
If the Fund requires the Custodian to advance cash or securities for any purpose or in the event that the Custodian or its nominee shall incur or be assessed any taxes, charges, expenses, assessments, claims or liabilities in connection with the performance of this Contract, except such as may arise from its or its nominee's own negligent action, negligent failure to act or willful misconduct, any property at any time held for the account of the Fund shall be security therefor and should the Fund fail to repay the Custodian promptly, the Custodian shall be entitled to utilize available cash and to dispose of the Fund assets to the extent necessary to obtain reimbursement provided, however that, prior to disposing of Fund assets hereunder, the Custodian shall give the Fund notice of its intention to dispose
of assets identifying such assets and the Fund shall have one business day from receipt of such notice to notify the Custodian if the Fund wishes the Custodian to dispose of Fund assets of equal value other than those identified in such notice.
13. Effective Period, Termination and Amendment
This Contract shall become effective as of its execution, shall continue in full force and effect until terminated as hereinafter provided, may be amended at any time by mutual agreement of the parties hereto and may be terminated by either party by an instrument in writing delivered or mailed, postage prepaid to the other party, such termination to take effect not sooner than sixty (60) days after the date of such delivery or mailing; provided, however that the Custodian shall not act under Section 2.10 hereof in the absence of receipt of an initial certificate of the Secretary or an Assistant Secretary that the Board of Directors/Trustees of the Fund has approved the initial use of a particular Securities System and the receipt of an annual certificate of the Secretary or an Assistant Secretary that the Board of Directors/Trustees has reviewed the use by the Fund of such Securities System, as required in each case by Rule 17f-4 under the Investment Company Act of 1940, as amended and that the Custodian shall not act under Section 2.10A hereof in the absence of receipt of an initial certificate of the Secretary or an Assistant Secretary that the Board of Directors/Trustees has approved the initial use of the Direct Paper System and the receipt of an annual certificate of the Secretary or an Assistant Secretary that the Board of Directors/Trustees has reviewed the
use by the Fund of the Direct Paper System; provided further, however, that the Fund shall not amend or terminate this Contract in contravention of any applicable federal or state regulations, or any provision of the Articles of Incorporation/Declaration of Trust, and further provided, that the Fund may at any time by action of its Board of Directors/Trustees (i) substitute another bank or trust company for the Custodian by giving notice as described above to the Custodian, or (ii) immediately terminate this Contract in the event of the appointment of a conservator or receiver for the Custodian by the Comptroller of the Currency or upon the happening of a like event at the direction of an appropriate regulatory agency or court of competent jurisdiction.
Upon termination of the Contract, the Fund shall pay to the Custodian such compensation as may be due as of the date of such termination and shall likewise reimburse the Custodian for its costs, expenses and disbursements.
14. Successor Custodian
If a successor custodian shall be appointed by the Board of Directors/Trustees of the Fund, the Custodian shall, upon termination, deliver to such successor custodian at the office of the Custodian, duly endorsed and in the form for transfer, all securities then held by it hereunder and shall transfer to an account of the successor custodian all of the Fund's securities held in a Securities System.
If no such successor custodian shall be appointed, the Custodian shall, in like manner, upon receipt of a certified copy of a vote of the Board of Directors/Trustees of the Fund, deliver
at the office of the Custodian and transfer such securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian or certified copy of a vote of the Board of Directors/Trustees shall have been delivered to the Custodian on or before the date when such termination shall become effective, then the Custodian shall have the right to deliver to a bank or trust company, which is a "bank" as defined in the Investment Company Act of 1940, doing business in Boston, Massachusetts, of its own selection, having an aggregate capital, surplus, and undivided profits, as shown by its last published report, of not less than $25,000,000, all securities, funds and other properties held by the Custodian and all instruments held by the Custodian relative thereto and all other property held by it under this Contract and to transfer to an account of such successor custodian all of the Fund's securities held in any Securities System. Thereafter, such bank or trust company shall be the successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the possession of the Custodian after the date of termination hereof owing to failure of the Fund to procure the certified copy of the vote referred to or of the Board of Directors/Trustees to appoint a successor custodian, the Custodian shall be entitled to fair compensation for its services during such period as the Custodian retains possession of such securities, funds and other properties and the provisions of this Contract relating to the duties and obligations of the Custodian shall remain in full force and effect.
15. Interpretive and Additional Provisions
In connection with the operation of this Contract, the Custodian and the Fund may from time to time agree on such provisions interpretive of or in addition to the provisions of this Contract as may in their joint opinion be consistent with the general tenor of this Contract. Any such interpretive or additional provisions shall be in a writing signed by both parties and shall be annexed hereto, provided that no such interpretive or additional provisions shall contravene any applicable federal or state regulations or any provision of the Articles of Incorporation/Declaration of Trust of the Fund. No interpretive or additional provisions made as provided in the preceding sentence shall be deemed to be an amendment of this Contract.
16. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof interpreted under and in accordance with laws of the Commonwealth of Massachusetts.
17. Prior Contracts
This Contract supersedes and terminates, as of the date hereof, all prior contracts between the Fund and the Custodian relating to the custody of the Fund's assets.
18. The Parties
All references herein to the "Fund" are to each of the Funds listed on Appendix A individually, as if this Contract were between such individual Fund and the Custodian. With respect to any Fund listed on Appendix A which is organized as a
Massachusetts Business Trust, references to Board of Directors and Articles of Incorporation shall be deemed a reference to Board of Directors/Trustees and Articles of Incorporation/Declaration of Trust respectively and reference to shares of capital stock shall be deemed a reference to shares of beneficial interest.
19. Limitation of Liability
Each Fund listed on Appendix A that is referenced as a Massachusetts Business Trust is the designation of the Directors/Trustees under a Articles of Incorporation/Declaration of Trust, dated (see Appendix A) and all persons dealing with the Fund must look solely to the property of the Fund for the enforcement of any claims against the Fund as neither the Directors/Trustees, officers, agents or shareholders assume any personal liability for obligations entered into on behalf of the Fund.
IN WITNESS WHEREOF, each of the parties has caused this instrument to be executed in its name and behalf by its duly authorized representative and its seal to be hereunder affixed as of the dates set forth on Appendix A.
ATTEST STATE STREET BANK AND TRUST COMPANY
/s/ By /s/ Al O'Neal
- ----------------------------- ---------------------------------
Assistant Secretary Vice President
ATTEST EACH OF THE FUNDS LISTED ON APPENDIX A
/s/ S. Jane Rose By /s/ Robert F. Gunia
- ----------------------------- --------------------------------
Secretary Vice President
|
Appendix A
Execution Date of
Fund Name Date Declaration of Trust
- --------- --------- --------------------
(if applicable)
Command Government Fund July 1, 1990 August 19, 1981
Command Money Fund July 1, 1990 June 5, 1981
Command Tax-Free Fund July 1, 1990 June 5, 1981
The Global Yield Fund, Inc. September 5, 1990
The Blackstone Government
Income Trust August 30, 1991 June 13, 1991
Prudential California Municipal Fund August 1, 1990 May 18, 1984
Prudential Equity Fund, Inc. August 1, 1990
Prudential Global Fund, Inc. June 7, 1990
Prudential GNMA Fund, Inc. August 1, 1990
Prudential Government Plus Fund,
Inc.
Prudential-Bache Government Securities
Trust September 22, 1981
Prudential-Bache Growth Opportunity Fund,
Inc.
Prudential-Bache High Yield Fund, Inc.
Prudential-Bache IncomeVertible Plus Fund,
Inc. June 6, 1990
Prudential-Bache MoneyMart Assets, Inc.
Prudential-Bache Multi-Sector Fund, Inc.
Prudential-Bache Municipal Series Fund May 18, 1984
Prudential-Bache National Municipals Fund,
Inc.
Prudential-Bache Option Growth Fund, Inc.
Prudential-Bache Research Fund, Inc.
Prudential-Bache Special Money Market Fund,
Inc. January 12, 1990
Prudential-Bache Structured Maturity Fund,
Inc. July 25, 1989
Prudential-Bache Tax-Free Money Fund, Inc.
Prudential-Bache U.S. Government Fund September 22, 1986
Prudential-Bache Utility Fund, Inc. June 6, 1990
The Target Portfolio Trust November 9, 1992 July 29, 1992
|
Prudential Utility Fund, Inc.
Schedule A
The following foreign banking institutions and foreign securities depositories have been approved by the Board of Directors/Trustees of Prudential Utility Fund, Inc. for use as subcustodians for the Fund's securities and other assets:
Securities Depository
Country Bank Clearing Agency
- ------- ---- ---------------------
Australia Westpac Banking Corp. Austraclear Limited
and Reserve Bank
Information and
Transfer System
Austria GiroCredit Bank Oesterreichische
Aktiangesellschaft Kontrollbank AG
der Sparkassen
Belgium Generale Bank Caisse Interpro-
fessionnelle de Depots
et de Virements de
Titres S.A.
Canada Canada Trustco The Canadian
Mortgage Company Depository for
Securities Limited
Denmark Den Danske Bank Vaerdipapircentralen,
The Danish Securities
Center
Finland Kansallis-Osake- Central Share Register
of Finland
France Banque Paribas Societe Interpro-
fessionnelle pour la
Compensation des
Valeurs Mobilieres
(SICOVAM)
Germany Berliner Handels-und The Deutscher
Frankfurter Bank Kassenverein AG
Hong Kong Standard Chartered The Central Clearing
Bank and Settlement System
Ireland Bank of Ireland The Gilts Settlement
Office
Italy Morgan Guaranty Monte Titoli S.p.A.
Trust Company
Japan Sumitomo Trust & None
Banking Co., Ltd.
Korea Bank of Seoul Korea Securities
Depository
Luxembourg Cedel
Malaysia Standard Chartered None
Bank - Malaysia Berhad
Mexico Citibank, N.A. - Mexico S.D. INDEVAL, S.A. de
(branch of Citibank NA) C.V. (Instituto para
el Deposito de
Valores)
Netherlands MeesPierson N.V. Nederlands Centraal
Instituut voor Giraal
Effectenverkeer B.V.
(NECIGEF)
New Zealand ANZ Banking Group None
(New Zealand) Limited
Norway Christiania Bank Verdipapirsentralen,
og Kreditkasse The Norwegian Registry
of Securities. (VPS)
Portugal Banco Comercial Central de Valores
Portugues Mobiliarios (Central)
Singapore The Development Bank The Central Depository
of Singapore Ltd. (Pte) Limited., (CDP)
Spain Banco Santander, S.A. Servicio de
Compensacion y
Liquidacion de Valores
(SCLV)
Sweden Skandinaviska Vardepapperscentralen
Enskilda Banken The Sweedish
Securities Register
Center (VPC)
Switzerland Union Bank of Schweizerische
Switzerland Effekten-Giro AG
(SEGA)
Thailand Standard Chartered Share Depository
Bank Center (SDC)
United Kingdom State Street Bank The Central Gilts
and Trust Company, Office
London branch, and
State Street London
Ltd., a subsidiary of
State Street Bank &
Trust Company
Transnational The Euroclear System
Cedel
|
Date: September 20, 1994
TRANSFER AGENCY AND SERVICE AGREEMENT
between
PRUDENTIAL-BACHE UTILITY FUND, INC.
and
PRUDENTIAL MUTUAL FUND SERVICES, INC.
TABLE OF CONTENTS
Article 1 Terms of Appointment; Duties of the Agent ........... 1
Article 2 Fees and Expenses .................................... 4
Article 3 Representations and Warranties of the Agent .......... 5
Article 4 Representations of Warranties of the Fund ............ 5
Article 5 Duty of Care and Indemnification ..................... 6
Article 6 Documents and Covenants of the Fund and the Agent .... 9
Article 7 Termination of Agreement ............................. 10
Article 8 Assignment ........................................... 11
Article 9 Affiliations ......................................... 11
Article 10 Amendment ............................................ 12
Article 11 Applicable Law ....................................... 12
Article 12 Miscellaneous ........................................ 12
Article 13 Merger of Agreement .................................. 13
|
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the 1st day of January, 1988 by and between PRUDENTIAL-BACHE UTILITY FUND, INC., a Maryland corporation, having its principal office and place of business at One Seaport Plaza, New York, New York 10292 (the "Fund"), and PRUDENTIAL MUTUAL FUND SERVICES, INC., a New Jersey corporation, having its principal office and place of business at Raritan Plaza I, Edison, New Jersey 08818 (the "Agent" or "PMFS").
WHEREAS, the Fund desires to appoint PMFS as its transfer agent, dividend disbursing agent and shareholder servicing agent in connection with certain other activities, and PMFS desires to accept such appointment;
NOW THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto agree as follows:
Article 1 Terms of Appointment; Duties of PMFS
1.01 Subject to the terms and conditions set forth in this Agreement, the Fund hereby employs and appoints PMFS to act as, and PMFS agrees to act as, the transfer agent for the authorized and issued shares of the common stock of each series of the Fund, $.01 par value ("Shares"), dividend disbursing agent and shareholder servicing agent in connection with any accumulation, open-account or similar plans provided to the shareholders of the Fund or any series thereof ("Shareholders") and set out in the currently effective prospectus and statement of additional information ("prospectus") of the Fund, including without limitation any periodic investment plan or periodic withdrawal program.
1.02 PMFS agrees that it will perform the following services:
(a) In accordance with procedures established from time to time by agreement between the Fund and PMFS, PMFS shall:
(i) Receive for acceptance, orders for the purchase of Shares, and promptly deliver payment and appropriate documentation therefor to the Custodian of the Fund authorized pursuant to the Articles of Incorporation of the Fund (the "Custodian");
(ii) Pursuant to purchase orders, issue the appropriate number of Shares and hold such Shares in the appropriate Shareholder account;
(iii) Receive for acceptance redemption requests and redemption directions and deliver the appropriate documentation therefor to the Custodian;
(iv) At the appropriate time as and when it receives monies paid to it by the Custodian with respect to any redemption, pay over or cause to be paid over in the appropriate manner such monies as instructed by the redeeming Shareholders;
(v) Effect transfers of Shares by the registered owners thereof upon receipt of appropriate instructions;
(vi) Prepare and transmit payments for dividends and distributions declared by the Fund;
(vii) Calculate any sales charges payable by a Shareholder on purchases and/or redemptions of Shares of the Fund as such charges may be reflected in the prospectus;
(viii) Maintain records of account for and advise the Fund and its Shareholders as to the foregoing; and
(ix) Record the issuance of Shares of the Fund and maintain pursuant to Rule 17Ad-l0(e) under the Securities Exchange Act of 1934 ("1934 Act") a record of the total number of Shares of the Fund which are authorized, based upon data provided to it by the Fund, and issued and outstanding. PMFS shall also provide to the Fund on a regular basis the total number of Shares which are authorized, issued and outstanding and shall notify the Fund in case any proposed issue of Shares by the Fund would result in an overissue. In case any issue of Shares would result in an overissue, PMFS shall refuse to issue such Shares and shall not countersign and issue any certificates requested for such Shares. When recording the issuance of Shares, PMFS shall have no obligation to take cognizance of any Blue Sky laws relating to the issue or sale of such Shares, which functions shall be the sole responsibility of the Fund.
(b) In addition to and not in lieu of the services set forth in the above paragraph (a), PMFS shall: (i) perform all of the customary services of a transfer agent, dividend disbursing agent and, as relevant, shareholder servicing agent in connection with accumulation, open-account or similar plans (including without limitation any periodic investment plan or periodic withdrawal program), including but not limited to, maintaining all Shareholder accounts, preparing Shareholder meeting lists, mailing proxies, receiving and tabulating proxies, mailing Shareholder reports and prospectuses to current Shareholders, withholding taxes on non-resident alien accounts, preparing and filing appropriate forms required with respect to dividends and distributions by federal tax authorities for all Shareholders, preparing and mailing confirmation forms and statements of account to Shareholders for all purchases and redemptions of Shares and other confirmable transactions in Shareholder accounts, preparing and mailing activity statements for Shareholders and providing Shareholder account information and (ii) provide a system which will
enable the Fund to monitor the total number of Shares sold in each State or other jurisdiction.
(c) In addition, the Fund shall (i) identify to PMFS in writing those transactions and assets to be treated as exempt from Blue Sky reporting for each State and (ii) verify the establishment of transactions for each State on the system prior to activation and thereafter monitor the daily activity for each State. The responsibility of PMFS for the Fund's registration status under the Blue Sky or securities laws of any State or other jurisdiction is solely limited to the initial establishment of transactions subject to Blue Sky compliance by the Fund and the reporting of such transactions to the Fund as provided above and as agreed from time to time by the Fund and PMFS.
PMFS may also provide such additional services and functions not specifically described herein as may be mutually agreed between PMFS and the Fund and set forth in Schedule B hereto.
Procedures applicable to certain of these services may be established from time to time by agreement between the Fund and PMFS.
Article 2 Fees and Expenses
2.01 For performance by PMFS pursuant to this Agreement, the Fund
agrees to pay PMFS an annual maintenance fee for each Shareholder account and
certain transactional fees as set out in the fee schedule attached hereto as
Schedule A. Such fees and out-of-pocket expenses and advances identified under
Section 2.02 below may be changed from time to time subject to mutual written
agreement between the Fund and PMFS.
2.02 In addition to the fees paid under Section 2.01 above, the Fund agrees to reimburse PMFS for out-of-pocket expenses or advances incurred by PMFS for the items set out in Schedule A attached hereto. In addition, any other expenses incurred by PMFS at the request or with the consent of the Fund will be reimbursed by the Fund.
2.03 The Fund agrees to pay all fees and reimbursable expenses within a reasonable period of time following the mailing of the respective billing notice. Postage for mailing of dividends, proxies, Fund reports and other mailings to all Shareholder accounts shall be advanced to PMFS by the Fund upon request prior to the mailing date of such materials.
Article 3 Representations and Warranties of PMFS
PMFS represents and warrants to the Fund that:
3.01 It is a corporation duly organized and existing and in good standing under the laws of New Jersey and it is duly qualified to carry on its business in New Jersey.
3.02 It is and will remain registered with the U.S. Securities and
Exchange Commission ("SEC") as a Transfer Agent pursuant to the requirements of
Section 17A of the 1934 Act.
3.03 It is empowered under applicable laws and by its charter and By-Laws to enter into and perform this Agreement.
3.04 All requisite corporate proceedings have been taken to authorize it to enter into and perform this Agreement.
3.05 It has and will continue to have access to the necessary facilities, equipment and personnel to perform its duties and obligations under this Agreement.
Article 4 Representations and Warranties of the Fund
The Fund represents and warrants to PMFS that:
4.01 It is a corporation duly organized and existing and in good standing under the laws of Maryland.
4.02 It is empowered under applicable laws and by its Articles of Incorporation and By-Laws to enter into and perform this Agreement.
4.03 All corporate proceedings required by said Articles of Incorporation and By-Laws have been taken to authorize it to enter into and perform this Agreement.
4.04 It is an investment company registered with the SEC under the Investment Company Act of 1940, as amended (the "1940 Act").
4.05 A registration statement under the Securities Act of 1933 (the "1933 Act") is currently effective and will remain effective, and appropriate state securities law filings have been made and will continue to be made, with respect to all Shares of the Fund being offered for sale.
Article 5 Duty of Care and Indemnification
5.01 PMFS shall not be responsible for, and the Fund shall indemnify and hold PMFS harmless from and against, any and all losses, damages, costs, charges, counsel fees, payments, expenses and liability arising out of or attributable to:
(a) All actions of PMFS or its agents or subcontractors required to be taken pursuant to this Agreement, provided that such actions are taken in good faith and without negligence or willful misconduct.
(b) The Fund's refusal or failure to comply with the terms of this Agreement, or which arise out of the Fund's lack of good faith, negligence or willful misconduct or which arise out of the breach of any representation or warranty of the Fund hereunder.
(c) The reliance on or use by PMFS or its agents or subcontractors of information, records and documents which (i) are received by PMFS or its agents or subcontractors and furnished to it by or on behalf of the Fund, and (ii) have been prepared and/or maintained by the Fund or any other person or firm on behalf of the Fund.
(d) The reliance on, or the carrying out by PMFS or its agents or subcontractors of, any instructions or requests of the Fund.
(e) The offer or sale of Shares in violation of any requirement under the federal securities laws or regulations or the securities or Blue Sky laws of any State or other jurisdiction that such Shares be registered in such State or other jurisdiction or in violation of any stop order or other determination or ruling by any federal agency or any State or other jurisdiction with respect to the offer or sale of such Shares in such State or other jurisdiction.
5.02 PMFS shall indemnify and hold the Fund harmless from and against any and all losses, damages, costs, charges, counsel fees, payments, expenses and liability arising out of or attributable to any action or failure or omission to act by PMFS as a result of PMFS' lack of good faith, negligence or willful misconduct.
5.03 At any time PMFS may apply to any officer of the Fund for instructions, and may consult with legal counsel, with respect to any matter arising in connection with the services to be performed by PMFS under this Agreement, and PMFS and its agents or subcontractors shall not be liable and shall be indemnified by the Fund for any action taken or omitted by it in reliance upon such instructions or upon the opinion of such counsel. PMFS, its agents and subcontractors shall be protected and indemnified in acting upon any paper or document furnished by or on behalf of the Fund, reasonably believed to be genuine and to have been signed by the proper person or persons, or upon any instruction, information, data, records or documents provided to PMFS or its agents or subcontractors by machine readable input, telex, CRT data entry or other similar means authorized by the Fund, and shall not be held to have notice of any change of authority of any person, until receipt of written notice thereof from the Fund. PMFS, its agents and subcontractors shall also
be protected and indemnified in recognizing stock certificates which are reasonably believed to bear the proper manual or facsimile signature of the officers of the Fund, and the proper countersignature of any former transfer agent or registrar, or of a co-transfer agent or co-registrar.
5.04 In the event either party is unable to perform its obligations under the terms of this Agreement because of acts of God, strikes, equipment or transmission failure or damage reasonably beyond its control, or other causes reasonably beyond its control, such party shall not be liable for damages to the other for any damages resulting from such failure to perform or otherwise from such causes.
5.05 Neither party to this Agreement shall be liable to the other party for consequential damages under any provision of this Agreement or for any act or failure to act hereunder.
5.06 In order that the indemnification provisions contained in this Article 5 shall apply, upon the assertion of a claim for which either party may be required to indemnify the other, the party seeking indemnification shall promptly notify the other party of such assertion, and shall keep the other party advised with respect to all developments concerning such claim. The party who may be required to indemnify shall have the option to participate with the party seeking indemnification in the defense of such claim. The party seeking indemnification shall in no case confess any claim or make any compromise in any case in which the other party may be required to indemnify it except with the other party's prior written consent.
Article 6 Documents and Covenants of the Fund and PMFS
6.01 The Fund shall promptly furnish to PMFS the following:
(a) A certified copy of the resolution of the Board of Directors of the Fund authorizing the appointment of PMFS and the execution and delivery of this Agreement;
(b) A certified copy of the Articles of Incorporation and By-Laws of the Fund and all amendments thereto;
(c) The current registration statements and any amendments and supplements thereto filed with the SEC pursuant to the requirements of the 1933 Act and the 1940 Act;
(d) A specimen of the certificate for Shares of the Fund in the form approved by the Board of Directors, with a certificate of the Secretary of the Fund as to such approval;
(e) All account application forms or other documents relating to Shareholder accounts and/or relating to any plan program or service offered or to be offered by the Fund; and
(f) Such other certificates, documents or opinions as the Agent deems to be appropriate or necessary for the proper performance of its duties.
6.02 PMFS hereby agrees to establish and maintain facilities and procedures reasonably acceptable to the Fund for safekeeping of stock certificates, check forms and facsimile signature imprinting devices, if any; and for the preparation or use, and for keeping account of, such certificates, forms and devices.
6.03 PMFS shall prepare and keep records relating to the services to be performed hereunder, in the form and manner as it may deem advisable. To the extent required by Section 31 of the 1940 Act, and the Rules and Regulations thereunder, PMFS agrees that all such records prepared or maintained by PMFS relating to the services to be performed by PMFS hereunder are the property of the Fund and will be preserved, maintained and made available in accordance with such Section 31 of the 1940 Act, and the Rules and Regulations thereunder, and will be surrendered promptly to the Fund on and in accordance with its request.
6.04 PMFS and the Fund agree that all books, records, information and data pertaining to the business of the other party which are exchanged or received pursuant to the negotiation or the carrying out of this Agreement shall remain confidential and shall not be voluntarily disclosed to any other person except as may be required by law or with the prior consent of PMFS and the Fund.
6.05 In case of any requests or demands for the inspection of the Shareholder records of the Fund, PMFS will endeavor to notify the Fund and to secure instructions from an authorized officer of the Fund as to such inspection. PMFS reserves the right, however, to exhibit the Shareholder records to any person whenever it is advised by its counsel that it may be held liable for the failure to exhibit the Shareholder records to such person.
Article 7 Termination of Agreement
7.01 This Agreement may be terminated by either party upon one hundred twenty (120) days written notice to the other.
7.02 Should the Fund exercise its right to terminate, all out-of-pocket expenses associated with the movement of records and other materials will be borne by the Fund. Additionally, PMFS reserves the right to charge for any other reasonable fees and expenses associated with such termination.
Article 8 Assignment
8.01 Except as provided in Section 8.03 below, neither this Agreement nor any rights or obligations hereunder may be assigned by either party without the written consent of the other party.
8.02 This Agreement shall inure to the benefit of and be binding upon the parties and their respective permitted successors and assigns.
8.03 PMFS may, in its sole discretion and without further consent by
the Fund, subcontract, in whole or in part, for the performance of its
obligations and duties hereunder with any person or entity including but not
limited to: (i) Prudential-Bache Securities Inc. ("Prudential-Bache"), a
registered broker-dealer, (ii) The Prudential Insurance Company of America
("Prudential"), (iii) Pruco Securities Corporation, a registered broker-dealer,
(iv) any Prudential-Bache or Prudential subsidiary or affiliate duly registered
as a broker-dealer and/or a transfer agent pursuant to the 1934 Act or (vi) any
other Prudential-Bache or Prudential affiliate or subsidiary; provided, however,
that PMFS shall be as fully responsible to the Fund for the acts and omissions
of any agent or subcontractor as it is for its own acts and omissions.
Article 9 Affiliations
9.01 PMFS may now or hereafter, without the consent of or notice to the Fund, function as Transfer Agent and/or Shareholder Servicing Agent for any other investment company registered with the SEC under the 1940 Act, including without limitation any investment company whose adviser, administrator, sponsor or principal underwriter is or may become affiliated with Prudential-Bache and/or Prudential or any of its or their direct or indirect subsidiaries or affiliates.
9.02 It is understood and agreed that the directors, officers, employees, agents and Shareholders of the Fund, and the directors, officers, employees, agents and shareholders of the Fund's investment adviser and/or distributor, are or may be interested in the Agent as directors, officers, employees, agents, shareholders or otherwise, and that the directors, officers, employees, agents or shareholders of the Agent may be interested in the Fund as directors, officers, employees, agents, Shareholders or otherwise, or in the investment adviser and/or distributor as officers, directors, employees, agents, shareholders or otherwise.
Article 10 Amendment
10.01 This Agreement may be amended or modified by a written agreement executed by both parties and authorized or approved by a resolution of the Board of Directors of the Fund.
Article 11 Applicable Law
11.01 This Agreement shall be construed and the provisions thereof interpreted under and in accordance with the laws of the State of New Jersey.
Article 12 Miscellaneous
12.01 In the event of an alleged loss or destruction of any Share certificate, no new certificate shall be issued in lieu thereof, unless there shall first be furnished to PMFS an affidavit of loss or non-receipt by the holder of Shares with respect to which a certificate has been lost or destroyed, supported by an appropriate bond satisfactory to PMFS and the Fund issued by a surety company satisfactory to PMFS, except that PMFS may accept an affidavit of loss and indemnity agreement executed by the registered holder (or legal representative) without surety in such form as PMFS deems appropriate indemnifying PMFS and the Fund for the issuance of a replacement certificate, in cases where the alleged loss is in the amount of $1000 or less.
12.02 In the event that any check or other order for payment of money on the account of any Shareholder or new investor is returned unpaid for any reason, PMFS will (a) give prompt notification to the Fund's distributor ("Distributor") of such non-payment; and (b) take such other action, including imposition of a reasonable processing or handling fee, as PMFS may, in its sole discretion, deem appropriate or as the Fund and the Distributor may instruct PMFS.
12.03 Any notice or other instrument authorized or required by this Agreement to be given in writing to the Fund or to PMFS shall be sufficiently given if addressed to that party and received by it at its office set forth below or at such other place as it may from time to time designate in writing.
To the Fund:
Prudential-Bache Utility Fund, Inc.
One Seaport Plaza
New York, NY 10292
Attention: President
To PMFS:
Prudential Mutual Fund Services, Inc.
Raritan Plaza I
Edison, NJ 08818
Attention: President
Article 13 Merger of Agreement
13.01 This Agreement constitutes the entire agreement between the parties hereto and supersedes any prior agreement with respect to the subject matter hereof whether oral or written.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in their names and on their behalf under their seals by and through their duly authorized officers, as of the day and year first above written.
PRUDENTIAL-BACHE UTILITY
FUND, INC.
BY: /s/ Robert F. Gunia
---------------------------
ATTEST:
/s/ S. Jane Rose
- ---------------------------
PRUDENTIAL MUTUAL FUND
SERVICES, INC.
BY: /s/ Fred A. Fiandaca
---------------------------
ATTEST:
/s/ Lynda M. Puglesi
- ---------------------------
|
SCHEDULE A
PRUDENTIAL MUTUAL FUND SERVICES, INC.
Fee Schedule
Fee Information for Services as
Transfer Agent, Dividend Disbursing Agent
and Shareholder Servicing Agent
PRUDENTIAL-BACHE UTILITY FUND, INC.
General - Fees are based on an annual per shareholder account charge for account maintenance plus out-of-pocket expenses. The effective period of this fee schedule is January 1, 1990 through December 31, 1990 and shall continue thereafter from year to year, unless otherwise amended.
Annual Maintenance Charges - The annual maintenance charge includes the processing of all transactions and correspondence. The fee is billable on a monthly basis at the rate of 1/12 of the annual fee. A charge is made for an account in the month that an account opens or closes.
Basic Annual Per Account Fee $10.00 New Account Set-up Fee for Manua1ly Established Accounts $ 2.00 |
Inactive Account Fee - $.20 per month. A monthly fee is charged for inactive accounts with a zero balance.
Out-of-Pocket Expenses - Out-of-pocket expenses include but are not limited to:
postage, stationery and printing, allocable communication costs, microfilm,
microfiche, and expenses incurred at the specific direction of the Fund.
Payment - An invoice will be presented to the Fund on a monthly basis assessing the Fund the appropriate fee and out-of-pocket expenses.
PRUDENTIAL-BACHE PRUDENTIAL MUTUAL FUND
UTILITY FUND, INC. SERVICES, INC.
NAME: /s/ Susan Cote(acute) NAME /s/ Robert F. Guina
---------------------- -------------------
TITLE: Treasurer TITLE: Executive Vice President
DATE: January 1, 1990 DATE: January 1, 1990
|
[Letterhead of Sullivan & Cromwell]
August 7, 1981
State Street Bank and Trust Company
P.O. Box 1031
Boston, Massachusetts 02130
Dear Sirs:
We have acted as counsel for Chancellor Tax-Managed Utility Fund, Inc. (the "Fund") in connection with its organization and the registration for sale of an indefinite number of shares of its Common Stock (par value $.01 per share) pursuant to its Registration Statement under the Securities Act of 1933, as amended, on Form N-1 (Registration No. 2-72097) (the "Registration Statement"). We have examined such documents and such questions of law as we have deemed necessary or appropriate for the purpose of this opinion.
Upon the basis of such examination, we advise you that, in our opinion:
(1) The Fund has authorized capital stock of 50,000,000 shares of Common Stock (par value $.01 per share);
State Street Bank and Trust Company -2-
(2) Shares of Common Stock of the Fund which are redeemed by the Fund in accordance with the Articles of Incorporation of the Fund are restored to the status of authorized but unissued shares;
(3) All outstanding shares of Common Stock of the Fund are duly and validly authorized and issued, full paid and nonassessable; and
(4) The Fund has registered an indefinite number of shares of its Common Stock under the Registration Statement which Registration Statement which Registration Statement is in effect as of the date hereof.
Very truly yours,
/s/ SULLIVAN & CROMWELL |
Exhibit 99.B10(B)
SULLIVAN & CROMWELL
NEW YORK TELEPHONE: (212) 558-4000
TELEX: 62694 (INTERNATIONAL) 127816 (DOMESTIC) 125 Broad Street, New York 10004-2498
CABLE ADDRESS: LADYCOURT, NEW YORK __________
FACSIMILE: (212) 558-3588 (125 Broad Street) 250 PARK AVENUE, NEW YORK 10177-0021
(212) 558-3792 (250 Park Avenue) 1701 PENNSYLVANIA AVE, N.W. WASHINGTON, D.C. 20006-5805
444 SOUTH FLOWER STREET, LOS ANGELES 90071-2901
8, PLACE VENDOME, 75001 PARIS
ST. OLAVE'S HOUSE, 9a IRONMONGER LANE, LONDON EC2V 8EY
101 COLLINS STREET, MELBOURNE 3000
2-1, MARUNOUCHI I-CHOME, CHIYODA-KU, TOKYO 100
GLOUCESTER TOWER, 11 PEDDER STREET, HONG KONG
|
March 3, 1997
Prudential Utility Fund, Inc.,
Gateway Center Three,
100 Mulberry Street,
New York, New York 07102-4077.
Dear Sirs:
You have requested our opinion in connection with
your filing of Post-Effective Amendment No. 24 to the Regis-
tration Statement on Form N-1A (the "Post-Effective
Amendment") under the Securities Act of 1933 (the "Act") and
your registration in connection therewith of 28,042,168
shares of your Common Stock, $.01 par value (the "Shares")
pursuant to Rule 24e-2 under the Investment Company Act of
1940.
As your counsel, we are familiar with your organi-
zation and corporate status and the validity of your Common
Stock.
We advise you that, in our opinion, when the Post-
Effective Amendment relating to the Shares has become
effective under the Act, the Shares, when duly issued and
sold, for not less than the par value thereof and in
Prudential Utility Fund, Inc.
conformity with your charter, will be duly authorized and
validly issued, fully paid and nonassessable.
The foregoing opinion is limited to the Federal
laws of the United States and the General Corporation Laws
of the State of Maryland, and we are expressing no opinion
as to the effect by the laws of any other jurisdiction.
We have relied as to certain matters on informa-
tion obtained from public officials, your officers and other
sources believed by us to be responsible.
We consent to the filing of this opinion with the
Securities and Exchange Commission in connection with the
notice referred to above. In giving such consent, we do not
thereby admit that we come within the category of persons
whose consent is required under Section 7 of the Securities
Act of 1933.
Very truly yours,
/s/ Sullivan & Cromwell |
Consent of Independent Accountants
We hereby consent to the use in the Statement of Additional Information constituting part of this Post-Effective Amendment No. 25 to the registration statement on Form N-1A (the "Registration Statement") of our report dated February 28, 1997, relating to the financial statements and financial highlights of Prudential Utility Fund, Inc., which appears in such Statement of Additional Information, and to the incorporation by reference of our report into the Prospectus which constitutes part of this Registration Statement. We also consent to the reference to us under the heading "Custodian and Transfer and Dividend Disbursing Agent and Independent Accountants" in such Statement of Additional Information and to the reference to us under the heading "Financial Highlights" in such Prospectus.
PRICE WATERHOUSE LLP
New York, New York
February 28, 1997
PRUDENTIAL-BACHE UTILITY FUND, INC.
EXHIBIT
AVERAGE ANNUAL TOTAL RETURN
CALCULATION
ERV = P * (1 + T)^n
P = hypothetical initial payment of $1,000.00
T = average annual total return
n = number of years
ERV = ending redeemable value
1 Year 5 Year Inception
P = $1,000.00 $1,000.00 $1,000.00
n = 1 5 7.4
ERV = $1,184.55 $2,733.25 $3,924.22
T = 18.45% 22.27% 20.29%
|
PRUDENTIAL UTILITY FUND
EXHIBIT
AVERAGE ANNUAL TOTAL RETURN
CALCULATION
CLASS A SHARES
ERV = P * (1 + T)^n
P = hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value
Inception
P = $1,000.00
n = .94
ERV = $ 940.23
T = -5.98%
|
PRUDENTIAL UTILITY FUND
CLASS "A"
EXHIBIT
AGGREGATE TOTAL RETURN
CALCULATION
ERV - P
T = -----------
P
P = hypothetical initial payment of $1,000
ERV = ending redeemable value
T = average annual total return
1 Year Inception
ended through
December 31, December 31,
1992 1992
------------ ------------
P = $1,000.00 $1,000.00
ERV = $1,098.80 $1,316.60
T = 9.88% 31.66%
|
PRUDENTIAL UTILITY FUND
CLASS "B"
EXHIBIT
AGGREGATE TOTAL RETURN
CALCULATION
ERV - P
T = -----------
P
P = hypothetical initial payment of $1,000
ERV = ending redeemable value
T = Aggregate total return
1 Year 5 Years 10 Years
ended ended ended
December 31, December 31, December 31,
1992 1992 1992
------------ ------------ ------------
P = $1,000.00 $1,000.00 $1,000.00
ERV = $1,090.20 $2,043.10 $5,117.00
T = 9.02% 104.31% 411.70%
|
[ARTICLE] 6
[CIK] 0000352665
[NAME] PRUDENTIAL UTILITY FUND, INC.
[SERIES]
[NUMBER] 001
[NAME] PRUDENTIAL UTILITY FUND, INC. (CLASS A)
[PERIOD-TYPE] YEAR [FISCAL-YEAR-END] DEC-31-1996 [PERIOD-END] DEC-31-1996 [INVESTMENTS-AT-COST] 3,024,351,896 [INVESTMENTS-AT-VALUE] 4,190,413,205 [RECEIVABLES] 35,139,769 [ASSETS-OTHER] 1,017,487 [OTHER-ITEMS-ASSETS] 0 [TOTAL-ASSETS] 4,226,570,461 [PAYABLE-FOR-SECURITIES] 3,675,500 [SENIOR-LONG-TERM-DEBT] 0 [OTHER-ITEMS-LIABILITIES] 22,302,613 [TOTAL-LIABILITIES] 25,978,113 [SENIOR-EQUITY] 0 [PAID-IN-CAPITAL-COMMON] 2,988,910,648 [SHARES-COMMON-STOCK] 386,198,070 [SHARES-COMMON-PRIOR] 412,112,470 [ACCUMULATED-NII-CURRENT] 557,976 [OVERDISTRIBUTION-NII] 0 [ACCUMULATED-NET-GAINS] 44,981,682 [OVERDISTRIBUTION-GAINS] 0 [ACCUM-APPREC-OR-DEPREC] 1,166,142,042 [NET-ASSETS] 4,200,592,348 [DIVIDEND-INCOME] 141,030,867 [INTEREST-INCOME] 17,714,542 [OTHER-INCOME] 0 [EXPENSES-NET] 50,914,796 [NET-INVESTMENT-INCOME] 107,830,613 [REALIZED-GAINS-CURRENT] 320,235,886 [APPREC-INCREASE-CURRENT] 357,572,748 [NET-CHANGE-FROM-OPS] 785,639,247 [EQUALIZATION] 0 [DISTRIBUTIONS-OF-INCOME] (107,417,634) [DISTRIBUTIONS-OF-GAINS] (289,993,034) [DISTRIBUTIONS-OTHER] 0 [NUMBER-OF-SHARES-SOLD] 334,796,081 [NUMBER-OF-SHARES-REDEEMED] (952,813,724) [SHARES-REINVESTED] 363,055,255 [NET-CHANGE-IN-ASSETS] 133,266,191 [ACCUMULATED-NII-PRIOR] 194,184,073 [ACCUMULATED-GAINS-PRIOR] 14,253,475 [OVERDISTRIB-NII-PRIOR] 0 [OVERDIST-NET-GAINS-PRIOR] 0 [GROSS-ADVISORY-FEES] 16,378,451 [INTEREST-EXPENSE] 0 [GROSS-EXPENSE] 50,914,796 [AVERAGE-NET-ASSETS] 1,786,000 [PER-SHARE-NAV-BEGIN] 9.87 [PER-SHARE-NII] 2.12 [PER-SHARE-GAIN-APPREC] 0.00 [PER-SHARE-DIVIDEND] (0.32) [PER-SHARE-DISTRIBUTIONS] (0.79) [RETURNS-OF-CAPITAL] 0.00 [PER-SHARE-NAV-END] 10.88 [EXPENSE-RATIO] 0.86 [AVG-DEBT-OUTSTANDING] 0 [AVG-DEBT-PER-SHARE] 0.00 |
[ARTICLE] 6
[CIK] 0000352665
[NAME] PRUDENTIAL UTILITY FUND, INC.
[SERIES]
[NUMBER] 002
[NAME] PRUDENTIAL UTILITY FUND, INC. (CLASS B)
[PERIOD-TYPE] YEAR [FISCAL-YEAR-END] DEC-31-1996 [PERIOD-END] DEC-31-1996 [INVESTMENTS-AT-COST] 3,024,351,896 [INVESTMENTS-AT-VALUE] 4,190,413,205 [RECEIVABLES] 35,139,769 [ASSETS-OTHER] 1,017,487 [OTHER-ITEMS-ASSETS] 0 [TOTAL-ASSETS] 4,226,570,461 [PAYABLE-FOR-SECURITIES] 3,675,500 [SENIOR-LONG-TERM-DEBT] 0 [OTHER-ITEMS-LIABILITIES] 22,302,613 [TOTAL-LIABILITIES] 25,978,113 [SENIOR-EQUITY] 0 [PAID-IN-CAPITAL-COMMON] 2,988,910,648 [SHARES-COMMON-STOCK] 386,198,070 [SHARES-COMMON-PRIOR] 412,112,470 [ACCUMULATED-NII-CURRENT] 557,976 [OVERDISTRIBUTION-NII] 0 [ACCUMULATED-NET-GAINS] 44,981,682 [OVERDISTRIBUTION-GAINS] 0 [ACCUM-APPREC-OR-DEPREC] 1,166,142,042 [NET-ASSETS] 4,200,592,348 [DIVIDEND-INCOME] 141,030,867 [INTEREST-INCOME] 17,714,542 [OTHER-INCOME] 0 [EXPENSES-NET] 50,914,796 [NET-INVESTMENT-INCOME] 107,830,613 [REALIZED-GAINS-CURRENT] 320,235,886 [APPREC-INCREASE-CURRENT] 357,572,748 [NET-CHANGE-FROM-OPS] 785,639,247 [EQUALIZATION] 0 [DISTRIBUTIONS-OF-INCOME] (107,417,634) [DISTRIBUTIONS-OF-GAINS] (289,993,034) [DISTRIBUTIONS-OTHER] 0 [NUMBER-OF-SHARES-SOLD] 334,796,081 [NUMBER-OF-SHARES-REDEEMED] (952,813,724) [SHARES-REINVESTED] 363,055,255 [NET-CHANGE-IN-ASSETS] 133,266,191 [ACCUMULATED-NII-PRIOR] 194,184,073 [ACCUMULATED-GAINS-PRIOR] 14,253,475 [OVERDISTRIB-NII-PRIOR] 0 [OVERDIST-NET-GAINS-PRIOR] 0 [GROSS-ADVISORY-FEES] 16,378,451 [INTEREST-EXPENSE] 0 [GROSS-EXPENSE] 50,914,796 [AVERAGE-NET-ASSETS] 2,184,000 [PER-SHARE-NAV-BEGIN] 9.87 [PER-SHARE-NII] 2.04 [PER-SHARE-GAIN-APPREC] 0.00 [PER-SHARE-DIVIDEND] (0.24) [PER-SHARE-DISTRIBUTIONS] (0.79) [RETURNS-OF-CAPITAL] 0.00 [PER-SHARE-NAV-END] 10.88 [EXPENSE-RATIO] 1.61 [AVG-DEBT-OUTSTANDING] 0 [AVG-DEBT-PER-SHARE] 0.00 |
[ARTICLE] 6
[CIK] 0000352665
[NAME] PRUDENTIAL UTILITY FUND, INC.
[SERIES]
[NUMBER] 003
[NAME] PRUDENTIAL UTILITY FUND, INC. (CLASS C)
[PERIOD-TYPE] YEAR [FISCAL-YEAR-END] DEC-31-1996 [PERIOD-END] DEC-31-1996 [INVESTMENTS-AT-COST] 3,024,351,896 [INVESTMENTS-AT-VALUE] 4,190,413,205 [RECEIVABLES] 35,139,769 [ASSETS-OTHER] 1,017,487 [OTHER-ITEMS-ASSETS] 0 [TOTAL-ASSETS] 4,226,570,461 [PAYABLE-FOR-SECURITIES] 3,675,500 [SENIOR-LONG-TERM-DEBT] 0 [OTHER-ITEMS-LIABILITIES] 22,302,613 [TOTAL-LIABILITIES] 25,978,113 [SENIOR-EQUITY] 0 [PAID-IN-CAPITAL-COMMON] 2,988,910,648 [SHARES-COMMON-STOCK] 386,198,070 [SHARES-COMMON-PRIOR] 412,112,470 [ACCUMULATED-NII-CURRENT] 557,976 [OVERDISTRIBUTION-NII] 0 [ACCUMULATED-NET-GAINS] 44,981,682 [OVERDISTRIBUTION-GAINS] 0 [ACCUM-APPREC-OR-DEPREC] 1,166,142,042 [NET-ASSETS] 4,200,592,348 [DIVIDEND-INCOME] 141,030,867 [INTEREST-INCOME] 17,714,542 [OTHER-INCOME] 0 [EXPENSES-NET] 50,914,796 [NET-INVESTMENT-INCOME] 107,830,613 [REALIZED-GAINS-CURRENT] 320,235,886 [APPREC-INCREASE-CURRENT] 357,572,748 [NET-CHANGE-FROM-OPS] 785,639,247 [EQUALIZATION] 0 [DISTRIBUTIONS-OF-INCOME] (107,417,634) [DISTRIBUTIONS-OF-GAINS] (289,993,034) [DISTRIBUTIONS-OTHER] 0 [NUMBER-OF-SHARES-SOLD] 334,796,081 [NUMBER-OF-SHARES-REDEEMED] (952,813,724) [SHARES-REINVESTED] 363,055,255 [NET-CHANGE-IN-ASSETS] 133,266,191 [ACCUMULATED-NII-PRIOR] 194,184,073 [ACCUMULATED-GAINS-PRIOR] 14,253,475 [OVERDISTRIB-NII-PRIOR] 0 [OVERDIST-NET-GAINS-PRIOR] 0 [GROSS-ADVISORY-FEES] 16,378,451 [INTEREST-EXPENSE] 0 [GROSS-EXPENSE] 50,914,796 [AVERAGE-NET-ASSETS] 4,517,000 [PER-SHARE-NAV-BEGIN] 9.87 [PER-SHARE-NII] 2.04 [PER-SHARE-GAIN-APPREC] 0.00 [PER-SHARE-DIVIDEND] (0.24) [PER-SHARE-DISTRIBUTIONS] (0.79) [RETURNS-OF-CAPITAL] 0.00 [PER-SHARE-NAV-END] 10.88 [EXPENSE-RATIO] 1.61 [AVG-DEBT-OUTSTANDING] 0 [AVG-DEBT-PER-SHARE] 0.00 |
[ARTICLE] 6
[CIK] 0000352665
[NAME] PRUDENTIAL UTILITY FUND, INC.
[SERIES]
[NUMBER] 004
[NAME] PRUDENTIAL UTILITY FUND, INC. (CLASS Z)
[PERIOD-TYPE] YEAR [FISCAL-YEAR-END] DEC-31-1996 [PERIOD-END] DEC-31-1996 [INVESTMENTS-AT-COST] 3,024,351,896 [INVESTMENTS-AT-VALUE] 4,190,413,205 [RECEIVABLES] 35,139,769 [ASSETS-OTHER] 1,017,487 [OTHER-ITEMS-ASSETS] 0 [TOTAL-ASSETS] 4,226,570,461 [PAYABLE-FOR-SECURITIES] 3,675,500 [SENIOR-LONG-TERM-DEBT] 0 [OTHER-ITEMS-LIABILITIES] 22,302,613 [TOTAL-LIABILITIES] 25,978,113 [SENIOR-EQUITY] 0 [PAID-IN-CAPITAL-COMMON] 2,988,910,648 [SHARES-COMMON-STOCK] 386,198,070 [SHARES-COMMON-PRIOR] 412,112,470 [ACCUMULATED-NII-CURRENT] 557,976 [OVERDISTRIBUTION-NII] 0 [ACCUMULATED-NET-GAINS] 44,981,682 [OVERDISTRIBUTION-GAINS] 0 [ACCUM-APPREC-OR-DEPREC] 1,166,142,042 [NET-ASSETS] 4,200,592,348 [DIVIDEND-INCOME] 141,030,867 [INTEREST-INCOME] 17,714,542 [OTHER-INCOME] 0 [EXPENSES-NET] 50,914,796 [NET-INVESTMENT-INCOME] 107,830,613 [REALIZED-GAINS-CURRENT] 320,235,886 [APPREC-INCREASE-CURRENT] 357,572,748 [NET-CHANGE-FROM-OPS] 785,639,247 [EQUALIZATION] 0 [DISTRIBUTIONS-OF-INCOME] (107,417,634) [DISTRIBUTIONS-OF-GAINS] (289,993,034) [DISTRIBUTIONS-OTHER] 0 [NUMBER-OF-SHARES-SOLD] 334,796,081 [NUMBER-OF-SHARES-REDEEMED] (952,813,724) [SHARES-REINVESTED] 363,055,255 [NET-CHANGE-IN-ASSETS] 133,266,191 [ACCUMULATED-NII-PRIOR] 194,184,073 [ACCUMULATED-GAINS-PRIOR] 14,253,475 [OVERDISTRIB-NII-PRIOR] 0 [OVERDIST-NET-GAINS-PRIOR] 0 [GROSS-ADVISORY-FEES] 16,378,451 [INTEREST-EXPENSE] 0 [GROSS-EXPENSE] 50,914,796 [AVERAGE-NET-ASSETS] 34,291,000 [PER-SHARE-NAV-BEGIN] 10.05 [PER-SHARE-NII] 1.96 [PER-SHARE-GAIN-APPREC] 0.00 [PER-SHARE-DIVIDEND] (0.34) [PER-SHARE-DISTRIBUTIONS] (0.79) [RETURNS-OF-CAPITAL] 0.00 [PER-SHARE-NAV-END] 10.88 [EXPENSE-RATIO] 0.61 [AVG-DEBT-OUTSTANDING] 0.00 [AVG-DEBT-PER-SHARE] 0.00 |