<PAGE>
As filed with the Securities and Exchange Commission on December 14, 1998
Securities Act Registration No. 333-00203 Investment Company Act Registration
No. 811-07491
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [_]
PRE-EFFECTIVE AMENDMENT NO. [_]
POST-EFFECTIVE AMENDMENT NO. 4 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [_]
AMENDMENT NO. 5 [X]
(Check appropriate box or boxes)
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PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
(Exact name of registrant as specified in charter)
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973)367-7525
MARGUERITE E.H. MORRISON, ESQ.
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(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)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of Rule
485.
If appropriate, check the following box:
[_] this post-effective amendment designates a new
effective date for a previously filed post-
effective amendment.
Title of Securities Being Registered. . . . Shares of common stock, $.001 par
value per share.
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<PAGE>
FUND TYPE:
_____________________________
Stock and Bond
INVESTMENT OBJECTIVE:
_____________________________
Capital appreciation
[LOGO OF PRUDENTIAL APPEARS HERE]
PRUDENTIAL DISTRESSED
SECURITIES FUND, INC.
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PROSPECTUS: JANUARY , 1999
As with all mutual funds,
filing this prospectus with
the Securities and Exchange
Commission does not mean that
the SEC has approved the
Fund's shares, nor has the SEC
determined that this pro-
spectus is complete or accu-
rate. It is a criminal offense
to state otherwise. [LOGO OF PRUDENTIAL] Prudential
APPEARS HERE] Investments
<PAGE>
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TABLE OF CONTENTS
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<TABLE>
<C> <S>
1 Risk/Return Summary
1 Investment Objective and Principal Strategies
1 Principal Risks
2 Evaluating Performance
3 Shareholder Fees and Expenses
5 How the Fund Invests
5 Investment Objective and Policies
6 Other Investments
8 Derivative Strategies
9 Additional Strategies
10 Investment Risks
14 How the Fund is Managed
14 Manager
14 Investment Adviser
14 Portfolio Manager
14 Distributor
15 Year 2000
16 Fund Distributions and Tax Issues
16 Distributions
17 Tax Issues
18 If You Sell or Exchange Your Shares
20 How to Buy, Sell and Exchange Shares of the Fund
20 How to Buy Shares
28 How to Sell Your Shares
32 How to Exchange Your Shares
34 Financial Highlights
34 Class A Shares
35 Class B Shares
36 Class C Shares
37 The Prudential Mutual Fund Family
For More Information (Back Cover)
</TABLE>
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PRUDENTIAL DISTRESSED SECURITIES FUND, INC. (800) 225-1852
<PAGE>
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RISK/RETURN SUMMARY
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This section highlights key information about the PRUDENTIAL DISTRESSED
SECURITIES FUND, INC., which we refer to as "the Fund." Additional information
follows this summary.
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is CAPITAL APPRECIATION. This means we seek
investments that will increase in value. We normally invest at least 65% of the
Fund's total assets in the debt and equity securities of financially troubled
companies and in equity securities of operationally troubled companies. Current
income is not a significant factor in the selection of investments. While we
make every effort to achieve our objective, we can't guarantee success.
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Financially troubled companies are in weak financial condition or bankrupt.
Operationally troubled companies may have poor operating results and are under-
valued or out of favor in comparison to their long-term potential for growth
and income.
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PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. Our investment
in the securities of financially and operationally troubled companies may
result in large losses and/or share price volatility. Since the Fund invests in
stocks and bonds, there is the risk that the price of a particular Security we
own could go
down. In addition, the value of the equity markets could go down.
The Fund also invests in debt obligations which have credit, market and
interest rate risks. It also may invest more than 35% of its net assets in low
quality debt securities--also known as "junk" bonds--which have a higher risk
of default and tend to be less liquid.
The Fund may be subject to litigation risk or be unable to dispose of an
investment because it may get involved in bankruptcy proceedings,
reorganizations and financial restructurings.
Since the Fund invests in foreign securities, there are additional risks.
Foreign markets are often more volatile than U.S. markets. Changes in currency
exchange rates can reduce or increase market performance.
Some of our investment strategies--such as using derivatives, leverage and
short sales--also involve risk. Like any mutual fund, an investment in the Fund
could lose value, and you could lose money. For more information about the
risks associated with the Fund, see "Investment Risks." The Fund does not
represent a complete investment program.
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1
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RISK/RETURN SUMMARY
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An investment in the Fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
EVALUATING PERFORMANCE
A number of factors--including risk--can affect how the Fund performs. The fol-
lowing bar chart and table show the Fund's performance since it began and pro-
vide some indication of the risks of investing in the Fund by demonstrating how
returns can change from year to year. Past performance does not mean that the
Fund will achieve similar results in the future.
ANNUAL RETURNS (CLASS B SHARES)
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[BAR CHART APPEARS HERE]
1996 1997 1998
(5.68)% 31.44%
1 These annual returns do not include sales charges. If the sales charges were
included, the annual returns would be lower than those shown.
AVERAGE ANNUAL RETURNS (AS OF 12-31-98/1/)
- ----------------------------------------------
<TABLE>
<CAPTION>
1 YR SINCE INCEPTION
<S> <C> <C>
Class A shares - -% - -% (since 3-26-96)
Class B shares - -% - -% (since 3-26-96)
Class C shares - -% - -% (since 3-26-96)
Class Z shares n/a n/a (since 1- -99)
Lipper Average/2/ - -% n/a
</TABLE>
1 The Fund's returns are after deduction of sales charges and expenses.
2 The Lipper Capital Appreciation Fund Average is based on the average return
of all mutual funds in the Lipper Capital Appreciation category and does not
include the effect of any sales charges. Again, these returns would be lower
if they included the effect of sales charges. Lipper Since Inception returns
are % for Class A, Class B, and Class C shares.
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PRUDENTIAL DISTRESSED SECURITIES FUND, INC. (800) 225-1852
2
<PAGE>
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RISK/RETURN SUMMARY
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SHAREHOLDER FEES AND EXPENSES
This table shows the sales charges, fees and expenses for each share class of
the Fund--Class A, B, C and Z. This table describes the fees and expenses that
you may pay if you buy and hold shares of the Fund. Each share class has dif-
ferent sales charges--known as loads--and expenses, but represents an invest-
ment in the same fund. Class Z shares are available only to a limited group of
investors. For more information about which share class may be right for you,
see "How to Buy, Sell and Exchange Shares of the Fund."
SHAREHOLDER FEES/1/ (PAID DIRECTLY FROM YOUR INVESTMENT)
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<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
<S> <C> <C> <C> <C>
Maximum sales charge (load) imposed on 5% None 1% None
purchases (as a percentage of offering
price)
Maximum deferred sales charge (load) None 5%/2/ 1%/3/ None
(as a percentage of the lower of original
purchase price or sale proceeds)
Maximum sales charge (load) imposed on None None None None
reinvested dividends and other
distributions
Redemption fees None None None None
Exchange fee None None None None
Maximum account fee None None None None
</TABLE>
ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS)
<TABLE>
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<CAPTION>
CLASS A CLASS B CLASS C [CLASS Z
<S> <C> <C> <C> <C>
Management fees .75% .75% .75% .75%
+ Distribution and service (12b-1) fees .30%/4/ 1.00% 1.00% None
+ Other expenses - - - - - - - -
= TOTAL ANNUAL FUND OPERATING EXPENSES - -/5/ - -/5/ - -/5/ - -/5/]
</TABLE>
1 Your broker may charge you a separate or additional fee for purchases and
sales of shares.
2 The Contingent Deferred Sales Charge (CDSC) for Class B shares decreases by
1% annually to 1% in the fifth and sixth years and 0% in the seventh year.
3 The CDSC for Class C shares is 1% for shares redeemed within 18 months of
purchase.
4 The Distributor of the Fund has voluntarily reduced its distribution and
service fees for Class A shares to .25 of 1% of the average daily net assets
of the Class A shares. This voluntary reduction may be terminated at any time
without notice.
5 For the fiscal year ending November 30, 1999, PIFM has agreed to subsidize
the Fund's operating expenses so that total Fund operating expenses do not
exceed 1.25%, 2.00%, 2.00% and % of the average net assets for Class A,
Class B, Class C and Class Z shares, respectively.
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3
<PAGE>
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RISK/RETURN SUMMARY
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EXAMPLE
This example will help you compare the fees and expenses of the Fund's dif-
ferent share classes. This example is intended to help you compare the cost of
investing in the Fund with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that
the Fund's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
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<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
<S> <C> <C> <C> <C>
Class A shares $- - $- - $- - $- -
Class B shares $- - $- - $- - $- -
Class C shares $- - $- - $- - $- -
[Class Z shares $- - $- -]
</TABLE>
You would pay the following expenses on the same investment if you did not sell
your shares:
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<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
<S> <C> <C> <C> <C>
Class A shares $- - $- - $- - $- -
Class B shares $- - $- - $- - $- -
Class C shares $- - $- - $- - $- -
[Class Z shares $- - $- -]
</TABLE>
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PRUDENTIAL DISTRESSED SECURITIES FUND, INC. (800) 225-1852
4
<PAGE>
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HOW THE FUND INVESTS
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INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is CAPITAL APPRECIATION. This means we seek
investments that will increase in value. While we make every effort to achieve
our objective, we can't guarantee success.
In pursuing our objective, we normally invest at least 65% of our total
assets in the DEBT and EQUITY SECURITIES of financially troubled companies and
in equity securities of operationally troubled companies. This means that we
focus on companies that will react positively to changing economic conditions
or on managements that will act to overcome adversity, such as restructuring
business operations.
We buy debt and equity securities of companies of every size--small, medium
and large capitalization. The Fund invests in a wide variety of debt and equity
securities. The Fund may invest in equity-related securities, including
convertible securities, convertible and non convertible preferred stock,
warrants and rights that can be exercised to obtain stock, investments in
various types of business ventures, including partnerships and joint ventures,
and securities--like American Depositary Receipts (ADRs)--that represent an
equity investment in a foreign company.
The Fund may invest in debt obligations. Issuers use bonds and other debt
obligations to borrow money from investors. The issuer pays a fixed or variable
rate of interest to the investor and must repay the amount borrowed at
maturity. Troubled investments may not pay interest or even principal at
maturity. We can invest in corporate, non-corporate or municipal obligations
and also in convertible securities, zero coupon bonds, pay in kind securities
and deferred payment securities. We can also invest in defaulted securities and
low quality securities which are more speculative, including high-yield or junk
bonds (obligations rated D by S&P or C by Moody's or better). We may also
invest in obligations that are not rated, but that we believe are of comparable
quality to these obligations. Generally, we consider selling a security when,
in the opinion of the investment adviser, it has increased in value to the
point where it is no longer undervalued.
- ----------------------------
WE USE A CONTRARIAN
APPROACH
To achieve our investment strategy, we generally take a strong contrarian
approach to investing. In other words, we usually buy securities that are out
of favor and that many other investors are selling, and we attempt to invest in
companies and industries before other investors recognize their true value.
Using these guidelines, we focus on long-term performance, not short-term gain.
- ----------------------------
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5
<PAGE>
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HOW THE FUND INVESTS
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For more information, see "Investment Risks" and the Statement of Additional
Information, "Description of the Fund, Its Investments and Risks." The State-
ment of Additional Information--which we refer to as the SAI--contains addi-
tional information about the Fund. To obtain a copy, see the back cover page of
this prospectus.
The Fund's investment objective is a fundamental policy that cannot be
changed without shareholder approval. The Board of the Fund can change invest-
ment policies that are not fundamental.
OTHER INVESTMENTS
We may also use the following investment strategies to increase the Fund's
returns or protect its assets if market conditions warrant.
TRADE CLAIMS
The Fund may invest in trade claims which are a right of payment due from obli-
gations of a bankrupt or troubled company. Trade claims typically are bought
and sold at a discount based on the expected timing and extent of recovery.
LOAN PARTICIPATIONS AND ASSIGNMENTS
The Fund may invest in fixed and floating rate loans (secured or unsecured)
made to financially troubled companies by banks, insurance companies and gov-
ernment institutions. The Fund may invest in a portion of a loan (Participa-
tions) and assignments of all or a portion of loans (Assignments). The Partici-
pations and Assignments are high yield, non-convertible corporate debt
securities of varying maturities. With Participations, the Fund has the right
to receive payments of principal, interest and fees, which it is due from the
lender conditioned upon the lender's receipt of payment from the borrower. With
Assignments, the Fund has direct rights against the borrower on the loan, but
its rights may be more limited than the lenders'.
MUNICIPAL SECURITIES
The Fund may invest in municipal bonds, including general obligation and rev-
enue bonds, issued by states, municipalities, local governments and their agen-
cies and authorities. It may also invest in municipal lease obligations, where
interest and principal are payable out of lease payments made by
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PRUDENTIAL DISTRESSED SECURITIES FUND, INC. (800) 225-1852
6
<PAGE>
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HOW THE FUND INVESTS
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the party leasing the facilities financed by the issue, and in municipal notes,
including tax, revenue and bond anticipation notes, which are issued to obtain
funds for various public purposes.
FOREIGN SECURITIES
We may invest up to 30% of the Fund's total assets in FOREIGN SECURITIES,
including money market instruments, fixed-income securities, stock and other
equity-related securities, denominated in U.S. dollars or foreign currencies.
For purposes of this limitation, we do not consider ADRs and other similar
receipts or shares to be foreign securities.
MONEY MARKET INSTRUMENTS
Under normal circumstances, the Fund may invest up to 35% of its total assets
in MONEY MARKET INSTRUMENTS, which include the commercial paper of U.S. and
non-U.S. corporations, short-term obligations of U.S. and foreign banks and
short-term obligations issued or guaranteed by the U.S. government or its agen-
cies. Generally, money market instruments provide a fixed rate of return, but
provide less opportunity for capital appreciation than stocks. The Fund may
invest in commercial paper of financially or operationally troubled companies.
If we believe it is necessary, we may temporarily invest up to 100% of the
Fund's assets in money market instruments. Investing heavily in these securi-
ties limits our ability to achieve capital appreciation, but may help to pre-
serve the Fund's assets when the equity markets are unstable.
SHORT SALES
The Fund may use short sales, where it sells a security it does not own, with
the expectation of a decline in the market value of that security. To complete
the transaction, the Fund will borrow the security to make delivery to the
buyer. The Fund must replace the security borrowed by purchasing it at the
market price at the time of replacement. The price at that time may be more or
less than the price at which the Fund sold the security. The Fund is required
to pay the lender any dividends or interest accrued. To borrow the security,
the Fund may pay a premium which would increase the cost of the security sold.
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7
<PAGE>
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HOW THE FUND INVESTS
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DERIVATIVE STRATEGIES
We may use a number of alternative investment strategies--including
DERIVATIVES--to try to improve the Fund's returns or protect its assets,
although we cannot guarantee they will work or that the Fund will not lose
money. Derivatives--such as futures, options, foreign currency forward con-
tracts and options on futures--involve costs and can be volatile. With deriva-
tives, the investment adviser tries to predict whether the underlying invest-
ment, a security, market index, currency, interest rate or some other
investment, will go up or down at some future date. We may use derivatives to
try to reduce risk or to increase return consistent with the Fund's overall
investment objective. Any derivatives we may use may not match the Fund's
underlying holdings.
OPTIONS.
The Fund may purchase and sell put and call options on securities, financial
indices and currencies traded on U.S. or foreign securities exchanges or in the
over-the-counter market. The options may be on debt and equity securities. The
Fund will sell only covered options.
FUTURES CONTRACTS AND RELATED OPTIONS.
The Fund may purchase and sell financial futures contracts and related options
on debt and equity securities, including U.S. government securities, financial
indices and foreign currencies. For more information about these strategies,
see the SAI, "Description of the Fund, Its Investments and Risks--Hedging and
Return Enhancement Strategies."
ADDITIONAL STRATEGIES
The Fund may also use REPURCHASE AGREEMENTS, where a party agrees to sell a
security to the Fund and then repurchase it at an agreed-upon price at a stated
time. This creates a fixed return for the Fund.
The Fund also follows certain policies when it: BORROWS MONEY (the Fund can
borrow up to 33 1/3% of the value of its total assets); LENDS ITS SECURITIES to
others (the Fund can lend up to 30% of the value of its total assets, including
collateral received in the transaction); holds ILLIQUID SECURITIES (the Fund
may hold up to 15% of its net assets in illiquid securities, including securi-
ties with legal or contractual restrictions, those without a readily available
market and repurchase agreements with maturities longer
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PRUDENTIAL DISTRESSED SECURITIES FUND, INC. (800) 225-1852
8
<PAGE>
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HOW THE FUND INVESTS
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than seven days). The Fund is subject to certain investment restrictions that
are fundamental policies, which means they cannot be changed without share-
holder approval. For more information about these restrictions, see the SAI.
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9
<PAGE>
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HOW THE FUND INVESTS
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INVESTMENT RISKS
As noted, all investments involve risk, and investing in the Fund is no excep-
tion. This chart outlines the key risks and potential rewards of the Fund's
principal investments. See, too, "Description of the Fund, Its Investments and
Risks" in the SAI.
INVESTMENT TYPE
% OF FUND'S TOTAL ASSETSRISKS POTENTIAL REWARDS
TROUBLED . [TBD]
HOLDINGS
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EQUITY SECURITIES . Individual stocks . Historically,
Percentage Varies could lose value stocks have
outperformed
. The equity mar- other investments
kets could go over the long
down resulting in term
a decline in
value of the . Generally, eco-
Fund's invest- nomic growth
ments means higher cor-
porate profits,
. Companies that which leads to an
pay dividends may increase in stock
not do so if they prices, known as
don't have capital apprecia-
profits or ade- tion
quate cash flow
. May be one source
. Changes in eco- of dividend
nomic or polit- income
ical conditions,
both domestic and
international,
resulting in a
decline in value
of the Fund's
investments
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DEBT OBLIGATIONS . Credit risk--the . Regular interest
Percentage default of an income
Varies issuer would
leave the Fund . Generally more
with unpaid secure than
interest or prin- stocks since com-
cipal panies must pay
their debts
. Market risk--the before they pay
risk that bonds dividends
or other debt
instruments may . Most bonds rise
lose value in the in value when
market because interest rates
there is a lack fall
of confidence in
the borrower . Junk bonds offer
higher yields and
. Interest rate higher potential
risk--the value gains
of most bonds
will fall when
interest rates
rise. The longer
a bond's maturity
and the lower its
credit quality,
the more its
value typically
falls
. Junk bonds have a
higher risk of
default, tend to
be less liquid
and may be more
difficult to
value
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PRUDENTIAL DISTRESSED SECURITIES FUND, INC. (800) 225-1852
10
<PAGE>
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HOW THE FUND INVESTS
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INVESTMENT TYPE (CONT'D)
% OF FUND'S TOTAL ASSETS
RISKS POTENTIAL REWARDS
TRADE CLAIMS . See credit risk . It is priced at a
Percentage varies and market risk discount and
above appreciate sig-
nificantly
. The amount of the
claim may be dis-
puted by the
obligor
. Volatile pricing
due to a less
liquid market
with a small
number of buyers
and brokers
. Gains may not
qualify under
Internal Revenue
Code
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LOAN . See credit risk . A source of
PARTICIPATIONS and market risk income
AND ASSIGNMENTS above
Percentage varies . May offer right
. The Fund is also to receive prin-
subject to credit cipal, interest
risk of the and fees without
lender as much risk as a
lender
. No right to
enforce compli-
ance by the bor-
rower in a loan
participation
- --------------------------------------------------------------------------------
MUNICIPAL . See credit risk,
SECURITIES market risk and
Percentage varies interest rate
risk above.
. Revenue bonds are
payable only from
the revenue of
the designated
source.
. With municipal
lease obliga-
tions, munici-
pality may not
appropriate funds
for lease pay-
ments.
. May be subject to
political or nat-
ural event risks.
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11
<PAGE>
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HOW THE FUND INVESTS
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INVESTMENT TYPE (CONT'D)
% OF FUND'S TOTAL ASSETS
RISKS POTENTIAL REWARDS
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FOREIGN . Foreign markets, . Investors can
SECURITIES economies and participate in
political systems the growth of
may not be as foreign markets
stable as in the and companies
U.S. operating in
those markets
Up to 30%
. Currency risk . Opportunities for
diversification.
. May be less
liquid than U.S.
stocks
. Differences in
foreign law,
accounting stan-
dards and public
information
- --------------------------------------------------------------------------------
DERIVATIVES
. Derivatives such . The Fund could
Percentage varies as futures, make money and
options and for- protect against
eign currency losses if the
forward contracts investment anal-
may not fully ysis proves cor-
offset the under- rect
lying positions
and this could . Derivatives that
result in losses involve leverage
to the Fund that could generate
would not have substantial gains
otherwise at low cost
occurred/1/
. One way to manage
. Derivatives used the Fund's
for risk manage- risk/return bal-
ment may not have ance by locking
the intended in the value of
effects and may an investment
result in losses ahead of time
or missed oppor-
tunities
. The counterparty
to a derivatives
contract could
default
. Derivatives that
involve leverage
could magnify
losses
. Certain types of
derivatives
involve costs to
the Fund which
can reduce
returns
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PRUDENTIAL DISTRESSED SECURITIES FUND, INC. (800) 225-1852
12
<PAGE>
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HOW THE FUND INVESTS
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INVESTMENT TYPE (CONT'D)
% OF FUND'S TOTAL ASSETS
RISKS POTENTIAL REWARDS
ILLIQUID
SECURITIES
. May be difficult . May offer a more
Up to 15% of net to value pre- attractive yield
assets cisely or potential for
growth than more
. May be difficult widely traded
to sell at the securities
time or price
desired
- --------------------------------------------------------------------------------
MONEY MARKET . Limits potential . May preserve the
INSTRUMENTS for capital Fund's assets
appreciation
Up to 100% on a . See Credit risk
temporary basis and Market risk
- --------------------------------------------------------------------------------
1 An option is the right to buy or sell securities in exchange for a premium. A
futures contract is an agreement to buy or sell a set quantity of an under-
lying product at a future date, or to make or receive a cash payment based on
the value of a securities index. A foreign currency forward contract is an
obligation to buy or sell a given currency on a future date and at a set
price.
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13
<PAGE>
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HOW THE FUND IS MANAGED
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MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM)
GATEWAY CENTER THREE, 100 MULBERRY STREET
NEWARK, NJ 07102-4077
Under a management agreement with the Fund, PIFM manages the Fund's invest-
ment operations and administers its business affairs. For the fiscal year ended
November 30, 1998, the Fund paid PIFM management fees of .75% of the Fund's
average net assets.
As of December 31, 1998, PIFM served as the Manager to all of the Pruden-
tial Mutual Funds, and as Manager or administrator to closed-end investment
companies, with aggregate assets of approximately $ billion.
INVESTMENT ADVISER
The Prudential Investment Corporation, called Prudential Investments, is the
Fund's investment adviser. Its address is Prudential Plaza, 751 Broad Street,
Newark, NJ 07102. PIFM has responsibility for all investment advisory services,
supervises Prudential Investments and reimburses Prudential Investments for its
reasonable costs and expenses.
PORTFOLIO MANAGER
GEORGE EDWARDS, a Managing Director of Prudential Investments, and PAUL PRICE,
CFA, Vice President of Prudential Investments, are co-managers of the Fund. Mr.
Edwards has managed the Fund since its inception in 1996 and has been employed
at Prudential since 1985. Mr. Edwards has day to day responsibility to the high
yield desk. Mr. Price has managed the Fund since 1998 and has been employed at
Prudential since 1987 as an investment professional.
DISTRIBUTOR
Prudential Investment Management Services LLC (PIMS) distributes the Fund's
shares under a Distribution Agreement with the Fund. The Fund has Distribution
and Service Plans under Rule 12b-1 of the Investment Company Act. Under the
Plans and the Distribution Agreement, PIMS pays the expenses of distributing
the Fund's Class A, B, C and Z shares and provides certain shareholder support
services. The Fund pays distribution and other fees to PIMS as compensation for
its services for each class of shares other than Class Z.
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PRUDENTIAL DISTRESSED SECURITIES FUND, INC. (800) 225-1852
14
<PAGE>
- --------------------------------------------------------------------------------
HOW THE FUND IS MANAGED
- --------------------------------------------------------------------------------
These fees--known as 12b-1 fees--are shown in the "Shareholder Fees and
Expenses" table.
YEAR 2000
Many computer systems used today cannot distinguish the year 2000 from the year
1900 because of the way dates are encoded. This could be a problem when the
year 2000 arrives and could affect securities trades, interest and dividend
payments, pricing and account services. Although we cannot guarantee that this
will not be a problem, the Fund's service providers have been working on
adapting their computer systems. They expect that their systems, and the sys-
tems of their service providers, will be ready for the year 2000.
In addition, issuers of securities may also encounter year 2000 compliance
problems. If these problems are significant and are not corrected, securities
markets could go down or issuers could have poor performance. If the Fund owns
these securities, then it is possible that the Fund could lose money.
- --------------------------------------------------------------------------------
15
<PAGE>
- --------------------------------------------------------------------------------
FUND DISTRIBUTIONS AND TAX ISSUES
- --------------------------------------------------------------------------------
Investors who buy shares of the Fund should be aware of some important tax
issues. For example, the Fund distributes DIVIDENDS of ordinary income and any
realized net CAPITAL GAINS to shareholders. These distributions are subject to
taxes, unless you hold your shares in a 401(k) plan, an Individual Retirement
Account (IRA) or some other qualified tax-deferred plan or account.
Also, if you sell shares of the Fund for a profit, you may have to pay cap-
ital gains taxes on the amount of your profit, again unless you hold your
shares in a qualified tax-deferred plan or account.
The following briefly discusses some of the important federal tax issues you
should be aware of, but is not meant to be tax advice. For tax advice, please
speak with your tax adviser.
DISTRIBUTIONS
Because of the Fund's emphasis on financially and operationally troubled
issuers and its investment policies, the Fund is unlikely to receive dividend
income on its portfolio securities. The Fund distributes DIVIDENDS of any net
investment income to shareholders, typically annually. For example, if the Fund
owns ACME Corp. stock and the stock pays a dividend, the Fund will pay out a
portion of this dividend to its shareholders, assuming the Fund's income is
more than its costs and expenses. The dividends you receive from the Fund will
be taxed as ordinary income, whether or not they are reinvested in the Fund.
The Fund also distributes realized net CAPITAL GAINS to shareholders--typi-
cally once a year--which are generated when the Fund sells its assets for a
profit. For example, if the Fund bought 100 shares of ACME Corp. stock for a
total of $1,000 and more than one year later sold the shares for a total of
$1,500, the Fund has net long-term capital gains of $500, which it will pass on
to shareholders (assuming the Fund's total gains are greater than any losses it
may have). Capital gains are taxed differently depending on how long the Fund
holds the security--the longer a security is held before it is sold, the lower
the capital gains tax rate, up to a point. Different rates apply to corporate
shareholders.
For your convenience, Fund distributions of dividends and capital gains are
AUTOMATICALLY REINVESTED in the Fund without any sales charge. If you ask us to
pay the distributions in cash, we will send you a check if your account is with
the Transfer Agent. Otherwise, if your account is with a broker you will
receive a credit to your account. Either way, the distributions may be subject
to taxes, unless your shares are held in a qualified tax-deferred plan or
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PRUDENTIAL DISTRESSED SECURITIES FUND, INC. (800) 225-1852
16
<PAGE>
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FUND DISTRIBUTIONS AND TAX ISSUES
- --------------------------------------------------------------------------------
account. For more information about automatic reinvestment and other share-
holder services, see "Step 4: Additional Shareholder Services" in the next sec-
tion.
TAX ISSUES
FORM 1099
Every year, you will receive a Form 1099, which reports the amount of dividends
and capital gains we distributed to you during the prior year. If you own
shares of the Fund as part of a qualified tax-deferred plan or account, your
taxes are deferred, so you will not receive a Form 1099. However, you will
receive a Form 1099 when you take any distributions from your qualified tax-
deferred plan or account.
Fund distributions are generally taxable to you in the year they are
received, except when we declare certain dividends in the fourth quarter and
actually pay them in January of the following year. In such cases, the divi-
dends are treated as if they were paid on December 31 of the prior year. Corpo-
rate shareholders are eligible for the 70% dividends-received deduction for
certain dividends.
WITHHOLDING TAXES
If federal tax law requires you to provide the Fund with your tax identifica-
tion number and certifications as to your tax status, and you fail to do this,
we will withhold and pay to the U.S. Treasury 31% of your distributions and
sale proceeds. If you are subject to backup withholding, we will withhold and
pay to the U.S. Treasury 31% of your distributions. Dividends of net investment
income and short-term capital gains paid to a nonresident foreign shareholder
generally will be subject to a U.S. withholding tax of 30%. This rate may be
lower, depending on any tax treaty the U.S. may have with the shareholder's
country.
IF YOU PURCHASE JUST BEFORE RECORD DATE
If you buy shares of the Fund just before the record date (the date that deter-
mines who receives the distribution), that distribution will be paid to you. As
explained above, the distribution may be subject to income or capital gains
taxes. You may think you've done well, since you bought shares one day, and
soon thereafter received a distribution. That is not so because when dividends
are paid out, the value of each share of the Fund decreases by the
- --------------------------------------------------------------------------------
17
<PAGE>
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FUND DISTRIBUTIONS AND TAX ISSUES
- --------------------------------------------------------------------------------
amount of the dividend and the market changes (if any) to reflect the payout.
The distribution you receive makes up for the decrease in share value. However,
the timing of your purchase does mean that part of your investment came back to
you as taxable income.
QUALIFIED RETIREMENT PLANS
Retirement plans and accounts allow you to defer paying taxes on investment
income and capital gains. Contributions to these plans may also be tax deduct-
ible, although distributions from these plans generally are taxable. In the
case of Roth IRA accounts, contributions are not tax deductible, but distribu-
tions from the plan may be tax-free. Please contact your financial adviser for
information on a variety of retirement plans offered by Prudential.
IF YOU SELL OR EXCHANGE YOUR SHARES
If you sell any shares of the Fund for a profit, you have realized a capital
gain, which is subject to tax, unless you hold shares in a qualified tax-
deferred plan or account. The amount of tax you pay depends on how long you
owned your shares. If
you sell shares of the Fund for a loss, you may have a capital loss, which you
may use to offset certain capital gains you have.
Exchanging your shares of the Fund for the shares of another Prudential
Mutual Fund is considered a sale for tax purposes. In other words, it's a "tax-
able event." Therefore, if the shares you exchanged have increased in value
since you purchased them, you have capital gains, which are subject to the
taxes described above.
Any gain or loss you may have from selling or exchanging Fund shares will not
be reported on the Form 1099. Therefore, unless you hold your shares in a qual-
ified tax-deferred plan or account, you or your financial adviser should keep
track of the dates on which you buy and sell--or exchange--Fund shares, as well
as the amount of any gain or loss on each transaction. For tax advice, please
see your tax adviser.
- --------------------------------------------------
Capital Gain
(taxes owed)
Receipts
from Sale [GRAPHIC] OR
Capital Loss
(offset against gain)
- --------------------------------------------------
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PRUDENTIAL DISTRESSED SECURITIES FUND, INC. (800) 225-1852
18
<PAGE>
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FUND DISTRIBUTIONS AND TAX ISSUES
- --------------------------------------------------------------------------------
AUTOMATIC CONVERSION OF CLASS B SHARES
We have obtained a legal opinion that the conversion of Class B shares into
Class A shares--which happens automatically approximately seven years after
purchase--is not a "taxable event" because it does not involve an actual sale
of your Class B shares. This opinion, however, is not binding on the IRS. For
more information about the automatic conversion of Class B shares, see "Class B
Shares Convert to Class A Shares After Approximately Seven Years" in the next
section.
- --------------------------------------------------------------------------------
19
<PAGE>
HOW TO BUY, SELL AND
- --------------------------------------------------------------------------------
EXCHANGE SHARES OF THE FUND
- --------------------------------------------------------------------------------
HOW TO BUY SHARES
STEP 1: OPEN AN ACCOUNT
If you don't have an account with us or a securities firm that is permitted to
buy or sell shares of the Fund for you, call Prudential Mutual Fund Services
LLC (PMFS) at (800) 225-1852 or contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: INVESTMENT SERVICES
P.O. BOX 15020
NEW BRUNSWICK, NJ 08906-5020
To purchase by wire, call the number above to obtain an application. After
PMFS receives your completed application, you will receive an account number.
For additional information about purchasing shares of the Fund, see the back
cover page of this prospectus. We have the right to reject any purchase order
(including an exchange into the Fund) or suspend or modify the Fund's sale of
its shares.
STEP 2: CHOOSE A SHARE CLASS
Individual investors can choose among Class A, Class B, Class C and Class Z
shares of the Fund, although Class Z shares are available only to a limited
group of investors.
Multiple share classes let you choose a cost structure that better meets your
needs. With Class A shares, you pay the sales charge at the time of purchase,
but the operating expenses each year are lower than the expenses of Class B and
Class C shares. With Class B shares, you only pay a sales charge if you sell
your shares within certain time periods (that is why it is called a Contingent
Deferred Sales Charge, or CDSC), but the operating expenses each year are
higher than the Class A share expenses. With Class C shares, you pay a low
front-end sales charge and a low CDSC, but the operating expenses are also
higher than the expenses for Class A shares.
When choosing a share class, you should consider the following:
. The amount of your investment
. The length of time you expect to hold the shares and the impact of the
varying distribution fees
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PRUDENTIAL DISTRESSED SECURITIES FUND, INC. (800) 225-1852
20
<PAGE>
HOW TO BUY, SELL AND
- --------------------------------------------------------------------------------
EXCHANGE SHARES OF THE FUND
- --------------------------------------------------------------------------------
. The different sales charges that apply to each share class--Class A's
front-end sales charge vs. Class B's CDSC vs. Class C's low front-end
sales charge and low CDSC
. Whether you qualify for any reduction or waiver of sales charges
. The fact that Class B shares automatically convert to Class A shares
approximately seven years after purchase
. Whether you qualify to purchase Class Z shares
Share Class Comparison. Use this chart to help you compare the Fund's different
share classes. The discussion following this chart will tell you whether you
are entitled to a reduction or waiver of any sales charges.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C [CLASS Z
<S> <C> <C> <C> <C>
Minimum purchase $10,000 $10,000 $10,000 $10,000
amount/1/
Minimum amount for $100 $100 $100 None
subsequent purchases/1/
Maximum initial 5% of the public None 1% of the public None
sales charge offering price offering price
Contingent Deferred None If Sold During: 1% on sales None
Sales Charge Year 1 5% made within
(CDSC)/2/ Year 2 4% 18 months of
Year 3 3% purchase/2/
Year 4 2%
Years 5/6 1%
Year 7 0%
Annual distribution .30 of 1%; 1% 1% None]
(12b-1) and service (.25 of 1%
fees (shown as a currently)
percentage of average
net assets)/3/
</TABLE>
1 The minimum investment requirements do not apply to certain retirement and
employee savings plans and custodial accounts for minors. The minimum initial
and subsequent investment for purchases made through the Automatic Investment
Plan is $50. For more information, see "Additional Shareholder Services-
Automatic Investment Plan."
2 For more information about the CDSC and how it is calculated, see "Contingent
Deferred Sales Charges (CDSC)." Class C shares bought before November 2, 1998
have a 1% CDSC if sold within one year.
3 These distribution fees are paid from the Fund's assets on a continuous
basis. Over time, the fees will increase the cost of your investment and may
cost you more than paying other types of sales charges.
- --------------------------------------------------------------------------------
21
<PAGE>
HOW TO BUY, SELL AND
- --------------------------------------------------------------------------------
EXCHANGE SHARES OF THE FUND
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REDUCING OR WAIVING CLASS A'S INITIAL SALES CHARGE
The following describes the different ways investors can reduce or avoid paying
Class A's initial sales charge.
Increase the Amount of Your Investment. You can reduce Class A's sales charge
by increasing the amount of your investment. This table shows you how the sales
charge decreases as the amount of your investment increases.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SALES CHARGE AS % SALES CHARGE AS % DEALER
AMOUNT OF PURCHASE OF OFFERING PRICE OF AMOUNT INVESTED REALLOWANCE
<S> <C> <C> <C>
Less than $25,000 5.00% 5.26% 4.75%
$25,000 to $49,999 4.50% 4.71% 4.25%
$50,000 to $99,999 4.00% 4.17% 3.75%
$100,000 to $249,999 3.25% 3.36% 3.00%
$250,000 to $499,999 2.50% 2.56% 2.40%
$500,000 to $999,999 2.00% 2.04% 1.90%
$1 million and above/1/ None None None
</TABLE>
1 If you invest $1 million or more, you can buy only Class A shares, unless you
qualify to buy Class Z shares.
To satisfy the purchase amounts above, you can:
. invest with an eligible group of related investors;
. buy the Class A shares of two or more Prudential Mutual Funds at the
same time;
. use your RIGHTS OF ACCUMULATION, which allow you to combine the value of
Prudential Mutual Fund shares you already own with the value of the
shares you are purchasing for purposes of determining the applicable
sales charge; or
. sign a LETTER OF INTENT, stating in writing that you or an eligible
group of related investors will purchase a certain amount of shares in
the Fund and other Prudential Mutual Funds within 13 months.
Benefit Plans. BENEFIT PLANS can avoid Class A's initial sales charges if 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
under the exchange privilege) or 250 eligible employees or participants. For
these purposes a Benefit Plan is a pension, profit-sharing or other employee
benefit plan qualified under Section 401 of the Internal Revenue
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PRUDENTIAL DISTRESSED SECURITIES FUND, INC. (800) 225-1852
22
<PAGE>
HOW TO BUY, SELL AND
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EXCHANGE SHARES OF THE FUND
- --------------------------------------------------------------------------------
Code, a deferred compensation or annuity plan under Sections 403(b) and 457 of
the Internal Revenue Code, a "rabbi" trust, or a non-qualified deferred compen-
sation plan sponsored by an employer that has a tax-qualified benefit plan with
Prudential. Class A shares may also be purchased without a sales charge by par-
ticipants who are repaying loans from Benefit Plans where Prudential (or its
affiliates) provides administrative or recordkeeping services, sponsors the
product or provides account services.
Certain Prudential retirement programs--such as PruArray Association Benefit
Plans and PruArray Savings Programs--may also be exempt from Class A's sales
charges. For more information, see the SAI or contact your Prudential profes-
sional. In addition, waivers are available to investors in certain programs
sponsored by brokers, investment advisers and financial planners who have
agreements with Prudential Investments Advisory Group relating to:
. Mutual fund "wrap" or asset allocation programs where the sponsor places
Fund trades and charges its clients a management, consulting or other
fee for its services; and
. Mutual fund "supermarket" programs where the sponsor links its custom-
ers' accounts to a master account in the sponsor's name and the sponsor
charges a fee for its services.
Other Types of Investors. Other investors pay no sales charges, including cer-
tain officers, employees or agents of Prudential and its affiliates, Prudential
Mutual Funds, the subadvisers of the Prudential Mutual Funds and of brokers
that have entered into a selected dealer agreement with the Distributor. To
qualify for a reduction or waiver of sales charges, you must notify the
Transfer Agent or your broker at the time of purchase. For more information
about reducing or eliminating Class A's sales charge, see the SAI, "Purchase,
Redemption and Pricing of Fund Shares--Reduction and Waiver of Initial Sales
Charges--Class A Shares."
WAIVING CLASS C'S INITIAL SALES CHARGE
Benefit Plans. Benefit Plans (as defined above) may purchase Class C shares
without paying an initial sales charge. Class C shares may also be purchased
without an initial sales charge by participants who are repaying loans
- --------------------------------------------------------------------------------
23
<PAGE>
HOW TO BUY, SELL AND
- --------------------------------------------------------------------------------
EXCHANGE SHARES OF THE FUND
- --------------------------------------------------------------------------------
from Benefit Plans where Prudential (or its affiliates) provides administrative
or recordkeeping services, sponsors the product or provides account services.
Prudential Retirement Plans. The initial sales charge will be waived for pur-
chases of Class C shares by both qualified and non-qualified retirement and
deferred compensation plans participating in the PruArray Plan and other plans
if Prudential also provides administrative or recordkeeping services.
Investments of Redemption Proceeds from Other Investment Companies. The initial
sales charge will be waived for purchases of Class C shares if the purchase is
made with money from the redemption of shares of any unaffiliated investment
company, as long as the shares were not held in an account at Prudential Secu-
rities Incorporated or one of its affiliates. Such purchases must be made
within 60 days of the redemption. To qualify for this waiver, you must:
. purchase your shares through an account at Prudential Securities
. purchase your shares through an ADVANTAGE Account or an Investor Account
with Pruco Securities Corporation
. purchase your shares through other brokers
This waiver is not available to investors who purchase shares directly from the
Transfer Agent. If you are entitled to the waiver, you must notify either the
Transfer Agent or your broker. The Transfer Agent may require any supporting
documents it considers to be appropriate.
[QUALIFYING FOR CLASS Z SHARES
Class Z shares of the Fund can be purchased by any of the following:
. Any Benefit Plan as defined above, and certain nonqualified plans, pro-
vided the Benefit Plan--in combination with other plans sponsored by the
same employer or group of related employers--has at least $50 million in
defined contribution assets
. Participants in any fee-based program or trust program sponsored by Pru-
dential or an affiliate which includes mutual funds as investment
options and the Fund as an available option
. Certain participants in the MEDLEY Program (group variable annuity con-
tracts) sponsored by Prudential for whom Class Z shares of the Pruden-
tial Mutual Funds are an available option]
- --------------------------------------------------------------------------------
PRUDENTIAL DISTRESSED SECURITIES FUND, INC. (800) 225-1852
24
<PAGE>
HOW TO BUY, SELL AND
- --------------------------------------------------------------------------------
EXCHANGE SHARES OF THE FUND
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[. Benefit Plans for which an affiliate of the Distributor provides admin-
istrative or recordkeeping services and as of September 20, 1996 were
either Class Z shareholders of the Prudential Mutual Funds or executed a
letter of intent to purchase Class Z shares of the Prudential Mutual
Funds
. Current and former Directors/Trustees of the Prudential Mutual Funds
(including the Fund)
. Employees of Prudential and/or Prudential Securities who participate in
a Prudential-sponsored employee savings plan
. Prudential and its affiliates with an investment of $10 million or more]
In connection with the sale of shares, the Manager, the Distributor or one of
their affiliates may pay brokers, financial advisers and other persons a com-
mission of up to 4% of the purchase price for Class B shares, up to 2% of the
purchase price for Class C shares and a finder's fee for Class Z shares from
their own resources based on a percentage of the net asset value of shares sold
or otherwise.
CLASS B SHARES CONVERT TO CLASS A SHARES AFTER APPROXIMATELY SEVEN YEARS
If you buy Class B shares and hold them for approximately seven years, we will
automatically convert them into Class A shares without charge. At that time, we
will also convert any Class B shares that you purchased with reinvested divi-
dends and other distributions. Since the 12b-1 fees for Class A shares are
lower than for Class B shares, converting to Class A shares lowers your Fund
expenses.
When we do the conversion, you will get fewer Class A shares than the number
of Class B shares converted if the price of the Class A shares is higher than
the price of Class B shares. The total dollar value will be the same, so you
will not have lost any money by getting fewer Class A shares. We do the conver-
sions quarterly, not on the anniversary date of your purchase. For more infor-
mation, see the SAI, "Purchase, Redemption and Pricing of Fund Shares--Conver-
sion Feature--Class B Shares."
STEP 3: UNDERSTANDING THE PRICE YOU'LL PAY
The price you pay for each share of the Fund is based on the share value. The
share value of a mutual fund--known as the NET ASSET VALUE or NAV-- is deter-
mined by a simple calculation--it's the total value of the F und (assets
minus liabilities) divided by the total number of shares outstanding. For exa
- --------------------------------------------------------------------------------
25
<PAGE>
HOW TO BUY, SELL AND
- --------------------------------------------------------------------------------
EXCHANGE SHARES OF THE FUND
- --------------------------------------------------------------------------------
ple, if the value of the investments held by Fund XYZ (minus its expenses) is
$1,000 and there are 100 shares of Fund XYZ owned by shareholders, the price of
one share of the fund--or the NAV--is $10 ($1,000 divided by
100). Portfolio securities are valued based upon market quotations or, if not
readily available, at fair value as determined in good faith under procedures
established by the Fund's Board. Most national newspapers report the NAVs of
most mutual funds, which allows investors to know the price of mutual funds
daily.
We determine the NAV of our shares once each business day at 4:15 p.m. New
York Time on days that the New York Stock Exchange is
- --------------------------------------------------------------------------------
MUTUAL FUND SHARES
The NAV of mutual fund shares changes every day because the value of a fund's
portfolio changes constantly. For example, if Fund XYZ holds ACME Corp. bonds
in its portfolio and the price of ACME bonds goes up, while the value of the
fund's other holdings remains the same and expenses don't change, the NAV of
Fund XYZ will increase.
- --------------------------------------------------------------------------------
open for trading. We do not determine NAV on days when we have not received any
orders to purchase, sell or exchange, or when changes in the value of the
Fund's portfolio do not materially affect the NAV.
WHAT PRICE WILL YOU PAY FOR SHARES OF THE FUND?
For Class A and Class C shares, you'll pay the public offering price, which is
NAV next determined after we receive your order to purchase, plus an initial
sales charge (unless you're entitled to a waiver). For Class B and Class Z
shares, you will pay the NAV next determined after we receive your order to
purchase (remember, there are no up-front sales charges for these share clas-
ses). Your broker may charge you a separate or additional fee for purchases of
shares.
STEP 4: ADDITIONAL SHAREHOLDER SERVICES
As a Fund shareholder, you can take advantage of the following services and
privileges:
Automatic Reinvestment. As we explained in the "Fund Distributions and Tax
Issues" section, the Fund pays out--or distributes--its net invest ment
income and capital gains to all shareholders. For your convenience, we will
automa
- --------------------------------------------------------------------------------
PRUDENTIAL DISTRESSED SECURITIES FUND, INC. (800) 225-1852
26
<PAGE>
HOW TO BUY, SELL AND
- --------------------------------------------------------------------------------
EXCHANGE SHARES OF THE FUND
- --------------------------------------------------------------------------------
ically reinvest your distributions in the Fund at NAV, without any sales
charge. If you want your distributions paid in cash, you can indicate this
preference on your application, notify your broker or notify the Transfer Agent
in writing (at the address below) at least five business days before the date
we determine who receives dividends:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTENTION: ACCOUNT MAINTENANCE
P.O. BOX 15015
NEW BRUNSWICK, NJ 08906-5015
Automatic Investment Plan. You can make regular purchases of the Fund for as
little as $50 by having the funds automatically withdrawn from your bank or
brokerage account at specified intervals.
Retirement Plan Services. Prudential offers a wide variety of retirement plans
for individuals and institutions, including large and small businesses. For
information on IRAs, including Roth IRAs, or SEP-IRAs for a one-person busi-
ness, please contact your financial adviser. If you are interested in opening a
401(k) or other company-sponsored retirement plan (SIMPLES, SEP plans, Keoghs,
403(b)(7) plans, pension and profit-sharing plans), your financial adviser will
help you determine which retirement plan best meets your needs. Complete
instructions about how to establish and maintain your plan and how to open
accounts for you and your employees will be included in the retirement plan kit
you receive in the mail.
The PruTector Program. Optional group term life insurance--which protects the
value of your Prudential Mutual Fund investment for your beneficiaries against
market declines--is available to investors who purchase their shares through
Prudential. This insurance is subject to various restrictions and charges and
is not available in all states.
Systematic Withdrawal Plan. A systematic withdrawal plan is available that will
provide you with monthly or quarterly checks. Remember, the sale of Class B and
Class C shares may be subject to a CDSC.
- --------------------------------------------------------------------------------
27
<PAGE>
HOW TO BUY, SELL AND
- --------------------------------------------------------------------------------
EXCHANGE SHARES OF THE FUND
- --------------------------------------------------------------------------------
Reports to Shareholders. Every year we will send you an annual report (along
with an updated prospectus) and a semi-annual report, which contain important
financial information about the Fund. To reduce Fund expenses, we will send one
annual shareholder report, one semi-annual shareholder report and one annual
prospectus per household unless you instruct us or your broker otherwise.
HOW TO SELL YOUR SHARES
You can sell your shares of the Fund for cash (in the form of a check) at any
time, subject to certain restrictions.
When you sell shares of the Fund--also known as redeeming your shares--the
price you will receive will be the NAV next determined after the Transfer
Agent, the Distributor or your broker receives your order to sell. If your
broker holds your shares, he must receive your order to sell by 4:15 p.m. New
York Time to process the sale on that day. Otherwise, contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTENTION: REDEMPTION SERVICES
P.O. BOX 15010
NEW BRUNSWICK, NJ 08906-5010
Generally, we will pay you for the shares that you sell within seven days
after the Transfer Agent receives your sell order. If you hold shares through a
broker, payment will be credited to your account. If you are selling shares you
recently purchased with a check, we may delay your sale until your check
clears, which can take up to 10 days. Your broker may charge you a separate or
additional fee for sales of shares.
RESTRICTIONS ON SALES
There are certain times when you may not be able to sell shares of the Fund, or
when we may delay paying you the proceeds from a sale. This may happen during
unusual market conditions or emergencies when the Fund can't determine the
value of its assets or sell its holdings. If you invest by check, we will only
process your redemptions after your check clears. This can take up to 10 cal-
endar days. You can avoid delay if you purchase shares by wire, certified check
or cashier's check. For more information, see the SAI, "Purchase, Redemption
and Pricing of Fund Shares--Sale of Shares."
- --------------------------------------------------------------------------------
PRUDENTIAL DISTRESSED SECURITIES FUND, INC. (800) 225-1852
28
<PAGE>
HOW TO BUY, SELL AND
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EXCHANGE SHARES OF THE FUND
- --------------------------------------------------------------------------------
If you hold your shares directly with the Transfer Agent, you may have to
have the signature on your sell order guaranteed by a financial institution.
For more information, see the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Sale of Shares--Signature Guarantee."
CONTINGENT DEFERRED SALES CHARGES (CDSC)
If you sell Class B shares within six years of purchase or Class C shares
within 18 months of purchase (one year for Class C shares purchased before
November 2, 1998), you will have to pay a CDSC. To keep the CDSC as low as pos-
sible, we will sell amounts representing shares in the following order:
. Amounts representing shares you purchased with reinvested dividends and
distributions
. Amounts representing shares that represent the increase in NAV above the
total amount of payments for shares made during the past six years
. Amounts representing the cost of shares held beyond the CDSC period (six
years for Class B shares and 18 months for Class C shares)
Since shares that fall into any of the categories listed above are not sub-
ject to the CDSC, selling them first helps you to avoid--or at least minimize--
the CDSC.
Having sold the exempt shares first, if there are any remaining shares that
are subject to the CDSC, we will apply the CDSC to the amounts representing the
cost of shares held for the longest period of time within the applicable CDSC
period.
As we noted before in the "Share Class Comparison" chart, the CDSC for Class
B shares is 5% in the first year, 4% in the second, 3% in the third, 2% in the
fourth and 1% in the fifth and sixth years. The rate decreases on the first day
of the month following the anniversary date of your purchase, not on the anni-
versary date itself. The CDSC of 1% for Class C shares--which is applied to
shares sold within 18 months of purchase (one year for Class C shares purchased
before November 2, 1998)--is the lesser of the original purchase price or the
redemption proceeds. For purposes of determining how long you've held your
shares, all purchases during the month
- --------------------------------------------------------------------------------
29
<PAGE>
HOW TO BUY, SELL AND
- --------------------------------------------------------------------------------
EXCHANGE SHARES OF THE FUND
- --------------------------------------------------------------------------------
are grouped together and considered to have been made on the last day of the
month.
The holding period for purposes of determining the applicable CDSC will be
calculated from the first day of the month after initial purchase, excluding
any time shares were held in a money market fund.
WAIVER OF THE CDSC--CLASS B SHARES
The CDSC will be waived if the Class B shares are sold:
. After a shareholder is deceased or disabled (or, in the case of a trust
account, the death or disability of the grantor). This waiver applies to
individual shareholders, as well as shares owned in joint tenancy (with
rights of survivorship), provided the shares were purchased before the
death or disability
. To provide for certain distributions--made without IRS penalty--from a
tax-deferred retirement plan, IRA or Section 403(b) custodial account
. On certain sales from a Systematic Withdrawal Plan
For more information on the above and other waivers, see the SAI, "Purchase,
Redemption and Pricing of Fund Shares--Waiver of Contingent Deferred Sales
Charges--Class B Shares."
WAIVER OF THE CDSC--CLASS C SHARES
Prudential Retirement Plans. The CDSC will be waived for purchases of Class C
shares by both qualified and nonqualified retirement and deferred compensation
plans participating in the PruArray Plan and other plans if Prudential also
provides administrative or recordkeeping services. The CDSC will also be waived
on redemptions sponsored by Prudential and its affiliates to the extent that
the redemption proceeds are invested in the Guaranteed Investment Account, a
group annuity insurance product sponsored by Prudential, the Guaranteed Insu-
lated Separate Account, a separate account offered by Prudential, and shares of
the Stable Value Fund, an unaffiliated bank collective fund.
Other Benefit Plans. The CDSC will be waived on redemptions from Benefit Plans
holding shares through a broker not affiliated with Prudential and for which
the broker provides administrative or recordkeeping services.
- --------------------------------------------------------------------------------
PRUDENTIAL DISTRESSED SECURITIES FUND, INC. (800) 225-1852
30
<PAGE>
HOW TO BUY, SELL AND
- --------------------------------------------------------------------------------
EXCHANGE SHARES OF THE FUND
- --------------------------------------------------------------------------------
REDEMPTION IN KIND
If the sales of Fund shares you make during any 90-day period reach the lesser
of $250,000 or 1% of the value of the Fund's net assets, we can then give you
securities from the Fund's portfolio instead of cash. If you want to sell the
securities for cash, you would have to pay the costs charged by a broker.
SMALL ACCOUNTS
If you make a sale that reduces your account value to less than $500, we may
sell the rest of your shares (without charging any CDSC) and close your
account. We would do this to minimize the Fund's expenses paid by other share-
holders. We will give you 60 days' notice, during which time you can purchase
additional shares to avoid this action. This involuntary sale does not apply to
shareholders who own their shares as part of a 401(k) plan, an IRA or some
other tax-deferred plan or account.
90-DAY REPURCHASE PRIVILEGE
After you redeem your shares, you have a 90-day period during which you may
reinvest any of the redemption proceeds in shares of the same Fund without
paying an initial sales charge. Also, if you paid a CDSC when you redeemed your
shares, we will credit your new account with the appropriate number of shares
to reflect the amount of the CDSC you paid. In order to take advantage of this
one-time privilege, you must notify the Transfer Agent or your broker at the
time of the repurchase. See the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Sale of Shares."
RETIREMENT PLANS
To sell shares and receive a distribution from your retirement account, call
your broker or the Transfer Agent for a distribution request form. There are
special distribution and income tax withholding requirements for distributions
from retirement plans and you must submit a withholding form with your request
to avoid delay. If your retirement plan account is held for you by your
employer or plan trustee, you must arrange for the distribution request to be
signed and sent by the plan administrator or trustee. For additional informa-
tion, see the SAI.
- --------------------------------------------------------------------------------
31
<PAGE>
HOW TO BUY, SELL AND
- --------------------------------------------------------------------------------
EXCHANGE SHARES OF THE FUND
- --------------------------------------------------------------------------------
HOW TO EXCHANGE YOUR SHARES
You can exchange your shares of the Fund for shares of the same class in cer-
tain other Prudential Mutual Funds--including certain money market funds--if
you satisfy the minimum investment requirements. [For example, you can exchange
Class A shares of the Fund for Class A shares of another Prudential Mutual
Fund, but you can't exchange Class A shares for Class B, Class C or Class Z
shares.] Class B and Class C shares may not be exchanged into money market funds
other than Prudential Special Money Market Fund, Inc. After an exchange, at
redemption the CDSC will be calculated from the first day of the month after
initial purchase, excluding any timeshares were held in a money market fund. We
may change the terms of the exchange privilege after giving you 60 days'
notice.
If you hold shares through a broker, you must exchange shares through your
broker. Otherwise contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: EXCHANGE PROCESSING
P.O. BOX 15010
NEW BRUNSWICK, NJ 08906-5010
There is no sales charge for such exchanges. However, if you exchange--and
then sell--Class B shares within approximately six years of your original pur-
chase or Class C shares within 18 months of your original purchase, you must
still pay the applicable CDSC. If you have exchanged Class B shares into a
money market fund, the time you hold the shares in the money market account
will not be counted for purposes of calculating the required holding periods
for CDSC liability.
Remember, as we explained in the section entitled "If You Sell or Exchange
Your Shares," exchanging shares is considered a sale for tax purposes. There-
fore, if the shares you exchange are worth more than you paid for them, you may
have to pay capital gains tax. For additional information about exchanging
shares, see the SAI, "Shareholder Investment Account--Exchange Privilege."
If you own Class B or Class C shares and qualify to purchase either Class A
shares without paying an initial sales charge [or Class Z shares], we will auto-
matically exchange your Class B or Class C shares which are not subject to a
CDSC for Class A [or Class Z shares], as appropriate. We
- --------------------------------------------------------------------------------
PRUDENTIAL DISTRESSED SECURITIES FUND, INC. (800) 225-1852
32
<PAGE>
HOW TO BUY, SELL AND
- --------------------------------------------------------------------------------
EXCHANGE SHARES OF THE FUND
- --------------------------------------------------------------------------------
make such exchanges on a quarterly basis if you qualify for this exchange priv-
ilege. We have obtained a legal opinion that this exchange is not a "taxable
event" for federal income tax purposes. This opinion is not binding on the IRS.
FREQUENT TRADING
You should not use the Fund for frequent trading in response to short-term
changes in the market. Doing this may make it harder for us to efficiently
manage the Fund, and it also increases transaction costs. If we believe you are
engaged in this kind of trading, we reserve the right to refuse any of your
purchase orders or exchanges. The Fund will reject all exchanges and purchases
from any person or group that we believe is following a market timing strategy
unless we have an agreement to follow certain procedures, including a daily
dollar limit on trading.
- --------------------------------------------------------------------------------
33
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights will help you evaluate the Fund's financial perfor-
mance. The TOTAL RETURN in each chart represents the rate that a shareholder
earned on an investment in that share class of the Fund, assuming reinvestment
of all dividends and other distributions. The information is for each share
class for the periods indicated.
Review each chart with the financial statements and report of independent
accountants, which appear in the SAI and are available upon request. Additional
performance information for each share class is contained in the annual report,
which you can receive at no charge. No financial information is shown for Class
Z shares because they have not been offered before the date of this prospectus.
CLASS A SHARES
The financial highlights for the two years ended November 30, 1998 were audited
by LLP, and the financial highlights for the period ended November
30, 1996 were audited by other independent auditors, whose reports were unqual-
ified.
<TABLE>
<CAPTION>
CLASS A SHARES (FISCAL YEARS ENDED 11-30-98)
- ---------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1998 1997/5/ 1996/1/
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $- - $11.85 $12.50
INCOME FROM INVESTMENT OPERATIONS:
Net investment income/2/ - - .49 .25
Net realized and unrealized gain (loss) on
investment transactions - - 3.23 (.90)
TOTAL FROM INVESTMENT OPERATIONS - - 3.72 (.65)
- ---------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income - - (.38) --
NET ASSET VALUE, END OF PERIOD $- - $15.19 $11.85
TOTAL RETURN/3/ - -% 32.35% (5.20)%
- ---------------------------------------------------------------------
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996
<S> <C> <C> <C>
NET ASSETS, END OF PERIOD (000) $- - $1,976 $3,404
Average net assets (000) $- - $2,167 $4,391
RATIOS TO AVERAGE NET ASSETS:/2/
Expenses, including distribution fees - -% 2.04% 2.76%/4/
Expenses, excluding distribution fees - -% 1.79% 2.51%/4/
Net investment income - -% 3.73% 2.37%/4/
Portfolio turnover - -% 36% 36%
</TABLE>
- --------------------------------------------------------------------------------
1 Information shown is for the period 3-26-96, when Class A shares were first
offered, through 11-30-96.
2 Net of expense reimbursement.
3 Total return assumes reinvestment of dividends and any other distributions,
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each period
reported.
4 Annualized.
5 Calculated based upon weighted average shares outstanding during the year.
- --------------------------------------------------------------------------------
PRUDENTIAL DISTRESSED SECURITIES FUND, INC. (800) 225-1852
34
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
CLASS B SHARES
The financial highlights for the two years ended November 30, 1998 were audited
by LLP, and the financial highlights for the period ended November
30, 1996 were audited by other independent auditors, whose reports were unqual-
ified.
<TABLE>
<CAPTION>
CLASS B SHARES (FISCAL YEARS ENDED 11-30-98)
- ------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1998 1997/5/ 1996/1/
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $- - $11.79 $12.50
INCOME FROM INVESTMENT OPERATIONS:
Net investment income/2/ - - .39 .16
Net realized and unrealized gain (loss) on investment
transactions - - 3.24 (.87)
TOTAL FROM INVESTMENT OPERATIONS - - 3.63 (.71)
- ------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income - - (.26) --
NET ASSET VALUE, END OF PERIOD $- - $15.16 $11.79
TOTAL RETURN/3/ - -% 31.44% (5.68)%
- ------------------------------------------------------------------------------
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996
<S> <C> <C> <C>
NET ASSETS, END OF PERIOD (000) $- - $5,029 $5,387
Average net assets (000) $- - $4,860 $6,650
RATIOS TO AVERAGE NET ASSETS/2/:
Expenses, including distribution fees - -% 2.79% 3.51%/4/
Expenses, excluding distribution fees - -% 1.79% 2.51%/4/
Net investment income - -% 2.98% 1.59%/4/
Portfolio turnover - -% 36% 36%
</TABLE>
- --------------------------------------------------------------------------------
1 Information shown is for the period 3-26-96, when Class B shares were first
offered, through 11-30-96.
2 Net of expense reimbursement.
3 Total return assumes reinvestment of dividends and any other distributions,
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each period
reported.
4 Annualized.
5 Calculated based upon weighted average shares outstanding during the year.
- --------------------------------------------------------------------------------
35
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
CLASS C SHARES
The financial highlights for the two years ended November 30, 1998 were audited
by LLP, and the financial highlights for the period ended November 30,
1996 were audited by other independent auditors, whose reports were unquali-
fied.
<TABLE>
<CAPTION>
CLASS C SHARES (FISCAL YEARS ENDED 11-30-98)
- --------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1998 1997/5/ 1996/1/
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $- - $11.79 $12.50
INCOME FROM INVESTMENT OPERATIONS:
Net investment income/2/ - - .39 .16
Net realized and unrealized gain (loss) on
investment transactions - - 3.24 (.87)
TOTAL FROM INVESTMENT OPERATIONS - - 3.63 (.71)
- --------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income - - (.26) --
NET ASSET VALUE, END OF PERIOD $- - $15.16 $11.79
TOTAL RETURN/3/ - -% 31.44% (5.68)%
- --------------------------------------------------------------------------
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996
<S> <C> <C> <C> <C>
NET ASSETS, END OF PERIOD (000) $- - $831 $1,485
Average net assets (000) $- - $1,100 $1,678
RATIOS TO AVERAGE NET ASSETS:/2/
Expenses, including distribution fees - -% 2.79% 3.51%/4/
Expenses, excluding distribution fees - -% 1.79% 2.51%/4/
Net investment income - -% 2.98% 1.71%/4/
</TABLE>
- --------------------------------------------------------------------------------
1 Information shown is for the period 3-26-96, when Class C shares were first
offered, through 11-30-96.
2 Net of expense reimbursement.
3 Total return assumes reinvestment of dividends and any other distributions,
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each period
reported. Total return for periods of less than a full year is not
annualized.
4 Annualized.
5 Calculated based upon weighted average shares outstanding during the year.
- --------------------------------------------------------------------------------
PRUDENTIAL DISTRESSED SECURITIES FUND, INC. (800) 225-1852
36
<PAGE>
- --------------------------------------------------------------------------------
THE PRUDENTIAL MUTUAL FUND FAMILY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Prudential offers a broad range of mutual funds designed to meet your
individual needs. For information about these funds, contact your broker or
Prudential professional or call us at (800) 225-1852. Read the prospectus
carefully before you invest or send money.
STOCK FUNDS
PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
PRUDENTIAL EMERGING GROWTH FUND, INC.
PRUDENTIAL EQUITY FUND, INC.
PRUDENTIAL EQUITY INCOME FUND
PRUDENTIAL INDEX SERIES FUND
Prudential Small-Cap Index Fund
Prudential Stock Index Fund
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
PRUDENTIAL MID-CAP VALUE FUND
PRUDENTIAL REAL ESTATE SECURITIES FUND
PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
PRUDENTIAL TAX-MANAGED EQUITY FUND
PRUDENTIAL 20/20 FOCUS FUND
PRUDENTIAL UTILITY FUND, INC.
NICHOLAS-APPLEGATE FUND, INC.
Nicholas-Applegate Growth Equity Fund
ASSET ALLOCATION/BALANCED FUNDS
PRUDENTIAL BALANCED FUND
PRUDENTIAL DIVERSIFIED FUNDS
Conservative Growth Fund
Moderate Growth Fund
High Growth Fund
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
Prudential Active Balanced Fund
GLOBAL FUNDS
GLOBAL STOCK FUNDS
PRUDENTIAL DEVELOPING MARKETS FUND
Prudential Developing Markets Equity Fund
Prudential Latin America Equity Fund
PRUDENTIAL EUROPE GROWTH FUND, INC.
PRUDENTIAL GLOBAL GENESIS FUND, INC.
PRUDENTIAL INDEX SERIES FUND
Prudential Europe Index Fund
Prudential Pacific Index Fund
PRUDENTIAL NATURAL RESOURCES FUND, INC.
PRUDENTIAL PACIFIC GROWTH FUND, INC.
PRUDENTIAL WORLD FUND, INC.
Global Series
International Stock Series
GLOBAL UTILITY FUND, INC.
GLOBAL BOND FUNDS
PRUDENTIAL GLOBAL LIMITED MATURITY FUND, INC.
Limited Maturity Portfolio
PRUDENTIAL INTERMEDIATE GLOBAL INCOME FUND, INC.
PRUDENTIAL INTERNATIONAL BOND FUND, INC.
THE GLOBAL TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
37
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BOND FUNDS
TAXABLE BOND FUNDS
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
PRUDENTIAL GOVERNMENT SECURITIES TRUST
Short-Intermediate Term Series
PRUDENTIAL HIGH YIELD FUND, INC.
PRUDENTIAL HIGH YIELD TOTAL RETURN FUND, INC.
PRUDENTIAL INDEX SERIES FUND
Prudential Bond Market Index Fund
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
Income Portfolio
TAX-EXEMPT BOND FUNDS
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
California Series
California Income Series
PRUDENTIAL MUNICIPAL BOND FUND
High Income Series
Insured Series
PRUDENTIAL MUNICIPAL SERIES FUND
Florida Series
Massachusetts Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
MONEY MARKET FUNDS
TAXABLE MONEY MARKET FUNDS
CASH ACCUMULATION TRUST
Liquid Assets Fund
National Money Market Fund
PRUDENTIAL GOVERNMENT SECURITIES TRUST
Money Market Series
U.S. Treasury Money Market Series
PRUDENTIAL SPECIAL MONEY MARKET FUND, INC.
Money Market Series
PRUDENTIAL MONEYMART ASSETS, INC.
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
- --------------------------------------------------------------------------------
PRUDENTIAL DISTRESSED SECURITIES FUND, INC. (800) 225-1852
38
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[This page intentionally left blank].
- --------------------------------------------------------------------------------
39
<PAGE>
FOR MORE INFORMATION
________________________________________________________________
Please read this prospectus before you invest in the Fund and keep it for
future reference. For information or shareholder questions contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
P.O. BOX 15005
NEW BRUNSWICK, NJ 08906-5005
(800) 225-1852
(732) 417-7555
(if calling from outside the U.S.)
- --------------------------------------------------------------------------------
Outside Brokers Should Contact:
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC
P.O. BOX 15035
NEW BRUNSWICK, NJ 08906-5035
(800) 778-8769
- --------------------------------------------------------------------------------
Visit Prudential's Web Site At:
HTTP://WWW.PRUDENTIAL.COM
- --------------------------------------------------------------------------------
Additional information about the Fund can be obtained without charge and can be
found in the following documents:
STATEMENT OF ADDITIONAL INFORMATION (SAI)
(incorporated by reference into this prospectus)
ANNUAL REPORT
(contains a discussion of the market conditions and investment strategies
that significantly affected the Fund's performance)
SEMI-ANNUAL REPORT
You can also obtain copies of Fund documents from the Securities and Exchange
Commission as follows:
By Mail:
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-6009
(The SEC charges a fee to copy documents.)
In Person:
Public Reference Room in Washington, DC
(For hours of operation, call 1(800) SEC-0330)
Via the Internet:
http://www.sec.gov
- --------------------------------------------------------------------------------
CUSIP NUMBERS:
CLASS A: 743966-10-3
CLASS B: 743966-20-2
CLASS C: 743966-30-1
CLASS Z:
Investment Company Act File No:
811-07491
MF171A
<PAGE>
PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
Statement of Additional Information dated January , 1999
Prudential Distressed Securities Fund, Inc. (the Fund), is an open-end,
diversified, management investment company whose investment objective is
capital appreciation. The Fund seeks to achieve its objective by investing
primarily in debt and equity securities issued by financially troubled or
bankrupt companies (financially troubled issuers) and in equity securities of
companies that in the view of its investment adviser are currently
undervalued, out-of-favor or price-depressed relative to their long term
potential for growth and income (operationally troubled issuers). These
issuers may be experiencing poor operating results. The Fund may engage in
various derivative transactions, including the purchase and sale of put and
call options on securities, stock indices and foreign currencies, the purchase
and sale of foreign currency exchange contracts and transactions involving
futures contracts and related options to hedge its portfolio and to attempt to
enhance return. There can be no assurance that the Fund's investment objective
will be achieved. See "Description of the Fund, Its Investments and Risks."
The Fund's address is Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077, and its telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Fund's Prospectus dated January , 1999, a copy
of which may be obtained from the Fund upon request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CROSS-REFERENCE
TO PAGE IN
PAGE PROSPECTUS
----- ---------------
<S> <C> <C>
Fund History.............................................. B-2
Description of the Fund, Its Investments and Risks........ B-2
Investment Restrictions................................... B-27
Management of the Fund.................................... B-29
Control Persons and Principal Holders of Securities....... B-33
Investment Advisory and Other Services.................... B-33
Brokerage Allocation and Other Practices.................. B-38
Capital Shares, Other Securities and Organization......... B-40
Purchase, Redemption and Pricing of Fund Shares........... B-41
Shareholder Investment Account............................ B-52
Net Asset Value........................................... B-57
Taxes, Dividends and Distributions........................ B-58
Performance Information................................... B-63
Financial Statements...................................... B-66 --
Report of Independent Accountants......................... --
Description of Security Ratings........................... A-1
Appendix I--General Investment Information................ I-1 --
Appendix II--Historical Performance Data.................. II-1 --
Appendix III--Information Relating to Prudential.......... III-1 --
</TABLE>
- -------------------------------------------------------------------------------
MF171B
<PAGE>
FUND HISTORY
The Fund was incorporated in Maryland on November 30, 1995.
DESCRIPTION OF THE FUND, ITS INVESTMENTS AND RISKS
(A) CLASSIFICATION. The Fund is a diversified, open-end, management investment
company.
(B) AND (C) INVESTMENT STRATEGIES, POLICIES AND RISKS. The Fund's investment
objective is capital appreciation. The Fund will seek to achieve its objective
by investing primarily in debt and equity securities of companies that are in
weak financial condition or bankrupt (financially troubled issuers) and in
equity securities of companies that, in the view of its investment adviser,
The Prudential Investment Corporation (PIC), doing business as Prudential
Investments (PI, the Subadviser or the investment adviser), are currently
undervalued, out-of-favor or price-depressed relative to their long term
potential for growth and income (operationally troubled issuers). These
companies may be experiencing poor operating results. Current income is not a
factor in the selection of investments. While the principal investment
policies and strategies for seeking to achieve this objective are described in
the Fund's Prospectus, the Fund may from time to time also use the securities,
instruments, policies and strategies described below in seeking to achieve its
objective. The Fund may not be successful in achieving its objective and you
could lose money.
The Fund is a vehicle for diversification and is not intended to constitute
a balanced investment program. Because of its emphasis on securities of
financially and operationally troubled issuers, the Fund should be considered
speculative and subject to greater investment risks than are assumed by other
investment companies.
Under normal circumstances, the Fund will invest at least 65% of its total
assets in debt and equity securities of financially and operationally troubled
issuers (that is, distressed securities), including defaulted securities and
junk bonds. The Fund has not established any percentage limitations for the
allocation of investments between debt and equity securities. The allocation
of assets between debt and equity securities will be determined by the
investment adviser. With respect to the remainder of its assets, the Fund may
(i) invest in money market instruments, (ii) purchase and write (that is,
sell) put and call options on debt and equity securities, stock indices and
foreign currencies, (iii) purchase and sell foreign currency exchange
contracts, (iv) purchase and sell futures contracts and options thereon
(including stock index futures, futures contracts on U.S. Government
securities, foreign currencies and indices and options thereon) and (v) enter
into repurchase agreements. In addition, the Fund may (a) lend its securities,
(b) make short sales, (c) purchase and sell securities on a when-issued or
delayed delivery basis and (d) borrow money, in all instances subject to the
limitations described below. For temporary defensive purposes, the Fund may
hold up to 100% of its assets in cash, high quality money market instruments
and U.S. Treasury securities. The Fund may also temporarily hold cash, high
quality money market instruments and U.S. Treasury securities pending
investment of proceeds from new sales of Fund shares or to meet ordinary daily
cash needs.
SECURITIES OF FINANCIALLY AND OPERATIONALLY TROUBLED ISSUERS
Financially troubled issuers include domestic or foreign companies or
institutions in weak financial condition, companies having negative net worth
or substantial capital needs and companies involved in bankruptcy or
reorganization proceedings or financial restructurings. Operationally troubled
issuers are companies experiencing poor operating results that may have no
earnings or severely depressed earnings or have special competitive or product
obsolescence problems.
B-2
<PAGE>
The Fund will invest in a wide variety of debt and equity securities
involving financially or operationally troubled companies in the belief that
these companies (and their securities) will react positively to changing
economic conditions or that management will take actions designed to overcome
adversity, such as the restructuring of current business operations. The Fund
may invest in loans and participations (both secured and unsecured) made to
financially troubled companies by banks, insurance companies and Government
institutions such as the Federal Deposit Insurance Corporation or the Pension
Benefit Guaranty Corporation. The Fund may also invest in fixed-income
securities issued by states, municipalities, local governments and their
agencies and authorities, which pay interest which is exempt from federal
income taxation. In addition, the Fund may invest in mortgage-backed
securities. Equity-related securities in which the Fund may invest include
common stocks, preferred stocks, securities convertible or exchangeable for
common stocks or preferred stocks, equity investments in partnerships, joint
ventures and other forms of non-corporate investments, American Depositary
Receipts (ADRs), and warrants and rights exercisable for equity securities.
The Fund may invest up to 30% of its total assets in equity and fixed-income
securities of foreign issuers denominated in U.S. dollars or foreign
currencies. ADRs and Global Depositary Receipts (GDRs) are not included in
this 30% limitation. See "Risks of Financially and Operationally Troubled
Issuers" below.
The Fund is permitted to invest in defaulted securities and in low quality
debt securities having a rating of D or better as determined by Standard &
Poor's Ratings Group (S&P), C or better by Moody's Investors Service, Inc.
(Moody's), or having a comparable rating determined by another nationally
recognized statistical rating organization (NRSRO), or in unrated securities
which, in the opinion of the investment adviser, are of equivalent quality.
These lower rated securities are commonly known as "junk bonds." See "Risk
Factors Relating to Investing in Debt Securities Rated Below Investment Grade
(Junk Bonds)" below and the "Description of Security Ratings" in the Appendix.
The Subadviser maintains a credit unit which the Fund's portfolio managers
may consult in managing the Fund's portfolio and in researching financially
troubled and operationally troubled issuers. The Fund's portfolio managers
review on an ongoing basis financially troubled and operationally troubled
issuers, including prospective purchases and portfolio holdings of the Fund.
They have broad access to research and financial reports, data retrieval
services and industry analysts.
The securities of financially and operationally troubled issuers may require
active monitoring and at times may require the Fund's investment adviser to
participate in bankruptcy or reorganization proceedings on behalf of the Fund.
To the extent the investment adviser becomes involved in such proceedings, the
Fund may have a more active participation in the affairs of the issuer than is
generally assumed by an investor and such participation may subject the Fund
to the litigation risks described below. However, the Fund does not invest in
the securities of financially or operationally troubled issuers for the
purpose of exercising day-to-day management of any issuer's affairs.
RISKS OF FINANCIALLY AND OPERATIONALLY TROUBLED ISSUERS
Investment in the securities of financially and operationally troubled
issuers involves a high degree of credit and market risk. See "Risk Factors
Relating to Investing in Debt Securities Rated Below Investment Grade (Junk
Bonds)" below. Although the Fund will invest in select companies which in the
view of its investment adviser have the potential over the long term for
capital growth, there can be no assurance that such financially or
operationally troubled companies can be successfully transformed into
profitable operating companies. There is a possibility that the Fund may incur
substantial or total losses on its investments. During an economic downturn or
recession, securities of financially troubled issuers are more likely to go
into default than securities of other issuers. In addition, it may be
difficult to obtain information about financially and operationally troubled
issuers.
Investment in the securities of financially and operationally troubled
issuers is a long-term investment strategy and, accordingly, investors in the
Fund should have the financial ability and willingness to remain invested for
the long term.
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Securities of financially troubled issuers are less liquid and more volatile
than securities of companies not experiencing financial difficulties. The
market prices of such securities are subject to erratic and abrupt market
movements and the spread between bid and asked prices may be greater than
normally expected. In addition, it is anticipated that many of the Fund's
portfolio investments may not be widely traded and that the Fund's position in
such securities may be substantial relative to the market for such securities.
As a result, the Fund may experience delays and incur losses and other costs
in connection with the sale of its portfolio securities.
The Fund may invest in the securities of companies involved in bankruptcy
proceedings, reorganizations and financial restructurings and may have a more
active participation in the affairs of the issuer than is generally assumed by
an investor. This may subject the Fund to litigation risks or prevent the Fund
from disposing of securities. In a bankruptcy or other proceeding, the Fund as
a creditor may be unable to enforce its rights in any collateral or may have
its security interest in any collateral challenged, disallowed or subordinated
to the claims of other creditors. While the Fund will attempt to avoid taking
the types of actions that would lead to equitable subordination or creditor
liability, there can be no assurance that such claims will not be asserted or
that the Fund will be able to successfully defend against them. Because
(unlike the Fund) other investors may purchase the securities of these
companies for the purpose of exercising control or management, the Fund may be
at a disadvantage to the extent that the Fund's interests differ from the
interests of these other investors.
BANKRUPTCY AND OTHER PROCEEDINGS--LITIGATION RISKS
When a company seeks relief under the Federal Bankruptcy Code (or has a
petition filed against it), an automatic stay prevents all entities, including
creditors, from foreclosing or taking other actions to enforce claims, perfect
liens or reach collateral securing such claims. Creditors who have claims
against the company prior to the date of the bankruptcy filing must petition
the court to permit them to take any action to protect or enforce their claims
or their rights in any collateral. Such creditors may be prohibited from doing
so if the court concludes that the value of the property in which the creditor
has an interest will be "adequately protected" during the proceedings. If the
bankruptcy court's assessment of adequate protection is inaccurate, a
creditor's collateral may be wasted without the creditor being afforded the
opportunity to preserve it. Thus, even if the Fund holds a secured claim, it
may be prevented from collecting the liquidation value of the collateral
securing its debt, unless relief from the automatic stay is granted by the
court.
Security interests held by creditors are closely scrutinized and frequently
challenged in bankruptcy proceedings and may be invalidated for a variety of
reasons. For example, security interests may be set aside because, as a
technical matter, they have not been perfected properly under the Uniform
Commercial Code or other applicable law. If a security interest is
invalidated, the secured creditor loses the value of the collateral and
because loss of the secured status causes the claim to be treated as an
unsecured claim, the holder of such claim will almost certainly experience a
significant loss of its investment. While the Fund intends to scrutinize any
security interests that secure the debt it purchases, there can be no
assurance that the security interests will not be challenged vigorously and
found defective in some respect, or that the Fund will be able to prevail
against the challenge.
Moreover, debt may be disallowed or subordinated to the claims of other
creditors if the creditor is found guilty of certain inequitable conduct
resulting in harm to other parties with respect to the affairs of a company
filing for protection from creditors under the Federal Bankruptcy Code.
Creditors' claims may be treated as equity if they are deemed to be
contributions to capital, or if a creditor attempts to control the outcome of
the business affairs of a company prior to its filing under the Bankruptcy
Code. If a creditor is found to have interfered with the company's affairs to
the detriment of other creditors or shareholders, the creditor may be held
liable for damages to injured parties. While the Fund will attempt to avoid
taking the types of action that would lead to equitable subordination or
creditor liability, there can be no assurance that such claims will not be
asserted or that the Fund will be able successfully to defend against them.
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While the challenges to liens and debt described above normally occur in a
bankruptcy proceeding, the conditions or conduct that would lead to an attack
in a bankruptcy proceeding could in certain circumstances result in actions
brought by other creditors of the debtor, shareholders of the debtor or even
the debtor itself in other state or federal proceedings. As is the case in a
bankruptcy proceeding, there can be no assurance that such claims will not be
asserted or that the Fund will be able successfully to defend against them. To
the extent that the Fund assumes an active role in any legal proceeding
involving the debtor, the Fund may be prevented from disposing of securities
issued by the debtor due to the Fund's possession of material, non-public
information concerning the debtor.
CORPORATE AND OTHER DEBT OBLIGATIONS
The Fund may invest in corporate and other debt obligations including
convertible securities of domestic and foreign issuers. Issuers are not
limited to the corporate form of organization. Bonds and other debt securities
are used by issuers to borrow money from investors. The issuer pays the
investor a fixed or variable rate of interest and must repay the amount
borrowed at maturity. Some debt securities, such as zero coupon bonds, do not
pay current interest but are purchased at a discount from their face values.
The discount approximates the total amount of interest the security will
accrue and compound over the period until maturity of the particular interest
payment date at a rate of interest reflecting the market rate of the security
at the time of issuance. Zero coupon securities do not require the periodic
payment of interest. These investments benefit the issuer by mitigating its
need for cash to meet debt service but also require a higher rate of return to
attract investors who are willing to defer receipt of cash.
Pay-in-kind securities have their interest payable upon maturity by delivery
of additional securities. Deferred payment securities are securities that
remain a zero coupon security until a predetermined date, at which time the
stated coupon rate becomes effective and interest becomes payable at regular
intervals. Certain debt securities are subject to call provisions. Zero
coupon, pay-in-kind and deferred payment securities may be subject to greater
fluctuation in value and lesser liquidity in the event of adverse market
conditions than comparably rated securities paying cash interest at regular
payment periods. See "Zero Coupon, Pay-in-Kind or Deferred Payment Securities"
below.
The Fund is permitted to invest in defaulted securities and in low quality
debt securities or in unrated securities which, in the opinion of the
investment adviser, are of equivalent quality. See "Securities of Financially
and Operationally Troubled Issuers" above, "Risk Factors Relating to Investing
in Debt Securities Rated Below Investment Grade (Junk Bonds)" below and the
"Description of Security Ratings" in the Appendix. Lower rated securities are
subject to a greater risk of loss of principal and interest than are higher
rated securities.
ZERO COUPON, PAY-IN-KIND OR DEFERRED PAYMENT SECURITIES
The Fund may invest in zero coupon, pay-in-kind or deferred payment
securities. Zero coupon securities are securities that are sold at a discount
to par value and on which interest payments are not made during the life of
the security. Upon maturity, the holder is entitled to receive the par value
of the security. While interest payments are not made on such securities,
holders of such securities are deemed to have received annually "phantom
income." The Fund accrues income with respect to these securities prior to the
receipt of cash payments. Pay-in-kind securities are securities that have
interest payable by delivery of additional securities. Upon maturity, the
holder is entitled to receive the aggregate par value of the securities.
Deferred payment securities are securities that remain a zero coupon security
until a predetermined date, at which time the stated coupon rate becomes
effective and interest becomes payable at regular intervals. Zero coupon, pay-
in-kind and deferred payment securities may be subject to greater fluctuation
in value and lesser liquidity in the event of adverse market conditions than
comparable rated securities paying cash interest at regular intervals.
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CONVERTIBLE SECURITIES, WARRANTS AND RIGHTS
A convertible security is typically a bond, debenture, corporate note or
preferred stock or other similar security that may be converted at a stated
price within a specified period of time into a specified number of shares of
common stock or other equity securities of the same or a different issuer. A
warrant or right entitles the holder to purchase equity securities at a
specific price for a specific period of time. Convertible securities are
generally senior to common stocks in a corporation's capital structure, but
are usually subordinated to similar nonconvertible securities. While providing
a fixed income stream (generally higher in yield than the income derivable
from a common stock but lower than that afforded by a similar nonconvertible
security), a convertible security also affords an investor the opportunity,
through its conversion feature, to participate in the capital appreciation
attendant upon a market price advance in the convertible security's underlying
common stock. Convertible securities also include preferred stocks which
technically are equity securities.
In general, the market value of a convertible security is at least the
higher of its "investment value" (i.e., its value as a fixed-income security)
or its "conversion value" (i.e., its value upon conversion into its underlying
common stock). As a fixed-income security, a convertible security tends to
increase in market value when interest rates decline and tends to decrease in
value when interest rates rise. However, the price of a convertible security
is also influenced by the market value of the security's underlying common
stock. The price of a convertible security tends to increase as the market
value of the underlying stock rises, whereas it tends to decrease as the
market value of the underlying stock declines. While no securities investment
is without some risk, investments in convertible securities generally entail
less risk than investments in the common stock of the same issuer.
TRADE CLAIMS
The Fund may invest in trade claims, which are non-securitized rights of
payment arising from obligations other than borrowed funds. Trade claims
typically arise when, in the ordinary course of business, vendors and
suppliers extend credit to a company by offering payment terms. Generally,
when a company files for bankruptcy protection, payments on trade claims cease
and the claims are subject to compromise along with the other debts of the
company. Trade claims typically are bought and sold at a discount reflecting
the degree of uncertainty with respect to the timing and extent of recovery.
In addition to the risks otherwise associated with low-quality obligations,
trade claims have other risks, including (1) the possibility that the amount
of the claim may be disputed by the obligor, (2) the debtor may have a variety
of defenses to assert against the claim under the bankruptcy code, and (3)
volatile pricing due to a less liquid market, including a small number of
brokers for trade claims and a small universe of potential buyers. It is not
unusual for trade claims to be priced at a discount to publicly traded
securities that have an equal or lower priority claim. Additionally, trade
claims may be treated as non-securities investments. As a result, any gains
may be considered "non-qualifying" under the Internal Revenue Code. See
"Taxes, Dividends and Distributions".
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities are securities that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage
loans secured by real property. There are currently three basic types of
mortgage-backed securities: (1) those issued or guaranteed by the U.S.
Government or one of its agencies or instrumentalities, such as the Government
National Mortgage Association (GNMA), Federal National Mortgage Association
(FNMA) and Federal Home Loan Mortgage Corporation (FHLMC); (2) those issued by
private issuers that represent an interest in or are collateralized by
mortgage-backed securities issued or guaranteed by the U.S. Government or one
of its agencies or instrumentalities; and (3) those issued by private issuers
that represent an interest in or are collateralized by whole mortgage loans or
mortgage-backed securities without a Government guarantee but usually having
some form of private credit enhancement.
Mortgage-backed securities are subject to the risk that the principal on the
underlying mortgage loans may be prepaid at any time. Although the extent of
prepayments on a pool of mortgage loans depends on various economic and other
factors,
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as a general rule prepayments on fixed rate mortgage loans will increase
during a period of falling interest rates and decrease during a period of
rising interest rates. Accordingly, amounts available for reinvestment by the
Fund are likely to be greater during a period of declining interest rates and,
as a result, likely to be reinvested at lower interest rates than during a
period of rising interest rates. Mortgage-backed securities may decrease in
value as a result of increases in interest rates and may benefit less than
other fixed-income securities from declining interest rates because of the
risk of prepayment.
MULTI-CLASS PASS-THROUGH SECURITIES AND COLLATERALIZED MORTGAGE OBLIGATIONS.
A collateralized mortgage obligation (CMO) is a security issued by a
corporation or U.S. Government agency or instrumentality which is backed by a
portfolio of mortgages or mortgage-backed securities. The issuer's obligation
to make interest and principal payments is secured by the underlying portfolio
of mortgages or mortgage-backed securities. Multi-class pass-through
securities are equity interests in a trust composed of mortgages or mortgage-
backed securities. Payments of principal and interest on the underlying
mortgage assets, and any reinvestment income thereon, provide the funds to pay
debt service on the CMOs or make scheduled distributions on the multi-class
pass-through securities. CMOs may be issued by agencies or instrumentalities
of the U.S. Government, or by private originators of, or investors in,
mortgage loans, including depository institutions, mortgage banks, investment
banks and special purpose subsidiaries of the foregoing. The issuer of a
series of CMOs may elect to be treated as a Real Estate Mortgage Investment
Conduit (REMIC). All future references to CMOs include REMICs.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the underlying mortgage assets may cause the
CMOs to be retired substantially earlier than their stated maturities or final
distribution dates. Interest is paid or accrues on all classes of the CMOs on
a monthly, quarterly or semi-annual basis. The principal of and interest on
the underlying mortgage assets may be allocated among the several classes of a
CMO series in a number of different ways. Generally, the purpose of the
allocation of the cash flow of a CMO to the various classes is to obtain a
more predictable cash flow to the individual tranches than exists with the
underlying collateral of the CMO. As a general rule, the more predictable the
cash flow is on a CMO tranche, the lower the anticipated yield will be on that
tranche at the time of issuance relative to prevailing market yields on
mortgage-backed securities.
ASSET-BACKED SECURITIES
The Fund may invest in asset-backed securities. Through the use of trusts
and special purpose corporations, various types of assets, primarily
automobile and credit card receivables and home equity loans, have been
securitized in pass-through structures similar to the mortgage pass-through
structures or in a pay-through structure similar to the CMO structure. The
Fund may invest in these and other types of asset-backed securities that may
be developed in the future. Unlike mortgage-backed securities, asset-backed
securities do not have the benefit of a security interest in the related
collateral. Credit card receivables, for example, are generally unsecured and
the debtors are entitled to the protection of a number of state and federal
consumer credit laws, some of which may reduce the ability to obtain full
payment. In the case of automobile receivables, the security interests in the
underlying automobiles are often not transferred when the pool is created,
with the resulting possibility that the collateral could be resold. In
general, these types of loans are of shorter average life than mortgage loans
and are less likely to have substantial prepayments. In many instances, asset-
backed securities are over-collateralized to ensure the relative stability of
their credit quality.
LOAN PARTICIPATIONS AND ASSIGNMENTS
The Fund may invest in fixed and floating rate loans (Loans) arranged
through private negotiations between a corporate borrower and one or more
financial institutions (Lenders). The Fund may invest in such Loans generally
in the form of participations in Loans (Participations) and assignments of all
or a portion of Loans from third parties (Assignments). The Fund may acquire
Participations and Assignments which are high yield, non-convertible corporate
debt securities of varying maturities. Participations typically will result in
the Fund having a contractual relationship only with the Lender, not with the
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borrower. The Fund will have the right to receive payments of principal,
interest and any fees to which it is entitled only from the Lender selling the
Participation and only upon receipt by the Lender of the payments from the
borrower. In connection with purchasing Participations, the Fund generally
will have no right to enforce compliance by the borrower with the terms of the
loan agreement relating to the Loan, nor any rights of set-off against the
borrower, and the Fund may not benefit directly from any collateral supporting
the Loan in which it has purchased the Participation. As a result, the Fund
will assume the credit risk of both the borrower and the Lender that is
selling the Participation. In the event of the insolvency of the Lender
selling a Participation, the Fund may be treated as a general creditor of the
Lender and may not benefit from any set-off between the Lender and the
borrower. When the Fund purchases Assignments from Lenders, the Fund will
acquire direct rights against the borrower on the Loan, except that under
certain circumstances such rights may be more limited than those held by the
assigning Lender.
The Fund may have difficulty disposing of Assignments and Participations.
Because the market for such instruments is not highly liquid, the Fund
anticipates that such instruments could be sold only to a limited number of
institutional investors. The lack of a highly liquid secondary market may have
an adverse impact on the value of such instruments and will have an adverse
impact on the Fund's ability to dispose of particular Assignments or
Participations in response to a specific economic event, such as deterioration
in the creditworthiness of the borrower.
MUNICIPAL SECURITIES
The Fund may invest in municipal securities, which include notes and bonds
issued by or on behalf of states, territories and possessions of the United
States and their political subdivisions, agencies and instrumentalities and
the District of Columbia, the interest on which is generally eligible for
exclusion from federal income tax and, in certain instances, applicable state
or local income and personal property taxes. Such securities are traded
primarily in the over-the-counter market.
MUNICIPAL BONDS. Municipal bonds are issued to obtain funds for various
public purposes, including the construction of a wide range of public
facilities such as airports, bridges, highways, housing, hospitals, mass
transportation, schools, streets, water and sewer works and gas and electric
utilities. Municipal bonds also may be issued in connection with the refunding
of outstanding obligations and obtaining funds to lend to other public
institutions or for general operating expenses.
The two principal classifications of municipal bonds are "general
obligation" and "revenue." General obligation bonds are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue bonds are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise tax or other specific revenue source.
Industrial development bonds (IDBs) are issued by or on behalf of public
authorities to obtain funds to provide various privately-operated facilities
for business and manufacturing, housing, sports, pollution control, and for
airport, mass transit, port and parking facilities. Although IDBs are issued
by municipal authorities, they are generally secured by the revenues derived
from payments of the industrial user. The payment of the principal and
interest on IDBs is dependent solely on the ability of the user of the
facilities financed by the bonds to meet its financial obligations and the
pledge, if any, of real and personal property so financed as security for the
payment.
MUNICIPAL NOTES. Municipal notes generally are used to provide for short-
term capital needs and generally have maturities of one year or less.
Municipal notes include:
1. Tax Anticipation Notes. Tax Anticipation Notes are issued to finance
working capital needs of municipalities. Generally, they are issued in
anticipation of various seasonal tax revenues, such as income, sales, use
and business taxes, and are payable from these specific future taxes.
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2. Revenue Anticipation Notes. Revenue Anticipation Notes are issued in the
expectation of reception of other kinds of revenue, such as federal revenues
available under the Federal Revenue Sharing Programs.
3. Bond Anticipation Notes. Bond Anticipation Notes are issued to provide
interim financing until long-term financing can be arranged. In most cases,
the long-term bonds then provide the money for the repayment of the Notes.
4. Construction Loan Notes. Construction Loan Notes are sold to provide
construction financing. Permanent financing, the proceeds of which are
applied to the payment of Construction Loan Notes, is sometimes provided by
a commitment by the Government National Mortgage Association (GNMA) to
purchase the loan, accompanied by a commitment by the Federal Housing
Administration to insure mortgage advances thereunder. In other instances,
permanent financing is provided by commitments of banks to purchase the
loan.
TAX-EXEMPT COMMERCIAL PAPER. Issues of tax-exempt commercial paper, the
interest on which is generally exempt from federal income taxes, typically are
represented by short-term, unsecured, negotiable promissory notes. These
obligations are issued by agencies of state and local governments to finance
seasonal working capital needs of municipalities or to provide interim
construction financing and are paid from general revenues of municipalities or
are refinanced with long-term debt. In most cases, tax-exempt commercial paper
is backed by letters of credit, lending agreements, note repurchase agreements
or other credit facility agreements offered by banks or other institutions and
is actively traded.
FLOATING RATE AND VARIABLE RATE SECURITIES. The Fund is permitted to invest
in floating rate and variable rate municipal securities, including
participation interests therein and inverse floaters. Floating or variable
rate securities often have a rate of interest that is set as a specific
percentage of a designated base rate, such as the rate on Treasury Bonds or
Bills or the prime rate at a major commercial bank. These securities also
allow the holder to demand payment of the obligation on short notice at par
plus accrued interest, which amount may be more or less than the amount the
holder paid for them. Variable rate securities provide for a specified
periodic adjustment in the interest rate. The interest rate on floating rate
securities changes whenever there is a change in the designated base interest
rate. Floating rate and variable rate securities typically have long
maturities but afford the holder the right to demand payment at earlier dates.
Such floating rate and variable rate securities will be treated as having
maturities equal to the period of adjustment of the interest rate.
An inverse floater is a debt instrument with a floating or variable interest
rate that moves in the opposite direction of the interest rate on another
security or the value of an index. Changes in the interest rate on the other
security or index inversely affect the residual interest rate paid on the
inverse floater, with the result that the inverse floater's price will be
considerably more volatile than that of a fixed rate bond. The market for
inverse floaters is relatively new.
MUNICIPAL LEASE OBLIGATIONS. The Fund may also invest in municipal lease
obligations. A municipal lease obligation is a municipal security the interest
on and principal of which is payable out of lease payments made by the party
leasing the facilities financed by the issue. Typically, municipal lease
obligations are issued by a state or municipal financing authority to provide
funds for the construction of facilities (for example, schools, dormitories,
office buildings or prisons) or the acquisition of equipment. The facilities
are typically used by the state or municipality pursuant to a lease with a
financing authority. Certain municipal lease obligations may trade
infrequently. Accordingly, the investment adviser will monitor the liquidity
of municipal lease obligations under the supervision of the Board of
Directors. Municipal lease obligations will not be considered illiquid for
purposes of the Fund's 15% limitation on illiquid securities provided the
investment adviser determines that there is a readily available market for
such securities. See "Illiquid Securities" below.
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RISK FACTORS RELATING TO INVESTING IN DEBT SECURITIES RATED BELOW INVESTMENT
GRADE (JUNK BONDS)
Fixed-income securities are subject to the risk of an issuer's inability to
meet principal and interest payments on the obligations (credit risk) and may
also be subject to price volatility due to such factors as interest rate
sensitivity, market perception of the creditworthiness of the issuer and
general market liquidity (market risk). Lower rated or unrated (i.e., high
yield or high risk) securities (commonly referred to as junk bonds) are more
likely to react to developments affecting market and credit risk than are more
highly rated securities, which react primarily to movements in the general
level of interest rates. The investment adviser considers both credit risk and
market risk in making investment decisions for the Fund.
Under adverse economic conditions, there is a risk that highly leveraged
issuers may be unable to service their debt obligations or to repay their
obligations upon maturity. During an economic downturn or recession,
securities of highly leveraged issuers are more likely to default than
securities of higher rated issuers. In addition, the secondary market for high
yield securities, which is concentrated in relatively few market makers, may
not be as liquid as the secondary market for more highly rated securities.
Under adverse market or economic conditions, the secondary market for high
yield securities could contract further, independent of any specific adverse
changes in the condition of a particular issuer. As a result, the investment
adviser could find it more difficult to sell these securities or may be able
to sell the securities only at prices lower than if such securities were
widely traded. Prices realized upon the sale of such lower rated or unrated
securities, under these circumstances, may be less than the prices in
calculating the Fund's net asset value. Lower rated or unrated debt
obligations also present risks based on payment expectations. The Fund may
invest more than 35% of its assets in lower rated fixed-income securities,
including securities having the lowest ratings assigned by nationally
recognized statistical ratings organizations or no rating but judged by the
Subadviser to be of comparable quality. Such investments involve a high degree
of risk and are predominantly speculative.
Debt rated BB, B, CCC, CC and C by S&P, and debt rated Ba, B, Caa, Ca and C
by Moody's is regarded by the rating agency, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB/Ba indicates the
lowest degree of speculation and D/C the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions. Similarly, debt rated Ba or BB and below is regarded by the
relevant rating agency as speculative. Debt rated C by S&P is the lowest rated
debt that is not in default as to principal or interest and such issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing. Such securities are also generally considered to be
subject to greater risk than securities with higher ratings with regard to a
deterioration of general economic conditions. Debt rated D by S&P is in
payment default. Moody's does not have a D rating. See the "Description of
Security Ratings" in the Appendix.
Ratings of fixed-income securities represent the rating agency's opinion
regarding their credit quality and are not a guarantee of quality. Rating
agencies attempt to evaluate the safety of principal and interest payments and
do not evaluate the risks of fluctuations in market value. Also, rating
agencies may fail to make timely changes in credit ratings in response to
subsequent events, so that an issuer's current financial condition may be
better or worse than a rating indicates.
FOREIGN SECURITIES
The Fund may invest up to 30% of its total assets in equity and fixed-income
securities of foreign issuers denominated in U.S. dollars or foreign
currencies. ADRs and GDRs are not included in this 30% limitation. ADRs,
European Depositary Receipts (EDRs), GDRs and other types of depositary
receipts evidence ownership of underlying securities issued by a foreign
corporation that have been deposited with a depositary or custodian bank,
typically a U.S. bank or trust company. Depositary receipts may be issued in
connection with an offering of securities by the issuer of the underlying
securities or issued by a depositary bank as a vehicle to promote investment
and trading in the underlying securities. While depositary
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receipts may not necessarily be denominated in the same currency as the
underlying securities, the risks associated with foreign securities also
generally apply to depositary receipts. See "Risk Factors Relating to
Investing in Foreign Securities" below.
FOREIGN GOVERNMENT SECURITIES
Foreign government securities include debt securities issued or guaranteed,
as to payment of principal and interest, by governments, quasi-governmental
entities, governmental agencies, supranational entities and other governmental
entities (collectively, Government Entities) denominated in U.S. dollars or
foreign currencies. A "supranational entity" is an entity constituted by the
national governments of several countries to promote economic development.
Examples of such supranational entities include, among others, the World Bank
(International Bank for Reconstruction and Development), the European
Investment Bank and the Asian Development Bank. Debt securities of "quasi-
governmental entities" are issued by entities owned by a national, state, or
equivalent government or are obligations of a political unit that are not
backed by the national government's "full faith and credit" and general taxing
powers. Examples of quasi-governmental entities include, among others, the
Province of Ontario and the City of Stockholm. Foreign government securities
also include mortgage-backed securities issued by Government Entities.
BRADY BONDS. The Fund is permitted to invest in debt obligations commonly
known as "Brady Bonds" which are created through the exchange of existing
commercial bank loans to foreign entities for new obligations in connection
with debt restructurings under a plan introduced by former U.S. Secretary of
the Treasury, Nicholas F. Brady (the Brady Plan). Brady Bonds have been issued
in connection with the restructuring of the bank loans, for example, of the
governments of Mexico, Venezuela and Argentina.
Brady Bonds have been issued only recently, and, accordingly, do not have a
long payment history. They may be collateralized or uncollateralized and
issued in various currencies (although most are dollar-denominated) and they
are actively traded in the over-the-counter secondary market.
Dollar-denominated, collateralized Brady Bonds, which may be fixed rate par
bonds or floating rate discount bonds, are generally collateralized in full as
to principal due at maturity by U.S. Treasury zero coupon obligations which
have the same maturity as the Brady Bonds. Interest payments on these Brady
Bonds generally are collateralized by cash or securities in an amount that, in
the case of fixed rate bonds, is equal to at least one year of rolling
interest payments based on the applicable interest rate at that time and is
adjusted at regular intervals thereafter. Certain Brady Bonds are entitled to
"value recovery payments" in certain circumstances, which in effect constitute
supplemental interest payments but generally are not collateralized. Brady
Bonds are often viewed as having three or four valuation components: (1) the
collateralized repayment of principal at final maturity; (2) the
collateralized interest payments; (3) the uncollateralized interest payments;
and (4) any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constitute the "residual risk"). In the event of a
default with respect to collateralized Brady Bonds as a result of which the
payment obligations of the issuer are accelerated, the U.S. Treasury zero
coupon obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will equal the
principal payments which would have then been due on the Brady Bonds in the
normal course. In addition, in light of the residual risk of Brady Bonds and,
among other factors, the history of defaults with respect to commercial bank
loans by public and private entities of countries issuing Brady Bonds,
investments in Brady Bonds are to be viewed as speculative.
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<PAGE>
RISK FACTORS RELATING TO INVESTING IN FOREIGN SECURITIES
Foreign securities involve certain risks, which should be considered
carefully by an investor in the Fund. These risks include political or
economic instability in the country of the issuer, the difficulty of
predicting international trade patterns, the possibility of imposition of
exchange controls and the risk of currency fluctuations. Such securities may
be subject to greater fluctuations in price than securities issued by U.S.
corporations or issued or guaranteed by the U.S. Government, its
instrumentalities or agencies. In addition, there may be less publicly
available information about a foreign company or government than about a
domestic company or the U.S. Government. Foreign companies generally are not
subject to uniform accounting, auditing and financial reporting standards
comparable to those applicable to domestic companies. There is generally less
government regulation of securities exchanges, brokers and listed companies
abroad than in the United States and there is a possibility of expropriation,
confiscatory taxation or diplomatic developments which could affect
investment. In many instances, foreign debt securities may provide higher
yields than securities of domestic issuers which have similar maturities and
quality. These investments, however, may be less liquid than the securities of
U.S. corporations. In the event of default of any such foreign debt
obligations, it may be more difficult for the Fund to obtain or enforce a
judgment against the issuers of such securities.
Investing in the equity and fixed-income markets of developing countries
involves exposure to economies that are generally less diverse and mature and
to political systems which can be expected to have less stability than those
of developed countries. Historical experience indicates that the markets of
developing countries have been more volatile than the markets of developed
countries. The risks associated with investments in foreign securities may be
greater with respect to investments in developing countries and are certainly
greater with respect to investments in the securities of financially and
operationally troubled issuers.
Additional costs could be incurred in connection with the Fund's
international investment activities. Foreign brokerage commissions are
generally higher than United States brokerage commissions. Increased custodian
costs as well as administrative difficulties (such as the applicability of
foreign laws to foreign custodians in various circumstances) may be associated
with the maintenance of assets in foreign jurisdictions.
If the security is denominated in a foreign currency, it will be affected by
changes in currency exchange rates and in exchange control regulations, and
costs will be incurred in connection with conversions between currencies. A
change in the value of any such currency against the U.S. dollar will result
in a corresponding change in the U.S. dollar value of the Fund's securities
denominated in that currency. Such changes also will affect the Fund's income
and distributions to shareholders. In addition, although the Fund will receive
income in such currencies, the Fund will be required to compute and distribute
its income in U.S. dollars. Therefore, if the exchange rate for any such
currency declines after the Fund's income has been accrued and translated into
U.S. dollars, the Fund could be required to liquidate portfolio securities to
make such distributions, particularly in instances in which the amount of
income the Fund is required to distribute is not immediately reduced by the
decline in such currency. Similarly, if an exchange rate declines between the
time the Fund incurs expenses in U.S. dollars and the time such expenses are
paid, the amount of such currency required to be converted into U.S. dollars
in order to pay such expenses in U.S. dollars will be greater than the
equivalent amount in any such currency of such expenses at the time they were
incurred.
The Fund may, but need not, enter into foreign currency forward contracts,
options on foreign currencies and futures contracts on foreign currencies and
related options, for hedging purposes, including: locking-in the U.S. dollar
price of the purchase or sale of securities denominated in a foreign currency:
locking-in the U.S. dollar equivalent of dividends to be paid on such
securities which are held by the Fund; and protecting the U.S. dollar value of
such securities which are held by the Fund.
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MONEY MARKET INSTRUMENTS
The Fund may invest in high quality money market instruments, including
commercial paper of a U.S. or non-U.S. company, foreign government securities,
certificates of deposit, bankers' acceptances and time deposits of domestic
and foreign banks, and obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities. These obligations will be U.S.
dollar-denominated or denominated in a foreign currency. Consistent with its
investment objective and policies, the Fund will also invest in lower quality
money market instruments of financially or operationally troubled issuers,
such as commercial paper. Money market instruments typically have a maturity
of thirteen months or less as measured from the date of purchase.
HEDGING AND RETURN ENHANCEMENT STRATEGIES
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. The Fund, and thus its investors, may lose money through any
unsuccessful use of these strategies. These strategies currently include the
use of options, forward currency exchange contracts and futures contracts and
options thereon. The Fund's ability to use these strategies may be limited by
market conditions, regulatory limits and tax considerations and there can be
no assurance that any of these strategies will succeed. See "Taxes, Dividends
and Distributions." New financial products and risk management techniques
continue to be developed and the Fund may use these new investments and
techniques to the extent consistent with its investment objective and
policies.
OPTIONS TRANSACTIONS
The Fund may purchase and write (that is, sell) put and call options on
securities, financial indices and currencies that are traded on U.S. or
foreign securities exchanges or in the over-the-counter (OTC) market to hedge
the Fund's portfolio or to attempt to enhance return. These options will be on
equity and debt securities, including U.S. Government securities, financial
indices, including stock indices (for example, S&P 500), and foreign
currencies. The Fund may write covered put and call options to attempt to
generate additional income through the receipt of premiums, purchase put
options in an effort to protect the value of securities (or currencies) that
it owns against a decline in market value and purchase call options in an
effort to protect against an increase in the price of securities (or
currencies) it intends to purchase. The Fund may also purchase put and call
options to offset previously written put and call options of the same series.
A call option gives the purchaser, in exchange for a premium paid, the right
for a specified period of time to purchase the securities or currency subject
to the option at a specified price (the exercise price or strike price). The
writer of a call option, in return for the premium, has the obligation, upon
exercise of the option, to deliver, depending upon the terms of the option
contract, the underlying securities or a specified amount of cash to the
purchaser upon receipt of the exercise price. When the Fund writes a call
option, the Fund gives up the potential for gain on the underlying securities
or currency in excess of the exercise price of the option during the period
that the option is open. 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 or currency subject to the
option to the writer of the put at the specified exercise price. The writer of
the put option, in return for the premium, has the obligation, upon exercise
of the option, to acquire the securities or currency underlying the option at
the exercise price. The Fund might, therefore, be obligated to purchase the
underlying securities or currency for more than their current market price.
The Fund will write only "covered" options. A written option is covered if,
as long as the Fund is obligated under the option, it (i) owns an offsetting
position in the underlying security or currency or (ii) maintains, in a
segregated account, cash or other liquid assets in an amount equal to or
greater than its obligation under the option. Under the first circumstance,
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the Fund's losses are limited because it owns the underlying security; under
the second circumstance, in the case of a written call option, the Fund's
losses are potentially unlimited.
OPTIONS ON SECURITIES. The Fund may wish to protect certain portfolio
securities against a decline in market value at a time when put options on
those particular securities are not available for purchase. The Fund may
therefore purchase a put option on other carefully selected securities, the
values of which the investment adviser expects will have a high degree of
positive correlation to the values of such portfolio securities. If the
investment adviser's judgment is correct, changes in the value of the put
options should generally offset changes in the value of the portfolio
securities being hedged. If the investment adviser's judgment is not correct,
the value of the securities underlying the put option may decrease less than
the value of the Fund's investments and therefore the put option may not
provide complete protection against a decline in the value of the Fund's
investments below the level sought to be protected by the put option.
The Fund may similarly wish to hedge against appreciation in the value of
securities that it intends to acquire at a time when call options on such
securities are not available. The Fund may, therefore, purchase call options
on other carefully selected securities the values of which the investment
adviser expects will have a high degree of positive correlation to the values
of the securities that the Fund intends to acquire. In such circumstances the
Fund will be subject to risks analogous to those summarized above in the event
that the correlation between the value of call options so purchased and the
value of the securities intended to be acquired by the Fund is not as close as
anticipated and the value of the securities underlying the call options
increases less than the value of the securities to be acquired by the Fund.
The Fund may write options on securities in connection with buy-and-write
transactions; that is, the Fund may purchase a security and concurrently write
a call option against that security. If the call option is exercised, the
Fund's maximum gain will be the premium it received for writing the option,
adjusted upwards or downwards by the difference between the Fund's purchase
price of the security and the exercise price of the option. If the option is
not exercised and the price of the underlying security declines, the amount of
the decline will be offset in part, or entirely, by the premium received.
The exercise price of a call option may be below ("in-the-money"), equal to
("at-the-money") or above ("out-of-the-money") the current value of the
underlying security at the time the option is written. Buy-and-write
transactions using in-the-money call options may be used when it is expected
that the price of the underlying security will remain flat or decline
moderately during the option period. Buy-and-write transactions using at-the-
money call options may be used when it is expected that the price of the
underlying security will remain fixed or advance moderately during the option
period. A buy-and-write transaction using an out-of-the-money call option may
be used when it is expected that the premium received from writing the call
option plus the appreciation in the market price of the underlying security up
to the exercise price will be greater than the appreciation in the price of
the underlying security alone. If the call option is exercised in such a
transaction, the Fund's maximum gain will be the premium received by it for
writing the option, adjusted upwards or downwards by the difference between
the Fund's purchase price of the security and the exercise price of the
option. If the option is not exercised and the price of the underlying
security declines, the amount of the decline will be offset in part, or
entirely, by the premium received.
Prior to being notified of exercise of the option, the writer of an
exchange-traded option that wishes to terminate its obligation may effect a
"closing purchase transaction" by buying an option of the same series as the
option previously written. (Options of the same series are options with
respect to the same underlying security, having the same expiration date and
the same strike price.) The effect of the purchase is that the writer's
position will be cancelled by the exchange's affiliated clearing organization.
Likewise, an investor who is the holder of an exchange-traded option may
liquidate a position by effecting a "closing sale transaction" by selling an
option of the same series as the option previously purchased. There is no
guarantee that either a closing purchase or a closing sale transaction can be
effected.
B-14
<PAGE>
Exchange-traded options are issued by a clearing organization affiliated
with the exchange on which the option is listed which, in effect, gives its
guarantee to every exchange-traded option transaction. In contrast, OTC
options are contracts between the Fund and its contra-party with no clearing
organization guarantee. Thus, when the Fund purchases an OTC option, it relies
on the dealer from which it has purchased the OTC option to make or take
delivery of the securities underlying the option. Failure by the dealer to do
so would result in the loss of the premium paid by the Fund as well as the
loss of the expected benefit of the transaction.
When the Fund writes an OTC option, it generally will be able to close out
the OTC option prior to its expiration only by entering into a closing
purchase transaction with the dealer to which the Fund originally wrote the
OTC option. While the Fund will enter into OTC options only with dealers which
agree to, and which are expected to be capable of, entering into closing
transactions with the Fund, there can be no assurance that the Fund will be
able to liquidate an OTC option at a favorable price at any time prior to
expiration. Until the Fund is able to effect a closing purchase transaction in
a covered OTC call option the Fund has written, it will not be able to
liquidate securities used as cover until the option expires or is exercised or
different cover is substituted. In the event of insolvency of the contra-
party, the Fund may be unable to liquidate an OTC option. See "Illiquid
Securities" below.
OTC options purchased by the Fund will be treated as illiquid securities
subject to any applicable limitation on such securities. Similarly, the assets
used to "cover" OTC options written by the Fund will be treated as illiquid
unless the OTC options are sold to qualified dealers who agree that the Fund
may repurchase any OTC options it writes for a maximum price to be calculated
by a formula set forth in the option agreement. The "cover" for an OTC option
written subject to this procedure would be considered illiquid only to the
extent that the maximum repurchase price under the formula exceeds the
intrinsic value of the option. See "Illiquid Securities" below.
The Fund may write only "covered" options. This means that so long as the
Fund is obligated as the writer of a call option, it will own the underlying
securities subject to the option or an option to purchase the same underlying
securities, having an exercise price equal to or less than the exercise price
of the "covered" option, or will establish and maintain with its Custodian for
the term of the option a segregated account consisting of cash or other liquid
assets having a value equal to or greater than the exercise price of the
option. In the case of a straddle written by the Fund, the amount maintained
in the segregated account will equal the amount, if any, by which the put is
"in-the-money."
OPTIONS ON SECURITIES INDICES. The Fund also may purchase and write call and
put options on securities indices in an attempt to hedge against market
conditions affecting the value of securities that the Fund owns or intends to
purchase. Through the writing or purchase of index options, the Fund can
achieve many of the same objectives as through the use of options on
individual securities. Options on securities indices are similar to options on
a security except that, rather than the right to take or make delivery of a
security at a specified price, an option on a securities index gives the
holder the right to receive, upon exercise of the option, an amount of cash if
the closing level of the securities 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. This amount of cash is equal to such difference
between the closing price of the index and the exercise price of the option.
The writer of the option is obligated, in return for the premium received, to
make delivery of this amount. Unlike security options, all settlements are in
cash and gain or loss depends upon price movements in the market generally (or
in a particular industry or segment of the market), rather than upon price
movements in individual securities. Price movements in securities that the
Fund owns or intends to purchase will probably not correlate perfectly with
movements in the level of an index and, therefore, the Fund bears the risk
that a loss on an index option would not be completely offset by movements in
the price of such securities.
When the Fund writes an option on a securities index, it will be required to
deposit with its custodian, and mark-to-market, eligible securities equal in
value to 100% of the exercise price in the case of a put, or the contract
value in the case of a call.
B-15
<PAGE>
In addition, where the Fund writes a call option on a securities index at a
time when the contract value exceeds the exercise price, the Fund will
segregate and mark-to-market, until the option expires or is closed out, cash
or cash equivalents equal in value to such excess.
Options on a securities index involve risks similar to those risks relating
to transactions in financial futures contracts described below. Also, an
option purchased by the Fund may expire worthless, in which case the Fund
would lose the premium paid therefor.
RISKS OF OPTIONS TRANSACTIONS
An exchange-traded option position may be closed out only on an Exchange
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 at any
particular time, and for some exchange-traded options, no secondary market on
an Exchange 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 exchange-traded options in order to realize any
profit and may incur transaction costs in connection therewith. 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.
Reasons for the absence of a liquid secondary market on an Exchange include
the following: (a) insufficient trading interest in certain options; (b)
restrictions on transactions imposed by an Exchange; (c) trading halts,
suspensions or other restrictions imposed with respect to particular classes
or series of options or underlying securities; (d) interruption of the normal
operations on an Exchange; (e) inadequacy of the facilities of an Exchange or
clearinghouse, such as The Options Clearing Corporation (the OCC) to handle
current trading volume; or (f) a decision by one or more Exchanges 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 that
class or series of options) would cease to exist, although outstanding options
on that Exchange that had been issued by the OCC as a result of trades on that
Exchange would generally continue to be exercisable in accordance with their
terms.
In the event of the bankruptcy of a broker through which the Fund engages in
options transactions, the Fund could experience delays and/or losses in
liquidating open positions purchased or sold through the broker and/or incur a
loss of all or part of its margin deposits with the broker. Similarly, in the
event of the bankruptcy of the writer of an OTC option purchased by the Fund,
the Fund could experience a loss of all or part of the value of the option.
Transactions are entered into by the Fund only with brokers or financial
institutions deemed creditworthy by the investment adviser.
The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the option markets
close before the markets for the underlying securities, significant price and
rate movements can take place in the underlying markets that cannot be
reflected in the option markets.
RISKS OF OPTIONS ON FOREIGN CURRENCIES
Options on foreign currencies involve the currencies of two nations and
therefore, developments in either or both countries affect the values of
options on foreign currencies. Risks include government actions affecting
currency valuation and the movements of currencies from one country to
another. The quantity of currency underlying option contracts represent odd
lots in a market dominated by transactions between banks; this can mean extra
transaction costs upon exercise. Option markets may be closed while round-the-
clock interbank currency markets are open, and this can create price and rate
discrepancies.
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<PAGE>
FUTURES CONTRACTS AND RELATED OPTIONS
The Fund may purchase and sell financial futures contracts and options
thereon which are traded on a commodities exchange or board of trade to reduce
certain risks of its investments and to attempt to enhance return in
accordance with regulations of the Commodity Futures Trading Commission
(CFTC). These futures contracts and related options will be on debt
securities, including U.S. Government securities, financial indices and
foreign currencies. The Fund, and thus its investors, may lose money through
any unsuccessful use of these strategies.
A futures contract is an agreement to purchase or sell an agreed amount of
securities or currencies at a set price for delivery in the future. A stock
index futures contract is an agreement to deliver an amount of cash equal to a
specific dollar amount times the difference between the value of a specific
stock index on an agreed future date and the contract price. The Fund may
purchase and sell futures contracts as a hedge against changes resulting from
market conditions in the value of securities which are held in the Fund's
portfolio or which the Fund intends to acquire.
The Fund may not purchase or sell futures contracts and related options to
attempt to enhance return, if immediately thereafter the sum of the amount of
initial margin deposits on the Fund's existing futures and options on futures
and premiums paid for such related options would exceed 5% of the liquidation
value of the Fund's total assets. The Fund may purchase and sell futures
contracts and related options, without limitation, for bona fide hedging
purposes in accordance with regulations of the CFTC (i.e., to reduce certain
risks of its investments). The value of all futures contracts sold will not
exceed the total market value of the Fund's portfolio.
Futures contracts and related options are generally subject to segregation
requirements of the Securities and Exchange Commission (the Commission) and
the coverage requirements of the CFTC. If the Fund does not hold the security
underlying the futures contract, the Fund will be required to segregate on an
ongoing basis with its Custodian cash or other liquid assets in an amount at
least equal to the Fund's obligations with respect to such futures contracts.
The Fund's successful use of futures contracts and related options 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 movements in the index or price of
the currencies being hedged is imperfect and there is a risk that the value of
the indices or currencies being hedged may increase or decrease at a greater
rate than the related futures contracts, resulting in losses to the Fund.
Certain futures exchanges or boards of trade have established daily limits on
the amount that the price of futures contracts or related options may vary,
either up or down, from the previous day's settlement price. These daily
limits may restrict the Fund's ability to purchase or sell certain futures
contracts or related options on any particular day.
The Fund's ability to enter into or close out futures contracts and options
thereon is limited by the requirements of the Internal Revenue Code for
qualification as a regulated investment company.
As a purchaser of a futures contract, the Fund incurs an obligation to take
delivery of a specified amount of the obligation underlying the futures
contract at a specified time in the future for a specified price. As a seller
of a futures contract, the Fund incurs an obligation to deliver the specified
amount of the underlying obligation at a specified time in return for an
agreed upon price. The Fund may purchase and sell futures contracts on debt
and equity securities, financial indices (including stock indices) and foreign
currencies.
The Fund will purchase or sell futures contracts for the purpose of hedging
its portfolio (or anticipated portfolio) securities against changes in
prevailing interest rates or market conditions. The investment adviser may
purchase futures when the price of securities, indices or currencies is
expected to rise and sell futures when the price of securities, indices or
currencies is expected to decline. If the investment adviser anticipates that
interest rates may rise and, concomitantly, the price of the
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<PAGE>
Fund's portfolio securities may fall, the Fund may sell a futures contract. If
declining interest rates are anticipated, the Fund may purchase a futures
contract to protect against a potential increase in the price of securities
the Fund intends to purchase. Subsequently, appropriate securities may be
purchased by the Fund in an orderly fashion; as securities are purchased,
corresponding futures positions would be terminated by offsetting sales of
contracts. In addition, futures contracts will be bought or sold in order to
close out a short or long position in a corresponding futures contract.
Although most futures contracts call for actual delivery or acceptance of
securities or cash, the contracts usually are closed out before the settlement
date without the making or taking of delivery. A futures contract sale is
closed out by effecting a futures contract purchase for the same aggregate
amount of the specific type of security and the same delivery date. If the
sale price exceeds the offsetting purchase price, the seller would be paid the
difference and would realize a gain. If the offsetting purchase price exceeds
the sale price, the seller would pay the difference and would realize a loss.
Similarly, a futures contract purchase is closed out by effecting a futures
contract sale for the same aggregate amount of the specific type of security
(or currency) and the same delivery date. If the offsetting sale price exceeds
the purchase price, the purchaser would realize a gain, whereas if the
purchase price exceeds the offsetting sale price, the purchaser would realize
a loss. There is no assurance that the Fund will be able to enter into a
closing transaction.
When the Fund enters into a futures contract it is initially required to
deposit with its Custodian, in a segregated account in the name of the broker
performing the transaction, an "initial margin" of cash or other liquid assets
equal to approximately 2-3% of the contract amount. Initial margin
requirements are established by the Exchanges on which futures contracts trade
and may, from time to time, change. In addition, brokers may establish margin
deposit requirements in excess of those required by the Exchanges.
Initial margin in futures transactions is different from margin in
securities transactions in that initial margin does not involve the borrowing
of funds by a brokers' client but is, rather, a good faith deposit on a
futures contract which will be returned to the Fund upon the proper
termination of the futures contract. The margin deposits made are marked-to-
market daily and the Fund may be required to make subsequent deposits into the
segregated account, maintained at its Custodian for that purpose, of cash or
U.S. Government securities, called "variation margin", in the name of the
broker, which are reflective of price fluctuations in the futures contract.
OPTIONS ON FUTURES CONTRACTS
The Fund may purchase and sell call and put options on futures contracts
which are traded on an Exchange and enter into closing transactions with
respect to such options to terminate an existing position. An option on a
futures contract gives the purchaser the right (in return for the premium
paid), and the writer 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 term of
the option. Upon exercise of the option, the assumption of an offsetting
futures position by the writer and holder of the option will be accompanied by
delivery of the accumulated cash balance in the writer's futures margin
account which represents the amount by which the market price of the futures
contract at exercise exceeds, in the case of a call, or is less than, in the
case of a put, the exercise price of the option on the futures contract.
The Fund may only write "covered" put and call options on futures contracts.
The Fund will be considered "covered" with respect to a call option it writes
on a futures contract if the Fund owns the assets which are deliverable under
the futures contract or an option to purchase that futures contract having a
strike price equal to or less than the strike price of the "covered" option
and having an expiration date not earlier than the expiration date of the
"covered" option, or if it segregates and maintains with its Custodian for the
term of the option cash or other liquid assets equal to the fluctuating value
of the optioned future. The Fund will be considered "covered" with respect to
a put option it writes on a futures contract if it owns an option to sell that
futures contract having a strike price equal to or greater than the strike
price of the "covered" option,
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<PAGE>
or if it segregates and maintains with its Custodian for the term of the
option cash or other liquid assets at all times equal in value to the exercise
price of the put (less any initial margin deposited by the Fund with its
Custodian with respect to such option). There is no limitation on the amount
of the Fund's assets which can be placed in the segregated account.
The Fund will purchase options on futures contracts for identical purposes
to those set forth above for the purchase of a futures contract (purchase of a
call option or sale of a put option) and the sale of a futures contract
(purchase of a put option or sale of a call option), or to close out a long or
short position in futures contracts.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS
The Fund may sell a futures contract to protect against the decline in the
value of securities held by the Fund. However, it is possible that the futures
market may advance and the value of securities held in the Fund's portfolio
may decline. If this were to occur, the Fund would lose money on the futures
contracts and also experience a decline in value in its portfolio securities.
If the Fund purchases a futures contract to hedge against the increase in
value of securities it intends to buy, and the value of such securities
decreases, then the Fund may determine not to invest in the securities as
planned and will realize a loss on the futures contract that is not offset by
a reduction in the price of the securities.
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 a requirement that all of the Fund's futures or
options transactions constitute bona fide hedging transactions within the
meaning of the regulations of the CFTC. The Fund will use futures and options
on futures in a manner consistent with this requirement. The Fund may also
enter into futures or related options contracts to attempt to enhance return
if the aggregate initial margin and option premiums do not exceed 5% of the
liquidation value of the Fund's total assets, after taking into account
unrealized profits and unrealized losses on any such contracts, provided,
however, that in the case of an option that is in-the-money, the in-the-money
amount may be excluded in computing such 5%. The above restriction does not
apply to the purchase and sale of futures and related options contracts for
bona fide hedging purchases.
In order to assure that the Fund is entering into transactions in futures
contracts for hedging purposes as such term is defined by the CFTC, either:
(1) a substantial majority (i.e., approximately 75%) of all anticipatory hedge
transactions (transactions in which the Fund does not own at the time of the
transaction, but expects to acquire, the securities underlying the relevant
futures contract) involving the purchase of futures contracts will be
completed by the purchase of securities which are the subject of the hedge, or
(2) the underlying value of all long positions in futures contracts will not
exceed the total value of (a) all short-term debt obligations held by the
Fund; (b) cash held by the Fund; (c) cash proceeds due to the Fund on
investments within thirty days; (d) the margin deposited on the contracts; and
(e) any unrealized appreciation in the value of the contracts.
If the Fund maintains a short position in a futures contract, it will cover
this position by holding, in a segregated account maintained at its Custodian,
cash or other liquid assets equal in value (when added to any initial or
variation margin on deposit) to the market value of the securities underlying
the futures contract. Such a position may also be covered by owning the
securities underlying the futures contract, or by holding a call option
permitting the Fund to purchase the same contract at a price no higher than
the price at which the short position was established.
In addition, if the Fund holds a long position in a futures contract, it
will hold cash or other liquid assets equal to the purchase price of the
contract (less the amount of initial or variation margin on deposit) in a
segregated account maintained
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for the Fund by its Custodian. Alternatively, the Fund could cover its long
position by purchasing a put option on the same futures contract with an
exercise price as high or higher than the price of the contract held by the
Fund.
Exchanges limit the amount by which the price of a futures contract may move
on any day. If the price moves equal the daily limit on successive days, then
it may prove impossible to liquidate a futures position until the daily limit
moves have ceased. In the event of adverse price movements, the Fund would
continue to be required to make daily cash payments of variation margin on
open futures positions. In such situations, if the Fund has insufficient cash,
it may be disadvantageous to do so. In addition, the Fund may be required to
take or make delivery of the instruments underlying futures contracts it holds
at a time when it is disadvantageous to do so. The ability to close out
options and futures positions could also have an adverse impact on the Fund's
ability to hedge effectively its portfolio.
In the event of the bankruptcy of a broker through which the Fund engages in
transactions in futures or options thereon, the Fund could experience delays
and/or losses in liquidating open positions purchased or sold through the
broker and/or incur a loss of all or part of its margin deposits with the
broker. Transactions are entered into by the Fund only with brokers or
financial institutions deemed creditworthy by the investment adviser.
There are risks inherent in the use of futures contracts and options
transactions for the purpose of hedging the Fund's portfolio securities. One
such risk which may arise in employing futures contracts to protect against
the price volatility of portfolio securities is that the prices of securities
subject to futures contracts (and thereby the futures contract prices) may
correlate imperfectly with the behavior of the cash prices of the Fund's
portfolio securities. Another such risk is that prices of futures contracts
may not move in tandem with the changes in prevailing interest rates against
which the Fund seeks a hedge. A correlation may also be distorted by the fact
that the futures market is dominated by short-term traders seeking to profit
from the difference between a contract or security price objective and their
cost of borrowed funds. Such distortions are generally minor and would
diminish as the contract approached maturity.
There may exist an imperfect correlation between the price movements of
futures contracts purchased by the Fund and the movements in the prices of the
securities (or currencies) which are the subject of the hedge. If participants
in the futures market elect to close out their contracts through offsetting
transactions rather than meet margin deposit requirements, distortions in the
normal relationships between the debt securities (or currencies) and futures
market could result. Price distortions could also result if investors in
futures contracts elect to make or take delivery of underlying securities (or
currencies) rather than engage in closing transactions due to the resultant
reduction in the liquidity of the futures market. In addition, due to the fact
that, from the point of view of speculators, the deposit requirements in the
futures markets are less onerous than margin requirements in the cash market,
increased participation by speculators in the futures markets could cause
temporary price distortions. Due to the possibility of price distortions in
the futures market and because of the imperfect correlation between movements
in the prices of securities (or currencies) and movements in the prices of
futures contracts, a correct forecast of interest rate trends by the
investment adviser may still not result in a successful hedging transaction.
Compared to the purchase or sale of futures contracts, the purchase and sale
of call or put options on futures contracts involves less potential risk to
the Fund because the maximum amount at risk is the premium paid for the
options (plus transaction costs). However, there may be circumstances when the
purchase of a call or put option on a futures contract would result in a loss
to the Fund notwithstanding that the purchase or sale of a futures contract
would not result in a loss, as in the instance where there is no movement in
the prices of the futures contracts or underlying securities (or currencies).
FOREIGN CURRENCY FORWARD CONTRACTS
The Fund may enter into foreign currency forward contracts to protect the
value of its assets against future changes in the level of currency exchange
rates. The Fund may enter into such contracts on a spot, i.e., cash, basis at
the rate then
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prevailing in the currency exchange market or on a forward basis, by entering
into a forward contract to purchase or sell currency. A forward contract on
foreign currency is an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days agreed upon by the parties
from the date of the contract at a price set on the date of the contract. See
"Risks Related to Foreign Currency Forward Contracts" below.
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 currency (cross hedge). Although
there are no limits on the number of forward contracts which the Fund may
enter into, the Fund may not position hedge (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.
RISKS RELATED TO FOREIGN CURRENCY FORWARD CONTRACTS
The Fund may enter into foreign currency forward 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 may be able to
protect itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the 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. If
the Fund enters into a position hedging transaction, the transaction will be
covered by the position being hedged or the Fund's Custodian or subcustodian
will place cash or other liquid assets in 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
on a daily basis so that the value of the account will, at all times, equal
the amount of the Fund's net commitment with respect to the forward contract.
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.
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It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the forward contract.
Accordingly, if a decision is made to sell the security and make delivery of
the foreign currency and if the market value of the security is less than the
amount of foreign currency that the Fund is obligated to deliver, then it
would be necessary for the Fund to purchase additional foreign currency on the
spot market (and bear the expense of such purchase).
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. Should forward contract 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 foreign currency forward contracts will generally 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 recognized 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. 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 foreign currency forward contracts may be
limited by certain requirements for qualification as a regulated investment
company under the Internal Revenue Code. See "Taxes, Dividends and
Distributions."
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.
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
its investors, may lose money through any unsuccessful use of these
strategies. If the Subadviser's predictions 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 Subadviser's ability to predict correctly
movements in the direction of interest rates, securities prices and currency
markets; (2) imperfect correlation between the price of options and futures
contracts and options thereon and movements in the prices of the securities or
currencies being hedged; (3) the fact that skills needed to use these
strategies are different from those needed to select portfolio securities; (4)
the possible absence of a liquid secondary market for any particular
instrument at any time; (5) the possible need to defer closing out certain
hedged positions to avoid adverse tax consequences; and (6) the possible
inability of the Fund to purchase or sell a portfolio security at a time that
otherwise would be favorable for it to do so, or the possible need for the
Fund to sell a portfolio security at a disadvantageous time, due to the need
for the Fund to maintain "cover" or to segregate securities in connection with
hedging transactions. See "Taxes, Dividends and Distributions."
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<PAGE>
The Fund will generally purchase options and futures on an exchange only if
there appears to be a liquid secondary market for such options or futures; the
Fund will generally purchase OTC options only if the investment adviser
believes that the other party to options will continue to make a market for
such options. However, there can be no assurance that a liquid secondary
market will continue to exist or that the other party will continue to make a
market. Thus, it may not be possible to close an options or futures
transaction. The inability to close options and futures positions also could
have an adverse impact on the Fund's ability to effectively hedge its
portfolio. There is also the risk of loss by the Fund of margin deposits or
collateral in the event of bankruptcy of a broker with whom the Fund has an
open position in an option, a futures contract or related option.
OTHER INVESTMENTS
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
From time to time, in the ordinary course of business, the Fund may purchase
or sell securities on a when-issued or delayed delivery basis, that is,
delivery and payment can take place in the future after the date of the
transaction. The Fund will make commitments for such when-issued transactions
only with the intention of actually acquiring the securities. The Fund's
Custodian will segregate cash or other liquid assets having a value equal to
or greater than such commitments. If the Fund chooses to dispose of the right
to acquire a when-issued security prior to its acquisition, it could, as with
the disposition of any other portfolio security, incur a gain or loss due to
market fluctuations. 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 will enter into repurchase agreements whereby the seller of the
security agrees to repurchase that security from the Fund at a mutually
agreed-upon time and price. The repurchase date is usually within a day or two
of the original purchase, although it may extend over a number of months. The
Fund's repurchase agreements will at all times be fully collateralized in an
amount at least equal to the resale price. The Fund's repurchase agreements
will be collateralized by U.S. Government obligations. The Fund will enter
into repurchase transactions only with parties meeting creditworthiness
standards approved by the Fund's Board of Directors. The Fund's investment
adviser will monitor the creditworthiness of such parties, under the general
supervision of the Board of Directors. In the event of a default or bankruptcy
by a seller, the Fund will promptly seek to liquidate the collateral. To the
extent that the proceeds from any sale of such collateral upon a default in
the obligation to repurchase are less than the repurchase price, the Fund will
suffer a loss.
The Fund participates in a joint repurchase agreement account with other
investment companies managed by Prudential Investments Fund Management LLC
(PIFM or the Manager) pursuant to an order of the Commission. On a daily
basis, any uninvested cash balances of the Fund may be aggregated with those
of such investment companies and invested in one or more repurchase
agreements. Each fund participates in the income earned or accrued in the
joint account based on the percentage of its investment.
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 30% 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. 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
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<PAGE>
and the Fund may invest the cash collateral and earn additional income, or it
may receive an agreed-upon amount of interest income from the borrower. As
with any extensions of credit, there are risks of delay in recovery and in
some cases loss of rights in the collateral should the borrower of the
securities fail financially. The advantage of such loans is that the Fund
continues to receive payments in lieu of the interest and dividends of 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 Fund at any time without cause. 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.
BORROWING
The Fund may borrow up to 33 1/3% of the value of its total assets
(calculated at the time of the borrowing) from banks for temporary,
extraordinary or emergency purposes, for the clearance of transactions or for
investment purposes. The Fund may pledge up to 33 1/3% of its total assets to
secure these borrowings. If the Fund's asset coverage for borrowings falls
below 300%, the Fund will take prompt action to reduce its borrowings. If the
300% asset coverage should decline as a result of market fluctuations or other
reasons, the Fund may be required to sell portfolio securities to reduce the
debt and restore the 300% asset coverage, even though it may be
disadvantageous from an investment standpoint to sell securities at that time.
Such liquidations could cause the Fund to realize gains on securities held for
less than three months. Because no more than 30% of the Fund's gross income
may be derived from the sale or disposition of securities held for less than
three months to maintain the Fund's status as a regulated investment company
under the Internal Revenue Code, such gains would limit the ability of the
Fund to sell other securities held for less than three months that the Fund
might wish to sell. See "Taxes, Dividends and Distributions." The Fund will
not purchase portfolio securities when borrowings exceed 5% of the value of
its total assets.
Borrowing for investment purposes is generally known as "leveraging."
Leveraging exaggerates the effect on net asset value of any increase or
decrease in the market value of the Fund's portfolio. Money borrowed for
leveraging will be subject to interest costs which may or may not be recovered
by appreciation of the securities purchased and may exceed the income from the
securities purchased. In addition, the Fund may be required to maintain
minimum average balances in connection with such borrowing or pay a commitment
fee to maintain a line of credit which would increase the cost of borrowing
over the stated interest rate.
ILLIQUID SECURITIES
The Fund may hold up to 15% 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
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securities eligible for resale pursuant to Rule 144A under the Securities Act
of 1933, as amended (the Securities Act), privately placed commercial paper
and municipal lease obligations 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. Investing in Rule 144A securities could have the
effect of increasing the level of Fund illiquidity to the extent that
qualified institutional buyers become, for a limited time, uninterested in
purchasing these securities. Repurchase agreements subject to demand are
deemed to have a maturity equal to the applicable notice period.
Securities of financially and operationally troubled issuers are less liquid
and more volatile than securities of companies not experiencing financial
difficulties. Many of the Fund's portfolio investments may not be widely
traded. Accordingly, the Fund may have to sell portfolio securities at
disadvantageous times and at disadvantageous prices in order to maintain no
more than 15% of its net assets in illiquid securities. This could have an
adverse impact on the Fund's performance.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act, securities which are 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 these restricted or other illiquid
securities because of the potential for delays on resale and uncertainty in
valuation. Limitations on resale may have an adverse effect on the
marketability of portfolio securities and a mutual fund might be unable to
dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemptions within
seven days. A mutual fund might also have to register such restricted
securities in order to dispose of them resulting in additional expense and
delay. Adverse market conditions could impede such a public offering of
securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, 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 securities will expand further as a
result of this regulation and the development of automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers.
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act, commercial paper and municipal lease obligations 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). With respect to
municipal lease obligations, the investment adviser will also consider: (1)
the willingness of the municipality to continue, annually or biannually, to
appropriate funds for payment of the lease; (2) the general credit quality of
the municipality and the essentiality to the municipality of the property
covered by the lease; (3) an analysis of factors similar to
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<PAGE>
that performed by nationally recognized statistical rating organizations
(NRSROs) in evaluating the credit quality of a municipal lease obligation,
including (i) whether the lease can be cancelled; (ii) if applicable, what
assurance there is that the assets represented by the lease can be sold; (iii)
the strength of the lessee's general credit (e.g., its debt, administrative,
economic and financial characteristics); (iv) the likelihood that the
municipality will discontinue appropriating funding for the leased property
because the property is no longer deemed essential to the operations of the
municipality (e.g., the potential for an event of nonappropriation); and (v)
the legal recourse in the event of failure to appropriate; and (4) any other
factors unique to municipal lease obligations as determined by the investment
adviser. 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 NRSROs, or
if only one NRSRO rates the securities, by that NRSRO, or, if unrated, be of
comparable quality in the view of the investment adviser; and (ii) it must not
be "traded flat" (i.e., without accrued interest) or in default as to
principal or interest. Repurchase agreements subject to demand are deemed to
have a maturity equal to the notice period.
The staff of the Commission has taken the position that purchased over-the-
counter (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 would ordinarily 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 securities used as "cover"
as liquid. See "How the Fund Invests--Investment Policies and Techniques--
Illiquid Securities" in the Prospectus.
SHORT SALES
The Fund may sell a security it does not own in anticipation of a decline in
the market value of that security (short sales). To complete the transaction,
the Fund will borrow the security to make delivery to the buyer. The Fund is
then obligated to replace the security borrowed by purchasing it at the market
price at the time of replacement. The price at such time may be more or less
than the price at which the security was sold by the Fund. Until the security
is replaced, the Fund is required to pay to the lender any dividends or
interest which accrue during the period of the loan. To borrow the security,
the Fund may be required to pay a premium which would increase the cost of the
security sold. The proceeds of the short sale will be retained by the broker
to the extent necessary to meet margin requirements until the short position
is closed out. Until the Fund replaces the borrowed security, it will (a)
maintain in a segregated account cash or other liquid assets at such a level
that the amount deposited in the account plus the amount deposited with the
broker as collateral will equal the current value of the security sold short
and will not be less than the market value of the security at the time it was
sold short or (b) otherwise cover its short position through a short sale
"against-the-box," which is a short sale in which the Fund owns an equal
amount of the securities sold short or securities convertible into or
exchangeable for, without payment of any further consideration, securities of
the same issue as, and equal in amount to, the securities sold short. The
value of securities of any one issuer in which the Fund is short may not
exceed the lesser of 2% of the value of the Fund's net assets or 2% of the
securities of any class of any issuer.
The Fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which
the Fund replaces the borrowed security. The Fund will realize a gain if the
security declines in price between those dates. The amount of any gain will be
decreased, and the amount of any loss will be increased, by the amount of any
premium, dividends or interest paid in connection with the short sale.
SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest up to 10% of its total assets in securities of other
investment companies. If the Fund does invest in securities of other
investment companies, shareholders of the Fund may be subject to duplicate
management and advisory fees.
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SEGREGATED ASSETS
When the Fund is required to segregate assets in connection with certain
hedging transactions, it will segregate cash or liquid assets with the Fund's
Custodian. "Liquid assets" means cash, U.S. Government securities, equity
securities (including foreign securities), debt obligations or other liquid,
unencumbered assets, marked-to-market daily.
(D) DEFENSIVE STRATEGY AND TEMPORARY INVESTMENTS
For temporary defensive purposes, the Fund may hold up to 100% of its assets
in cash, high quality money market instruments and U.S. Treasury securities
(including repurchase agreements). U.S. Treasury securities include bills,
notes, bonds and other securities issued by the U.S. Treasury. These
instruments are direct obligations of the U.S. Government and, as such, are
backed by the "full faith and credit" of the United States. They differ
primarily in their interest rates, the length of their maturities and the
dates of their issuances.
High quality money market instruments include commercial paper of
corporations, certificates of deposit, bankers' acceptances and other
obligations of domestic and foreign banks. Temporary investments may also be
made in obligations issued or guaranteed by the U.S. Government, its agencies
or its instrumentalities and repurchase agreements. Investments in obligations
of foreign 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.
(E) PORTFOLIO TURNOVER
The Fund's portfolio turnover rate generally is not expected to exceed 150%.
The portfolio turnover rate for the fiscal years ended November 30, 1998 and
1997 were % and 175%. The higher portfolio turnover in 1997 was a result of
the unusually active new issue calendar in the high yield market. The
portfolio turnover rate is generally the percentage computed by dividing the
lesser of portfolio purchases or sales (excluding all securities, including
options, whose maturities or expiration date at acquisition were one year or
less) by the monthly average value of the portfolio. High portfolio turnover
(over 100%) involves correspondingly greater brokerage commissions and other
transaction costs, which are borne directly by the Fund. In addition, high
portfolio turnover may also mean that a proportionately greater amount of
distributions to shareholders will be taxed as ordinary income rather than
long-term capital gains compared to investment companies with lower portfolio
turnover. See "Brokerage Allocation and Other Practices" and "Taxes, Dividends
and Distributions."
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 securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of transactions); provided
that the deposit or payment by the Fund of initial or maintenance margin in
connection with futures or options is not considered the purchase of a
security on margin.
B-27
<PAGE>
2. Make short sales of securities or maintain a short position if, when
added together, more than 25% of the value of the Fund's net assets would be
(i) deposited as collateral for the obligation to replace securities
borrowed to effect short sales and (ii) allocated to segregated accounts in
connection with short sales. Short sales "against-the-box" are not subject
to this limitation.
3. Issue senior securities, borrow money or pledge its assets, except that
the Fund may borrow from banks up to 33 1/3% of the value of its total
assets (calculated when the loan is made) for temporary, extraordinary or
emergency purposes, for the clearance of transactions or for investment
purposes. The Fund may pledge up to 33 1/3% of the value of its total assets
to secure such borrowings. For purposes of this restriction, the purchase or
sale of securities on a when-issued or delayed delivery basis, forward
foreign currency exchange contracts and collateral arrangements relating
thereto, and collateral arrangements with respect to interest rate swap
transactions, reverse repurchase agreements, dollar roll transactions,
options, futures contracts and options thereon and obligations of the Fund
to Directors pursuant to deferred compensation arrangements are not deemed
to be a pledge of assets or the issuance of a senior security.
4. Purchase any security (other than obligations of the U.S. Government, its
agencies or instrumentalities) if as a result: (i) with respect to 75% of
the Fund's total assets, more than 5% of the Fund's total assets (determined
at the time of investment) would then be invested in securities of a single
issuer, or (ii) 25% or more of the Fund's total assets (determined at the
time of the investment) would be invested in a single industry.
5. Buy or sell real estate or interests in real estate, except that the Fund
may purchase and sell securities which are secured by real estate,
securities of companies which invest or deal in real estate and publicly
traded securities of real estate investment trusts. The Fund may not
purchase interests in real estate limited partnerships which are not readily
marketable.
6. Buy or sell commodities or commodity contracts, except that the Fund may
purchase and sell financial futures contracts and options thereon. (For
purposes of this restriction, futures contracts on securities, currencies
and on securities or financial indices and forward foreign currency exchange
contracts are not deemed to be commodities or commodity contracts.)
7. 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. The Fund has not adopted a
fundamental investment policy with respect to investments in restricted
securities.
8. Make investments for the purpose of exercising control or management.
9. 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 the Fund will not hold more than 3% of the outstanding
voting securities of any one investment company, will not have invested more
than 5% of its total assets in any one investment company and will not have
invested more than 10% of its total assets (determined at the time of
investment) in such securities of one or more investment companies, or
except as part of a merger, consolidation or other acquisition.
10. Invest in interests in oil, gas or other mineral exploration or
development programs, except that the Fund may invest in the securities of
companies which invest in or sponsor such programs.
11. Make loans, except through (i) repurchase agreements and (ii) loans of
portfolio securities limited to 30% of the Fund's total assets.
12. Purchase more than 10% of all outstanding voting securities of any one
issuer.
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.
B-28
<PAGE>
MANAGEMENT OF THE FUND
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATION
NAME, ADDRESS** AND (AGE) FUND DURING PAST 5 YEARS
------------------------- ------------- --------------------
<C> <C> <S>
Edward D. Beach (73)......... Director President and Director of
BMC Fund, Inc., a closed-
end investment company;
formerly 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. and Director or
Trustee of funds within
the Prudential Mutual
Funds.
Delayne Dedrick Gold (59).... Director Marketing and Management
Consultant; Director of The
High Yield Income Fund,
Inc. and Director or
Trustee of funds within
the Prudential Mutual
Funds.
*Robert F. Gunia (51)........ Vice President and Vice President (since
Director September 1997), The
Prudential Insurance
Company of America
(Prudential); Executive
Vice President and
Treasurer (since December
1996), Prudential
Investments Fund Management
LLC (PIFM); Senior Vice
President (since March
1987) of Prudential
Securities Incorporated
(Prudential Securities);
formerly Chief
Administrative Officer
(July 1990-September 1996),
Director (January 1989-
September 1996), and
Executive Vice President,
Treasurer and Chief
Financial Officer (June
1987-September 1996) of
Prudential Mutual Fund
Management, Inc.; Vice
President and Director
(since May 1989) of The
Asia Pacific Fund, Inc.;
Director of The High Yield
Income Fund, Inc. and
Director or Trustee of
funds within the Prudential
Mutual Funds.
Douglas H. McCorkindale (58). Director Vice Chairman (since March
1984) and President (since
September 1997) of Gannett
Co. Inc.; Director of
Gannett Co. Inc., Frontier
Corporation and Continental
Airlines, Inc. and Director
or Trustee of funds
within the Prudential
Mutual Funds.
*Mendel A. Melzer, CFA (38).. Director Chief Investment Officer
751 Broad Street (since October 1996) of
Newark, NJ 07102 Prudential Mutual Funds;
formerly Chief Financial
Officer of Prudential
Investments (November 1995-
September 1996), 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. and Director or
Trustee of funds within
the Prudential Mutual
Funds.
</TABLE>
B-29
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATION
NAME, ADDRESS** AND (AGE) FUND DURING PAST 5 YEARS
------------------------- ------------- --------------------
<C> <C> <S>
Thomas T. Mooney (56)... 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, The Business Council of
New York State, Executive Service
Corps of Rochester, Monroe County
Water Authority, Rochester Jobs,
Inc., Monroe County Industrial
Development Corporation, Northeast
Midwest Institute and, The High
Yield Income Fund, Inc., President,
Director and Treasurer of First
Financial Fund, Inc., and The High
Yield Plus Fund, Inc. and Director
or Trustee of funds within the
Prudential Mutual Funds.
Stephen P. Munn (55).... Director Chairman (since January 1994),
Director and President (since 1988)
and Chief Executive Officer (1988-
December 1993) of Carlisle Companies
Incorporated (manufacturer of
industrial products) and Director or
Trustee of funds within the
Prudential Mutual Funds.
*Richard A. Redeker
(54).................... Director Employee of Prudential Investments
751 Broad Street (September 1996-November 1998);
Newark, NJ 07102 formerly President, Chief Executive
Officer and Director (October 1993-
September 1996), Prudential Mutual
Fund Management, Inc., Executive
Vice President, Director and Member
of Operating Committee (October
1993-September 1996), Prudential
Securities, Director (October 1993-
September 1996) of Prudential
Securities Group, Inc. (PSG),
Executive Vice President, The
Prudential 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. and Director or Trustee
of funds within the Prudential
Mutual Funds.
Robin B. Smith (58)..... 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, Texaco Inc.,
Springs Industries Inc. and Kmart
Corporation and Director or Trustee
of funds within the Prudential
Mutual Funds.
</TABLE>
B-30
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATION
NAME, ADDRESS** AND (AGE) FUND DURING PAST 5 YEARS
------------------------- ------------- --------------------
<C> <C> <S>
*Brian M. Storms (44).... President and Director President (since October
1998) of Prudential
Investments; formerly
President (September 1996-
October 1998) of
Prudential Mutual Funds,
Annuities and Investment
Management Services,
Managing Director (July
1991-September 1996) of
Fidelity Investment
Institutional Services
Company, Inc., President
(October 1989-September
1991) of J.K. Schofield
and Senior Vice President
(September 1982-October
1989) of INVEST Financial
Corporation.
Louis A. Weil, III (57).. Director Chairman (since January
1999), Publisher 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 (May
1989-March 1991) of Time
Magazine, President,
Publisher and Chief
Executive Officer
(February 1986-August
1989) of The Detroit News
and member of the Advisory
Board, Chase Manhattan
Bank-Westchester; Director
of The High Yield Income
Fund, Inc. and Director or
Trustee of funds within
the Prudential Mutual
Funds.
Clay T. Whitehead (59)... Director President, National
Exchange Inc. (new
business development firm)
(since May 1983) and
Director or Trustee of
funds within the
Prudential Mutual Funds.
Marguerite E.H.
Morrison (42)............ Secretary Vice President (since
December 1996) of PIFM;
Vice President and
Associate General Counsel
(since September 1987) of
Prudential Securities;
formerly Vice President
and Associate General
Counsel (June 1991-
September 1996) of
Prudential Mutual Fund
Management Inc.
Grace C. Torres (39)..... Treasurer and Principal First Vice President
Financial and (since December 1996) of
Accounting Officer PIFM; First Vice President
(since March 1993) of
Prudential Securities;
formerly First Vice
President (March 1994-
September 1996) of
Prudential Mutual Fund
Management, Inc.; and Vice
President of Bankers Trust
(July 1989-March 1994).
Stephen M. Ungerman (44). Assistant Treasurer Tax Director (since March
1996) of Prudential
Investments; formerly
First Vice President
(February 1993-September
1996) of Prudential Mutual
Fund Management, Inc.
</TABLE>
- --------
* "Interested" Director, as defined in the Investment Company Act, by reason
of his affiliation with Prudential, Prudential Securities or PIFM.
** Unless otherwise stated, the address of the Director and officers is c/o
Prudential Investments Fund Management LLC, Gateway Center Three, 100
Mulberry Street, Newark, New Jersey 07102-4077.
B-31
<PAGE>
The Fund has Directors who, in addition to overseeing the actions of the
Fund's Manager, Subadviser and Distributor, decide upon matters of general
policy. The Directors also review the actions of the Fund's officers, who
conduct and supervise the daily business operations of the Fund.
Directors and officers of the Fund are also trustees, directors and officers
of some or all of the other investment companies distributed by Prudential
Investment Management Services LLC.
The officers conduct and supervise the daily business operations of the
Fund, while the Directors, in addition to their functions set forth under
"Manager" and "Distributor," oversee such actions and decide on general
policy.
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 currently pays each of its Directors who is not an affiliated
person of PIFM or the Subadviser annual compensation of $1,000, in addition to
certain out-of-pocket expenses.
Directors may receive their Directors' fees pursuant to a deferred fee
agreement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of Directors' fees in installments which accrue interest at a
rate equivalent to the prevailing rate applicable to 90-day U.S. Treasury
bills at the beginning of each calendar quarter or, pursuant to a Commission
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 Directors have adopted a retirement policy which calls for the
retirement of Directors on December 31 of the year in which they reach the age
of 72, except that retirement is being phased in for Directors who were age 68
or older as of December 31, 1993. Under this phase-in provision, Mr. Beach is
scheduled to retire on December 31, 1999.
B-32
<PAGE>
The following table sets forth the aggregate compensation paid by the Fund
for the fiscal year ended November 30, 1998 to the Directors who are not
affiliated with the Manager and the aggregate compensation paid to such
Directors for service on the Fund's board and that of all other funds managed
by PIFM (Fund Complex) for the calendar year ended December 31, 1998.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL 1998
PENSION OR COMPENSATION
RETIREMENT FROM FUND
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL AND FUND
COMPENSATION AS PART OF FUND BENEFITS UPON COMPLEX PAID
NAME AND POSITION FROM FUND EXPENSES RETIREMENT TO DIRECTORS
----------------- ------------ ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Edward D. Beach,........ $4,500 None N/A [$135,000(38/63)*
Director
Delayne D. Gold,........ $4,500 None N/A $135,000(38/63)*
Director
Robert F. Gunia,**...... -- None N/A None
Director
Douglas H. $4,500 None N/A $70,000(20/35)*
McCorkindale,***.......
Director
Mendel A. Melzer,**..... -- None N/A None
Director
Thomas T. Mooney,***.... $4,500 None N/A $115,000(31/64)*
Director
Stephen P. Munn,........ $4,500 None N/A $45,000(15/21)*
Director
Richard A. Redeker,**... -- None N/A None
Director
Robin B. Smith,***...... $4,500 None N/A $90,000(27/34)*
Director
Brian M. Storms,** ..... -- None N/A None
President and Director
Louis A. Weil, III,..... $4,500 None N/A $90,000(26/50)*
Director
Clay T. Whitehead,...... $4,500 None N/A $45,000(15/21)*]
Director
</TABLE>
- --------
* Indicates number of funds/portfolios in Fund Complex (including the Fund) to
which aggregate compensation relates.
** "Interested" Directors do not receive compensation from the Fund or other
funds in the Fund Complex.
*** Total compensation from all funds in the Fund Complex for the calendar
year ended December 31, 1998 includes amounts deferred at the election of
Directors under the funds' deferred compensation plans. Including accrued
interest, total compensation amounted to approximately $ , $ and $
for Messrs. McCorkindale and Mooney and Ms. Smith, respectively.
B-33
<PAGE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
Directors of the Fund are eligible to purchase Class Z shares of the Fund,
which are sold without either an initial sales charge or CDSC to a limited
group of investors.
As of November 15, 1998, the Directors and officers of the Fund, as a group,
owned less than 1% of the outstanding shares of the Fund.
As of November 15, 1998, the only beneficial owners, directly or indirectly,
of more than 5% of any class of shares of the Fund were: Prudential Securities
C/F, John P. Dobson IRA DTD 06/14/95, 140 Christie Hill Road, Darien, CT,
which owned 20,726 Class A shares (approximately 8.9% of the outstanding Class
A shares); Mr. E. Michael Caulfield & Mrs. Helen B. Caulfield, JTTEN, 4 Park
Ln., Madison, NJ 07940-2714 who owned 18,433 Class A shares (approximately
7.9% of the outstanding Class A shares); Publix Super Markets Charities, Inc.
ATTN Marvin Weathers, P.O. Box 407, Lakeland, FL 33802 which held 90,904 Class
A shares (approximately 39.2% of the outstanding Class A shares); David A.
Belford, 1 Nationwide Warehouse & Storage, 2097 S. Hamilton Rd., Columbus, OH
43232-4143 who owned 17,066 Class B shares (approximately 6.1% of the
outstanding Class B shares); Susan T. Auerbach, 990 5th Avenue, New York, NY
10021-0141 who owned 4,266 Class C shares (approximately 5.8% of outstanding
Class C shares); Ellias Manoles and Marylu Manoles, Co-TTEES, Ellias Manoles
Trust, UA DTD 10/20/73, FBO Ellias Manoles, 20 Circle West, Edina, MN 55436-
1358 who owned 4,582 Class C shares (approximately 6.2% of the outstanding
Class C shares); Nelag Partners, 37791 Halper Lake Drive, Rancho Mirage, CA
92270 which owned 3,790 Class C shares (approximately 5.2% of the outstanding
Class C shares) and Dr. Steven J. Bier MD, TTEE Retirement Trust, 2488 Grand
Concourse Rm 329, Bronx, NY 10458 who owned 5,088 Class C shares
(approximately 6.9% of the outstanding Class C shares).
As of November 15, 1998, Prudential Securities was the record holder for
other beneficial owners of 214,753 Class A shares (approximately 92.7% of the
outstanding Class A shares); 253,182 Class B shares (approximately 89.2% of
the outstanding Class B shares); and 69,214 Class C shares (approximately
94.9% of the outstanding Class C shares). 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.
INVESTMENT ADVISORY AND OTHER SERVICES
(A) MANAGER AND INVESTMENT ADVISER
The manager of the Fund is Prudential Investments Fund Management LLC (PIFM
or the Manager) (formerly Prudential Mutual Fund Management LLC), Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. PIFM serves
as manager to all of the other investment companies that, together with the
Fund, comprise the Prudential Mutual Funds. See "How the Fund Is Managed--
Manager" in the Prospectus. As of December 31, 1998, PIFM managed and/or
administered open-end and closed-end management investment companies with
assets of approximately $ billion. According to the Investment Company
Institute, as of October 31, 1998, the Prudential Mutual Funds were the 18th
largest family of mutual funds in the United States.
PIFM is a subsidiary of Prudential Securities and Prudential. Prudential
Mutual Fund Services LLC (PMFS or the Transfer Agent), a wholly-owned
subsidiary of PIFM, serves as the transfer agent for the Prudential Mutual
Funds and, in addition, provides customer service, recordkeeping and
management and administration services to qualified plans.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PIFM, subject to the supervision of the Fund's Board of Directors
and in conformity with the stated 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
B-34
<PAGE>
and other assets. In connection therewith, PIFM is obligated to keep certain
books and records of the Fund. PIFM also administers the Fund's corporate
affairs and, in connection therewith, furnishes the Fund with office
facilities, together with those ordinary clerical and bookkeeping services
which are not being furnished by State Street Bank and Trust Company, the
Fund's custodian (the Custodian), and PMFS, the Fund's transfer and dividend
disbursing agent. The management services of PIFM for the Fund are not
exclusive under the terms of the Management Agreement and PIFM is free to, and
does, render management services to others.
For its services, PIFM receives, pursuant to the Management Agreement, a fee
at an annual rate of .75 of 1% of the Fund's average daily net assets. The fee
is computed daily and payable monthly. The Management Agreement also provides
that, in the event the expenses of the Fund (including the fees of PIFM, but
excluding interest, taxes, brokerage commissions, distribution fees and
litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Fund's business) for any fiscal year
exceed the lowest applicable annual expense limitation established and
enforced pursuant to the statutes or regulations of any jurisdiction in which
the Fund's shares are qualified for offer and sale, the compensation due to
PIFM will be reduced by the amount of such excess. No jurisdiction currently
limits the Fund's expenses.
In connection with its management of the corporate affairs of the Fund, PIFM
bears the following expenses:
(a) the salaries and expenses of all of its and the Fund's personnel except
the fees and expenses of Directors who are not affiliated persons of PIFM or
the Fund's investment adviser;
(b) all expenses incurred by PIFM or by the Fund in connection with managing
the ordinary course of the Fund's business, other than those assumed by the
Fund as described below; and
(c) the costs and expenses payable to the Subadviser pursuant to the
Subadvisory Agreement between PIFM and the Subadviser (the Subadvisory
Agreement).
Under the terms of the Management Agreement, the Fund is responsible for the
payment of the following expenses: (a) the fees payable to the Manager, (b)
the fees and expenses of Directors who are not affiliated persons of the
Manager or the 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) certain organization expenses of the Fund and the
fees and expenses involved in registering and maintaining registration of the
Fund and of its shares with the Commission, including the preparation and
printing of the Fund's registration statements and prospectuses for such
purposes, and paying the fees and expenses of notice filings made in
accordance with state securities laws, (k) allocable communications expenses
with respect to investor services and all expenses of shareholders' and
Directors' meetings and of preparing, printing and mailing reports, proxy
statements and prospectuses to shareholders in the amount necessary for
distribution to the shareholders, (l) litigation and indemnification expenses
and other extraordinary expenses not incurred in the ordinary course of the
Fund's business and (m) distribution fees.
The Management Agreement provides that PIFM will not be liable for any error
of judgment or for any loss suffered by the Fund in connection with the
matters to which the Management Agreement relates, except a loss resulting
from willful misfeasance, bad faith, gross negligence or reckless disregard of
duty. The Management Agreement provides that it will terminate automatically
if assigned, and that it may be terminated without penalty by either party
upon not more than 60 days' nor less than 30 days' written notice. The
Management Agreement will continue in effect for a period of more than two
B-35
<PAGE>
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.
For the fiscal years ended November 30, 1998 and 1997 and for the period
from March 26, 1996 through November 30, 1996, PIFM received management fees
of $ , $60,949 and $65,160, respectively.
PIFM has entered into the Subadvisory Agreement with PI (the Subadviser), a
wholly-owned subsidiary of Prudential. The Subadvisory Agreement provides that
the Subadviser will furnish investment advisory services in connection with
the management of the Fund. In connection therewith, the Subadviser is
obligated to keep certain books and records of the Fund. PIFM continues to
have responsibility for all investment advisory services pursuant to the
Management Agreement and supervises the Subadviser's performance of such
services. The Subadviser is reimbursed by PIFM for the reasonable costs and
expenses incurred by the Subadviser in furnishing those services.
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, PIFM or the Subadviser 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.
(B) PRINCIPAL UNDERWRITER, DISTRIBUTOR AND RULE 12B-1 PLANS
Prudential Investment Management Services LLC (PIMS or the Distributor),
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, acts
as the distributor of the shares of the Fund. Prior to June 1, 1998,
Prudential Securities Incorporated (Prudential Securities or the Distributor),
One Seaport Plaza, New York, New York 10292, was the Fund's distributor. PIMS
and Prudential Securities are subsidiaries of Prudential.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the
Fund under Rule 12b-1 under the Investment Company Act and a distribution
agreement (the Distribution Agreement), the Distributor incurs the expenses of
distributing the Fund's Class A, Class B and Class C shares. See "How the Fund
Is Managed--Distributor" in the Prospectus.
The expenses incurred under the Plans include commissions and account
servicing fees paid to, or on account of, brokers or financial institutions
which have entered into agreements with the Distributor, advertising expenses,
the cost of printing and mailing prospectuses to potential investors and
indirect and overhead costs of the Distributor associated with the sale of
Fund shares, including lease, utility, communications and sales promotion
expenses. The distribution and/or service fees may also be used by the
Distributor to compensate on a continuing basis brokers in consideration for
the distribution, marketing, administrative and other services and activities
provided by brokers with respect to the promotion of the sale of the Fund's
shares and the maintenance of related shareholder accounts.
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.
CLASS A. PLAN. Under the Class A Plan, the Fund may pay the Distributor for
its distribution-related activities with respect to Class A shares at an
annual rate of up to .30 of 1% of the average daily net assets of the Class A
shares. The Class A Plan provides that (1) up to .25 of 1% of the average
daily net assets of the Class A shares may be used to pay for personal
B-36
<PAGE>
service and/or the maintenance of shareholder accounts (service fee) and (2)
total distribution fees (including the service fee of .25 of 1%) may not
exceed .30 of 1%. The Distributor has voluntarily limited 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. This voluntary waiver may be terminated at
any time without notice.
CLASS A PLAN. For the fiscal year ended November 30, 1998, the Distributor
and Prudential Securities collectively received payments of approximately $
under the Class A Plan. This amount was primarily expended for payments of
account servicing fees to financial advisers and other persons who sell Class
A shares. For the fiscal year ended November 30, 1998, the Distributor and
Prudential Securities also received approximately $ and $ , respectively,
in initial sales charges.
CLASS B AND CLASS C PLANS. Under the Class B and Class C Plans, the Fund
pays the Distributor for its distribution-related activities with respect to
Class B and Class C shares at an annual rate of up to 1% of the average daily
net assets of each of the Class B and Class C shares. The Class B Plan
provides that (1) up to .25 of 1% of the average daily net assets of the Class
B shares may be paid as a service fee and (2) 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 paid for distribution-related expenses with respect
to Class B shares. The Class C Plan provides that (1) up to .25 of 1% of the
average daily net assets of the Class C shares may be paid as a service fee
for providing personal service and/or maintaining shareholder accounts and (2)
up to .75 of 1% of the average daily net assets of the Class C share may be
paid for distribution-related expenses with respect to Class C shares. The
service fee (.25 of 1% of average daily net assets) is used to pay for
personal service and/or the maintenance of shareholder accounts. The
Distributor also receives contingent deferred sales charges from certain
redeeming shareholders.
CLASS B PLAN. For the fiscal year ended November 30, 1998, the Distributor
and Prudential Securities collectively received approximately $ from the
Fund under the Class B Plan and spent approximately $ in distributing the
Fund's Class B shares. It is estimated that of the latter amount,
approximately % ($ ) was spent on printing and mailing of prospectuses to
other than current shareholders; % ($ ) on compensation to Pruco Securities
Corporation (an affiliated broker-dealer) (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 % ($ ) on the aggregate of (i) payments of
commissions and account servicing fees to financial advisers ( % or $ ) and
(ii) an allocation of overhead and other branch office distribution-related
expenses ( % or $ ). 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.
The Distributor (and Prudential Securities as its predecessor) also receives
the proceeds of contingent deferred sales charges paid by investors upon
certain redemptions of Class B shares. For the fiscal year ended November 30,
1998, the Distributor and Prudential Securities received approximately $
and $ , respectively, in contingent deferred sales charges attributable to
Class B shares.
CLASS C PLAN. For the fiscal year ended November 30, 1998, the Distributor
and Prudential Securities received approximately $ and $ , respectively,
under the Class C Plan and spent approximately $ and $ , respectively, in
distributing Class C shares. It is estimated that of the latter total amount,
approximately % ($ ) was spent on printing and mailing of prospectuses to
other than current shareholders; % ($ ) 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 % ($ ) on the aggregate of (i)
payments of commissions and account servicing fees to financial advisers ( %
or $ ) and (ii) an allocation of
B-37
<PAGE>
overhead and other branch office distribution-related expenses ( % or $ ).
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 November 30, 1998, the Distributor and Prudential Securities
received approximately $ and $ , respectively, in contingent deferred
sales charges attributable to Class C shares.
Distribution expenses attributable to the sale of Class A, Class B and Class
C shares of the Fund are allocated to each such class based upon the ratio of
sales of each such class to the sales of Class A, Class B and Class C shares
of the Fund other than expenses allocable to a particular class. The
distribution fee and sales charge of one class will not be used to subsidize
the sale of another class.
The Class A, Class B and Class C Plans continue in effect from year to year,
provided that each such continuance is approved at least annually by a vote of
the Board of Directors, including a majority vote of the Directors who are not
interested persons of the Fund and who have no direct or indirect financial
interest in the Class A, Class B or Class C Plan or any agreement related to
the Plans (Rule 12b-1 Directors), cast in person at a meeting called for the
purpose of voting on such continuance. A Plan may be terminated at any time,
without penalty, by the vote of a majority of the Rule 12b-1 Directors or by
the vote of the holders of a majority of the outstanding shares of the
applicable class of the Fund on not more than 60 days', nor less than 30 days'
written notice to any other party to the Plan. The Plans may not be amended to
increase materially the amounts to be spent for the services described therein
without approval by the shareholders of the applicable class, 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 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 will include 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 Rule 12b-1 Directors shall be committed to the
Rule 12b-1 Directors.
Pursuant to the Distribution Agreement, the Fund has agreed to indemnify the
Distributor to the extent permitted by applicable law against certain
liabilities under federal securities laws.
In addition to distribution and service fees paid by the Fund under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to brokers and other persons which
distribute shares of the Fund (including Class Z shares). Such payments may be
calculated by reference to the net asset value of shares sold by such persons
or otherwise.
PIFM may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Fund. In addition,
the Distributor has waived a portion of its distribution fees for the Class A
shares as described under "Distributor" above. Fee waivers and subsidies will
increase the Fund's total return. These voluntary waivers may be terminated at
any time without notice. See "Performance Information" in the Statement of
Additional Information and "Fund Expenses" above.
[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. In the case of
Class B shares, interest charges 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 required to be included in the calculation
of the 6.25% limitation. The
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<PAGE>
annual asset-based sales charge with respect to Class B and Class C shares of
the Fund may not exceed .75 of 1%. The 6.25% limitation applies to the Fund
rather than on a per shareholder basis. If aggregate sales charges were to
exceed 6.25% of total gross sales of any class, all sales charges on shares of
that class would be suspended.]
(C) OTHER SERVICE PROVIDERS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts, 02171, serves as Custodian for the Fund's portfolio securities
and cash and, in that capacity, maintains certain financial and accounting
books and records pursuant to an agreement with the Fund. Subcustodians
provide custodial services for the Fund's foreign assets held outside the
United States.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as the transfer and dividend disbursing agent of the
Fund. PMFS is a wholly-owned subsidiary of PIFM. PMFS provides customary
transfer agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, the payment of dividends and distributions and
related functions. For these services, PMFS receives an annual fee of $9.00
per shareholder account, a new account set-up fee of $2.00 for each manually
established shareholder account and a monthly inactive zero balance account
fee of $.20 per shareholder account. PMFS is also reimbursed for its out-of-
pocket expenses, including but not limited to postage, stationery, printing,
allocable communication expenses and other costs.
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.
BROKERAGE ALLOCATION AND OTHER PRACTICES
The Manager is responsible for decisions to buy and sell securities, futures
and options on securities and futures for the Fund, the selection of brokers,
dealers and futures commission merchants to effect the transactions and the
negotiation of brokerage commissions, if any. The term "Manager" as used in
this section includes the Subadviser. Broker-dealers may receive negotiated
brokerage commissions on Fund portfolio transactions, including options and
the purchase and sale of underlying securities upon the exercise of options.
On foreign securities exchanges, commissions may be fixed. Orders may be
directed to any broker or futures commission merchant including, to the extent
and in the manner permitted by applicable law, Prudential Securities and its
affiliates.
Equity securities traded in the over-the-counter market and bonds, including
convertible bonds, are generally traded on a "net" basis with dealers acting
as principal for their own accounts 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 and U.S.
Government agency securities may be purchased directly from the 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 affiliate acts as principal, except in accordance with rules
of the Commission. Thus, it will not deal in the over-the-counter market 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.
Portfolio securities may not be purchased from any underwriting or selling
syndicate of which Prudential Securities, or an affiliate, during the
existence of the syndicate, is a principal underwriter (as defined in the
Investment Company Act),
B-39
<PAGE>
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.
In placing orders for portfolio securities of the Fund, the Manager's
overriding objective is to obtain the best possible price and execution. The
Manager seeks to effect each transaction at a price and commission that
provides the most favorable total cost or proceeds reasonably attainable in
the circumstances. The factors that the Manager may consider in selecting a
particular broker, dealer or futures commission merchant (firms) are the
Manager's knowledge of negotiated commission rates currently available and
other current transaction costs; the nature of the portfolio transaction; the
size of the transaction; the desired timing of the trade; the activity
existing and expected in the market for the particular transaction;
confidentiality; the execution, clearance and settlement capabilities of the
firms; the availability of research and research related services provided
through such firms; the Manager's knowledge of the financial stability of the
firms; the Manager's knowledge of actual or apparent operational problems of
firms; and the amount of capital, if any, that would be contributed by firms
executing the transaction. Given these factors, the Fund may pay transaction
costs in excess of that which another firm might have charged for effecting
the same transaction.
When the Manager selects a firm that executes orders or is a party to
portfolio transactions, relevant factors taken into consideration are whether
that firm has furnished research and research related products and/or
services, such as research reports, research compilations, statistical and
economic data, computer data bases, quotation equipment and services, research
oriented computer-software, hardware and services, reports concerning the
performance of accounts, valuations of securities, investment related
periodicals, investment seminars and other economic services and consultants.
Such services are used in connection with some or all of the Manager's
investment activities; some of such services, obtained in connection with the
execution of transactions for one investment account, may be used in managing
other accounts, and not all of these services may be used in connection with
the Fund.
The Manager maintains an internal allocation procedure to identify those
firms who have provided it with research and research related products and/or
services, and the amount that was provided, and to endeavor to direct
sufficient commissions to them to ensure the continued receipt of those
services that the Manager believes provides a benefit to the Fund and its
other clients. The Manager makes a good faith determination that the research
and/or service is reasonable in light of the type of service provided and the
price and execution of the related portfolio transactions.
When the Manager deems the purchase or sale of equities to be in the best
interests of the Fund or its other clients, including Prudential, the Manager
may, but is under no obligation to, aggregate the transactions in order to
obtain the most favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of the transactions, as well as the
expenses incurred in the transaction, will be made by the Manager in the
manner it considers to be most equitable and consistent with its fiduciary
obligations to its clients. The allocation or orders among brokers and the
commission rates paid are reviewed periodically by the Fund's Board of
Directors. Portfolio securities may not be purchased from any underwriting or
selling syndicate of which Prudential Securities or any affiliate during the
existence of the syndicate, is a principal underwriter (as defined in the
Investment Company Act), except in accordance with rules of the Commission.
This limitation, in the opinion of the Fund, will not significantly affect the
Fund's ability to pursue its present investment objective. However, in the
future in other circumstances, the Fund may be at a disadvantage because of
this limitation in comparison to other funds with similar objectives but not
subject to such limitations.
Subject to the above considerations, Prudential Securities (or any
affiliate) may act as a securities 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
B-40
<PAGE>
and fair compared to the commissions, fees or other remuneration paid to other
firms in connection with comparable transactions involving similar securities
or futures being purchased or sold on an 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 firm in a commensurate arm's-length transaction.
Furthermore, the Board of Directors of the Fund, including a majority of the
Directors who are not "interested" persons, 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, as amended, Prudential Securities may not
retain compensation for effecting transactions on a national securities
exchange for the Fund unless the Fund has expressly authorized the retention
of such compensation. Prudential Securities must furnish to the Fund at least
annually a statement setting forth the total amount of all compensation
retained by Prudential Securities from transactions effected for the Fund
during the applicable period. Brokerage and futures transactions with
Prudential Securities are also subject to such fiduciary standards as may be
imposed by applicable law.
The table below sets forth information concerning the payment of commissions
by the Fund, including the commissions paid to Prudential Securities, for the
periods indicated.
<TABLE>
<CAPTION>
FISCAL FISCAL MARCH
YEAR YEAR 26, 1996
ENDED ENDED THROUGH
NOVEMBER NOVEMBER NOVEMBER
30, 1998 30, 1997 30, 1996
-------- -------- --------
<S> <C> <C> <C>
Total brokerage commissions paid by the Fund........ $ $23,699 $22,054
Total brokerage commissions paid to Prudential Secu-
rities............................................. $ $ 0 $ 0
Percentage of total brokerage commissions paid to
Prudential Securities.............................. % 0% 0%
</TABLE>
[The Fund did not pay commissions to Prudential Securities during the year
ended November 30, 1998. No payments were made to firms which provide
research, statistical or other services to the Subadviser.] PIFM has not
separately identified a portion of such brokerage commissions as applicable to
the provision of such research, statistical or other services.
The Fund is required to disclose its holdings of securities of its regular
brokers and dealers (as defined under Rule 10b-1 of the Investment Company
Act) and their parents at November 30, 1998. As of November 30, 1998, the Fund
held securities of in the amount of $ .
CAPITAL SHARES, OTHER SECURITIES AND ORGANIZATION
The Fund is authorized to issue 2 billion shares of common stock, $.001 par
value per share, divided into four classes, designated Class A, Class B, Class
C and Class Z common stock. Of the authorized shares of common stock of the
Fund, 500 million shares consist of Class A common stock, 500 million shares
consist of Class B common stock, 500 million shares consist of Class C common
stock and 500 million shares consist of Class Z common stock. Each class of
common stock of the Fund represents an interest in the same assets of the Fund
and is identical in all respects except that (1) each class is subject to
different sales charges and distribution and/or service fees (except Class Z
shares, which are not subject to any sales charges and distribution and/or
service fees), which may affect performance, (2) each class has exclusive
voting rights on any matter submitted to shareholders that relates solely to
its distribution arrangement and has separate voting rights on any matter
submitted to shareholders in which the interests of one class differ from the
interests of any other class, (3) each class has a different exchange
privilege, and (4) only Class B shares have a conversion feature. Class Z
shares are not currently offered for sale to investors. In accordance with the
Fund's Articles of Incorporation, the Board of Directors
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<PAGE>
may authorize the creation of additional series of common stock and classes
within such series, with such preferences, privileges, limitations and voting
and dividend rights as the Board may determine.
The Board of Directors may increase or decrease the number of authorized
shares without the approval of shareholders. Shares of the Fund, when issued,
are fully paid, nonassessable, fully transferable and redeemable at the option
of the holder. Shares are also redeemable at the option of the Fund under
certain circumstances. Each share of each class of common stock is equal as to
earnings, assets and voting privileges, except as noted above, and each class
bears the expenses related to the distribution of its shares (with the
exception of Class Z shares, which are not subject to any distribution and/or
service fees). Except for the conversion feature applicable to the Class B
shares, there are no conversion, preemptive or other subscription rights. In
the event of liquidation, each share of common stock of the Fund is entitled
to its portion of all of the Fund's assets after all debts 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% or
more 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.
PURCHASE, REDEMPTION AND PRICING OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share plus a sales charge which, at the election of the
investor, may be imposed either (i) at the time of purchase (Class A or Class
C 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 NAV without any sales
charges.
Each class of shares represents an interest in the same portfolio of
investments of the Fund and has the same rights, except that (i) each class is
subject to different sales charges and distribution and service fees, (except
for Class Z Shares, which are not subject to any sales charges and
distribution and service fees). (ii) each class has exclusive voting rights
with respect to 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."
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, you
must complete an application and telephone PMFS at (800) 225-1852 (toll-free)
to receive an account number. The following information will be requested:
your name, address, tax identification number, class election, dividend
distribution election, amount being wired and wiring bank. Instructions should
then be given by you to your bank to transfer funds by wire to State Street
Bank and Trust Company (State Street), Boston, Massachusetts, Custody and
Shareholder Services Division, Attention: Prudential Distressed Securities
Fund, Inc., specifying on the wire the account number assigned by PMFS and
your name and identifying the class in which you are eligible to invest (Class
A, Class B, Class C or Class Z shares).
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Fund as of that day.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Distressed
Securities Fund, Inc., Class A, Class B, Class C or Class Z shares and your
name and
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<PAGE>
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.
ISSUANCE OF FUND SHARES FOR SECURITIES
Transactions involving the issuance of Fund shares for securities (rather
than cash) will be limited to: (i) reorganizations, (ii) statutory mergers, or
(iii) other acquisitions of portfolio securities that: (a) meet the investment
objective and policies of the Fund, (b) are liquid and not subject to
restrictions on resale, (c) have a value that is readily ascertainable via
listing on or trading in a recognized United States or international exchange
or market, and (d) is approved by the Fund's investment adviser.
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares are sold with a maximum sales charge of 5%, Class
C* shares are sold with a 1% sales charge and Class B* and Class Z shares are
sold at NAV. Using the NAV at November 30, 1998, the maximum offering price of
the Fund's shares is as follows:
<TABLE>
<S> <C>
CLASS A
Net asset value and redemption price per Class A share.................. $
Maximum sales charge (5% of offering price).............................
------
Offering price to public................................................ $
======
CLASS B
Net asset value, redemption price and offering price to public per Class
B share*............................................................... $
======
CLASS C
Net asset value and redemption price per Class C share*................. $
Maximum sales charges (1% of offering price)............................
------
Offering price to public................................................ $
======
CLASS Z
Net asset value, redemption price and offering price to public per Class
Z share**.............................................................. $
======
</TABLE>
- --------
* Class B and Class C shares are subject to a contingent deferred sales charge
on certain redemptions. See "Shareholder Guide--How to Sell Your Shares" in
the Prospectus.
** Class Z shares were not offered on November 30, 1998.
SELECTING A PURCHASE ALTERNATIVE
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 4 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to an initial sales charge of 5% and Class B shares are
subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B
shares.
If you intend to hold your investment for longer than 4 years, but less than
5 years, and do not qualify for a reduced sales charge on Class A shares, you
should consider purchasing Class B or Class C shares over Class A shares. This
is because the initial sales charge plus the cumulative annual distribution-
related fee on Class A shares would exceed those of the Class B and Class C
shares if you redeem your investment during this time period. In addition,
more of your money
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<PAGE>
would be invested initially in the case of Class C shares, because of the
relatively low initial sales charge, and all of your money would be invested
initially in the case of Class B shares, which are sold at NAV.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B shares, you would not have all of your money invested initially
because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B shares and 5 years in the case of
Class C shares for the higher cumulative annual distribution-related fee on
those shares plus, in the case of Class C shares, the 1% initial sales charge
to exceed the initial sales charge plus the cumulative annual distribution-
related fees on Class A shares. This does not take into account the time value
of money, which further reduces the impact of the higher Class B or Class C
distribution-related fee on the investment, fluctuations in NAV, the effect of
the return on the investment over this period of time or redemptions when the
CDSC is applicable.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES--CLASS A SHARES
Benefit Plans. Class A shares may be purchased at NAV, without payment of an
initial sales charge, by pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code, deferred
compensation or annuity plans under Sections 403(b) and 457 of the Internal
Revenue Code, "rabbi" trusts and non-qualified deferred compensation plans
that are sponsored by any employer that has a tax qualified benefit plan with
Prudential (collectively, Benefit Plans), provided that the Benefit Plan has
existing assets of at least $1 million invested in shares of Prudential Mutual
Funds (excluding money market funds other than those acquired pursuant to the
exchange privilege) or 250 eligible employees or participants. In the case of
Benefit Plans whose accounts are held directly with the Transfer Agent or
Prudential Securities and for which the Transfer Agent or Prudential
Securities does individual account recordkeeping (Direct Account Benefit
Plans) and Benefit Plans sponsored by Prudential, Prudential Securities or its
subsidiaries (Prudential Securities or Subsidiary Prototype Benefit Plans),
Class A shares may be purchased at NAV by participants who are repaying loans
made from such plans to the participant.
Prudential Retirement Programs. Class A shares may be purchased at NAV by
certain savings, retirement and deferred compensation plans, qualified or non-
qualified under the Internal Revenue Code, for which Prudential provides
administrative or recordkeeping services, provided that (1) the plan has at
least $1 million in existing assets or 250 eligible employees and (2) the Fund
is an available investment option. These plans include pension, profit-
sharing, stock-bonus or other employee benefit plans under Section 401 of the
Internal Revenue Code, deferred compensation and annuity plans under Sections
457 and 403(b)(7) of the Internal Revenue Code and plans that participate in
the PruArray Program (benefit plan recordkeeping service) (hereafter referred
to as a PruArray Plan). All Benefit Plans of a company (or affiliated
companies under common control) for which Prudential serves as plan
administrator or recordkeeper are aggregated in meeting the $1 million
threshold, provided that Prudential has been notified in advance of the
entitlement to the waiver of the sales charge based on the aggregated assets.
The term "existing assets" as used herein includes stock issued by a plan
sponsor, shares of Prudential Mutual Funds and shares of certain unaffiliated
mutual funds that participate in the PruArray Plan (Participating Fund).
"Existing assets" also include monies invested in The Guaranteed Investment
Account (GIA), a group annuity insurance product issued by Prudential, the
Guaranteed Insulated Separate Account, a separate account offered by
Prudential and units of The Stable Value Fund (SVF), an unaffiliated bank
collective fund. Class A shares may also be purchased at NAV by plans that
have monies invested in GIA and SVF, provided (1) the purchase is made with
the proceeds of a redemption from either GIA or SVF and (2) Class A shares are
an investment option of the plan.
B-44
<PAGE>
PruArray Association Benefit Plans. Class A shares are also offered at NAV
to Benefit Plans or non-qualified plans sponsored by employers which are
members of a common trade, professional or membership association
(Association) that participate in the PruArray Plan provided that the
Association enters into a written agreement with Prudential. Such Benefit
Plans or non-qualified plans may purchase Class A shares at NAV without regard
to the assets or number of participants in the individual employer's qualified
Plan(s) or non-qualified plans so long as the employers in the Association (1)
have retirement plan assets in the aggregate of at least $1 million or 250
participants in the aggregate and (2) maintain their accounts with the
Transfer Agent.
PruArray Savings Program. Class A shares are also offered at NAV to
employees of companies that enter into a written agreement with Prudential
Retirement Services to participate in the PruArray Savings Program. Under this
Program, a limited number of Prudential Mutual Funds are available for
purchase at NAV by Individual Retirement Accounts and Savings Accumulation
Plans of the company's employees. The Program is available only to (1)
employees who open an IRA or Savings Accumulation Plan account with the
Transfer Agent and (2) spouses of employees who open an IRA account with the
Transfer Agent. The program is offered to companies that have at least 250
eligible employees.
Special Rules Applicable to Retirement Plans. After a Benefit Plan or
PruArray Plan qualifies to purchase Class A shares at NAV, all subsequent
purchases will be made at NAV.
Other Waivers. In addition, Class A shares may be purchased at NAV, through
the Distributor or the Transfer Agent, by:
. officers of the Prudential Mutual Funds (including the Fund),
. employees of the Distributor, Prudential Securities, PIFM and their
subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer
Agent,
. employees of subadvisers of the Prudential Mutual Funds provided that
purchases at NAV are permitted by such person's employer,
. 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,
. registered representatives and employees of brokers who have entered into
a selected dealer agreement with the Distributor provided that purchases
at NAV are permitted by such person's employer,
. investors who have a business relationship with a financial adviser who
joined Prudential Securities from another investment firm, provided that
(1) the purchase is made within 180 days of the commencement of the
financial adviser's employment at Prudential Securities, or within one
year in the case of Benefit Plans, (2) the purchase is made with proceeds
of a redemption of shares of any open-end non-money market fund sponsored
by the financial adviser's previous employer (other than a fund which
imposes a distribution or service fee of .25 of 1% or less) and (3) the
financial adviser served as the client's broker on the previous purchase,
and
. investors in Individual Retirement Accounts, provided the purchase is
made in a directed rollover to such Individual Retirement Account or with
the proceeds of a tax-free rollover of assets from a Benefit Plan for
which Prudential provides administrative or recordkeeping services, and
further provided that such purchase is made within 60 days of receipt of
the Benefit Plan distribution,
. orders placed by broker-dealers, investment advisers or financial
planners who have entered into an agreement with the Distributor, who
place trades for their own accounts or the accounts of their clients and
who charge a management, consulting or other fee for their services
(e.g., mutual fund "wrap" or asset allocation programs), and
B-45
<PAGE>
. orders placed by clients of broker-dealers, investment advisers or
financial planners who place trades for customer accounts if the accounts
are linked to the master account of such broker-dealer, investment
adviser or financial planner and the broker-dealer, investment adviser or
financial planner charges its client a separate fee for its services
(e.g., mutual fund "supermarket programs").
For an investor to obtain any reduction or waiver of the initial sales
charges, at the time of the sale either the Transfer Agent must be notified
directly by the investor or the Distributor must be notified by the broker
facilitating the transaction that the sale qualifies for the reduced or waived
sales charge. The reduction or waiver will be granted subject to confirmation
of your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions.
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other Prudential Mutual Funds, the
purchases may be combined to take advantage of the reduced sales charges
applicable to larger purchases. See "How to Buy, Sell and Exchange Shares of
the Fund--Reducing or Waiving Class A's Initial Sales Charge" in the
Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
. an individual;
. the individual's spouse, their children and their parents;
. the individual's and spouse's Individual Retirement Account (IRA);
. 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);
. a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children;
. a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse; and
. 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 retirement or group
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that
employer).
The Transfer Agent, the Distributor or your broker must be notified at the
time of purchase that the investor is entitled to a reduced sales charge. The
reduced sales charge will be granted subject to confirmation of the investor's
holdings. The Combined Purchase and Cumulative Purchase Privilege does not
apply to individual participants in 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.
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. The value of shares held
directly with the Transfer Agent and through your broker 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
B-46
<PAGE>
the maximum offering or price (NAV plus maximum sales charge) as of the
previous business day. The Distributor or the Transfer Agent must be notified
at the time of purchase that the investor is entitled to a reduced sales
charge. The reduced sales 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 NAV by entering into a Letter of
Intent whereby they agree to enroll, within a thirteen-month period, a
specified number of eligible employees or participants (Participant Letter of
Intent).
For purposes of the Investment Letter of Intent, all shares of the Fund and
shares of other Prudential Mutual Funds (excluding money market funds other
than those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent,
Prudential or its affiliates, and through your broker, will not be aggregated
to determine the reduced sales charge.
A Letter of Intent permits a purchaser, 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
enrollment 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 investment made during this
90-day period, valued at the purchaser's cost, can be applied to the
fulfillment of the Letter of Intent goal.
The Investment Letter of Intent does not obligate the investor to purchase,
nor the Fund to sell, the indicated amount. Similarly, the Participant Letter
of Intent does not obligate the retirement or group plan to enroll the
indicated number of eligible employees or participants. In the event the
Letter of Intent goal is not achieved within the thirteen-month period, the
purchaser (or the employer or plan sponsor in the case of any retirement or
group plan) is required to pay the difference between the sales charge
otherwise applicable to the purchases made during this period and sales
charges actually paid. Such payment may be made directly to the Distributor
or, if not paid, the Distributor will liquidate sufficient escrowed shares to
obtain such difference. Investors electing to purchase Class A shares of the
Fund pursuant to a Letter of Intent should carefully read such Letter of
Intent.
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charges 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 any
individual participant in any retirement or group plan.
CLASS B SHARES
The offering price of Class B shares for investors choosing one of the
deferred sales charge alternatives is the NAV next determined following
receipt of an order in proper form by the Transfer Agent, your Dealer of the
Distributor. Although there
B-47
<PAGE>
is no sales charge imposed at the time of purchase, redemptions of Class B
shares may be subject to a CDSC. See "Sale of Shares--Contingent Deferred
Sales Charges" below.
The Distributor will pay, from its own resources, sales commissions of up to
4% of the purchase price of Class B shares to brokers, financial advisers and
other persons who sell Class B shares at the time of sale. This facilitates
the ability of the Fund to sell the Class B shares without an initial sales
charge being deducted at the time of purchase. The Distributor anticipates
that it will recoup its advancement of sales commissions from the combination
of the CDSC and the distribution fee.
CLASS C SHARES
The offering price of Class C shares is the next determined NAV plus a 1%
sales charge. In connection with the sale of Class C shares, the Distributor
will pay, from its own resources, brokers, financial advisers and other
persons which distribute Class C shares a sales commission of up to 2% of the
purchase price at the time of the sale.
WAIVER OF INITIAL SALES CHARGE--CLASS C SHARES
Benefit Plans. Class C shares may be purchased at NAV, without payment of an
initial sales charge, by Benefit Plans (as defined above). In the case of
Benefit Plans whose accounts are held directly with the Transfer Agent or
Prudential Securities and for which the Transfer Agent or Prudential
Securities does individual account recordkeeping (Direct Account Benefit
Plans) and Benefit Plans sponsored by Prudential, Prudential Securities or its
subsidiaries (Prudential Securities or Subsidiary Prototype Benefit Plans),
Class C shares may be purchased at NAV by participants who are repaying the
loans made from such plans to the participant.
Prudential Retirement Plans. The initial sales charge will be waived with
respect to purchases of Class C shares by qualified and non-qualified
retirement and deferred compensation plans participating in the PruArray Plan
and other plans for which Prudential provides administrative or recordkeeping
services.
Investments of Redemption Proceeds from Other Investment
Companies. Investors may purchase Class C shares at NAV, without the initial
sales charge, with the proceeds from the redemption of shares of any
unaffiliated registered investment company which were not held through an
account with any Prudential affiliate. Such pruchases must be made within 60
days of the redemption. Investors eligible for this waiver include: (1)
investors purchasing shares through an account at Prudential Securities; (2)
investors purchasing shares through an ADVANTAGE Account or an Investor
Account with Pruco Securities Corporation (Prusec); and (3) investors
purchasing shares through other Dealers. This waiver is not available to
investors who purchase shares directly from the Transfer Agent. You must
notify the Transfer Agent directly or through your Dealer if you are entitled
to this waiver and provide the Transfer Agent with such supporting documents
as it may deem appropriate.
CLASS Z SHARES
Class Z shares of the Fund currently are available for purchase by the
following categories of investors:
. pension, profit-sharing or other employee benefit plans qualified under
Section 401 of the Internal Revenue Code, deferred compensation plans and
annuity plans under Sections 457 and 403(b)(7) of the Internal Revenue
Code and non-qualified plans for which the Fund is an available option
(collectively, Benefit Plans), provided such Benefit Plans (in
combination with other plans sponsored by the same employer or group of
related employers) have at least $50 million in defined contribution
assets;
. participants in any fee-based program sponsored by an affiliate of the
Distributor which includes mutual funds as investment options and for
which the Fund is an available option;
B-48
<PAGE>
. certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by an affiliate of the Distributor for whom Class Z
shares of the Prudential Mutual Funds are an available option;
. Benefit Plans for which an affiliate of the Distributor provides
administrative or recordkeeping services and as of September 20, 1996,
(a) were Class Z shareholders of the Prudential Mutual Funds or (b)
executed a letter of intent to purchase Class Z shares of the Prudential
Mutual Funds;
. current and former Directors/Trustees of the Prudential Mutual Funds
(including the Fund);
. employees of Prudential and/or Prudential Securities who participate in a
Prudential-sponsored employee savings plan; and
. Prudential with an investment of $10 million or more.
In connection with the sale of Class Z shares, the Manager, the Distributor
or one of their affiliates may pay dealers, financial advisers and other
persons which distribute shares a finders' fee from its own resources based on
a percentage of the net asset value of shares sold by such persons.
Class Z shares of the Fund may also be purchased by certain savings,
retirement and deferred compensation plans, qualified or non-qualified under
the Internal Revenue Code of 1986, as amended (the Internal Revenue Code),
provided that (1) the plan purchases shares of the Fund pursuant to an
investment management agreement with The Prudential Insurance Company of
America or its affiliates, (2) the Fund is an available investment option
under the agreement and (3) the plan will participate in the PruArray Plan
sponsored by PMFS. These plans include 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 or 403(b)(7) of
the Internal Revenue Code.
SALE OF SHARES
You can redeem your shares at any time for cash at the NAV next determined
after the redemption request is received in proper form (in accordance with
procedures established by the Transfer Agent in connection with investors'
accounts) by the Transfer Agent, the Distributor or your broker. In certain
cases, however, redemption proceeds will be reduced by the amount of any
applicable CDSC, as described below. See "Contingent Deferred Sales Charges"
below. If you are redeeming your shares through a broker, your broker must
receive your sell order before the Fund computes its NAV for that day (i.e.,
4:15 P.M., New York time) in order to receive that day's NAV. Your broker will
be responsible for furnishing all necessary documentation to the Distributor
and may charge you for its services in connection with redeeming shares of the
Fund.
If you hold shares of the Fund through Prudential Securities, you must
redeem your shares through Prudential Securities. Please contact your
Prudential Securities financial adviser.
If you hold shares in non-certificate form, a written request for redemption
signed by you exactly as the account is registered is required. If you hold
certificates, the certificates, signed in the name(s) shown on the face of the
certificates, must be received by the Transfer Agent, the Distributor or your
broker in order for the redemption request to be processed. If redemption is
requested by a corporation, partnership, trust or fiduciary, written evidence
of authority acceptable to the Transfer Agent must be submitted before such
request will be accepted. All correspondence and documents concerning
redemptions should be sent to the Fund in care of its Transfer Agent,
Prudential Mutual Fund Services LLC, Attention: Redemption Services, P.O. Box
15010, New Brunswick, New Jersey 08906-5010, the Distributor or to your
broker.
SIGNATURE GUARANTEE. If the proceeds of the redemption (1) exceed $50,000,
(2) are to be paid to a person other than the record owner, (3) are to be sent
to an address other than the address on the Transfer Agent's records, or (4)
are to be paid to a corporation, partnership, trust or fiduciary, 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
B-49
<PAGE>
any bank, broker, dealer or credit union. The Transfer Agent reserves the
right to request additional information from, and make reasonable inquiries
of, any eligible guarantor institution. For clients of Prusec, a signature
guarantee may be obtained from the agency or office manager of most Prudential
Insurance and Financial Services or Preferred Services offices. In the case of
redemptions from a PruArray Plan, if the proceeds of the redemption are
invested in another investment option of the plan in the name of the record
holder and at the same address as reflected in the Transfer Agent's records, a
signature guarantee is not required.
Payment for shares presented for redemption will be made by check within
seven days after receipt by the Transfer Agent, the Distributor or your broker
of the certificate and/or written request, except as indicated below. If you
hold shares through a Broker, payment for shares presented for redemption will
be credited to your account at your broker, unless you indicate
otherwise. Such payment may be postponed or the right of redemption suspended
at times (1) when the New York Stock Exchange is closed for other than
customary weekends and holidays, (2) when trading on such Exchange is
restricted, (3) when an emergency exists as a result of which disposal by the
Fund of securities owned by it is not reasonably practicable or it is not
reasonably practicable for the Fund fairly to determine the value of its net
assets, or (4) during any other period when the Commission, by order, so
permits; provided that applicable rules and regulations of the Commission
shall govern as to whether the conditions prescribed in (2), (3) or (4) exist.
Payment for redemption of recently purchased shares will be delayed until
the Fund or its Transfer Agent has been advised that the purchase check has
been honored, which may take up to 10 calendar days from the time of receipt
of the purchase check by the Transfer Agent. Such delay may be avoided by
purchasing shares by wire or by certified or cashier's check.
REDEMPTION IN KIND. If the Board of Directors determines that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price
in whole or in part by a distribution in kind of securities from the
investment portfolio of the Fund, in lieu of cash, in conformity with
applicable rules of the Commission. Securities will be readily marketable and
will be valued in the same manner as in a regular redemption. If your shares
are redeemed in kind, you would incur transaction costs in converting the
assets into cash. The Fund, however, has elected to be governed by Rule 18f-1
under the Investment Company Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the NAV of the
Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Board
of Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose
account has a net asset value of less than $500 due to a redemption. The Fund
will give such shareholders 60 days' prior written notice in which to purchase
sufficient additional shares to avoid such redemption. No CDSC will be imposed
on any such involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of the Fund at the NAV next
determined after the order is received, which must be within 90 days after the
date of the redemption. Any CDSC paid in connection with such redemption will
be credited (in shares) to your account. (If less than a full repurchase is
made, the credit will be on a pro rata basis.) You must notify the Transfer
Agent, either directly or through The Distributor or your broker, at the time
the repurchase privilege is exercised to adjust your account for the CDSC you
previously paid. Thereafter, any redemptions will be subject to the CDSC
applicable at the time of the redemption. See "Contingent Deferred Sales
Charges" below. Exercise of the repurchase privilege will generally not affect
federal tax treatment of any gain realized upon redemption. However, if the
redemption was made within a 30 day period of the repurchase and if the
redemption resulted in a loss, some or all of the loss, depending on the
amount reinvested, may not be allowed for federal income tax purposes.
B-50
<PAGE>
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C
shares redeemed within 18 months of purchase (or one year in the case of
shares purchased prior to November 2, 1998) will be subject to a 1% CDSC. The
CDSC will be deducted from the redemption proceeds and reduce the amount paid
to you. The CDSC will be imposed on any redemption by you which reduces the
current value of your Class B or Class C shares to an amount which is lower
than the amount of all payments by you for shares during the preceding six
years, in the case of Class B shares, and 18 months, in the case of Class C
shares (one year for Class C shares purchased before November 2, 1998). A CDSC
will be applied on the lesser of the original purchase price or the current
value of the shares being redeemed. Increases in the value of 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.
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 "Shareholder Investment Account--Exchange Privilege."
The following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------------- -------------------------
<S> <C>
First........................................ 5.0%
Second....................................... 4.0%
Third........................................ 3.0%
Fourth....................................... 2.0%
Fifth........................................ 1.0%
Sixth........................................ 1.0%
Seventh...................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in NAV above the total amount of payments
for the purchase of Fund shares made during the preceding six years; then of
amounts representing the cost of shares held beyond the applicable CDSC
period; and finally, of amounts representing the cost of shares held for the
longest period of time within the applicable CDSC period.
For example, assume you purchased 800 Class B shares at $12.50 per share for
a cost of $10,000. Subsequently, you acquired 5 additional Class B shares
through dividend reinvestment. During the second year after the purchase you
decided to redeem $5,000 of your investment. Assuming at the time of the
redemption the NAV had appreciated to $15 per share, the value of your Class B
shares would be $12,075 (805 shares at $15 per share). The CDSC would not be
applied to the value of the reinvested dividend shares and the amount which
represents appreciation ($2,075). Therefore, $2,295 of the $5,000 redemption
proceeds ($5,000 minus $2,075) would be charged at a rate of 4% (the
applicable rate in the second year after purchase) for a total CDSC of $117.
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.
B-51
<PAGE>
WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint
tenancy (with rights of survivorship), at the time of death or initial
determination of disability, provided that the shares were purchased prior to
death or disability.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions are:
(1) in the case of a tax-deferred retirement plan, a lump-sum or other
distribution after retirement;
(2) in the case of an IRA (including a Roth IRA), a lump-sum or other
distribution after attaining age 59 1/2 or a periodic distribution based on
life expectancy;
(3) in the case of a Section 403(b) custodial account, a lump sum or other
distribution after attaining age 59 1/2; and
(4) a tax-free return of an excess contribution or plan distributions
following the death or disability of the shareholder, provided that the shares
were purchased prior to death or disability.
Finally, the CDSC will be waived to the extent that the proceeds from shares
redeemed are invested in Prudential Mutual Funds, The Guaranteed Investment
Account, the Guaranteed Insulated Separate Account or units of the Stable
Value Fund. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service (i.e.,
following voluntary or involuntary termination of employment or following
retirement). Under no circumstances will the CDSC be waived on redemptions
resulting from the termination of a tax-deferred retirement plan, unless such
redemptions otherwise qualify for a waiver as described above. In the case of
Direct Account and Prudential Securities or Subsidiary Prototype Benefit
Plans, the CDSC will be waived on redemptions which represent borrowings from
such plans. Shares purchased with amounts used to repay a loan from such plans
on which a CDSC was not previously deducted will thereafter be subject to a
CDSC without regard to the time such amounts were previously invested. In the
case of a 401(k) plan, the CDSC will also be waived upon the redemption of
shares purchased with amounts used to repay loans made from the account to the
participant and from which a CDSC was previously deducted.
Systematic Withdrawal Plan. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12%
of the total dollar amount subject to the CDSC may be redeemed without charge.
The Transfer Agent will calculate the total amount available for this waiver
annually on the anniversary date of your purchase or, for shares purchased
prior to March 1, 1997, on March 1 of the current year. The CDSC will be
waived (or reduced) on redemptions until this threshold 12% is reached.
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 your
broker, 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.
B-52
<PAGE>
In connection with these waivers, the Transfer Agent will require you to
submit the supporting documentation set forth below.
<TABLE>
<CAPTION>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
- ------------------ ----------------------
<S> <C>
Death A copy of the shareholder's death
certificate or, in the case of a trust, a
copy of the grantor's death certificate,
plus a copy of the trust agreement
identifying the grantor.
Disability--An individual will be consid- A copy of the Social Security
ered disabled if he or she is unable to Administration award letter or a letter
engage in any substantial gainful activity from a physician on the physician's
by reason of any medically determinable letterhead stating that the shareholder
physical or mental impairment which can be (or, in the case of a trust, the grantor)
expected to result in death or to be of is permanently disabled. The letter must
long-continued and indefinite duration. also indicate the date of disability.
Distribution from an IRA or 403(b) Custo- A copy of the distribution form from the
dial Account custodial firm indicating (i) the date of
birth of the shareholder and (ii) that the
shareholder is over age 59 1/2 and is
taking a normal distribution--signed by the
shareholder.
Distribution from Retirement Plan A letter signed by the plan
administrator/trustee indicating the reason
for the distribution.
Excess Contributions A letter from the shareholder (for an IRA)
or the plan administrator/trustee on
company letterhead indicating the amount of
the excess and whether or not taxes have
been paid.
</TABLE>
The Transfer Agent reserves the right to request such additional documents
as it may deem appropriate.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS C SHARES
Prudential Retirement Plans. The CDSC will be waived on redemptions from
qualified and non-qualified retirement and deferred compensation plans that
participate in the PruArray Plan and other plans for which Prudential provides
administrative or recordkeeping services. The CDSC will also be waived on
redemptions from Benefit Plans sponsored by Prudential and its affiliates to
the extent that the redemption proceeds are invested in The Guaranteed
Investment Account, the Guaranteed Insulated Separate Account and units of The
Stable Value Fund.
Other Benefit Plans. The CDSC will be waived on redemptions from Benefit
Plans holding shares through a broker not affiliated with Prudential and for
whom the broker provides administrative or recordkeeping services.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected
at relative net asset value without the imposition of any additional sales
charge.
Since the Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will
be determined on each conversion date in accordance with the following
formula: (i) the ratio of (a) the amounts paid for Class B shares purchased at
least seven
B-53
<PAGE>
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 800 shares were initially purchased at
$12.50 per share (for a total of $10,000) and a second purchase of 100 shares
was subsequently made at $15 per share (for a total of $1,500), 95.24 shares
would convert approximately seven years from the initial purchase (i.e.,
$10,000 divided by $11,500 (86.96%), multiplied by 900 shares equals 782.64
shares). The Manager reserves the right to modify the formula for determining
the number of Eligible Shares in the future as it deems appropriate on notice
to shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share NAV of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted.
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been
made on the last day of the month, or for Class B shares acquired through
exchange, or a series of exchanges, on the last day of the month in which the
original payment for purchases of such Class B shares was made. For Class B
shares previously exchanged for shares of a money market fund, the time period
during which such shares were held in the money market fund will be excluded.
For example, Class B shares held in a money market fund for one year would not
convert to Class A shares until approximately eight years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase
of such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (1) that the
dividends and other distributions paid on Class A, Class B, Class C and Class
Z shares will not constitute "preferential dividends" under the Internal
Revenue Code and (2) that the conversion of shares does not constitute a
taxable event. The conversion of Class B shares into Class A shares may be
suspended if such opinions or rulings are no longer available. If conversions
are suspended, Class B shares of the Fund will continue to be subject,
possibly indefinitely, to their higher annual distribution and service fee.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which a record of the shares held is
maintained by the Transfer Agent. If a stock certificate is desired, it must
be requested in writing for each transaction. Certificates are issued only for
full shares and may be redeposited in the Account at any time. There is no
charge to the investor for issuance of a certificate. The Fund makes available
to its shareholders the following privileges and plans.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND 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 five full business days prior to the record
date to have subsequent dividends or distributions sent in
B-54
<PAGE>
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 NAV 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 NAV per share next determined after receipt of the check or
proceeds by the Transfer Agent. Such shareholder will receive credit for any
CDSC 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 the relative NAV next
determined after receipt of an order in proper form. An exchange will be
treated as a redemption and purchase for tax purposes. Shares may be exchanged
for shares of another fund only if shares of such fund may legally be sold
under applicable state laws. For retirement and group plans having a limited
menu of Prudential Mutual Funds, the exchange privilege is available for those
funds eligible for investment in the particular program.
It is contemplated that the exchange privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
In order to exchange shares by telephone, 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.
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.
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.
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.
B-55
<PAGE>
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 York Money Market Series)
(New Jersey Money Market Series)
Prudential MoneyMart Assets, Inc. (Class A shares)
Prudential Tax-Free Money Fund, Inc.
CLASS B AND CLASS C. Shareholders of the Fund may exchange their Class B and
Class C shares of the Fund for Class B and Class C shares, respectively, of
certain other Prudential Mutual Funds and shares of Prudential Special Money
Market Fund, Inc., a money market fund. No CDSC will be payable upon such
exchange, but a CDSC may be payable upon the redemption of the Class B and
Class C shares acquired as a result of the exchange. The applicable sales
charge will be that imposed by the fund in which shares were initially
purchased and the purchase date will be deemed to be the date of 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 without regard to the time such shares were held in the money
market fund. In order to minimize the period of time in which shares are
subject to a CDSC, shares exchanged out of the money market fund will be
exchanged on the basis of their remaining holding periods, with the longest
remaining holding periods being transferred first. In measuring the time
period shares are held in a money market fund and "tolled" for purposes of
calculating the CDSC holding period, exchanges are deemed to have been made on
the last day of the month. Thus, if shares are exchanged into the Fund from a
money market fund during the month (and are held in the Fund at the end of the
month), the entire month will be included in the CDSC holding period.
Conversely, if shares are exchanged into a money market fund prior to the last
day of the month (and are held in the money market fund on the last day of the
month), the entire month will be excluded from the CDSC holding period.
At any time after acquiring shares of other funds participating in the Class
B or Class C exchange privilege, a shareholder may again exchange those shares
(and any reinvested dividends and distributions) for Class B or Class C shares
of the Fund, respectively, without subjecting such shares to any CDSC. Shares
of any fund participating in the Class B or Class C exchange privilege that
were acquired through reinvestment of dividends or distributions may be
exchanged for Class B or Class C shares of other funds, respectively, without
being subject to any CDSC.
CLASS Z. Class Z shares may be exchanged for Class Z shares of other
Prudential Mutual Funds.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV [and for
shareholders who qualify to purchase Class Z shares]. Under this exchange
privilege, amounts representing any Class B and Class C shares which are not
subject to a CDSC held in such a shareholder's account will be automatically
exchanged for Class A shares for shareholders who qualify to purchase Class A
shares at NAV on a quarterly basis, unless the shareholder elects otherwise.
[Similarly, shareholders who qualify to purchase Class Z shares will have
B-56
<PAGE>
their Class B and Class C shares which are not subject to a CDSC and their
Class A shares exchanged for Class Z shares on a quarterly basis.] Eligibility
for this exchange privilege will be calculated on the business day prior to
the date of the exchange. Amounts representing Class B or Class C shares which
are not subject to a CDSC include the following: (1) amounts representing
Class B or Class C shares acquired pursuant to the automatic reinvestment of
dividends and distributions, (2) amounts representing the increase in the net
asset value above the total amount of payments for the purchase of Class B or
Class C shares and (3) amounts representing Class B or Class C shares held
beyond the applicable CDSC period. Class B and Class C shareholders must
notify the Transfer Agent either directly or through Prudential Securities,
Prusec or another broker that they are eligible for this special exchange
privilege.
[Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares
when they elect to have those assets become a part of the fee-based program.
Upon leaving the program (whether voluntarily or not), such Class Z shares
(and, to the extent provided for in the program, Class Z shares acquired
through participation in the program) will be exchanged for Class A shares at
net asset value.]
Additional details about the exchange privilege and prospectuses for each of
the Prudential Mutual Funds are available from the Fund's Transfer Agent, the
Distributor or your broker. The exchange privilege may be modified, terminated
or suspended on sixty days' notice, and any fund, including the Fund, or the
Distributor, has the right to reject any exchange application relating to such
fund's shares.
DOLLAR COST AVERAGING. Dollar cost averaging is a method of accumulating
shares by investing a fixed amount of dollars in shares at set intervals. An
investor buys more shares when the price is low and fewer shares when the
price is high. The average cost per share is lower than it would be if a
constant number of shares were bought at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2011, the cost of four years at a private
college could reach $210,000 and over $90,000 at a public university.(/1/)
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(/2/)
<TABLE>
<CAPTION>
PERIOD OF MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
- ------------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
25 Years................................. $ 110 $ 165 $ 220 $ 275
20 Years................................. 176 264 352 440
15 Years................................. 296 444 592 740
10 Years................................. 555 833 1,110 1,388
5 Years.................................. 1,371 2,057 2,742 3,428
</TABLE>
- --------
(/1/) Source information concerning the costs of education at public and private
universities is available from The College Board Annual Survey of
Colleges, 1993. Average costs for private institutions include tuition,
fees, room and board for the 1993-1994 academic year.
(/2/) The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not
intended to reflect the performance of an investment in shares of the
Fund. The investment return and principal value of an investment will
fluctuate so that an investor's shares when redeemed may be worth more or
less than their original cost.
B-57
<PAGE>
See "Automatic Savings Accumulation Plan."
AUTOMATIC INVESTMENT PLAN (AIP)
Under AIP, an investor may arrange to have a fixed amount automatically
invested in shares of the Fund monthly by authorizing his or her bank account
or brokerage account (including a Prudential Securities Command Account) to be
debited to invest specified dollar amounts in shares of the Fund. The
investor's bank must be a member of the Automatic Clearing House System. Stock
certificates are not issued to AIP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, the Distributor or your broker.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders through the
Transfer Agent, the Distributor or your broker. 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 (1) a $10,000 minimum
account value applies, (2) withdrawals may not be for less than $100 and (3)
the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at NAV on
shares held under this plan.
The Transfer Agent, the Distributor or your broker 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 be recognized for federal income tax purposes. In
addition, withdrawals made concurrently with purchases of additional shares
are inadvisable because of the sales charges applicable to (1) the purchase of
Class A and Class C shares and (2) the redemption of Class B and Class C
shares. Each shareholder should consult his or her own tax adviser with regard
to the tax consequences of the plan, particularly if used in connection with a
retirement plan.
TAX-DEFERRED RETIREMENT PLANS
Various qualified retirement plans, including a 401(k) plan, self-directed
individual retirement accounts and "tax-deferred accounts" under Section
403(b)(7) of the Internal Revenue Code of 1986, as amended (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, and the
administration, custodial fees and other details are available from the
Distributor or the Transfer Agent.
Investors who are considering the adoption of such a plan should consult
with their own legal counsel or tax adviser with respect to the establishment
and maintenance of any such plan.
B-58
<PAGE>
TAX-DEFERRED RETIREMENT ACCOUNTS
INDIVIDUAL RETIREMENT ACCOUNTS. An individual retirement account (IRA)
permits the deferral of federal income tax on income earned in the account
until the earnings are withdrawn. The following chart represents a comparison
of the earnings in a personal savings account with those in an IRA, assuming a
$2,000 annual contribution, an 8% rate of return and a 39.6% federal income
tax bracket and shows how much more retirement income can accumulate within an
IRA as opposed to a taxable individual savings account.
TAX-DEFERRED COMPOUNDING(/1/)
<TABLE>
<CAPTION>
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
------------- -------- --------
<S> <C> <C>
10 years................................................... $ 26,165 $ 31,291
15 years................................................... 44,676 58,649
20 years................................................... 68,109 98,846
25 years................................................... 97,780 157,909
30 years................................................... 135,346 244,692
</TABLE>
- --------
(/1/)The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable
versus tax-deferred compounding for the periods and on the terms
indicated. Earnings in a traditional IRA account will be subject to tax
when withdrawn from the account. Distributions from a Roth IRA which meet
the conditions required under the Internal Revenue Code will not be
subject to tax upon withdrawal from the account.
MUTUAL FUND PROGRAMS
From time to time, the Fund may be included in a mutual fund program with
other Prudential Mutual Funds. Under such a program, a group of portfolios
will be selected and thereafter marketed collectively. Typically, these
programs are created with an investment theme, e.g., to seek greater
diversification, protection from interest rate movements or access to
different management styles. In the event such a program is instituted, there
may be a minimum investment requirement for the program as a whole. The Fund
may waive or reduce the minimum initial investment requirements in connection
with such a program.
The mutual funds in the program may be purchased individually or as a part
of a program. Since the allocation of portfolios included in the program may
not be appropriate for all investors, investors should consult their financial
advisor concerning the appropriate blend of portfolios for them. If investors
elect to purchase the individual mutual funds that constitute the program in
an investment ratio different from that offered by the program, the standard
minimum investment requirements for the individual mutual funds will apply.
NET ASSET VALUE
The Fund's net asset value per share or NAV is determined by subtracting its
liabilities from the value of its assets and dividing the remainder by the
number of outstanding shares. NAV is calculated separately for each class. The
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.
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
B-59
<PAGE>
a securities exchange and NASDAQ National Market System securities (other than
options on stock and stock indices) are valued at the last sales price of such
exchange system on the day of valuation, or, if there was no sale on such day,
the mean between the last bid and asked prices on such day or at the bid price
on such day in the absence of an asked price. Corporate bonds (other than
convertible debt securities) and U.S. Government securities that are actively
traded in the over-the-counter market, including listed securities for which
the primary market is believed by the Manager, in consultation with the
Subadviser to be over-the-counter, are valued on the basis of valuations
provided by an independent pricing agent or principal market maker which uses
information with respect to transactions in bonds, quotations from bond
dealers, agency ratings, market transactions in comparable securities and
various relationships between securities in determining value. Convertible
debt securities that are actively traded in the over-the-counter market,
including listed securities for which the primary market is believed by the
Manager in consultation with the Subadviser to be over-the-counter, are valued
at the mean between the last reported bid and asked prices provided by
principal market makers or independent pricing agents. Options on stock and
stock indices traded on an exchange are valued at the average between the most
recently quoted bid and asked prices on the respective exchange and futures
contracts and options thereon are valued at their last sales prices as of the
close of trading on the applicable commodities exchange or board of trade or,
if there was no sale on the applicable commodities exchange or board of trade
on such day, at the mean between the most recently quoted bid and asked prices
on such exchange or board of trade. Should an extraordinary event, which is
likely to affect the value of the security, occur after the close of an
exchange on which a portfolio security is traded, such security will be valued
at fair value considering factors determined in good faith by the investment
adviser under procedures established by and under the general supervision of
the Fund's Board of Directors.
Securities or other assets for which reliable market quotations are not
readily available or for which the pricing agent or principal market maker
does not provide a valuation or methodology or provides a valuation or
methodology that, in the judgement of the Manager or Subadviser (or Valuation
Committee or Board of Directors) does not represent fair value, are valued by
the Valuation Committee or Board of Directors in consultation with the Manager
or Subadviser, including its portfolio managers, traders and its research and
credit analysts, on the basis of the following factors: cost of the security,
transactions in comparable securities, relationships among various securities
and such other factors as may be determined by the Manager, Subadviser, Board
of Directors or Valuation Committee to materially affect the value of the
security. Short-term debt securities are valued at cost, with interest accrued
or discount amortized to the date of maturity, if their original maturity was
60 days or less, unless this is determined by the Board of Directors not to
represent fair value. Short-term securities with remaining maturities of 60
days or more, 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 NAV at 4:15 P.M., New York
time, on each day the New York Stock Exchange is open for trading except on
days on which no orders to purchase, sell or redeem Fund shares have been
received or days on which changes in the value of the Fund's portfolio
securities do not affect NAV. In the event the New York Stock Exchange closes
early on any business day, the NAV of the Fund's shares shall be determined at
a time between such closing and 4:15 P.M., New York time. The New York Stock
Exchange is closed on the following holidays: New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
NAVs and dividends. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A shares as a result of the larger distribution-
related fee to which Class B and Class C shares are subject. It is expected,
however, that the net asset value per share of each class will tend to
converge immediately after the recording of dividends, if any, which will
differ by approximately the amount of the distribution and/or service fee
expense accrual differential among the classes.
B-60
<PAGE>
TAXES, DIVIDENDS AND DISTRIBUTIONS
The Fund has elected to qualify and intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code.
This relieves the Fund (but not its shareholders) from paying federal income
tax on income and capital gains which are distributed to shareholders, and
permits net capital gains of the Fund (i.e., the excess of net long-term
capital gains over net short-term capital losses) to be treated as long-term
capital gains of the shareholders, regardless of how long shareholders have
held their shares in the Fund. Net capital gains of a Fund which are available
for distribution to shareholders will be computed by taking into account any
capital loss carryforward of the Fund.
Qualification of a Fund as a regulated investment company requires, among
other things, that (a) at least 90% of the Fund's annual gross income (without
reduction for losses from the sale or other disposition of securities) be
derived from interest, dividends, payments with respect to securities loans
and gains from the sale or other disposition of securities or options thereon
or foreign currencies, or other income (including but not limited to gains
from options, futures or forward contracts) derived with respect to its
business of investing in such securities or currencies; (b) the Fund diversify
its holdings so that, at the end of each quarter of the taxable year (i) at
least 50% of the value of the Fund's assets is represented by cash, U.S.
Government securities and other securities limited in respect of any one
issuer to an amount not greater than 5% of the value of the Fund's assets and
10% of the outstanding voting securities of such issuer, and (ii) not more
than 25% of the value of its assets is invested in the securities of any one
issuer (other than U.S. Government securities); and (c) the Fund distribute to
its shareholders at least 90% of its net investment income and net short-term
gains (i.e., the excess of net short-term capital gains over net long-term
capital losses) in each year.
Gains or losses on sales of securities by the Fund will be treated as long-
term capital gains or losses if the securities have been held by it for more
than one year except in certain cases where the Fund acquires a put or writes
a call thereon or otherwise holds an offsetting position with respect to the
securities. Other gains or losses on the sale of securities will be short-term
capital gains or losses. Gains and losses on the sale, lapse or other
termination of options on securities will be treated as gains and losses from
the sale of securities. If an option written by the Fund on securities lapses
or is terminated through a closing transaction, such as a repurchase by the
Fund of the option from its holder, the Fund will generally realize short-term
capital gain or loss. If securities are sold by the Fund pursuant to the
exercise of a call option written by it, the Fund will include the premium
received in the sale proceeds of the securities delivered in determining the
amount of gain or loss on the sale. Certain of the Fund's transactions may be
subject to wash sale, short sale, constructive sale, straddle and anti-
conversion provisions of the Internal Revenue Code which may, among other
things, require the Fund to defer recognition of losses. In addition, debt
securities acquired by the Fund may be subject to original issue discount and
market discount rules which, respectively, may cause the Fund to accrue income
in advance of the receipt of cash with respect to interest or cause gains to
be treated as ordinary income.
Special rules apply to most options on stock indices, futures contracts and
options thereon, and forward foreign currency exchange contracts in which the
Fund may invest. These investments will generally constitute Section 1256
contracts and will be required to be "marked to market" for federal income tax
purposes at the end of the Fund's taxable year; that is, treated as having
been sold at market value. Except with respect to certain forward foreign
currency exchange contracts, 60% of any gain or loss recognized on such
"deemed sales" and on actual dispositions will be treated as long-term capital
gain or loss, and the remainder will be treated as short-term capital gain or
loss.
Gain or loss on the sale, lapse or other termination of options on stock and
on narrowly-based stock indices will be capital gain or loss and will be long-
term or short-term depending upon the holding period of the option. In
addition, positions which are part of a straddle will be subject to certain
wash sale, short sale and constructive sale provisions of the Internal Revenue
Code. In the case of a straddle, the Fund may be required to defer the
recognition of losses on positions it
B-61
<PAGE>
holds to the extent of any unrecognized gain on offsetting positions held by
the Fund. The conversion transaction rules may apply to certain transactions
to treat all or a portion of the gain thereon as ordinary income rather than
as capital gain.
A "passive foreign investment company" (PFIC) is a foreign corporation that,
in general, meets either of the following tests: (a) at least 75% of its gross
income is passive or (b) an average of at least 50% of its assets produce, or
are held for the production of, passive income. If the Fund acquires and holds
stock in a PFIC beyond the end of the year of its acquisition, the Fund will
be subject to federal income tax on a portion of any "excess distribution"
received on the stock or of any gain from disposition of the stock
(collectively, PFIC income), plus interest thereon, even if the Fund
distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in the Fund's investment company
taxable income and, accordingly, will not be taxable to it to the extent that
income is distributed to its shareholders. The Fund may make a "mark-to-
market" election with respect to any stock it holds of a PFIC. If the election
is in effect, at the end of the Fund's taxable year, the Fund will recognize
the amount of gains, if any, with respect to PFIC stock. No loss will be
recognized on PFIC stock, except to the extent of gains recognized in prior
years. Alternatively, the Fund, if it meets certain requirements, may elect to
treat any PFIC in which it invests as a "qualified electing fund," in which
case, in lieu of the foregoing tax and interest obligation, the Fund will be
required to include in income each year its pro rata share of the qualified
electing fund's annual ordinary earnings and net capital gain, even if they
are not distributed to the Fund; those amounts would be subject to the
distribution requirements applicable to the Fund described above.
Gains or losses attributable to fluctuations in exchange rates which occur
between the time the Fund accrues interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time
the Fund actually collects such receivables or pays such liabilities are
treated as ordinary income or ordinary loss. Similarly, gains or losses on
forward foreign currency exchange contracts or dispositions of debt securities
denominated in a foreign currency attributable to fluctuations in the value of
the foreign currency between the date of acquisition of the security and the
date of disposition also are treated as ordinary gain or loss. These gains,
referred to under the Internal Revenue Code as "Section 988" gains or losses,
increase or decrease the amount of the Fund's investment company taxable
income available to be distributed to its shareholders as ordinary income,
rather than increasing or decreasing the amount of the Fund's net capital
gain. If Section 988 losses exceed other investment company taxable income
during a taxable year, the Fund would not be able to make any ordinary
dividend distributions, or distributions made before the losses were realized
would be recharacterized as a return of capital to shareholders, rather than
as an ordinary dividend, reducing each shareholder's basis in his or her Fund
shares.
The Fund is required to distribute 98% of its ordinary income in the same
calendar year in which it is earned. The Fund is also required to distribute
during the calendar year 98% of the capital gain net income it earned during
the 12 months ending on October 31 of such calendar year, as well as all
undistributed ordinary income and undistributed capital gain net income from
the prior year or the twelve-month period ending on October 31 of such prior
year, respectively. To the extent it does not meet these distribution
requirements, the Fund will be subject to a nondeductible 4% excise tax on the
undistributed amount. For purposes of this excise tax, income on which the
Fund pays income tax is treated as distributed.
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. Therefore, prior to purchasing
shares of the Fund, the investor should carefully consider the impact of
dividends, including capital gains distributions, which are expected to be or
have been announced.
Any loss realized on a sale, redemption or exchange of shares of the Fund by
a shareholder will be disallowed to the extent the shares are replaced within
a 61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
B-62
<PAGE>
A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes
of calculating gain or loss realized upon a sale or exchange of shares of the
Fund.
The per share dividends on Class B and Class C shares will generally be
lower than the per share dividends on Class A shares as a result of the higher
distribution-related fee applicable to the Class B and Class C shares. The per
share capital gains distributions, if any, will be paid in the same amounts
for Class A, Class B and Class C shares. See "Net Asset Value."
Dividends of net investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a
nominee or fiduciary) who is a nonresident alien individual, a foreign
corporation or a foreign partnership (foreign shareholder) are subject to a
30% (or lower treaty rate) withholding tax upon the gross amount of the
dividends unless the dividends are effectively connected with a U.S. trade or
business conducted by the foreign shareholder. Capital gain dividends paid to
a foreign shareholder are generally not subject to withholding tax. A foreign
shareholder will, however, be required to pay U.S. income tax on any dividends
and capital gain distributions which are effectively connected with a U.S.
trade or business of the foreign shareholder.
Dividends received by corporate shareholders are eligible for a dividends-
received deduction of 70% to the extent the Fund's income is derived from
qualified dividends received by the Fund from domestic corporations. Dividends
attributable to foreign corporations, interest income, capital and currency
gain, gain or loss from Section 1256 contracts (described above) and income
from certain other sources will not constitute qualified dividends. Individual
shareholders are not eligible for the dividends-received deduction.
Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Income tax
treaties between certain countries and the United States may reduce or
eliminate such taxes. It is impossible to determine in advance the effective
rate of foreign tax to which the Fund will be subject, since the amount of the
Fund's assets to be invested in various countries will vary. The Fund does not
expect to meet the requirements of the Internal Revenue Code for "passing-
through" to its shareholders any foreign income taxes paid.
Foreign shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the
Fund.
PERFORMANCE INFORMATION
YIELD. The Fund may from time to time advertise its yield as calculated over
a 30-day period. Yield is calculated separately for Class A, Class B and Class
C shares. This yield is computed by dividing the Fund's net investment income
per share earned during this 30-day period by the maximum offering price per
share on the last day of this period. Yield is calculated according to the
following formula:
a-b
YIELD = 2 [( ___ +1)/6/-1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
B-63
<PAGE>
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. Yields for the Fund will vary based on a number of factors
including changes in net asset value, market conditions, the level of interest
rates and the level of Fund income and expenses.
The Fund's 30-day yields for the 30 days ended November 30, 1998 were %, %
and % for the Class A, Class B and Class C shares, respectively. Class Z
shares were not offered as of November 30, 1998.
AVERAGE ANNUAL TOTAL RETURN. The Fund may also advertise its average annual
total return. Average annual total return is determined separately for Class
A, Class B and Class C shares. See "How the Fund Calculates Performance" in
the Prospectus.
Average annual total return is computed according to the following formula:
P ( 1 + T ) n = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 payment made
at the beginning of the 1, 5 or 10 year periods at the end of the
1, 5 or 10 year periods (or fractional portion thereof).
Average annual total return takes into account any applicable initial or
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 the one year and since inception (March
26, 1996) periods ended November 30, 1998, for the Fund's Class A shares were
% and %, respectively. The average annual total returns for the one year and
since inception (March 26, 1996) periods ended November 30, 1998 for the
Fund's Class B shares were % and %, respectively. The average annual total
returns for the one year and since inception (March 26, 1996) periods ended
November 30, 1998 for the Fund's Class C shares were % and %, respectively.
AGGREGATE TOTAL RETURN. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B
and Class C 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:
ERV-P
--------
P
Where: P = a hypothetical initial payment of $1,000.
ERV = ending redeemable value of a hypothetical $1,000 payment made
at the beginning of the 1, 5 or 10 year periods at the end of the
1, 5 or 10 year periods (or fractional portion thereof).
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 and since
inception periods ended on November 30, 1998 were % and %, respectively. The
aggregate total returns for Class B shares for the one year and since
inception periods ended on November 30, 1998 were % and %, respectively. The
aggregate total returns for Class C shares for the one year and since
inception periods ended November 30, 1998 were % and %, respectively.
B-64
<PAGE>
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. Set forth
below is a chart which compares the performance of different types of
investments over the long term and the rate of inflation./(1)/
- --------------------------------------------------------------------------------
A Look at Performance Over the Long-Term
Average Annual Returns
1/1/26 - 12/31/97
[BAR GRAPH APPEARS HERE]
Common Stocks Long-Term Gov't. Bonds Inflation
11.0% 5.2% 3.1%
- --------------------------------------------------------------------------------
- --------
/(1)/ Source: Ibbotson Associates, Stocks, Bonds, Bills and Inflation--1998
Yearbook (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. All rights reserved. Common stock
returns are based on the Standard and Poor's 500 Stock Index, a market-
weighted, unmanaged index of 500 common stocks in a variety of industry
sectors. It is a commonly used indicator of broad stock price movements.
This chart is for illustrative purposes only and is not intended to
represent the performance of any particular investment or fund. Investors
cannot invest directly in an index. Past performance is not a guarantee of
future results.
B-65
<PAGE>
Portfolio of Investments as of PRUDENTIAL DISTRESSED SECURITIES
November 30, 1997 FUND, INC.
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------------------
LONG-TERM INVESTMENTS--99.2%
COMMON STOCKS(c)--36.1%
- ------------------------------------------------------------------------
Beverages--2.6%
10,000 Dr. Pepper Bottling Holdings, Inc. $ 203,125
- ------------------------------------------------------------------------
Broadcasting--2.4%
15,000 On Command Corp. 186,562
- ------------------------------------------------------------------------
Building & Related Industries--4.9%
19,000 EMCOR Group, Inc. 380,000
- ------------------------------------------------------------------------
Casinos--7.0%
30,000 Alliance Gaming Corp. 120,938
13,357 Casino America, Inc. 38,401
50,127 Colorado Gaming & Entertainment Co. 281,964
7,000 Grand Casinos, Inc. 91,875
10,000 Lady Luck Gaming Corp. 11,250
------------
544,428
- ------------------------------------------------------------------------
Consumer Goods & Services--0.2%
1,400 Coinstar, Inc.(b)
(cost $11,039; purchased 10/7/96) 13,475
- ------------------------------------------------------------------------
Electronics--1.1%
15,000 Electronic Retailing Systems
International, Inc. 83,438
- ------------------------------------------------------------------------
Energy--3.3%
35,000 Baycorp Holdings, Ltd. 258,125
- ------------------------------------------------------------------------
Food Serving - Fast Foods
50 AmeriKing, Inc. 2,500
- ------------------------------------------------------------------------
Metals--6.2%
150,000 Ladish Company, Inc. 487,500
- ------------------------------------------------------------------------
Mining--1.1%
100,000 Sunshine Mining & Refining Co. $ 87,500
- ------------------------------------------------------------------------
Retail--3.8%
20,000 Phar-Mor, Inc. 167,500
10,000 Sassco Fashions, Ltd. 132,500
------------
300,000
- ------------------------------------------------------------------------
Telecommunications--0.6%
2,500 Jordon Telecommunications Products 0
5,000 PageMart Wireless, Inc., Class A 49,375
------------
49,375
- ------------------------------------------------------------------------
Waste Management--2.9%
318,800 Waste Systems International, Inc. 229,137
------------
Total common stocks
(cost $2,262,736) 2,825,165
------------
PREFERRED STOCKS--15.1%
- ------------------------------------------------------------------------
Communications--0.6%
500 American Communications Services,
12.75%, PIK 48,875
- ------------------------------------------------------------------------
Consumer Goods & Services--2.3%
1,800 Pantry Pride, Inc.,
Conv. Exch., $14.875, Ser. B 181,800
- ------------------------------------------------------------------------
Energy--1.0%
15,500 Grant Geophysical, Inc.,(c)
Conv. Exch., $2.4375 75,563
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-66
<PAGE>
Portfolio of Investments as of PRUDENTIAL DISTRESSED SECURITIES
November 30, 1997 FUND, INC.
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------------------
Financial--5.3%
750,000 GPA Group Plc.(b)
(Ireland)
Conv., 7.00%
(cost $316,875; purchased 11/6/96) $ 410,625
- ------------------------------------------------------------------------
Industrials--2.3%
2,000 Geneva Steel Co.,
Conv. Exch., 14.25%, Ser. B 180,000
- ------------------------------------------------------------------------
Telecommunications--3.6%
2,500 Jordan Telecommunication Products,
Conv. Exch. 13.25% 285,000
------------
Total preferred stocks
(cost $1,225,475) 1,181,863
------------
WARRANTS(c)
Units
- ------------
- ------------------------------------------------------------------------
Building & Related Industries
960 ICF Kaiser International, Inc.,
expiring 12/31/03 480
- ------------------------------------------------------------------------
Casinos
2,968 Casino America, Inc.,
expiring 5/3/01 148
- ------------------------------------------------------------------------
Communications
860 Price Communications Corp.,
expiring 8/1/07 0
125 UNIFI Communications, Inc.,
expiring 3/1/07 2,500
------------
2,500
- ------------------------------------------------------------------------
Recreation
125 Discovery Zone, Inc.,
expiring 8/1/07 0
------------
Total warrants
(cost $2,500) 3,128
------------
- ------------------------------------------------------------------------
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
- ------------------------------------------------------------------------
CORPORATE BONDS--48.0%
- ------------------------------------------------------------------------
Building & Related Industries--12.2%
B2 $ 250 Clean Harbors, Inc.,
Sr. Notes,
12.50%, 5/15/01 $ 250,000
Caa 300 DeGeorge Home Alliance, Inc.
Sr. Notes,
12.00%, 4/1/01 262,500
B3 200 ICF Kaiser International,
Inc.,
Sr. Sub. Notes,
13.00%, 12/31/03 207,500
B3 250 Wickes Lumber Co.,
Sr. Sub. Notes,
11.625%, 12/15/03 240,000
----------
960,000
- ------------------------------------------------------------------------
Casinos--4.0%
B3 250 Casino Magic Corp.,
First Mortgage Notes
13.00%, 8/15/03 245,000
NR 64 Colorado Gaming &
Entertainment Co.,
12.00%, 6/1/03, PIK 69,364
----------
314,364
- ------------------------------------------------------------------------
Communications--3.3%
Caa1 250 Price Communications Cellular,
Zero Coupon, 8/1/07 143,750
NR 125 UNIFI Communications, Inc.,
Sr. Notes,
14.00%, 3/1/04 115,000
----------
258,750
- ------------------------------------------------------------------------
Consumer Goods & Services--0.5%
NR 50 Coinstar, Inc.,(b)
Sr. Sub. Notes, Zero Coupon
until 10/1/99, 13.00%,
10/1/06
(cost $38,684; purchased
10/17/96) 40,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-67
<PAGE>
Portfolio of Investments as of PRUDENTIAL DISTRESSED SECURITIES
November 30, 1997 FUND, INC.
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Distribution/Wholesalers--3.9%
Ca $ 250 Merisel, Inc.
Sr. Notes,
12.50%, 12/31/04 $ 302,500
- ------------------------------------------------------------------------
Finance--1.2%
Caa 100 Trumps Castle Funding, Inc.,
Mortgage Bond,
11.75%, 11/15/03 93,250
- ------------------------------------------------------------------------
Packaging--3.2%
NR 266 Packaging Resources, Inc.,
Sr. Notes,
13.00%, 6/30/03 248,944
- ------------------------------------------------------------------------
Recreation--1.6%
NR 125 Discovery Zone, Inc.,
Sr. Notes,
13.50%, 8/1/02 130,000
- ------------------------------------------------------------------------
Restaurants--1.5%
NR 118 American Restaurant Group,
Inc.,
Sr. Sec'd. Notes, Ser. 92
13.00%, 9/15/98 114,443
- ------------------------------------------------------------------------
Retail--14.5%
B3 250 Barry's Jewelers, Inc.(a)/(b)
Sr. Sec'd. Notes,
11.00%, 12/22/00
(cost $200,229; purchased
2/13/97) 150,000
Caa1 250 Duane Reade Holding Corp.,
Sr. Sub. Notes, Ser. B,
Zero Coupon, 9/15/04 208,125
NR 299 Edison Brothers Trade
Claims,(a)
Zero Coupon, 1/1/49 239,404
B1 125 International Semi-Tech
Microelectronics Inc.,
Zero Coupon, 8/15/03 52,500
NR $ 519 Today's Man, Inc. Trade
Claims,(a)/(b)
Sr. Notes, Zero Coupon,
1/1/49
(cost $306,259; purchased
1/17/97) $ 482,748
----------
1,132,777
- ------------------------------------------------------------------------
Textiles & Apparel--2.1%
NR 250 Forstmann & Company, Inc.,(a)
Sr. Sub. Notes,
14.75%, 4/15/99 165,000
----------
Total corporate bonds
(cost $3,306,569) 3,760,028
----------
Total long-term investments
(cost $6,797,280) 7,770,184
----------
- ------------------------------------------------------------------------
SHORT-TERM INVESTMENTS--1.0%
JOINT REPURCHASE AGREEMENT--1.0%
82,000 Joint Repurchase Agreement
Account,
5.70%, 12/1/97
(cost $82,000; Note 5) 82,000
----------
- ------------------------------------------------------------------------
Total Investments--100.2%
(cost $6,879,280; Note 4) 7,852,184
Liabilities in excess of other
assets--(0.2%) (16,307)
----------
Net Assets--100% $7,835,877
----------
----------
</TABLE>
- ---------------
(a) Represents issuer in default on interest payments; non-income producing
security.
(b) Indicates a restricted security; the aggregate cost of such securities is
$873,086. The aggregate value ($1,096,848) is approximately 14% of net
assets.
(c) Non-income producing securities.
NR--Not rated by Moody's or Standard & Poor's.
PIK--Payment in kind securities.
The Fund's current Prospectus contains a description of Moody's and Standard &
Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-68
<PAGE>
PRUDENTIAL DISTRESSED SECURITIES
Statement of Assets and Liabilities FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets November 30, 1997
<S> <C>
Investments, at value (cost $6,879,280)................................................................. $ 7,852,184
Cash.................................................................................................... 9,477
Interest and dividends receivable....................................................................... 67,986
Due from Manager........................................................................................ 14,822
Receivable for Fund shares sold......................................................................... 3,500
Receivable for investments sold......................................................................... 515
Deferred expenses and other assets...................................................................... 57,936
--------------
Total assets......................................................................................... 8,006,420
--------------
Liabilities
Accrued expenses........................................................................................ 125,525
Payable for Fund shares reacquired...................................................................... 39,750
Distribution fee payable................................................................................ 5,268
--------------
Total liabilities.................................................................................... 170,543
--------------
Net Assets.............................................................................................. $ 7,835,877
==============
Net assets were comprised of:
Common stock, at par................................................................................. $ 516
Paid-in capital in excess of par..................................................................... 6,511,014
--------------
6,511,530
Undistributed net investment income.................................................................. 253,972
Accumulated net realized gain on investments......................................................... 97,471
Net unrealized appreciation on investments........................................................... 972,904
--------------
Net assets, November 30, 1997........................................................................... $ 7,835,877
==============
Class A:
Net asset value and redemption price per share
($1,976,438 / 130,114 shares of common stock issued and outstanding).............................. $15.19
Maximum sales charge (5% of offering price).......................................................... .80
--------------
Maximum offering price to public..................................................................... $15.99
==============
Class B:
Net asset value, offering price and redemption price per share
($5,028,743 / 331,606 shares of common stock issued and outstanding).............................. $15.16
==============
Class C:
Net asset value, offering price and redemption price per share
($830,696 / 54,778 shares of common stock issued and outstanding)................................. $15.16
==============
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-69
<PAGE>
PRUDENTIAL DISTRESSED
SECURITIES FUND, INC.
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income November 30, 1997
-----------------
<S> <C>
Income
Interest and discount earned.......... $ 394,937
Dividends (net of foreign withholding
taxes of $30)...................... 74,540
--------------
469,477
--------------
Expenses
Management fee........................ 60,949
Distribution fee--Class A............. 5,417
Distribution fee--Class B............. 48,598
Distribution fee--Class C............. 10,998
Registration fees..................... 101,000
Custodian's fees and expenses......... 74,000
Reports to shareholders............... 45,000
Directors' fees and expenses.......... 23,000
Amortization of deferred
organizational costs............... 21,302
Audit fee............................. 20,000
Legal fees and expenses............... 12,000
Transfer agent's fees and expenses.... 8,800
Miscellaneous......................... 5,618
--------------
Total expenses..................... 436,682
Less: expense reimbursement (Note
2)................................. (225,869)
--------------
Net expenses....................... 210,813
--------------
Net investment income.................... 258,664
--------------
Realized and Unrealized Gain
on Investments
Net realized gain on investment
transactions.......................... 465,952
Net change in unrealized appreciation on
investments........................... 1,413,109
--------------
Net gain on investments.................. 1,879,061
--------------
Net Increase in Net Assets
Resulting from Operations................ $ 2,137,725
==============
</TABLE>
PRUDENTIAL DISTRESSED
SECURITIES FUND, INC.
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year March 26,
Ended 1996(a)
Increase (Decrease) November 30, November 30,
in Net Assets 1997 1996
------------ ------------
<S> <C> <C>
Operations
Net investment income............ $ 258,664 $ 163,021
Net realized gain (loss) on
investments................... 465,952 (368,481)
Net change in unrealized
appreciation/depreciation of
investments................... 1,413,109 (440,205)
------------ ------------
Net increase (decrease) in net
assets resulting from
operations.................... 2,137,725 (645,665)
------------ ------------
Dividends from net investment income
(Note 1)
Class A.......................... (90,663) --
Class B.......................... (108,026) --
Class C.......................... (29,623) --
------------ ------------
(228,312) --
------------ ------------
Fund share transactions (net of
share conversions) (Note 6)
Net proceeds from shares sold.... 909,156 14,160,097
Net asset value of shares issued
to shareholders in
reinvestment of dividends..... 216,983 --
Cost of shares reacquired........ (5,475,625) (3,338,482)
------------ ------------
Net increase (decrease) in net
assets from Fund share
transactions.................. (4,349,486) 10,821,615
------------ ------------
Total increase (decrease)........... (2,440,073) 10,175,950
Net Assets
Beginning of period................. 10,275,950 100,000
------------ ------------
End of period....................... $ 7,835,877 $ 10,275,950
============ ============
</TABLE>
- ---------------
(a) Commencement of investment operations.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-70
<PAGE>
Notes to Financial Statements PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
Prudential Distressed Securities Fund, Inc. (the 'Fund'), is registered under
the Investment Company Act of 1940, as a diversified, open-end management
company. The Fund was incorporated in Maryland on November 30, 1995. The Fund
had no significant operations other than the issuance of 2,667 shares of Class
A, 2,667 shares of Class B and 2,666 shares of Class C common stock for $100,000
on February 8, 1996 to Prudential Investments Fund Management LLC. ('PIFM').
Investment operations commenced on March 26, 1996.
The investment objective of the Fund is capital appreciation by investing
primarily in debt and equity securities issued by financially troubled or
bankrupt companies (financially troubled issuers) and in equity securities of
companies that in the view of its investment adviser are currently undervalued,
out-of-favor or price-depressed relative to their long-term potential for growth
and income (operationally troubled issuers). Securities of financially and
operationally troubled issuers are less liquid and more volatile than securities
of companies not experiencing financial difficulties. Investment in such
securities may be considered speculative and may present potential for
substantial loss.
- --------------------------------------------------------------------------------
NOTE 1. ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Securities Valuation: Investments listed on a securities exchange are valued at
the last sales price on the day of valuation, or, if there was no sale on such
day, the average between the last bid and asked prices on such day, as provided
by a pricing service. Corporate bonds and U.S. Government securities that are
actively traded in the over-the-counter market, are valued by an independent
pricing service. Convertible debt securities that are actively traded in the
over-the-counter market, are valued at the mean between the most recently quoted
bid and asked prices provided by principal market makers. Equity securities
issued in private placements shall be valued at the mean between the bid and
asked prices provided by primary market dealers. Debt securities issued in
private placements shall be valued on the bid side by primary market dealers.
Securities for which market quotations are not available, other than private
placements, shall each be valued at a price supplied by an independent pricing
agent. Options on stock and stock indices traded on an exchange are valued at
the average between the most recently quoted bid and asked prices provided by
the respective exchange. Futures contracts and options thereon are valued at the
last sales price as of the close of business of the exchange. Securities for
which reliable market quotations are not available or for which the pricing
agent or principal market maker does not provide a valuation will be valued at
fair value determined in good faith by or under the direction of the Board of
Directors of the Fund.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
In connection with transactions in repurchase agreements, it is the Fund's
policy that its custodian or designated subcustodians under triparty repurchase
agreements take possession of the underlying collateral securities, the value of
which exceeds the principal amount of the repurchase transaction, including
accrued interest. If the seller defaults and the value of the collateral
declines or if bankruptcy proceedings are commenced with respect to the seller
of the security, realization of the collateral by the Fund may be delayed or
limited.
The Fund may hold up to 15% of its net assets in illiquid securities, including
those which are restricted as to disposition under securities law ('restricted
securities'). None of the issues of restricted securities held by the Fund at
November 30, 1997 include registration rights under which the Fund may demand
registration by the issuer.
Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date; interest income is recorded on the accrual basis. The Fund
amortizes premiums and discounts paid on purchases of portfolio securities as
adjustments to interest income. Expenses are recorded on the accrual basis which
may require the use of certain estimates by management.
Net investment income (other than distribution fees) and unrealized and realized
gains or losses are allocated daily to each class of shares of the Fund based
upon the relative proportion of net assets of each class at the beginning of the
day.
Taxes: It is the Fund's policy to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable net income to its shareholders. Therefore, no
federal income tax provision is required.
Withholding taxes on foreign dividends have been provided for in accordance with
the Fund's understanding of the applicable country's tax rates.
Dividends and Distributions: The Fund expects to pay dividends out of net
investment income and make distributions of any net capital gains, if any,
- --------------------------------------------------------------------------------
B-71
<PAGE>
Notes to Financial Statements PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
at least annually. Dividends and distributions are recorded on the ex-dividend
date.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
Deferred Organization Costs: The Fund incurred approximately $96,000 in
connection with the organization of the Fund. These costs were deferred and are
being amortized over a period of 60 months ending March 2001.
Reclassification of Capital Accounts: The Fund accounts and reports for and
reports distributions to shareholders in accordance with the American Institute
of Certified Public Accountants' Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to increase undistributed net investment income and decrease
paid-in capital in excess of par by $60,599 due to a non-deductible prior year
expense. Net investment income, net realized gains and net assets were not
affected by these changes.
- --------------------------------------------------------------------------------
NOTE 2. AGREEMENTS
The Fund has a management agreement with PIFM. Pursuant to this agreement, PIFM
has responsibility for all investment advisory services and supervises the
subadviser's performance of such services. PIFM has entered into a subadvisory
agreement with The Prudential Investment Corporation ('PIC'); PIC furnishes
investment advisory services in connection with the management of the Fund. PIFM
pays for the services of PIC, the cost of compensation of officers of the Fund,
occupancy and certain clerical and bookkeeping costs of the Fund. The Fund bears
all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly, at an annual
rate of .75 of 1% of the average daily net assets of the Fund.
Effective June 2, 1997, PIFM voluntarily agreed to reimburse the Fund in order
to reduce total expenses so as not to exceed 1.25%, 2.00% and 2.00% of the
average daily net assets of the Class A, Class B and Class C shares,
respectively, on an annualized basis. Prior to June 2, 1997, PIFM reimbursed the
Fund for expenses (including the fees of PIFM but excluding interest, taxes,
brokerage commissions, distribution fees, litigation and indemnification
expenses and other extraordinary expenses) in excess of the most restrictive
expense limitation imposed by state securities commissions. Such expense
reimbursements were estimated and accrued daily and paid monthly. For the year
ended November 30, 1997, such reimbursements amounted to $225,869 (2.78% of
average net assets; $0.44 per share for Class A, B and C shares).
The Fund has a distribution agreement with Prudential Securities Incorporated
('PSI'), which acts as the distributor of the Class A, B and C shares of the
Fund. The Fund compensates PSI for distributing and servicing the Fund's Class
A, Class B and Class C shares pursuant to plans of distribution (the 'Class A,
Class B and Class C Plans'), regardless of expenses actually incurred by them.
The distribution fees are accrued daily and payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI for its
distribution related activities at an annual rate of up to .30 of 1%, 1% and 1%
of the average daily net asset values of the Class A, B and C shares,
respectively. Such expenses under the Plans were .25 of 1%, 1% and 1% of the
average daily net assets of the Class A, B and C shares, respectively, for the
year ended November 30, 1997.
PSI has advised the Fund that it has received approximately $2,600 in front-end
sales charges resulting from sales of Class A shares for the year ended November
30, 1997. From these fees, PSI paid such sales charges to dealers, which in turn
paid commissions to salespersons and incurred other distribution costs.
PSI has advised the Fund that for the year ended November 30, 1997, it received
approximately $29,400 and $1,200 in contingent deferred sales charges imposed
upon redemptions by certain Class B and Class C shareholders, respectively.
PSI, PIFM and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America.
The Fund, along with other affiliated registered investment companies (the
'Funds'), entered into a credit agreement (the 'Agreement') on December 31, 1996
with an unaffiliated lender. The maximum commitment under the Agreement is
$200,000,000. Interest on any such borrowings outstanding will be at market
rates. The purpose of the Agreement is to serve an an alternative source of
funding for capital share redemptions. The Fund has not borrowed any amounts
pursuant to the Agreement as of November 30, 1997. The Funds pay a commitment
fee at an annual rate of .055 of 1% on the unused portion of the credit
facility. The commitment fee is accrued and paid quarterly on a pro-rata basis
by the Funds. The Agreement expired on December 30, 1997 and has been extended
through December 29, 1998 under the same terms.
- --------------------------------------------------------------------------------
B-72
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES
Prudential Mutual Fund Services LLC ('PMFS'), a wholly-owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the fiscal year ended November 30,
1997 the Fund incurred fees of approximately $4,600 for the services of PMFS. As
of November 30, 1997, approximately $330 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
- --------------------------------------------------------------------------------
NOTE 4. PORTFOLIO SECURITIES
Purchases and sales of investment securities, other than short-term investments,
for the year ended November 30, 1997 were $13,937,000 and $17,336,498,
respectively.
The federal income tax basis of the Fund's investments at November 30, 1997 was
substantially the same as for financial reporting purposes and, accordingly, net
unrealized appreciation for federal income tax purposes was $972,904 (gross
unrealized appreciation--$1,442,825; gross unrealized depreciation--$469,921).
The Fund utilized it's capital loss carryforward of approximately $99,000 to
offset net taxable gains realized and recognized during the fiscal year ended
November 30, 1997.
- --------------------------------------------------------------------------------
NOTE 5. JOINT REPURCHASE AGREEMENT ACCOUNT
The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Treasury or federal agency obligations. As of November 30, 1997, the
Fund had a .007% undivided interest in the repurchase agreements in the joint
account. This undivided interest represented $82,000 in principal amount. As of
such date, the repurchase agreements in the joint account and the value of the
collateral therefor were as follows:
Bear, Stearns & Co., 5.74%, in the principal amount of $330,000,000, repurchase
price $330,157,842, due 12/1/97. The value of the collateral including accrued
interest was $337,310,022.
Credit Suisse First Boston Corp., 5.70%, in the principal amount of
$330,000,000, repurchase price $330,156,750, due 12/1/97. The value of the
collateral including accrued interest was $342,024,757.
Deutsche Morgan Grenfell, Inc., 5.70%, in the principal amount of $330,000,000,
repurchase price $330,156,750, due 12/1/97. The value of the collateral
including accrued interest was $336,600,387.
Morgan Stanley, Dean Witter, Discover & Co., 5.63%, in the principal amount of
$119,585,000, repurchase price $119,641,055, due 12/1/97. The value of the
collateral including accrued interest was $121,976,916.
- --------------------------------------------------------------------------------
NOTE 6. CAPITAL
The Fund offers Class A, Class B and Class C shares. Class A shares are sold
with a front-end sales charge of up to 5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a contingent
deferred sales charge of 1% during the first year. Class B shares will
automatically convert to Class A shares on a quarterly basis approximately seven
years after purchase. A special exchange privilege is also available for
shareholders who qualify to purchase Class A shares at net asset value.
There are 2 billion shares of $.001 par value common stock authorized divided
into three classes, designated Class A, Class B and Class C, which consist of 1
billion, 500 million and 500 million authorized shares, respectively. Of the
516,498 shares of common stock issued and outstanding at November 30, 1997, PIFM
owned 2,667 shares of Class A, 2,667 shares of Class B and 2,666 shares of Class
C.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------- -------- -----------
<S> <C> <C>
Year ended November 30, 1997:
Shares sold.......................... 28,654 $ 390,626
Shares issued in reinvestment of
dividends.......................... 7,185 84,009
Shares reacquired.................... (193,700) (2,363,624)
-------- -----------
Net decrease in shares outstanding
before conversion.................. (157,861) (1,888,989)
Shares issued upon conversion from
Class B............................ 715 9,982
-------- -----------
Net decrease in shares outstanding... (157,146) $(1,879,007)
======== ===========
March 26, 1996* through
November 30, 1996:
Shares sold.......................... 408,299 $ 5,117,186
Shares reacquired.................... (123,706) (1,547,651)
-------- -----------
Net increase in shares outstanding... 284,593 $ 3,569,535
======== ===========
</TABLE>
- --------------------------------------------------------------------------------
B-73
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Shares Amount
- ------- -------- -----------
<S> <C> <C>
Year ended November 30, 1997:
Shares sold.......................... 16,501 $ 214,769
Shares issued in reinvestment of
dividends.......................... 8,896 104,821
Shares reacquired.................... (150,167) (1,863,184)
-------- -----------
Net decrease in shares outstanding
before conversion.................. (124,770) (1,543,594)
Shares reacquired upon conversion
into Class A....................... (715) (9,982)
-------- -----------
Net decrease in shares outstanding... (125,485) $(1,553,576)
-------- -----------
-------- -----------
March 26, 1996* through
November 30, 1996:
Shares sold.......................... 582,979 $ 7,292,074
Shares reacquired.................... (128,555) (1,585,368)
-------- -----------
Net increase in shares outstanding... 454,424 $ 5,706,706
======== ===========
Class C
- -------
Year ended November 30, 1997:
Shares sold.......................... 23,901 $ 303,761
Shares issued in reinvestment of
dividends.......................... 2,403 28,153
Shares reacquired.................... (97,442) (1,248,817)
-------- -----------
Net decrease in shares outstanding... (71,138) $ (916,903)
======== ===========
March 26, 1996* through
November 30, 1996:
Shares sold.......................... 139,916 $ 1,750,837
Shares reacquired.................... (16,666) (205,463)
-------- -----------
Net increase in shares outstanding... 123,250 $ 1,545,374
======== ===========
</TABLE>
- ---------------
* Commencement of investment operations.
- --------------------------------------------------------------------------------
B-74
<PAGE>
Financial Highlights PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B
---------------------------------- ----------------------------------
Year March 26, 1996(d) Year March 26, 1996(d)
Ended Through Ended Through
November 30, November 30, November 30, November 30,
1997(e) 1996 1997(e) 1996
------------ ----------------- ------------ -----------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................... $ 11.85 $ 12.50 $ 11.79 $ 12.50
------ ------ ------ ------
Income from investment operations
Net investment income (a).............................. .49 .25 .39 .16
Net realized and unrealized gain (loss) on investment
transactions........................................ 3.23 (.90) 3.24 (.87)
------ ------ ------ ------
Total from investment operations.................... 3.72 (.65) 3.63 (.71)
------ ------ ------ ------
Less Distributions
Dividends from net investment income................... (.38) -- (.26) --
------ ------ ------ ------
Net asset value, end of period......................... $ 15.19 $ 11.85 $ 15.16 $ 11.79
====== ====== ====== ======
TOTAL RETURN(b):....................................... 32.35% (5.20)% 31.44% (5.68)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........................ $ 1,976 $ 3,404 $ 5,029 $ 5,387
Average net assets (000)............................... $ 2,167 $ 4,391 $ 4,860 $ 6,650
Ratios to average net assets(a):
Expenses, including distribution fees............... 2.04% 2.76%(c) 2.79% 3.51%(c)
Expenses, excluding distribution fees............... 1.79% 2.51%(c) 1.79% 2.51%(c)
Net investment income............................... 3.73% 2.37%(c) 2.98% 1.59%(c)
Portfolio turnover rate................................ 175% 61% 175% 61%
Average commission rate paid per share................. $ 0.0416 $0.0458 $ 0.0416 $0.0458
<CAPTION>
Class C
----------------------------------
Year March 26, 1996(d)
Ended Through
November 30, November 30,
1997(e) 1996
------------ -----------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................... $ 11.79 $ 12.50
------ ------
Income from investment operations
Net investment income (a).............................. .39 .16
Net realized and unrealized gain (loss) on investment
transactions........................................ 3.24 (.87)
------ ------
Total from investment operations.................... 3.63 (.71)
------ ------
Less Distributions
Dividends from net investment income................... (.26) --
------ ------
Net asset value, end of period......................... $ 15.16 $ 11.79
====== ======
TOTAL RETURN(b):....................................... 31.44% (5.68)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........................ $ 831 $ 1,485
Average net assets (000)............................... $ 1,100 $ 1,678
Ratios to average net assets(a):
Expenses, including distribution fees............... 2.79% 3.51%(c)
Expenses, excluding distribution fees............... 1.79% 2.51%(c)
Net investment income............................... 2.98% 1.71%(c)
Portfolio turnover rate................................ 175% 61%
Average commission rate paid per share................. $ 0.0416 $0.0458
</TABLE>
- ---------------
(a) Net of expense reimbursement.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(c) Annualized.
(d) Commencement of investment operations.
(e) Calculated based upon weighted average shares outstanding during the year.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-75
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Prudential Distressed Securities Fund, Inc.
1177 Avenue of the Americas
New York, New York
January 21, 1998
- --------------------------------------------------------------------------------
B-76
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE SHAREHOLDERS AND BOARD OF DIRECTORS OF THE PRUDENTIAL
DISTRESSED SECURITIES FUND, INC.:
New York, New York
January 10, 1997
B-77
<PAGE>
Portfolio of Investments as PRUDENTIAL DISTRESSED
of May 31, 1998 (Unaudited) SECURITIES FUND, INC.
- ------------------------------------------------------------------
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<S> <C> <C>
- ------------------------------------------------------------------
LONG-TERM INVESTMENTS--84.5%
COMMON STOCKS(c)--34.4%
- ------------------------------------------------------------------
Airlines--1.2%
39,100 Canadian Airlines Corp.
(Canada) $ 128,324
- ------------------------------------------------------------------
Beverages--2.9%
10,000 Dr. Pepper Bottling Holdings, Inc. 310,000
- ------------------------------------------------------------------
Building & Related Industries--1.0%
6,642 Edison Building LLC(b)
(cost $13,555; purchased 4/30/97) 13,284
4,750 EMCOR Group, Inc. 94,703
------------
107,987
- ------------------------------------------------------------------
Casinos--5.6%
30,000 Alliance Gaming Corp. 137,812
13,357 Casino America, Inc. 53,428
50,127 Colorado Gaming & Entertainment Co. 281,964
7,000 Grand Casinos, Inc. 122,938
2,000 Nevada Gold & Casinos, Inc. 7,688
------------
603,830
- ------------------------------------------------------------------
Consumer Goods & Services--0.1%
1,400 Coinstar, Inc. 11,988
- ------------------------------------------------------------------
Distribution/Wholesalers--0.3%
12,700 Merisel, Inc. 37,703
- ------------------------------------------------------------------
Electronics--1.9%
50,000 Electronic Retailing Systems
International, Inc. 200,000
- ------------------------------------------------------------------
Energy--2.0%
29,000 Baycorp Holdings, Ltd. 210,250
- ------------------------------------------------------------------
Food Serving - Fast Foods
50 AmeriKing, Inc. 2,500
Medical Products--0.7%
9,500 Columbia Laboratories, Inc. $ 80,156
Metals--3.4%
25,000 Ladish Company, Inc. 368,750
- ------------------------------------------------------------------
Mining--0.4%
50,000 Sunshine Mining & Refining Co. 46,875
- ------------------------------------------------------------------
Retail--4.3%
6,579 Edison Brothers Stores, Inc. 40,296
6,000 Homeland Holding Corp. 47,250
7,000 Musicland Stores Corp. 101,063
10,000 Sassco Fashions, Ltd 139,375
50,839 Today's Man, Inc. 130,275
------------
458,259
- ------------------------------------------------------------------
Telecommunications--2.9%
2,500 Jordan Telecommunications Products 62,500
5,000 PageMart Wireless, Inc., Class A 45,313
17,000 Paxson Communications Corp. 200,812
115 Scott Cable Communications, Inc. 0
------------
308,625
- ------------------------------------------------------------------
Textiles & Apparel--1.2%
13,304 Forstmann & Co., Inc. 128,051
- ------------------------------------------------------------------
Waste Management--6.5%
78,260 Waste Systems International, Inc. 704,340
------------
Total common stocks
(cost $2,837,534) 3,707,638
------------
PREFERRED STOCKS--10.4%
- ------------------------------------------------------------------
Energy--0.7%
15,500 Grant Geophysical, Inc.,(b)/(c)
Conv. Exch., $2.4375
(cost $237,500; purchased 3/26/96) 75,563
- ------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-78
<PAGE>
Portfolio of Investments as of May 31, 1998 (Unaudited)
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
<C> <S> <C>
Shares Description Value (Note 1)
Financial--4.2%
750,000 GPA Group Plc.(b)
(Ireland)
Conv., 7.00%
(cost $316,875; purchased 11/6/96) $ 450,000
- ------------------------------------------------------------------
Industrials--2.8%
2,000 Geneva Steel Co.
Conv. Exch., 14.00%, Ser. B 310,000
- ------------------------------------------------------------------
Telecommunications--2.7%
2,500 Jordan Telecommunication Products,
Conv. Exch., 13.25% 265,000
500 NEXTLINK Communications, Inc.,
Conv. Exch., 6.50% 24,000
------------
289,000
------------
Total preferred stocks
(cost $1,018,875) 1,124,563
------------
WARRANTS(c)
Units
- ------------
- ------------------------------------------------------------------
Building & Related Industries
960 ICF Kaiser International, Inc.,
expiring 12/31/03 96
- ------------------------------------------------------------------
Cable
500 People's Choice TV Corp.,
expiring 6/1/00 0
- ------------------------------------------------------------------
Casinos
2,968 Casino America, Inc.,
expiring 5/3/01 148
- ------------------------------------------------------------------
Communications
125 UNIFI Communications, Inc.,
expiring 3/1/07 1
------------
Total warrants
(cost $2,500) 245
------------
</TABLE>
PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Moody's Amount
Rating (000) Description Value (Note 1)
- --------------------------------------------------------------------
CORPORATE BONDS--39.7%
- --------------------------------------------------------------------
<C> <C> <S> <C>
Broadcasting--2.5%
B1 $ 250 Telemundo Group, Inc.,
Sr. Disc. Notes,
7.00%, 2/15/06 $ 268,750
- --------------------------------------------------------------------
Building & Related Industries--10.9%
B2 250 Clean Harbors, Inc.,
Sr. Notes,
12.50%, 5/15/01 235,000
Caa 300 DeGeorge Home Alliance, Inc.,
Sr. Notes,
12.00%, 4/1/01 264,000
B2 225 Hechinger Co.,
Sr. Notes,
6.95%, 10/15/03 168,750
B3 250 ICF Kaiser International,
Inc.,
Sr. Sub. Notes,
13.00%, 12/31/03 270,625
B3 250 The Presley Companies,
Sr. Notes,
12.50%, 7/1/01 235,000
-----------
1,173,375
- --------------------------------------------------------------------
Cable--1.5%
Caa 500 People's Choice TV Corp.,
Sr. Disc. Notes,
Zero Coupon, 6/1/04 160,000
- --------------------------------------------------------------------
Communications--0.2%
NR 125 UNIFI Communications, Inc.,
Sr. Notes,
14.00%, 3/1/04 23,125
- --------------------------------------------------------------------
Consumer Goods & Services--5.6%
NR 50 Coinstar, Inc.,
Sr. Disc Notes,
Zero Coupon, 10/1/06 41,750
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-79
<PAGE>
Portfolio of Investments as of PRUDENTIAL DISTRESSED SECURITIES
May 31, 1998 (Unaudited) FUND, INC.
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Moody's Amount
Rating (000) Description Value (Note 1)
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Consumer Goods & Services (cont'd.)
Ca $ 450 Grand Union Co.,
Sr. Notes,
12.00%, 9/1/04 $ 263,250
B3 125 Remington Products Co., LLC
Sr. Sub. Notes, Ser. B,
11.00%, 5/15/06 115,000
B3 200 Syratech Corp.,
Sr. Notes,
11.00%, 4/15/07 185,500
-----------
605,500
- ----------------------------------------------------------------------
Food & Beverage--2.2%
Specialty Foods Acquisition
Corp.,
Ca 250 Sr. Sec'd. Disc. Deb., Ser. B
Zero Coupon, 8/15/05 91,875
Caa 150 Sr. Sub. Notes, Ser. B,
11.25%, 8/15/03 138,000
-----------
229,875
- ----------------------------------------------------------------------
Gas Utilities--2.2%
Caa 250 Empire Gas Corp.,
Sr. Sec'd. Notes,
7.00%, 7/15/04 232,500
- ----------------------------------------------------------------------
Packaging--2.0%
NR 266 Packaging Resources, Inc.,
Sr. Notes,
13.00%, 6/30/03 213,000
Recreation--1.9%
Caa $ 250 Icon Health & Fitness
Holdings, Inc.,
Sr. Sec'd. Disc. Notes, Ser.
B,
Zero Coupon, 11/15/04 $ 202,500
- ----------------------------------------------------------------------
Retail--6.4%
Caa 250 Barry's Jewelers, Inc.(a)
Sr. Sec'd. Notes,
11.00%, 12/22/00 162,500
NR 77 Edison Brothers Stores, Inc.,
11.00%, 9/1/20 67,760
B2 250 Hills Stores Co.,
Sr. Notes, Ser. B,
12.50%, 7/1/03 243,750
B1 250 Speedy Muffler King, Inc.,
Sr. Notes,
10.875%, 10/1/06 220,000
-----------
694,010
- ----------------------------------------------------------------------
Telecommunications--1.1%
Scott Cable Communications,
NR 17 Inc.,
Jr. Sub. PIK Notes,
7/18/02 1,678
NR 115 15.00%, 3/18/02 116,150
-----------
117,828
- ----------------------------------------------------------------------
Trucking & Shipping--3.2%
B3 250 Ameritruck Distribution
Corp.,
Sr. Sub. Notes,
12.25%, 11/15/05 140,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-80
<PAGE>
PRUDENTIAL DISTRESSED
SECURITIES FUND, INC.
Portfolio of Investments as of May 31, 1998 (Unaudited)
- --------------------------------------------------------------------
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Moody's Amount Description Value (Note 1)
Rating (000)
<S> <C> <C> <C>
- --------------------------------------------------------------------
Trucking & Shipping (cont'd.)
B3 $ 250 TRISM, Inc.
Sr. Sub. Notes,
10.75%, 12/15/00 $ 208,750
-----------
348,750
Total corporate bonds
(cost $4,442,770) 4,269,213
-----------
- --------------------------------------------------------------------
Total Investments--84.5%
(cost $8,301,679; Note 4) 9,101,659
Other assets in excess of
liabilities--15.5% 1,664,530
-----------
Net Assets--100% $10,766,189
===========
</TABLE>
- ---------------
(a) Represents issuer in default on interest payments; non-income producing
security.
(b) Indicates a restricted security; the aggregate cost of such securities is
$567,930. The aggregate value ($538,847) is approximately 5.0% of net
assets.
(c) Non-income producing securities.
NR--Not rated by Moody's or Standard & Poor's.
PIK--Payment in kind securities.
The Fund's current Prospectus contains a description of Moody's and Standard &
Poor's ratings.
PRUDENTIAL DISTRESSED
SECURITIES FUND, INC.
Statement of Assets and Liabilities (Unaudited)
- --------------------------------------------------------------------
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets May 31, 1998
<S> <C>
Investments, at value (cost $8,301,679).... $ 9,101,659
Receivable for Fund shares sold............ 1,534,507
Receivable for investments sold............ 260,357
Interest receivable........................ 97,534
Due from Manager........................... 65,938
Deferred expenses and other assets......... 47,091
------------
Total assets............................ 11,107,086
------------
Liabilities
Bank overdraft............................. 223,538
Accrued expenses........................... 105,072
Distribution fee payable................... 6,293
Payable for Fund shares reacquired......... 5,994
------------
Total liabilities....................... 340,897
------------
Net Assets................................. $10,766,189
============
Net assets were comprised of:
Common stock, at par.................... $ 653
Paid-in capital in excess of par........ 8,713,105
------------
8,713,758
Undistributed net investment income..... 626,056
Accumulated net realized gain on
investments.......................... 626,395
Net unrealized appreciation on
investments.......................... 799,980
------------
Net assets, May 31, 1998................... $10,766,189
============
Class A:
Net asset value and redemption price per
share ($4,167,289 / 252,540 shares of
common stock issued and
outstanding)......................... $16.50
Maximum sales charge (5% of offering
price)............................... .87
------------
Maximum offering price to public........ $17.37
============
Class B:
Net asset value, offering price and
redemption price per share
($5,420,659 / 329,028 shares of
common stock issued and
outstanding)......................... $16.47
============
Class C:
Net asset value, offering price and
redemption price per share
($1,178,241 / 71,518 shares of common
stock issued and outstanding)........ $16.47
============
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-81
<PAGE>
PRUDENTIAL DISTRESSED
SECURITIES FUND, INC.
Statement of Operations (Unaudited)
- ---------------------------------------------------------------
- ---------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended
Net Investment Income May 31, 1998
------------
<S> <C>
Income
Interest and discount earned................. $ 691,166
Dividends.................................... 13,388
------------
704,554
------------
Expenses
Management fee............................... 31,655
Distribution fee--Class A.................... 2,745
Distribution fee--Class B.................... 26,345
Distribution fee--Class C.................... 4,882
Custodian's fees and expenses................ 46,000
Registration fees............................ 21,000
Reports to shareholders...................... 14,000
Legal fees and expenses...................... 12,000
Amortization of deferred organizational
costs..................................... 10,802
Audit fee.................................... 10,000
Directors' fees and expenses................. 4,000
Transfer agent's fees and expenses........... 4,000
Miscellaneous................................ 1,889
------------
Total expenses............................ 189,318
Less: expense reimbursement (Note 2)......... (113,121)
------------
Net expenses.............................. 76,197
------------
Net investment income........................... 628,357
------------
Realized and Unrealized Gain (Loss)
on Investments
Net realized gain on investment transactions.... 626,730
Net change in unrealized appreciation on
investments.................................. (172,924)
------------
Net gain on investments......................... 453,806
------------
Net Increase in Net Assets
Resulting from Operations....................... $1,082,163
============
</TABLE>
PRUDENTIAL DISTRESSED
SECURITIES FUND, INC.
Statement of Changes in Net Assets (Unaudited)
- -----------------------------------------------------------------
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
Increase (Decrease) May 31, November 30,
in Net Assets 1998 1997
---------- ------------
<S> <C> <C>
Operations
Net investment income............ $ 628,357 $ 258,664
Net realized gain on
investments................... 626,730 465,952
Net change in unrealized
appreciation/depreciation of
investments................... (172,924) 1,413,109
----------- ------------
Net increase in net assets
resulting from operations..... 1,082,163 2,137,725
----------- ------------
Dividends and distributions (Note
1):
Dividends from net investment
income
Class A.......................... (69,788) (90,663)
Class B.......................... (159,644) (108,026)
Class C.......................... (26,841) (29,623)
----------- ------------
(256,273) (228,312)
----------- ------------
Distributions from net realized
gains
Class A.......................... (26,850) --
Class B.......................... (59,158) --
Class C.......................... (11,798) --
----------- ------------
(97,806) --
----------- ------------
Fund share transactions (net of
share conversions) (Note 5)
Net proceeds from shares sold.... 2,951,641 909,156
Net asset value of shares issued
to shareholders in
reinvestment of dividends and
distributions................. 324,242 216,983
Cost of shares reacquired........ (1,073,655) (5,475,625)
----------- ------------
Net increase (decrease) in net
assets from Fund share
transactions.................. 2,202,228 (4,349,486)
----------- ------------
Total increase (decrease)........... 2,930,312 (2,440,073)
Net Assets
Beginning of period................. 7,835,877 10,275,950
----------- ------------
End of period(a).................... $10,766,189 $ 7,835,877
=========== ============
- ---------------
(a) Includes undistributed net
investment income of............. $ 626,056 $ 253,972
----------- ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-82
<PAGE>
PRUDENTIAL DISTRESSED
Notes to Financial Statements (Unaudited) SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
Prudential Distressed Securities Fund, Inc. (the 'Fund'), is registered under
the Investment Company Act of 1940, as a diversified, open-end management
company. The Fund was incorporated in Maryland on November 30, 1995. The Fund
had no significant operations other than the issuance of 2,667 shares of Class
A, 2,667 shares of Class B and 2,666 shares of Class C common stock for $100,000
on February 8, 1996 to Prudential Investments Fund Management LLC. ('PIFM').
Investment operations commenced on March 26, 1996.
The investment objective of the Fund is capital appreciation by investing
primarily in debt and equity securities issued by financially troubled or
bankrupt companies (financially troubled issuers) and in equity securities of
companies that in the view of its investment adviser are currently undervalued,
out-of-favor or price-depressed relative to their long-term potential for growth
and income (operationally troubled issuers). Securities of financially and
operationally troubled issuers are less liquid and more volatile than securities
of companies not experiencing financial difficulties. Investment in such
securities may be considered speculative and may present potential for
substantial loss.
- --------------------------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Securities Valuation: Investments listed on a securities exchange are valued at
the last sales price on the day of valuation, or, if there was no sale on such
day, the average between the last bid and asked prices on such day, as provided
by a pricing service. Corporate bonds and U.S. Government securities that are
actively traded in the over-the-counter market, are valued by an independent
pricing service. Convertible debt securities that are actively traded in the
over-the-counter market, are valued at the mean between the most recently quoted
bid and asked prices provided by principal market makers. Equity securities
issued in private placements shall be valued at the mean between the bid and
asked prices provided by primary market dealers. Debt securities issued in
private placements shall be valued on the bid side by primary market dealers.
Securities for which market quotations are not available, other than private
placements, shall each be valued at a price supplied by an independent pricing
agent. Options on stock and stock indices traded on an exchange are valued at
the average between the most recently quoted bid and asked prices provided by
the respective exchange. Futures contracts and options thereon are valued at the
last sales price as of the close of business of the exchange. Securities for
which reliable market quotations are not available or for which the pricing
agent or principal market maker does not provide a valuation will be valued at
fair value determined in good faith by or under the direction of the Board of
Directors of the Fund.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
In connection with transactions in repurchase agreements, it is the Fund's
policy that its custodian or designated subcustodians under triparty repurchase
agreements take possession of the underlying collateral securities, the value of
which exceeds the principal amount of the repurchase transaction, including
accrued interest. If the seller defaults and the value of the collateral
declines or if bankruptcy proceedings are commenced with respect to the seller
of the security, realization of the collateral by the Fund may be delayed or
limited.
The Fund may hold up to 15% of its net assets in illiquid securities, including
those which are restricted as to disposition under securities law ('restricted
securities'). None of the issues of restricted securities held by the Fund at
May 31, 1998 include registration rights under which the Fund may demand
registration by the issuer.
Foreign Currency Translation: The books and records of the Fund are maintained
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on
the following basis:
(i) market value of investment securities, other assets and liabilities--at the
closing daily rate of exchange;
(ii) purchases and sales of investment securities, income and expenses--at the
rate of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the period, the Fund does not isolate that
portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of securities held at the end of the period. Similarly, the Fund does not
isolate the effect of changes in foreign exchange rates from the fluctuations
arising from changes in the market prices of portfolio securities sold during
the period.
Net realized gains and losses on foreign currency transactions represent net
foreign exchange gains and losses from sales and maturities of
- --------------------------------------------------------------------------------
B-83
<PAGE>
PRUDENTIAL DISTRESSED
Notes to Financial Statements (Unaudited) SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
short-term securities, disposition of foreign currency, gains or losses realized
between the trade and settlement dates of security transactions, and the
difference between amounts of dividends, interest and foreign withholding taxes
recorded on the Fund's books and the U.S. dollar equivalent amounts actually
received or paid. Net currency gains and losses from valuing foreign currency
denominated assets, except portfolio securities, and liabilities at period end
exchange rates are reflected as a component of unrealized appreciation or
depreciation on foreign currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin as a result of,
among other factors, the possibility of political and economic instability and
the level of governmental supervision and regulation of foreign securities
markets.
Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date; interest income is recorded on the accrual basis. The Fund
amortizes premiums and discounts paid on purchases of portfolio securities as
adjustments to interest income. Expenses are recorded on the accrual basis which
may require the use of certain estimates by management.
Net investment income (other than distribution fees) and unrealized and realized
gains or losses are allocated daily to each class of shares of the Fund based
upon the relative proportion of net assets of each class at the beginning of the
day.
Taxes: It is the Fund's policy to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable net income to its shareholders. Therefore, no
federal income tax provision is required.
Withholding taxes on foreign dividends have been provided for in accordance with
the Fund's understanding of the applicable country's tax rates.
Dividends and Distributions: The Fund expects to pay dividends out of net
investment income and make distributions of any net capital gains, if any, at
least annually. Dividends and distributions are recorded on the ex-dividend
date.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
Deferred Organization Costs: The Fund incurred approximately $96,000 in
connection with the organization of the Fund. These costs were deferred and are
being amortized over a period of 60 months ending March 2001.
- --------------------------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with PIFM. Pursuant to this agreement, PIFM
has responsibility for all investment advisory services and supervises the
subadviser's performance of such services. PIFM has entered into a subadvisory
agreement with The Prudential Investment Corporation ('PIC'); PIC furnishes
investment advisory services in connection with the management of the Fund. PIFM
pays for the services of PIC, the cost of compensation of officers of the Fund,
occupancy and certain clerical and bookkeeping costs of the Fund. The Fund bears
all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly, at an annual
rate of .75 of 1% of the average daily net assets of the Fund.
PIFM voluntarily agreed to reimburse the Fund in order to reduce total expenses
so as not to exceed 1.25%, 2.00% and 2.00% of the average daily net assets of
the Class A, Class B and Class C shares, respectively, on an annualized basis.
For the six months ended May 31, 1998, such reimbursements amounted to $113,121
(1.34% of average net assets; $.17 per share for Class A, B and C shares).
The Fund has a distribution agreement with Prudential Securities Incorporated
('PSI'), which acts as the distributor of the Class A, B and C shares of the
Fund. The Fund compensates PSI for distributing and servicing the Fund's Class
A, Class B and Class C shares pursuant to plans of distribution (the 'Class A,
Class B and Class C Plans'), regardless of expenses actually incurred by them.
The distribution fees are accrued daily and payable monthly. Effective July 1,
1998, Prudential Investment Management Services LLC will become the distributor
of the Fund and will serve the Fund under the same terms and conditions as under
the arrangement with PSI.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI for its
distribution related activities at an annual rate of up to .30 of 1%, 1% and 1%
of the average daily net asset values of the Class A, B and C shares,
respectively. Such expenses under the Plans were .25 of 1%, 1% and 1% of the
average daily net assets of the Class A, B and C shares, respectively, for the
six months ended May 31, 1998.
- --------------------------------------------------------------------------------
B-84
<PAGE>
PRUDENTIAL DISTRESSED
Notes to Financial Statements (Unaudited) SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
PSI has advised the Fund that it has received approximately $22,400 in front-end
sales charges resulting from sales of Class A shares for the six months ended
May 31, 1998. From these fees, PSI paid such sales charges to dealers, which in
turn paid commissions to salespersons and incurred other distribution costs.
PSI has advised the Fund that for the six months ended May 31, 1998, it received
approximately $14,300 and $100 in contingent deferred sales charges imposed upon
redemptions by certain Class B and Class C shareholders, respectively.
PSI, PIFM, PIMS and PIC are indirect, wholly owned subsidiaries of The
Prudential Insurance Company of America.
The Fund, along with other affiliated registered investment companies (the
'Funds'), has a credit agreement (the 'Agreement') with an unaffiliated lender.
The maximum commitment under the Agreement is $200,000,000. Interest on any such
borrowings outstanding will be at market rates. The purpose of the Agreement is
to serve as an alternative source of funding for capital share redemptions. The
Fund has not borrowed any amounts pursuant to the Agreement as of May 31, 1998.
The Funds pay a commitment fee at an annual rate of .055 of 1% on the unused
portion of the credit facility. The commitment fee is accrued and paid quarterly
on a pro rata basis by the Funds. The Agreement expired on December 30, 1997 and
has been extended through December 29, 1998 under the same terms.
- --------------------------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the six months ended May 31, 1998
the Fund incurred fees of approximately $2,300 for the services of PMFS. As of
May 31, 1998, approximately $410 of such fees were due to PMFS. Transfer agent
fees and expenses in the Statement of Operations include certain out-of-pocket
expenses paid to nonaffiliates.
- --------------------------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the six months ended May 31, 1998 were $10,111,988 and $9,323,221,
respectively.
The federal income tax basis of the Fund's investments at May 31, 1998 was
substantially the same as for financial reporting purposes and, accordingly, net
unrealized appreciation for federal income tax purposes was $799,980 (gross
unrealized appreciation--$1,541,207; gross unrealized depreciation--$741,227).
Note 5. Capital
The Fund offers Class A, Class B and Class C shares. Class A shares are sold
with a front-end sales charge of up to 5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a contingent
deferred sales charge of 1% during the first year. Class B shares will
automatically convert to Class A shares on a quarterly basis approximately seven
years after purchase. A special exchange privilege is also available for
shareholders who qualify to purchase Class A shares at net asset value.
There are 2 billion shares of $.001 par value common stock authorized divided
into three classes, designated Class A, Class B and Class C, which consist of 1
billion, 500 million and 500 million authorized shares, respectively. Of the
653,086 shares of common stock issued and outstanding at May 31, 1998, PIFM
owned 2,667 shares of Class A, 2,667 shares of Class B and 2,666 shares of Class
C.
Transactions in shares of common stock were as follows:
Class A Shares Amount
- ------------------------------------- -------- -----------
Six months ended May 31, 1998:
Shares sold.......................... 132,853 $ 2,160,721
Shares issued in reinvestment of
dividends
and distributions.................. 5,220 79,164
Shares reacquired.................... (16,568) (252,837)
-------- -----------
Net increase in shares outstanding
before conversion.................. 121,505 1,987,048
Shares issued upon conversion from
Class B............................ 921 14,177
-------- -----------
Net increase in shares outstanding... 122,426 $ 2,001,225
======== ===========
Year ended November 30, 1997:
Shares sold.......................... 28,654 $ 390,626
Shares issued in reinvestment of
dividends.......................... 7,185 84,009
Shares reacquired.................... (193,700) (2,363,624)
-------- -----------
Net decrease in shares outstanding
before conversion.................. (157,861) (1,888,989)
Shares issued upon conversion from
Class B............................ 715 9,982
-------- -----------
Net decrease in shares outstanding... (157,146) $(1,879,007)
======== ===========
B-85
<PAGE>
PRUDENTIAL DISTRESSED
Notes to Financial Statements (Unaudited) SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Shares Amount
- ------- ------ -------
<S> <C> <C>
Six months ended May 31, 1998:
Shares sold.......................... 31,948 $ 499,219
Shares issued in reinvestment of
dividends
and distributions.................. 13,872 210,051
Shares reacquired.................... (47,477) (758,076)
-------- -----------
Net decrease in shares outstanding
before conversion.................. (1,657) (48,806)
Shares reacquired upon conversion
into Class A....................... (921) (14,177)
-------- -----------
Net decrease in shares outstanding... (2,578) $ (62,983)
======== ===========
Year ended November 30, 1997:
Shares sold.......................... 16,501 $ 214,769
Shares issued in reinvestment of
dividends.......................... 8,896 104,821
Shares reacquired.................... (150,167) (1,863,184)
-------- -----------
Net decrease in shares outstanding
before conversion.................. (124,770) (1,543,594)
Shares reacquired upon conversion
into Class A....................... (715) (9,982)
-------- -----------
Net decrease in shares outstanding... (125,485) $(1,553,576)
======== ===========
Class C
- -------
Six months ended May 31, 1998:
Shares sold.......................... 18,272 $ 291,701
Shares issued in reinvestment of
dividends
and distributions.................. 2,308 35,027
Shares reacquired.................... (3,840) (62,742)
-------- -----------
Net increase in shares outstanding... 16,740 $ 263,986
======== ===========
Year ended November 30, 1997:
Shares sold.......................... 23,901 $ 303,761
Shares issued in reinvestment of
dividends.......................... 2,403 28,153
Shares reacquired.................... (97,442) (1,248,817)
-------- -----------
Net decrease in shares outstanding... (71,138) $ (916,903)
======== ===========
</TABLE>
- --------------------------------------------------------------------------------
B-86
<PAGE>
PRUDENTIAL DISTRESSED
Financial Highlights (Unaudited) SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
-------------------------------------------------
Six March 26,
Months Year 1996(d)
Ended Ended Through
May 31, November 30, November 30,
1998(e) 1997(e) 1996
----------- ------------ ------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................... $ 15.19 $ 11.85 $ 12.50
----- ------ ------
Income from investment operations
Net investment income (a).......................................... 1.06 .49 .25
Net realized and unrealized gain (loss) on investment
transactions.................................................... 1.08 3.23 (.90)
----- ------ ------
Total from investment operations................................ 2.14 3.72 (.65)
----- ------ ------
Less Distributions
Dividends from net investment income............................... (.66) (.38) --
Distributions from net realized gains.............................. (.17) -- --
----- ------ ------
Total distributions............................................. (.83) (.38) --
----- ------ ------
Net asset value, end of period..................................... $ 16.50 $ 15.19 $ 11.85
----- ------ ------
----- ------ ------
TOTAL RETURN(b):................................................... 13.80% 32.35% (5.20)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).................................... $ 4,167 $ 1,976 $ 3,404
Average net assets (000)........................................... $ 2,202 $ 2,167 $ 4,391
Ratios to average net assets(a):
Expenses, including distribution fees........................... 1.25%(c) 2.04% 2.76%(c)
Expenses, excluding distribution fees........................... 1.00%(c) 1.79% 2.51%(c)
Net investment income........................................... 15.44%(c) 3.73% 2.37%(c)
For Class A, B and C shares
Portfolio turnover rate......................................... 113% 175% 61%
</TABLE>
- ---------------
(a) Net of expense reimbursement.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(c) Annualized.
(d) Commencement of investment operations.
(e) Calculated based upon weighted average shares outstanding during the period.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-87
<PAGE>
PRUDENTIAL DISTRESSED
Financial Highlights (Unaudited) SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
-------------------------------------------------
Six March 26,
Months Year 1996(d)
Ended Ended Through
May 31, November 30, November 30,
1998(e) 1997(e) 1996
----------- ------------ ------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................... $ 15.16 $ 11.79 $ 12.50
----- ------ ------
Income from investment operations
Net investment income (a).......................................... 1.17 .39 .16
Net realized and unrealized gain (loss) on investment
transactions.................................................... .92 3.24 (.87)
----- ------ ------
Total from investment operations................................ 2.09 3.63 (.71)
----- ------ ------
Less Distributions
Dividends from net investment income............................... (.61) (.26) --
Distributions from net realized gains.............................. (.17) -- --
----- ------ ------
Total distributions............................................. (.78) (.26) --
----- ------ ------
Net asset value, end of period..................................... $ 16.47 $ 15.16 $ 11.79
----- ------ ------
----- ------ ------
TOTAL RETURN(b):................................................... 13.37% 31.44% (5.68)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).................................... $ 5,421 $ 5,029 $ 5,387
Average net assets (000)........................................... $ 5,283 $ 4,860 $ 6,650
Ratios to average net assets(a):
Expenses, including distribution fees........................... 2.00%(c) 2.79% 3.51%(c)
Expenses, excluding distribution fees........................... 1.00%(c) 1.79% 2.51%(c)
Net investment income........................................... 14.69%(c) 2.98% 1.59%(c)
</TABLE>
- ---------------
(a) Net of expense reimbursement.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(c) Annualized.
(d) Commencement of investment operations.
(e) Calculated based upon weighted average shares outstanding during the period.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-88
<PAGE>
PRUDENTIAL DISTRESSED
Financial Highlights (Unaudited) SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
-------------------------------------------------
Six March 26,
Months Year 1996(d)
Ended Ended Through
May 31, November 30, November 30,
1998(e) 1997(e) 1996
----------- ------------ ------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................... $ 15.16 $ 11.79 $ 12.50
----- ------ ------
Income from investment operations
Net investment income (a).......................................... 1.14 .39 .16
Net realized and unrealized gain (loss) on investment
transactions.................................................... .95 3.24 (.87)
----- ------ ------
Total from investment operations................................ 2.09 3.63 (.71)
----- ------ ------
Less Distributions
Dividends from net investment income............................... (.61) (.26) --
Distributions from net realized gains.............................. (.17) -- --
----- ------ ------
Total distributions............................................. (.78) (.26) --
----- ------ ------
Net asset value, end of period..................................... $ 16.47 $ 15.16 $ 11.79
----- ------ ------
----- ------ ------
TOTAL RETURN(b):................................................... 13.37% 31.44% (5.68)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).................................... $ 1,178 $ 831 $ 1,485
Average net assets (000)........................................... $ 979 $ 1,100 $ 1,678
Ratios to average net assets(a):
Expenses, including distribution fees........................... 2.00%(c) 2.79% 3.51%(c)
Expenses, excluding distribution fees........................... 1.00%(c) 1.79% 2.51%(c)
Net investment income........................................... 14.69%(c) 2.98% 1.71%(c)
</TABLE>
- ---------------
(a) Net of expense reimbursement.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(c) Annualized.
(d) Commencement of investment operations.
(e) Calculated based upon weighted average shares outstanding during the period.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-89
<PAGE>
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE
BOND RATINGS
AAA: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than the Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment some time in the
future.
BAA: Bonds which are rated Baa are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa to B. The modifier 1 indicates that the company ranks
in the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
CAA: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
CA: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
SHORT-TERM DEBT RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted.
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obliqations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
. Leading market positions in well-established industries.
. High rates of return on funds employed.
. Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
. Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
. Well-established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This normally
will be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
A-1
<PAGE>
STANDARD & POOR'S RATINGS GROUP
DEBT RATINGS
AAA: An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA: An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A: An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB: An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
BB, B, CCC AND CC: Obligations rated BB, B, CCC and CC are regarded as
having significant speculative characteristics. BB indicates the least degree
of speculation and CC the highest. While such obligations will likely have
some quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
COMMERCIAL PAPER RATINGS
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-1: This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
DUFF & PHELPS CREDIT RATING CO.
LONG-TERM DEBT AND PREFERRED STOCK RATINGS
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA: High credit quality. Protection factors are strong. Risk is modest but
may vary sightly from time to time because of economic conditions.
A: Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.
BBB: Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.
BB: Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B: Below investment grade and possessing risk that obligations will not be
met when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
Duff & Phelps refines each generic rating classification from AA through B
with a "+" or a "-".
CCC: Well below investment grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
SHORT-TERM DEBT RATINGS
DUFF 1 +: Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free U.S. Treasury short-
term obligations.
DUFF 1: Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk factors
are minor.
DUFF 1-: High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
DUFF 2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
A-2
<PAGE>
APPENDIX I--GENERAL INVESTMENT INFORMATION
ASSET ALLOCATION
Asset allocation is a technique for reducing risk, 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 offset short-term price volatility and realize positive returns.
POWER OF COMPOUNDING
Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth
of assets. The long-term investment results of compounding may be greater than
that of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.
STANDARD DEVIATION
Standard deviation is an absolute (non-relative) measure of volatility
which, for a mutual fund, depicts how widely the returns varied over a certain
period of time. When a fund has a high standard deviation, its range of
performance has been very wide, implying a greater volatility potential.
Standard deviation is only one of several measures of a fund's volatility.
I-1
<PAGE>
APPENDIX II--HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
The following chart shows the long-term performance of various asset classes
and the rate of inflation.
HISTORICAL PERFORMANCE DATA
[LINE GRAPH APPEARS HERE]
Value of $1.00 invested on 1/1/26 through 12/31/97
Small Stocks -- $5,519.97 Long-Term Bonds -- $39.07
Common STocks -- $1,828.33 Treasury Bills -- $14.25
Inflation -- $ 9.02
Source: Stocks, Bonds, Bills, and Inflation 1998 Yearbook, Ibbotson
Associates, Chicago (annually updates work by Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. All rights reserved. This chart is for
illustrative purposes only and is not indicative of the past, present, or
future performance of any asset class or any Prudential Mutual Fund.
Generally, stock returns are due to capital appreciation and reinvesting any
gains. Bond returns are due mainly to reinvesting interest. Also, stock prices
usually are more volatile than bond prices over the long-term. Small stock
returns for 1926-1980 are those of stocks comprising the 5th quintile of the
New York Stock Exchange. Thereafter, returns are those of the Dimensional Fund
Advisors (DFA) Small Company Fund. Common stock returns are based on the S&P
Composite Index, a market-weighted, unmanaged index of 500 stocks (currently)
in a variety of industries. It is often used as a broad measure of stock
market performance.
Long-term government bond returns are measured using a constant one-bond
portfolio with a maturity of roughly 20 years. Treasury bill returns are for a
one-month bill. Treasuries are guaranteed by the government as to the timely
payment of principal and interest; equities are not. Inflation is measured by
the consumer price index (CPI).
II-1
<PAGE>
Set forth below is historical performance data relating to various sectors of
the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1987
through 1997. The total returns of the indices include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Fund or of any sector in which the
Fund invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees
of a mutual fund. See "Fund Expenses" in the prospectus. The net effect of the
deduction of the operating expenses of a mutual fund on these historical total
returns, including the compounded effect over time, could be substantial.
<TABLE>
<CAPTION>
YEAR 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT
TREASURY
BONDS/1/ 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% -3.4% 18.4% 2.7% 9.6%
- ------------------------------------------------------------------------------------------
U.S. GOVERNMENT
MORTGAGE
SECURITIES/2/ 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% -1.6% 16.8% 5.4% 9.5%
- ------------------------------------------------------------------------------------------
U.S. INVESTMENT GRADE
CORPORATE BONDS/3/ 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% -3.9% 22.3% 3.3% 10.2%
- ------------------------------------------------------------------------------------------
U.S. HIGH YIELD
CORPORATE BONDS/4/ 5.0% 12.5% 0.8% -9.6% 46.2% 15.8% 17.1% -1.0% 19.2% 11.4% 12.8%
- ------------------------------------------------------------------------------------------
WORLD GOVERNMENT
BONDS/5/ 35.2% 2.3% -3.4% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1% -4.3%
- ------------------------------------------------------------------------------------------
DIFFERENCE BETWEEN
HIGHEST AND LOWEST
RETURNS PERCENT 33.2% 10.2% 18.8% 24.9% 30.9% 11.0% 10.3% 9.9% 5.5% 8.7% 17.1%
</TABLE>
- -------
/1/ LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over
150 public issues of the U.S. Treasury having maturities of at least one year.
/2/ LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
/3/ LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year.
/4/ LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch
Investors Service). All bonds in the index have maturities of at least one
year.
/5/ SALOMON BROTHERS WORLD GOVERNMENT INDEX (NON U.S.) includes over 800 bonds
issued by various foreign governments or agencies, excluding those in the
U.S., but including those in Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.
II-2
<PAGE>
This chart shows the growth of a
This chart illustrates the hypothetical $10,000 investment made
performance of major world stock in the stocks representing the S&P
markets for the period from 500 stock index with and without
December 31, 1986 through December reinvested dividends.
31, 1997. It does not represent the
performance of any Prudential
Mutual Fund.
AVERAGE ANNUAL TOTAL RETURNS OF
MAJOR WORLD STOCK MARKETS 12/31/86-
12/31/97 (IN U.S. DOLLARS)
Netherlands 20.5%
Spain 20.4%
Sweden 20.4%
Hong Kong 19.7%
Belgium 19.5%
Switzerland 17.9% [LINE GRAPH APPEARS HERE]
USA 17.1%
UK 16.6% Capital Appreciation and
France 15.6% Reinvesting Dividends -- $304,596
Germany 12.1% Capital Appreciation only -- $105,413
Austria 9.6%
Japan 6.6%
Source: Morgan Stanley Capital Source: Stocks, Bonds, Bills, and
International (MSCI) and Lipper Inflation 1998 Yearbook, Ibbotson
Analytical Services, Inc. as of Associates, Chicago (annually updates
12/31/97. Used with permission. work by Roger G. Ibbotson and Rex A.
Morgan Stanley Country indices are Sinquefield). Used with permission.
unmanaged indices which include All rights reserved. This chart is
those stocks making up the largest used for illustrative purposes only
two-thirds of each country's total and is not intended to represent the
stock market capitalization. past, present or future performance
Returns reflect the reinvestment of of any Prudential Mutual Fund. Common
all distributions. This chart is stock total return is based on the
for illustrative purposes only and Standard & Poor's 500 Stock Index, a
is not indicative of the past, market-value-weighted index made up
present or future performance of of 500 of the largest stocks in the
any specific investment. Investors U.S. based upon their stock market
cannot invest directly in stock value. Investors cannot invest
indices. directly in indices.
II-3
<PAGE>
---------------------------------------
WORLD STOCK MARKET CAPITALIZATION BY
REGION
World Total: $12.5 Trillion
[PIE CHART APPEARS HERE]
U.S. 49.8%
Europe 32.1%
Pacific Basin 15.6%
Canada 2.5%
Source: Morgan Stanley Capital
International, December 30, 1997.
Used with permission. This chart
represents the capitalization of
major world stock markets as
measured by the Morgan Stanley
Capital International (MSCI) World
Index. The total market
capitalization is based on the value
of approximately 1577 companies in
22 countries (representing
approximately 60% of the aggregate
market value of the stock
exchanges). This chart is for
illustrative purposes only and does
not represent the allocation of any
Prudential Mutual Fund.
This chart below shows the historical volatility of general interest rates as
measured by the long U.S. Treasury Bond.
LONG U.S. TREASURY BOND YIELD IN PERCENT (1926-1997)
[LINE GRAPH APPEARS HERE]
- ---------------------------------------
Source: Stocks, Bonds, Bills, and Inflation 1998 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. The chart illustrates the historical
yield of the long-term U.S. Treasury Bond from 1926-1996. Yields represent that
of an annually renewed one-bond portfolio with a remaining maturity of
approximately 20 years. This chart is for illustrative purposes and should not
be construed to represent the yields of any Prudential Mutual Fund.
II-4
<PAGE>
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, 1977 through December 31, 1997. The horizontal "Best Returns
Zone" band shows that a hypothetical blended portfolio constructed of one-
third U.S. stock (S&P 500), one-third foreign stock (EAFE Index), and one-
third U.S. bonds (Lehman Index) would have eliminated the "highest highs" and
"lowest lows" of any single asset class.
[CHART]
- ---------------------------------------
* Source: Prudential Investment Corporation based on data from Lipper
Analytical New Application (LANA). Past performance is not indicative of
future results. The S&P 500 Index is a weighted, unmanaged index comprised of
500 stocks which provides a broad indication of stock price movements. The
Morgan Stanley EAFE Index is an unmanaged index comprised of 20 overseas stock
markets in Europe, Australia, New Zealand and the Far East. The Lehman
Aggregate Index includes all publicly-issued investment grade debt with
maturities over one year, including U.S. government and agency issues, 15 and
30 year fixed-rate government agency mortgage securities, dollar denominated
SEC registered corporate and government securities, as well as asset-backed
securities. Investors cannot invest directly in stock or bond market indices.
II-5
<PAGE>
APPENDIX III--INFORMATION RELATING TO PRUDENTIAL
Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating
to the Prudential Mutual Funds. See "How the Fund Is Managed--Manager" in the
Prospectus. The data will be used in sales materials relating to the
Prudential Mutual Funds. Unless otherwise indicated, the information is as of
December 31, 1997 and is subject to change thereafter. All information relies
on data provided by The Prudential Investment Corporation (PIC) or from other
sources believed by the Manager to be reliable. Such information has not been
verified by the Fund.
INFORMATION ABOUT PRUDENTIAL
The Manager and PIC/1/ are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December
31, 1997. Principal products and services include life and health insurance,
other healthcare products, property and casualty insurance, securities
brokerage, asset management, investment advisory services and real estate
brokerage. Prudential (together with its subsidiaries) employs more than
79,000 persons worldwide, and maintains a sales force of approximately 10,100
agents and 6,500 domestic and international financial advisors. Prudential is
a major issuer of annuities, including variable annuities. Prudential seeks to
develop innovative products and services to meet consumer needs in each of its
business areas. Prudential uses the rock of Gibraltar as its symbol. The
Prudential rock is a recognized brand name throughout the world.
Insurance. Prudential has been engaged in the insurance business since 1875.
It insures or provides financial services to nearly 40 million people
worldwide. Long one of the largest issuers of life insurance, the Prudential
has 25 million life insurance policies in force today with a face value of
almost $1 trillion. Prudential has the largest capital base ($12.1 billion) of
any life insurance company in the United States. The Prudential provides auto
insurance for more than 1.5 million cars and insures more than 1.2 million
homes.
Money Management. The Prudential is one of the largest pension fund managers
in the country, providing pension services to 1 in 3 Fortune 500 firms. It
manages $36 billion of individual retirement plan assets, such as 401(k)
plans. As of December 31, 1997, Prudential had more than $370 billion in
assets under management. Prudential Investments, a business group of
Prudential (of which Prudential Mutual Funds is a key part) manages over $211
billion in assets of institutions and individuals. In Pensions & Investments,
May 12 1996, Prudential was ranked third in terms of total assets under
management.
Real Estate. The Prudential Real Estate Affiliates, the fourth largest real
estate brokerage network in the United States, has more than 37,000 brokers
and agents and more than 1,100 offices throughout across the United States./2/
Healthcare. Over two decades ago, the Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, approximately 4.9
million Americans receive healthcare from a Prudential managed care
membership.
Financial Services. The Prudential Savings Bank FSB, a wholly-owned
subsidiary of the Prudential, has nearly $1 billion in assets and serves
nearly 1.5 million customers across 50 states.
- --------
/1/PIC serves as the Subadviser to substantially all of the Prudential Mutual
Funds. Wellington Management Company serves as the subadviser to Global
Utility Fund, Inc., Nicholas-Applegate Capital Management as the subadviser
to Nicholas-Applegate Fund, Inc., Jennison Associates LLC as one of the
subadvisers to The Prudential Investment Portfolios, Inc. and Mercator Asset
Management LP as the subadviser to International Stock Series, a portfolio
of Prudential World Fund, Inc. There are multiple subadvisers for The Target
Portfolio Trust.
/2/As of December 31, 1996.
III-1
<PAGE>
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
As of December 30, 1997 Prudential Investments Fund Management is the
eighteenth largest mutual fund company in the country, with over 2.5 million
shareholders invested in more than 50 mutual fund portfolios and variable
annuities with more than 3.7 million shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers who manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment
portfolios.
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser
in national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in
surveys conducted by national and regional publications and media
organizations such as The Wall Street Journal, The New York Times, Barron's
and USA Today.
Equity Funds. Forbes magazine listed Prudential Equity Fund among twenty
mutual funds on its Honor Roll in its mutual fund issue of August 28, 1995.
Honorees are chosen annually among mutual funds (excluding sector funds) which
are open to new investors and have had the same management for at least five
years. Forbes considers, among other criteria, the total return of a mutual
fund in both bull and bear markets as well as a fund's risk profile.
Prudential Equity Fund is managed with a "value" investment style by PIC. In
1995, Prudential Securities introduced Prudential Jennison Fund, a growth-
style equity fund managed by Jennison Associates LLC, a premier institutional
equity manager and a subsidiary of Prudential.
High Yield Funds. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor
approximately 200 issues held in the Prudential High Yield Fund (currently the
largest fund of its kind in the country) along with 100 or so other high yield
bonds, which may be considered for purchase./3/ Non-investment grade bonds,
also known as junk bonds or high yield bonds, are subject to a greater risk of
loss of principal and interest including default risk than higher-rated bonds.
Prudential high yield portfolio managers and analysts meet face-to-face with
almost every bond issuer in the High Yield Fund's portfolio annually, and have
additional telephone contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets--from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from Pulp and Paper Forecaster to Women's
Wear Daily--to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential
Mutual Fund.
Prudential Mutual Funds trade approximately $31 billion in U.S. and foreign
government securities a year. PIC seeks information from government policy
makers. In 1995, Prudential's portfolio managers met with several senior U.S.
and foreign government officials, on issues ranging from economic conditions
in foreign countries to the viability of index-linked securities in the United
States.
Prudential Mutual Funds' portfolio managers and analysts met with over 1,200
companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.
- --------
/3/As of December 31, 1996. The number of bonds and the size of the Fund are
subject to change.
III-2
<PAGE>
Prudential Mutual Fund global equity managers conducted many of their visits
overseas, often holding private meetings with a company in a foreign language
(our global equity managers speak 7 different languages, including Mandarin
Chinese).
Trading Data./4/ On an average day, Prudential Mutual Funds' U.S. and
foreign equity trading desks traded $77 million in securities representing
over 3.8 million shares with nearly 200 different firms. Prudential Mutual
Funds' bond trading desks traded $157 million in government and corporate
bonds on an average day. That represents more in daily trading than most bond
funds tracked by Lipper even have in assets./5/ Prudential Mutual Funds' money
market desk traded $3.2 billion in money market securities on an average day,
or over $800 billion a year. They made a trade every 3 minutes of every
trading day. In 1994, the Prudential Mutual Funds effected more than 40,000
trades in money market securities and held on average $20 billion of money
market securities./6/
Based on complex-wide data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Services LLC, the Transfer Agent of the
Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free number. On
an annual basis, that represents approximately 1.8 million telephone calls
answered.
INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 6,000 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
Annuities. As of December 31, 1997, assets held by Prudential Securities for
its clients approximated $235 billion. During 1997, over 29,000 new customer
accounts were opened each month at 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.
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 Architects SM, a state-of-the-art asset allocation software program
which helps Financial Advisors to evaluate a client's objectives and overall
financial plan, and a comprehensive mutual fund information and analysis
system that compares different mutual funds.
For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
- --------
/4/Trading data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PIC serves as the subadviser, portfolios
of the Prudential Series Fund and institutional and non-US accounts managed
by Prudential Investments, a business group of PIC, for the year ended
December 31, 1995.
/5/Based on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate
U.S. Government, Short Investment Grade Debt, Intermediate Investment Grade
Debt, General U.S. Treasury, General U.S. Government and Mortgage Funds.
/6/As of December 31, 1994.
/7/As of December 31, 1997.
/8/On an annual basis, Institutional Investor magazine surveys more than 700
institutional money managers, chief investment officers and research
directors, asking them to evaluate analysts in 76 industry sectors. Scores
are produced by taking the number of votes awarded to an individual analyst
and weighting them based on the size of the voting institution. In total,
the magazine sends its survey to approximately 2,000 institutions and a
group of European and Asian institutions.
III-3
<PAGE>
OTHER INFORMATION
ITEM 23. EXHIBITS.
(a) (1) Articles of Incorporation, incorporated by reference to Exhibit
1 to the Registration Statement on Form N-1A (File No. 333-00203)
filed via EDGAR on January 16, 1996.
(2) Articles Supplementary.*
(b) By-Laws, incorporated by reference to Exhibit 2 to the Registration
Statement on Form N-1A (File No. 333-00203) filed via EDGAR on
January 16, 1996.
(c) Instruments defining rights of shareholders incorporated by
reference to Exhibit 4 to the Registration Statement on Form N-1A
(File No. 333-00203) filed via EDGAR on January 16, 1996.
(d) (1) Management Agreement between the Registrant and Prudential
Mutual Fund Management, Inc., incorporated by reference to Exhibit
5(a) to Post-Effective Amendment No. 1 to the Registration Statement
on Form N-1A (File No. 333-00203) filed via EDGAR on September 6,
1996.
(2) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation, incorporated by
reference to Exhibit 5(b) to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A (File No. 333-00203) filed via
EDGAR on September 6, 1996.
(e) (1) Distribution Agreement between the Registrant and Prudential
Investment Management Services LLC.*
(2) Form of Selected Dealer Agreement.*
(g) Custodian Contract between the Registrant and State Street Bank and
Trust Company, incorporated by reference to Exhibit 8 to Post-
Effective Amendment No. 1 to the Registration Statement on Form N-1A
(File No. 333-00203) filed via EDGAR on September 6, 1996.
(h) Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc., incorporated by reference to
Exhibit 9 to Post-Effective Amendment No. 1 to the Registration
Statement on Form N-1A (File No. 333-00203) filed via EDGAR on
September 6, 1996.
(i) Opinion of Gardner, Carton & Douglas, incorporated by reference to
Exhibit 10 to Pre-Effective Amendment No. 1 to the Registration
Statement on Form N-1A (File No. 333-00203) filed via EDGAR on
February 16, 1996.
(l) Purchase Agreement, incorporated by reference to Exhibit 13 to Pre-
Effective Amendment No. 1 to the Registration Statement on Form N-1A
(File No. 333-00203) filed via EDGAR on February 16, 1996.
(m) (1) Amended and Restated Distribution and Service Plan for Class A
shares.*
(2) Amended and Restated Distribution and Service Plan for Class B
shares.*
(3) Amended and Restated Distribution and Service Plan for Class C
shares.*
(n)Financial Data Schedules.*
(o)Amended Rule 18f-3 Plan.*
- --------
*Filed herewith.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
C-1
<PAGE>
ITEM 25. INDEMNIFICATION
As permitted by Sections 17(h) and (i) of the Investment Company Act of
1940, as amended (the 1940 Act) and pursuant to Article VI of the Fund's By-
Laws (Exhibit (b) to the Registration Statement), officers, directors,
employees and agents of the Registrant will not be liable to the Registrant,
any shareholder, 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 (e)(1)) to the Registration Statement), the Distributor of
the Registrant may be indemnified against liabilities which it may incur,
except liabilities arising from bad faith, gross negligence, willful
misfeasance or reckless disregard of duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (Securities Act) may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the foregoing provisions
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the 1940 Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in connection with the
successful defense of any action, suit or proceeding) is asserted against the
Registrant by such director, officer or controlling person in connection with
the shares being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the 1940 Act and will be governed
by the final adjudication of such issue.
The Registrant has purchased an insurance policy insuring its officers and
directors against liabilities, and certain costs of defending claims against
such officers and directors, to the extent such officers and directors are not
found to have committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of
indemnification payments to officers and directors under certain
circumstances.
Section 9 of the Management Agreement (Exhibit (d)(1) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit (d)(2) to the
Registration Statement) limit the liability of Prudential Investments Fund
Management LLC (PIFM) 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 the Distribution Agreement in a manner
consistent with Release No. 11330 of the Securities and Exchange Commission
under the 1940 Act so long as the interpretation of Sections 17(h) and 17(i)
of such Act remain in effect and are consistently applied.
Under Section 17(h) of the 1940 Act, it is the position of the staff of the
Securities and Exchange Commission that if there is neither a court
determination on the merits that the defendant is not liable nor a court
determination that the defendant was not guilty of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of one's office, no indemnification will be permitted unless an
independent legal counsel (not including a counsel who does work for either
the registrant, its investment adviser, its principal underwriter or persons
affiliated with these persons) determines, based upon a review of the facts,
that the person in question was not guilty of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct
of his office.
C-2
<PAGE>
Under its Articles of Incorporation, the Registrant may advance funds to
provide for indemnification. Pursuant to the Securities and Exchange
Commission staff's position of Section 17(h) advances will be limited in the
following respect:
(1) Any advances must be limited to amounts used, or to be used, for the
preparation and/or presentation of a defense to the action (including cost
connected with preparation of a settlement);
(2) Any advances must be accompanied by a written promise by, or on
behalf of, the recipient to repay that amount of the advance which exceeds
the amount to which it is ultimately determined that he is entitled to
receive from the Registrant by reason of indemnification;
(3) Such promise must be secured by a surety bond or other suitable
insurance; and
(4) Such surety bond or other insurance must be paid for by the recipient
of such advance.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) Prudential Investments Fund Management LLC
See "How the Fund Is Managed--Manager" in the Prospectus constituting Part A
of this Registration Statement and "Investment Advisory and Other Services" in
the Statement of Additional Information constituting Part B of this
Registration Statement.
The business and other connections of the officers of PIFM are listed in
Schedules A and D of Form ADV of PIFM as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference
(File No. 801-31104).
The business and other connections of PIFM's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is Gateway Center Three, 100 Mulberry Street, Newark,
NJ 07102-4077.
<TABLE>
<CAPTION>
NAME POSITION WITH PIFM PRINCIPAL OCCUPATION
- ---- ------------------ --------------------
<S> <C> <C>
Robert F. Executive Vice President Vice President, Prudential; Executive Vice
Gunia and Treasurer President and Treasurer, PIFM; Senior Vice
President, Prudential Securities
Neil A. Executive Vice President Executive Vice President and Director of
McGuinness Marketing, Prudential Mutual Funds &
Annuities (PMF&A);
Executive Vice President, PIFM
Brian Officer in Charge, President, President, PMF&A; Officer-in Charge,
Storms Chief Executive Officer and President, Chief Executive Officer and Chief
Chief Operating Officer Operating Officer, PIFM
Robert J. Executive Vice President Executive Vice President, PMF&A, Executive
Sullivan Vice President, PIFM
</TABLE>
(b) The Prudential Investment Corporation
See "How the Fund Is Managed--Investment Adviser" in the Prospectus
constituting Part A of this Registration Statement and "Investment Advisory
and Other Services" in the Statement of Additional Information constituting
Part B of this Registration Statement.
C-3
<PAGE>
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.
<TABLE>
<CAPTION>
NAME AND
ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- -------- ----------------- ---------------------
<S> <C> <C>
E. Michael Chairman of the Board, Chief Executive Officer of Prudential Invest-
Caulfield President and Chief ments (PIC) of The Prudential Insurance Com-
Executive Officer and pany of America (Prudential)
Director
John R. Vice President and Director President of Private Asset Management Group
Strangfeld of Prudential; Senior Vice President, Pru-
dential; Vice President and Director PIC
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Prudential Investment Management Services LLC (PIMS)
PIMS is distributor for Cash Accumulation Trust, Command Government Fund,
Command Money Fund, Command Tax-Free Fund, The Global Total Return Fund, Inc.,
Global Utility Fund, Inc., Nicholas-Applegate Fund, Inc. (Nicholas-Applegate
Growth Equity Fund), Prudential Balanced Fund, Prudential California Municipal
Fund, Prudential Diversified Bond Fund, Inc., Prudential Distressed Securities
Fund, Inc., Prudential Emerging Growth Fund, Inc., Prudential Equity Fund,
Inc., Prudential Equity Income Fund, Prudential Europe Growth Fund, Inc.,
Prudential Global Genesis Fund, Inc., Prudential Global Limited Maturity Fund,
Inc., Prudential Government Income Fund, Inc., Prudential Government
Securities Trust, Prudential High Yield Fund, Inc., Prudential High Yield
Total Return Fund, Inc., Prudential Index Series Fund, Prudential
Institutional Liquidity Portfolio, Inc., Prudential Intermediate Global Income
Fund, Inc., Prudential International Bond Fund, Inc., Prudential Mid-Cap Value
Fund, 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 Real Estate Securities Fund, Prudential Small-Cap Quantum Fund,
Inc., Prudential Small Company Value Fund, Inc., Prudential Special Money
Market Fund, Inc., Prudential Structured Maturity Fund, Inc., Prudential 20/20
Focus Fund, Prudential Utility Fund, Inc., Prudential World Fund, Inc., The
Prudential Investment Portfolios, Inc. and The Target Portfolio Trust.
C-4
<PAGE>
(b) Information concerning the officers and directors of PIMS is set forth
below.
<TABLE>
<CAPTION>
POSITIONS AND
OFFICES WITH POSITIONS AND OFFICES
NAME(/1/) UNDERWRITER WITH REGISTRANT
--------- ------------- ---------------------
<C> <S> <C>
E. Michael Caulfield. President None
Mark R. Fetting...... Executive Vice President None
Gateway Center Three
100 Mulberry Street
Newark, New Jersey
07102
Jean D. Hamilton..... Executive Vice President None
Ronald P. Joelson.... Executive Vice President None
Brian M. Storms...... Executive Vice President President and Director
Gateway Center Three
100 Mulberry Street
Newark, New Jersey
07102
John R. Strangfeld, Executive Vice President None
Jr. ................
Mario A. Mosse ...... Senior Vice President and None
Chief Operating Officer
Scott S. Wallner..... Vice President, Secretary and None
Chief Legal Officer
Michael G. Vice President, Comptroller None
Williamson.......... and Chief Financial Officer
C. Edward Chaplin.... Treasurer None
</TABLE>
- --------
(/1/)The address of each person named is Prudential Plaza, 751 Broad Street,
Newark, NJ 07102, unless otherwise indicated.
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
ITEM 28. 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,
751 Broad Street, Newark, New Jersey 07102, the Registrant, Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077 and Prudential
Mutual Fund Services LLC, Raritan Plaza One, Edison, New Jersey 08837.
Documents required by Rules 31a-1(b)(5), (6), (7), (9), (10) and (11) and 31a-
1(f) and Rules 31a-(b)(4) and (11) and 31a-1(d) will be kept at Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077 and the remaining
accounts, books and other documents required by such other pertinent
provisions of Section 31(a) and the Rules promulgated thereunder will be kept
by State Street Bank and Trust Company and Prudential Mutual Fund
Services LLC.
C-5
<PAGE>
ITEM 29. 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
caption "Investment Advisory and Other Services" in the Statement of
Additional Information, constituting Parts A and B, respectively, of this
Post-Effective Amendment to the Registration Statement, Registrant is not a
party to any management-related service contract.
ITEM 30. UNDERTAKINGS
Not applicable.
C-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment
Company Act, 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 14th day of December, 1998.
PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
/s/ Brian M. Storms
By_________________________________
BRIAN M. STORMS PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Grace C. Torres Treasurer and Principal December 14, 1998
- --------------------------- Financial and Accounting Officer
GRACE C. TORRES
/s/ Edward D. Beach Director December 14, 1998
- ---------------------------
EDWARD D. BEACH
/s/ Delayne D. Gold Director December 14, 1998
- ---------------------------
DELAYNE D. GOLD
/s/ Robert F. Gunia Director December 14, 1998
- ---------------------------
ROBERT F. GUNIA
/s/ Douglas H. McCorkindale Director December 14, 1998
- ---------------------------
DOUGLAS H. MCCORKINDALE
/s/ Mendel A. Melzer Director December 14, 1998
- ---------------------------
MENDEL A. MELZER
/s/ Thomas T. Mooney Director December 14, 1998
- ---------------------------
THOMAS T. MOONEY
/s/ Stephen P. Munn Director December 14, 1998
- ---------------------------
STEPHEN P. MUNN
/s/ Richard A. Redeker Director December 14, 1998
- ---------------------------
RICHARD A. REDEKER
/s/ Robin B. Smith Director December 14, 1998
- ---------------------------
ROBIN B. SMITH
/s/ Brian M. Storms President and Director December 14, 1998
- ---------------------------
BRIAN M. STORMS
/s/ Louis A. Weil, III Director December 14, 1998
- ---------------------------
LOUIS A. WEIL, III
/s/ Clay T. Whitehead Director December 14, 1998
- ---------------------------
CLAY T. WHITEHEAD
</TABLE>
C-7
<PAGE>
PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION PAGE NUMBER
-------------- ----------- -----------
<C> <S> <C>
(a)(1) Articles of Incorporation, incorporated by refer- --
ence to Exhibit 1 to the Registration Statement
on Form N-1A (File No. 333-00203) filed via EDGAR
on January 16, 1996.
(2) Articles Supplementary.*
(b) By-Laws, incorporated by reference to Exhibit 2 --
to the Registration Statement on Form N-1A (File
No. 333-00203) filed via EDGAR on January 16,
1996.
(c) Instruments Defining Rights of Shareholders, in- --
corporated by reference to Exhibit 4 to the Reg-
istration Statement on Form N-1A (File No. 333-
00203) filed via EDGAR on January 16, 1996.
(d)(1) Management Agreement between the Registrant and --
Prudential Mutual Fund Management, Inc., incorpo-
rated by reference to Exhibit 5(a) to Post-Effec-
tive Amendment No. 1 to the Registration State-
ment on Form N-1A (File No. 333-00203) filed via
EDGAR on September 6, 1996.
(2) Subadvisory Agreement between Prudential Mutual --
Fund Management, Inc. and The Prudential Invest-
ment Corporation, incorporated by reference to
Exhibit 5(b) to Post-Effective Amendment No. 1 to
the Registration Statement on Form N-1A (File No.
333-00203) filed via EDGAR on September 6, 1996.
(e)(1) Distribution Agreement between the Registrant and --
Prudential Investment Management Services LLC.*
(2) Form of Selected Dealer Agreement.* --
(g) Custodian Contract between the Registrant and --
State Street Bank and Trust Company, incorporated
by reference to Exhibit 8 to Post-Effective
Amendment No. 1 to the Registration Statement on
Form N-1A (File No. 333-00203) filed via EDGAR on
September 6, 1996.
(h) Transfer Agency and Service Agreement between the --
Registrant and Prudential Mutual Fund Services,
Inc., incorporated by reference to Exhibit 9 to
Post-Effective Amendment No. 1 to the Registra-
tion Statement on Form N-1A (File No. 333-00203)
filed via EDGAR on September 6, 1996.
(i) Opinion of Gardner, Carton & Douglas, --
incorporated by reference to Exhibit 10 to Pre-
Effective Amendment No. 1 to the Registration
Statement on Form N-1A (File No. 333-00203) filed
via EDGAR on February 16, 1996.
(l) Purchase Agreement, incorporated by reference to --
Exhibit 13 to Pre-Effective Amendment No. 1 to
the Registration Statement on Form N-1A (File No.
333-00203) filed via EDGAR on February 16, 1996.
(m)(1) Amended and Restated Distribution and Service --
Plan for Class A Shares.*
(2) Amended and Restated Distribution and Service --
Plan for Class B Shares.*
(3) Amended and Restated Distribution and Service --
Plan for Class C Shares.*
(n) Financial Data Schedules.*
(o) Amended Rule 18f-3 Plan.* --
</TABLE>
- --------
* Filed herewith.
<PAGE>
EXHIBIT 99.(a)(2)
ARTICLES SUPPLEMENTARY
of
PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
Prudential Distressed Securities Fund, Inc., a Maryland corporation having
its principal office in Baltimore, Maryland (hereinafter called the
"Corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland that:
FIRST: In accordance with Article IV of the Charter of the Corporation and
the Maryland General Corporation Law, the Board of Directors has reclassified
the unissued shares of its Class C Common Stock (par value $.001 per share) by
changing certain terms and conditions as follows:
Effective November 2, 1998, all newly-issued Class C Shares of Common Stock
shall be subject to a front-end sales charge, a contingent deferred sales
charge, and a Rule 12b-1 distribution fee as determined by the Board of
Directors from time to time in accordance with the Investment Company Act of
1940, as amended, and as disclosed in the current prospectus for such shares.
IN WITNESS WHEREOF, Prudential Distressed Securities Fund, Inc. has caused
these presents to be signed in its name and on its behalf by its Vice President
and witnessed by its Assistant Secretary on October 30, 1998.
WITNESS: PRUDENTIAL DISTRESSED
SECURITIES FUND, INC.
/s/ Marguerite E.H. Morrison By: /s/ Robert F. Gunia
------------------------------- -------------------------------
Marguerite E. H. Morrison, Robert F. Gunia, Vice President
Assistant Secretary
THE UNDERSIGNED, Vice President of Prudential Distressed Securities
Fund, Inc., who executed on behalf of the Corporation Articles Supplementary of
which this Certificate is made a part, hereby acknowledges in the name and on
behalf of said Corporation the foregoing Articles Supplementary to be in the
corporate act of said Corporation and hereby certifies that the matters and
facts set forth herein with respect to the authorization and approval thereof
are true in all material respects under the penalties of perjury.
/s/ Robert F. Gunia
-------------------------------
Robert F. Gunia, Vice President
<PAGE>
EXHIBIT 99.E1
PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
Distribution Agreement
----------------------
Agreement made as of June 1, 1998, and amended as of August 26, 1998,
between Prudential Distressed Securities Fund, Inc. (the Fund), and Prudential
Investment Management Services LLC, a Delaware limited liability company (the
Distributor).
WITNESSETH
WHEREAS, the Fund is registered under the Investment Company Act of
1940, as amended (the Investment Company Act), as a diversified, open-end,
management investment company and it is in the interest of the Fund to offer its
shares for sale continuously;
WHEREAS, the shares of the Fund may be divided into classes and/or
series (all such shares being referred to herein as Shares) and the Fund
currently is authorized to offer Class A, Class B, Class C and Class Z Shares;
WHEREAS, the Distributor is a broker-dealer registered under the
Securities Exchange Act of 1934, as amended, and is engaged in the business of
selling shares of registered investment companies either directly or through
other broker-dealers;
WHEREAS, the Fund and the Distributor wish to enter into an agreement
with each other, with respect to the continuous offering of the Fund's Shares
from and after the date hereof in order to promote the growth of the Fund and
facilitate the distribution of its Shares; and
WHEREAS, the Fund has adopted a plan (or plans) of distribution
pursuant to Rule 12b-1 under the Investment Company Act with respect to certain
of its classes and/or series of Shares (the Plans) authorizing payments by the
Fund to the Distributor with respect to the distribution of such classes and/or
series of Shares and the maintenance of related shareholder accounts.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor
------------------------------
The Fund hereby appoints the Distributor as the principal
underwriter and distributor of the Shares of the Fund to sell Shares to the
public on behalf of the Fund and the Distributor hereby accepts such appointment
and agrees to act hereunder. The Fund hereby agrees during the term of this
Agreement to sell Shares of the Fund through the Distributor on the terms and
conditions set forth below.
<PAGE>
Section 2. Exclusive Nature of Duties
--------------------------
The Distributor shall be the exclusive representative of the Fund
to act as principal underwriter and distributor of the Fund's Shares, except
that:
2.1 The exclusive rights granted to the Distributor to sell Shares
of the Fund shall not apply to Shares of the Fund issued in connection with the
merger or consolidation of any other investment company or personal holding
company with the Fund or the acquisition by purchase or otherwise of all (or
substantially all) the assets or the outstanding shares of any such company by
the Fund.
2.2 Such exclusive rights shall not apply to Shares issued by the
Fund pursuant to reinvestment of dividends or capital gains distributions or
through the exercise of any conversion feature or exchange privilege.
2.3 Such exclusive rights shall not apply to Shares issued by the
Fund pursuant to the reinstatement privilege afforded redeeming shareholders.
2.4 Such exclusive rights shall not apply to purchases made
through the Fund's transfer and dividend disbursing agent in the manner set
forth in the currently effective Prospectus of the Fund. The term "Prospectus"
shall mean the Prospectus and Statement of Additional Information included as
part of the Fund's Registration Statement, as such Prospectus and Statement of
Additional Information may be amended or supplemented from time to time, and the
term "Registration Statement" shall mean the Registration Statement filed by the
Fund with the Securities and Exchange Commission and effective under the
Securities Act of 1933, as amended (Securities Act), and the Investment Company
Act, as such Registration Statement is amended from time to time.
Section 3. Purchase of Shares from the Fund
--------------------------------
3.1 The Distributor shall have the right to buy from the Fund on
behalf of investors the Shares needed, but not more than the Shares needed
(except for clerical errors in transmission) to fill unconditional orders for
Shares placed with the Distributor by investors or registered and qualified
securities dealers and other financial institutions (selected dealers).
3.2 The Shares shall be sold by the Distributor on behalf of the
Fund and delivered by the Distributor or selected dealers, as described in
Section 6.4 hereof, to investors at the offering price as set forth in the
Prospectus.
3.3 The Fund shall have the right to suspend the sale of any or
all classes and/or series of its Shares at times when redemption is suspended
pursuant to
2
<PAGE>
the conditions in Section 4.3 hereof or at such other times as may be determined
by the Board. The Fund shall also have the right to suspend the sale of any or
all classes and/or series of its Shares if a banking moratorium shall have been
declared by federal or New Jersey authorities.
3.4 The Fund, or any agent of the Fund designated in writing by the
Fund, shall be promptly advised of all purchase orders for Shares received by
the Distributor. Any order may be rejected by the Fund; provided, however, that
the Fund will not arbitrarily or without reasonable cause refuse to accept or
confirm orders for the purchase of Shares. The Fund (or its agent) will confirm
orders upon their receipt, will make appropriate book entries and upon receipt
by the Fund (or its agent) of payment therefor, will deliver deposit receipts
for such Shares pursuant to the instructions of the Distributor. Payment shall
be made to the Fund in New York Clearing House funds or federal funds. The
Distributor agrees to cause such payment and such instructions to be delivered
promptly to the Fund (or its agent).
Section 4. Repurchase or Redemption of Shares by the Fund
----------------------------------------------
4.1 Any of the outstanding Shares may be tendered for redemption
at any time, and the Fund agrees to repurchase or redeem the Shares so tendered
in accordance with its Declaration of Trust as amended from time to time, and in
accordance with the applicable provisions of the Prospectus. The price to be
paid to redeem or repurchase the Shares shall be equal to the net asset value
determined as set forth in the Prospectus. All payments by the Fund hereunder
shall be made in the manner set forth in Section 4.2 below.
4.2 The Fund shall pay the total amount of the redemption price as
defined in the above paragraph pursuant to the instructions of the Distributor
on or before the seventh day subsequent to its having received the notice of
redemption in proper form. The proceeds of any redemption of Shares shall be
paid by the Fund as follows: (i) in the case of Shares subject to a contingent
deferred sales charge, any applicable contingent deferred sales charge shall be
paid to the Distributor, and the balance shall be paid to or for the account of
the redeeming shareholder, in each case in accordance with applicable provisions
of the Prospectus; and (ii) in the case of all other Shares, proceeds shall be
paid to or for the account of the redeeming shareholder, in each case in
accordance with applicable provisions of the Prospectus.
4.3 Redemption of any class and/or series of Shares or payment may
be suspended at times when the New York Stock Exchange is closed for other than
customary weekends and holidays, when trading on said Exchange is restricted,
when an emergency exists as a result of which disposal by the Fund of securities
owned by it is not reasonably practicable or it is not reasonably practicable
for the Fund fairly to determine the value of its net assets, or during any
other period when the Securities and Exchange Commission, by order, so permits.
3
<PAGE>
Section 5. Duties of the Fund
------------------
5.1 Subject to the possible suspension of the sale of Shares as
provided herein, the Fund agrees to sell its Shares so long as it has Shares of
the respective class and/or series available.
5.2 The Fund shall furnish the Distributor copies of all
information, financial statements and other papers which the Distributor may
reasonably request for use in connection with the distribution of Shares, and
this shall include one certified copy, upon request by the Distributor, of all
financial statements prepared for the Fund by independent public accountants.
The Fund shall make available to the Distributor such number of copies of its
Prospectus and annual and interim reports as the Distributor shall reasonably
request.
5.3 The Fund shall take, from time to time, but subject to the
necessary approval of the Board and the shareholders, all necessary action to
fix the number of authorized Shares and such steps as may be necessary to
register the same under the Securities Act, to the end that there will be
available for sale such number of Shares as the Distributor reasonably may
expect to sell. The Fund agrees to file from time to time such amendments,
reports and other documents as may be necessary in order that there will be no
untrue statement of a material fact in the Registration Statement, or necessary
in order that there will be no omission to state a material fact in the
Registration Statement which omission would make the statements therein
misleading.
5.4 The Fund shall use its best efforts to notify such states as
the Distributor and the Fund may approve of its intention to sell any
appropriate number of its Shares; provided that the Fund shall not be required
to amend its Articles of Incorporation or By-Laws to comply with the laws of any
state, to maintain an office in any state, to change the terms of the offering
of its Shares in any state from the terms set forth in its Registration
Statement, to qualify as a foreign corporation in any state or to consent to
service of process in any state other than with respect to claims arising out of
the offering of its Shares. Any such notification may be withheld, terminated or
withdrawn by the Fund at any time in its discretion. As provided in Section 9
hereof, the expense of notification and maintenance of notification 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 notifications.
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<PAGE>
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 Securities Exchange Act Rule 10b-10 and the rules 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 or are institutions exempt from
registration under applicable federal securities laws. Shares sold to selected
dealers shall be for resale by such dealers only at the offering price
determined as set forth in the Prospectus.
Section 7. Payments to the Distributor
---------------------------
7.1 With respect to classes and/or series of Shares which impose
a front-end sales charge, the Distributor shall receive and may retain any
portion of any front-end sales charge which is imposed on such sales and not
reallocated to selected dealers as set forth in the Prospectus, subject to the
limitations of Rule 2830 of the Conduct Rules of the NASD. Payment of these
amounts to the Distributor is not contingent upon the adoption or continuation
of any applicable Plans.
7.2 With respect to classes and/or series of Shares which impose
a contingent deferred sales charge, the Distributor shall receive and may retain
any contingent deferred sales charge which is imposed on such sales as set forth
in the Prospectus, subject to the limitations of Rule 2830 of the Conduct Rules
of the NASD.
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<PAGE>
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 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,
financial institutions and investment advisers 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 or any agent or representative of the Fund, the
Distributor shall provide such additional information as may reasonably be
requested concerning the activities of the Distributor hereunder and the costs
incurred in performing such activities with respect to the relevant class and/or
series of Shares.
Section 9. Allocation of Expenses
----------------------
The Fund shall bear all costs and expenses of the continuous
offering of its Shares (except for those costs and expenses borne by the
Distributor pursuant to a Plan and subject to the requirements of Rule 12b-1
under the Investment Company Act), including fees and disbursements of its
counsel and auditors, in connection with the preparation and filing of any
required Registration Statements and/or Prospectuses under the Investment
Company Act or the Securities Act, and all amendments and supplements thereto,
and preparing and mailing annual and periodic reports and proxy materials to
shareholders (including but not limited to the expense of setting in type any
such Registration Statements, Prospectuses, annual or periodic reports or proxy
materials). The Fund shall also bear the cost of expenses of making notice
filings for 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 notification therein until the Fund decides to
discontinue such notification 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.
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<PAGE>
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, members 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 by
the Distributor to the Fund for use in the Registration Statement or Prospectus;
provided, however, that this indemnity agreement shall not inure to the benefit
of any such officer, member or controlling person unless a court of competent
jurisdiction shall determine in a final decision on the merits, that the person
to be indemnified was not liable by reason of willful misfeasance, bad faith or
gross negligence in the performance of its duties, or by reason of its reckless
disregard of its obligations under this Agreement (disabling conduct), or, in
the absence of such a decision, a reasonable determination, based upon a review
of the facts, that the indemnified person was not liable by reason of disabling
conduct, by (a) a vote of a majority of a quorum of Directors or Directors who
are neither "interested persons" of the Fund as defined in Section 2(a)(19) of
the Investment Company Act nor parties to the proceeding, or (b) an independent
legal counsel in a written opinion. The Fund's agreement to indemnify the
Distributor, its officers and members 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 members, 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
7
<PAGE>
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 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 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 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.
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<PAGE>
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 Jersey as at the
time in effect and the applicable provisions of the Investment Company Act. To
the extent that the applicable law of the State of New Jersey, or any of the
provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year above written.
Prudential Investment Management Services LLC
/s/ Brian M. Storms
By: ________________________
Brian M. Storms
Executive Vice President
Prudential Distressed Securities Fund, Inc.
/s/ Robert F. Gunia
By: ________________________
Robert F. Gunia
Vice President
9
<PAGE>
EXHIBIT 99.E2
DEALER AGREEMENT
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC
Prudential Investment Management Services LLC ("Distributor") and
_________________ ("Dealer") have agreed that Dealer will participate in the
distribution of shares ("Shares") of all the funds and series thereof (as they
may exist from time to time) comprising the Prudential Mutual Fund Family (each
a "Fund" and collectively the "Funds") and any classes thereof for which
Distributor now or in the future serves as principal underwriter and
distributor, subject to the terms of this Dealer Agreement ("Agreement"). Any
such additional Funds will be included in this Agreement upon Distributor's
written notification to Dealer.
1. LICENSING
---------
a. Dealer represents and warrants that it is: (i) a broker-dealer
registered with the Securities and Exchange Commission ("SEC"); (ii) a member in
good standing of the National Association of Securities Dealers, Inc. ("NASD");
and (iii) licensed by the appropriate regulatory agency of each state or other
jurisdiction in which Dealer will offer and sell Shares of the Funds, to the
extent necessary to perform the duties and activities contemplated by this
Agreement.
b. Dealer represents and warrants that each of its partners, directors,
officers, employees, and agents who will be utilized by Dealer with respect to
its duties and activities under this Agreement is either appropriately licensed
or exempt from such licensing requirements by the appropriate regulatory agency
of each state or other jurisdiction in which Dealer will offer and sell Shares
of the Funds.
c. Dealer agrees that: (i) termination or suspension of its
registration with the SEC; (ii) termination or suspension of its membership with
the NASD; or (iii) termination or suspension of its license to do business by
any state or other jurisdiction or federal regulatory agency shall immediately
cause the termination of this Agreement. Dealer further agrees to immediately
notify Distributor in writing of any such action or event.
d. Dealer agrees that this Agreement is in all respects subject to the
Conduct Rules of the NASD and such Conduct Rules shall control any provision to
the contrary in this Agreement.
e. Dealer agrees to be bound by and to comply with all applicable state
and federal laws and all rules and regulations promulgated thereunder generally
affecting the sale or distribution of mutual fund shares.
2. ORDERS
------
a. Dealer agrees to offer and sell Shares of the Funds (including those
of each of its classes) only at the regular public offering price applicable to
such Shares and in effect at the time of each transaction. The procedures
relating to all orders and the handling of each order (including the manner of
computing the net asset value of Shares and the effective time of orders
received from Dealer) are subject to: (i) the terms of the then current
prospectus and statement of
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additional information (including any supplements, stickers or amendments
thereto) relating to each Fund, as filed with the SEC ("Prospectus"); (ii) the
new account application for each Fund, as supplemented or amended from time to
time; and (iii) Distributor's written instructions and multiple class pricing
procedures and guidelines, as provided to Dealer from time to time. To the
extent that the Prospectus contains provisions that are inconsistent with this
Agreement or any other document, the terms of the Prospectus shall be
controlling.
b. Distributor reserves the right at any time, and without notice to
Dealer, to suspend the sale of Shares or to withdraw or limit the offering of
Shares. Distributor reserves the unqualified right not to accept any specific
order for the purchase or sale of Shares.
c. In all offers and sales of the Shares to the public, Dealer is not
authorized to act as broker or agent for, or employee of, Distributor, any Fund
or any other dealer, and Dealer shall not in any manner represent to any third
party that Dealer has such authority or is acting in such capacity. Rather,
Dealer agrees that it is acting as principal for Dealer's own account or as
agent on behalf of Dealer's customers in all transactions in Shares, except as
provided in Section 3.i. hereof. Dealer acknowledges that it is solely
responsible for all suitability determinations with respect to sales of Shares
of the Funds to Dealer's customers and that Distributor has no responsibility
for the manner of Dealer's performance of, or for Dealer's acts or omissions in
connection with, the duties and activities Dealer provides under this Agreement.
d. All orders are subject to acceptance by Distributor in its sole
discretion and become effective only upon confirmation by Distributor.
e. Distributor agrees that it will accept from Dealer orders placed
through a remote terminal or otherwise electronically transmitted via the
National Securities Clearing Corporation ("NSCC") Fund/Serv Networking program,
provided, however, that appropriate documentation thereof and agreements
relating thereto are executed by both parties to this Agreement, including in
particular the standard NSCC Networking Agreement and any other related
agreements between Distributor and Dealer deemed appropriate by Distributor, and
that all accounts opened or maintained pursuant to that program will be governed
by applicable NSCC rules and procedures. Both parties further agree that, if
the NSCC Fund/Serv Networking program is used to place orders, the standard NSCC
Networking Agreement will control insofar as there is any conflict between any
provision of the Dealer Agreement and the standard NSCC Networking Agreement.
3. DUTIES OF DEALER
----------------
a. Dealer agrees to purchase Shares only from Distributor or from
Dealer's customers.
b. Dealer agrees to enter orders for the purchase of Shares only from
Distributor and only for the purpose of covering purchase orders Dealer has
already received from its customers or for Dealer's own bona fide investment.
c. Dealer agrees to date and time stamp all orders received by Dealer
and promptly, upon receipt of any and all orders, to transmit to Distributor all
orders received prior to
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the time described in the Prospectus for the calculation of each Fund's net
asset value so as to permit Distributor to process all orders at the price next
determined after receipt by Dealer, in accordance with the Prospectus. Dealer
agrees not to withhold placing orders for Shares with Distributor so as to
profit itself as a result of such inaction.
d. Dealer agrees to maintain records of all purchases and sales of
Shares made through Dealer and to furnish Distributor or regulatory authorities
with copies of such records upon request. In that regard, Dealer agrees that,
unless Dealer holds Shares as nominee for its customers or participates in the
NSCC Fund/Serv Networking program, at certain matrix levels, it will provide
Distributor with all necessary information to comply properly with all federal,
state and local reporting requirements and backup and nonresident alien
withholding requirements for its customer accounts including, without
limitation, those requirements that apply by treating Shares issued by the Funds
as readily tradable instruments. Dealer represents and agrees that all Taxpayer
Identification Numbers ("TINs") provided are certified, and that no account that
requires a certified TIN will be established without such certified TIN. With
respect to all other accounts, including Shares held by Dealer in omnibus
accounts and Shares purchased or sold through the NSCC Fund/Serv Networking
program, at certain matrix levels, Dealer agrees to perform all federal, state
and local tax reporting with respect to such accounts, including without
limitation redemptions and exchanges.
e. Dealer agrees to distribute or cause to be delivered to its
customers Prospectuses, proxy solicitation materials and related information and
proxy cards, semi-annual and annual shareholder reports and any other materials
in compliance with applicable legal requirements, except to the extent that
Distributor expressly undertakes to do so in writing.
f. Dealer agrees that if any Share is repurchased by any Fund or is
tendered for redemption within seven (7) business days after confirmation by
Distributor of the original purchase order from Dealer, Dealer shall forfeit its
right to any concession or commission received by Dealer with respect to such
Share and shall forthwith refund to Distributor the full concession allowed to
Dealer or commission paid to Dealer on the original sale. Distributor agrees to
notify Dealer of such repurchase or redemption within a reasonable time after
settlement. Termination or cancellation of this Agreement shall not relieve
Dealer from its obligation under this provision.
g. Dealer agrees that payment for Shares ordered from Distributor shall
be in Fed Funds, New York clearinghouse or other immediately available funds and
that such funds shall be received by Distributor by the earlier of: (i) the end
of the third (3rd) business day following Dealer's receipt of the customer's
order to purchase such Shares; or (ii) the settlement date established in
accordance with Rule 15c6-1 under the Securities Exchange Act of 1934, as
amended. If such payment is not received by Distributor by such date, Dealer
shall forfeit its right to any concession or commission with respect to such
order, and Distributor reserves the right, without notice, forthwith to cancel
the sale, or, at its option, to sell the Shares ordered back to the Fund, in
which case Distributor may hold Dealer responsible for any loss, including loss
of profit, suffered by Distributor resulting from Dealer's failure to make
payment as aforesaid. If a purchase is made by check, the purchase is deemed
made upon conversion of the purchase instrument into Fed Funds, New York
clearinghouse or other immediately available funds.
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<PAGE>
h. Dealer agrees that it: (i) shall assume responsibility for any loss to
the Fund caused by a correction to any order placed by Dealer that is made
subsequent to the trade date for the order, provided such order correction was
not based on any negligence on Distributor's part; and (ii) will immediately pay
such loss to the Fund upon notification.
i. Dealer agrees that in connection with orders for the purchase of Shares
on behalf of any IRAs, 401(k) plans or other retirement plan accounts, by mail,
telephone, or wire, Dealer shall act as agent for the custodian or trustee of
such plans (solely with respect to the time of receipt of the application and
payments), and Dealer shall not place such an order with Distributor until it
has received from its customer payment for such purchase and, if such purchase
represents the first contribution to such a retirement plan account, the
completed documents necessary to establish the retirement plan. Dealer agrees
to indemnify Distributor and its affiliates for any claim, loss, or liability
resulting from incorrect investment instructions received by Distributor from
Dealer.
j. Dealer agrees that it will not make any conditional orders for the
purchase or redemption of Shares and acknowledges that Distributor will not
accept conditional orders for Shares.
k. Dealer agrees that all out-of-pocket expenses incurred by it in
connection with its activities under this Agreement will be borne by Dealer.
l. Dealer agrees that it will keep in force appropriate broker's blanket
bond insurance policies covering any and all acts of Dealer's partners,
directors, officers, employees, and agents adequate to reasonably protect and
indemnify the Distributor and the Funds against any loss which any party may
suffer or incur, directly or indirectly, as a result of any action by Dealer or
Dealer's partners, directors, officers, employees, and agents.
m. Dealer agrees that it will maintain the required net capital as
specified by the rules and regulations of the SEC, NASD and other regulatory
authorities.
4. DEALER COMPENSATION
-------------------
a. On each purchase of Shares by Dealer from Distributor, the total
sales charges and dealer concessions or commissions, if any, payable to Dealer
shall be as stated on Schedule A to this Agreement, which may be amended by
Distributor from time to time. Distributor reserves the right, without prior
notice, to suspend or eliminate such dealer concession or commissions by
amendment, sticker or supplement to the then current Prospectus for each Fund.
Such sales charges and dealer concessions or commissions, are subject to
reduction under a variety of circumstances as described in each Fund's then
current Prospectus. For an investor to obtain any reduction, Distributor must be
notified at the time of the sale that the sale qualifies for the reduced sales
charge. If Dealer fails to notify Distributor of the applicability of a
reduction in the sales charge at the time the trade is placed, neither
Distributor nor any Fund will be liable for amounts necessary to reimburse any
investor for the reduction that should have been effected. Dealer acknowledges
that no sales charge or concession or commission will be paid to Dealer on the
reinvestment of dividends or capital gains reinvestment or on Shares acquired in
exchange for Shares of another Fund, or class thereof, having the same sales
charge structure as the Fund, or class thereof, from which the exchange was
made, in accordance with the Prospectus.
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<PAGE>
b. In accordance with the Funds' Prospectuses, Distributor or any
affiliate may, but is not obligated to, make payments to dealers from
Distributor's own resources as compensation for certain sales that are made at
net asset value ("Qualifying Sales"). If Dealer notifies Distributor of a
Qualifying Sale, Distributor may make a contingent advance payment up to the
maximum amount available for payment on the sale. If any of the Shares
purchased in a Qualifying Sale are redeemed within twelve (12) months of the end
of the month of purchase, Distributor shall be entitled to recover any advance
payment attributable to the redeemed Shares by reducing any account payable or
other monetary obligation Distributor may owe to Dealer or by making demand upon
Dealer for repayment in cash. Distributor reserves the right to withhold
advances to Dealer, if for any reason Distributor believes that it may not be
able to recover unearned advances from Dealer.
c. With respect to any Fund that offers Shares for which distribution
plans have been adopted under Rule 12b-1 under the Investment Company Act of
1940, as amended ("Rule 12b-1 Plans"), Distributor also is authorized to pay the
Dealer continuing distribution and/or service fees, as specified in Schedule A
and the relevant Fund Prospectus, with respect to Shares of any such Fund, to
the extent that Dealer provides distribution, marketing, administrative and
other services and activities regarding the promotion of such Shares and the
maintenance of related shareholder accounts.
d. In connection with the receipt of distribution fees and/or service fees
under Rule 12b-1 Plans applicable to Shares purchased by Dealer's customers,
Distributor directs Dealer to provide enhanced shareholder services such as:
processing purchase and redemption transactions; establishing shareholder
accounts; and providing certain information and assistance with respect to the
Funds. (Redemption levels of shareholder accounts assigned to Dealer will be
considered in evaluating Dealer's continued ability to receive payments of
distribution and/or service fees.) In addition, Dealer agrees to support
Distributor's marketing efforts by, among other things, granting reasonable
requests for visits to Dealer's office by Distributor's wholesalers and
marketing representatives, including all Funds covered by a Rule 12b-1 Plan on
Dealer's "approved," "preferred" or other similar product lists, if applicable,
and otherwise providing satisfactory product, marketing and sales support.
Further, Dealer agrees to provide Distributor with supporting documentation
concerning the shareholder services provided, as Distributor may reasonably
request from time to time.
e. All Rule 12b-1 Plan distribution and/or servicing fees shall be based
on the value of Shares attributable to Dealer's customers and eligible for such
payment, and shall be calculated on the basis of and at the rates set forth in
the compensation schedule then in effect. Without prior approval by a majority
of the outstanding shares of a Fund, the aggregate annual fees paid to Dealer
pursuant to any Rule 12b-1 Plan shall not exceed the amounts stated as the
"annual maximums" in each Fund's Prospectus, which amount shall be a specified
percent of the value of the Fund's net assets held in Dealer's customers'
accounts that are eligible for payment pursuant to the Rule 12b-1 Plans
(determined in the same manner as each Fund uses to compute its net assets as
set forth in its then current Prospectus).
f. The provisions of any Rule 12b-1 Plan between the Funds and the
Distributor shall control over this Agreement in the event of any inconsistency.
Each Rule 12b-1 Plan in effect on the date of this Agreement is described in the
relevant Fund's Prospectus. Dealer
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hereby acknowledges that all payments under Rule 12b-1 Plans are subject to
limitations contained in such Rule 12b-1 Plans and may be varied or discontinued
at any time.
5. REDEMPTIONS, REPURCHASES AND EXCHANGES
--------------------------------------
a. The Prospectus for each Fund describes the provisions whereby the
Fund, under all ordinary circumstances, will redeem Shares held by shareholders
on demand. Dealer agrees that it will not make any representations to
shareholders relating to the redemption of their Shares other than the
statements contained in the Prospectus and the underlying organizational
documents of the Fund, to which it refers, and that Dealer will pay as
redemption proceeds to shareholders the net asset value, minus any applicable
deferred sales charge or redemption fee, determined after receipt of the order
as discussed in the Prospectus.
b. Dealer agrees not to repurchase any Shares from its customers at a
price below that next quoted by the Fund for redemption or repurchase, i.e., at
the net asset value of such Shares, less any applicable deferred sales charge,
or redemption fee, in accordance with the Fund's Prospectus. Dealer shall,
however, be permitted to sell Shares for the account of the customer or record
owner to the Funds at the repurchase price then currently in effect for such
Shares and may charge the customer or record owner a fair service fee or
commission for handling the transaction, provided Dealer discloses the fee or
commission to the customer or record owner. Nevertheless, Dealer agrees that it
shall not under any circumstances maintain a secondary market in such
repurchased Shares.
c. Dealer agrees that, with respect to a redemption order it has made,
if instructions in proper form, including any outstanding certificates, are not
received by Distributor within the time customary or the time required by law,
the redemption may be canceled forthwith without any responsibility or liability
on Distributor's part or on the part of any Fund, or Distributor, at its option,
may buy the shares redeemed on behalf of the Fund, in which latter case
Distributor may hold Dealer responsible for any loss, including loss of profit,
suffered by Distributor resulting from Distributor's failure to settle the
redemption.
d. Dealer agrees that it will comply with any restrictions and
limitations on exchanges described in each Fund's Prospectus, including any
restrictions or prohibitions relating to frequent purchases and redemptions
(i.e., market timing).
6. MULTIPLE CLASSES OF SHARES
--------------------------
Distributor may, from time to time, provide Dealer with written
guidelines or standards relating to the sale or distribution of Funds offering
multiple classes of Shares with different sales charges and distribution-related
operating expenses.
7. FUND INFORMATION
----------------
a. Dealer agrees that neither it nor any of its partners, directors,
officers, employees, and agents is authorized to give any information or make
any representations concerning Shares of any Fund except those contained in the
Fund's then current Prospectus or in materials provided by Distributor.
A-6
<PAGE>
b. Distributor will supply to Dealer Prospectuses, reasonable quantities
of sales literature, sales bulletins, and additional sales information as
provided by Distributor. Dealer agrees to use only advertising or sales
material relating to the Funds that: (i) is supplied by Distributor, or (ii)
conforms to the requirements of all applicable laws or regulations of any
government or authorized agency having jurisdiction over the offering or sale of
Shares of the Funds and is approved in writing by Distributor in advance of its
use. Such approval may be withdrawn by Distributor in whole or in part upon
written notice to Dealer, and Dealer shall, upon receipt of such notice,
immediately discontinue the use of such sales literature, sales bulletins and
advertising. Dealer is not authorized to modify or translate any such materials
without Distributor's prior written consent.
8. SHARES
------
a. Distributor acts solely as agent for the Fund and Distributor shall
have no obligation or responsibility with respect to Dealer's right to purchase
or sell Shares in any state or jurisdiction.
b. Distributor shall periodically furnish Dealer with information
identifying the states or jurisdictions in which it is believed that all
necessary notice, registration or exemptive filings for Shares have been made
under applicable securities laws such that offers and sales of Shares may be
made in such states or jurisdictions. Distributor shall have no obligation to
make such notice, registration or exemptive filings with respect to Shares in
any state or jurisdiction.
c. Dealer agrees not to transact orders for Shares in states or
jurisdictions in which it has been informed that Shares may not be sold or in
which it and its personnel are not authorized to sell Shares.
d. Distributor shall have no responsibility, under the laws regulating
the sale of securities in the United States or any foreign jurisdiction, with
respect to the qualification or status of Dealer or Dealer's personnel selling
Fund Shares. Distributor shall not, in any event, be liable or responsible for
the issue, form, validity, enforceability and value of such Shares or for any
matter in connection therewith.
e. Dealer agrees that it will make no offers or sales of Shares in any
foreign jurisdiction, except with the express written consent of Distributor.
9. INDEMNIFICATION
---------------
a. Dealer agrees to indemnify, defend and hold harmless Distributor and
the Funds and their predecessors, successors, and affiliates, each current or
former partner, officer, director, employee, shareholder or agent and each
person who controls or is controlled by Distributor from any and all losses,
claims, liabilities, costs, and expenses, including attorney fees, that may be
assessed against or suffered or incurred by any of them howsoever they arise,
and as they are incurred, which relate in any way to: (i) any alleged violation
of any statute or regulation (including without limitation the securities laws
and regulations of the United States or any state or foreign country) or any
alleged tort or breach of contract, related to the offer or sale by Dealer of
Shares of the Funds pursuant to this Agreement (except to the extent that
Distributor's negligence or failure to follow correct instructions received from
Dealer is the cause of such loss,
A-7
<PAGE>
claim, liability, cost or expense); (ii) any redemption or exchange pursuant to
instructions received from Dealer or its partners, affiliates, officers,
directors, employees or agents; or (iii) the breach by Dealer of any of its
representations and warranties specified herein or the Dealer's failure to
comply with the terms and conditions of this Agreement, whether or not such
action, failure, error, omission, misconduct or breach is committed by Dealer or
its predecessor, successor, or affiliate, each current or former partner,
officer, director, employee or agent and each person who controls or is
controlled by Dealer.
b. Distributor agrees to indemnify, defend and hold harmless Dealer and
its predecessors, successors and affiliates, each current or former partner,
officer, director, employee or agent, and each person who controls or is
controlled by Dealer from any and all losses, claims, liabilities, costs and
expenses, including attorney fees, that may be assessed against or suffered or
incurred by any of them which arise, and which relate to any untrue statement of
or omission to state a material fact contained in the Prospectus or any written
sales literature or other marketing materials provided by the Distributor to the
Dealer, required to be stated therein or necessary to make the statements
therein not misleading.
c. Dealer agrees to notify Distributor, within a reasonable time, of any
claim or complaint or any enforcement action or other proceeding with respect to
Shares offered hereunder against Dealer or its partners, affiliates, officers,
directors, employees or agents, or any person who controls Dealer, within the
meaning of Section 15 of the Securities Act of 1933, as amended.
d. Dealer further agrees promptly to send Distributor copies of (i) any
report filed pursuant to NASD Conduct Rule 3070, including, without limitation
quarterly reports filed pursuant to Rule 3070(c), (ii) reports filed with any
other self-regulatory organization in lieu of Rule 3070 reports pursuant to Rule
3070(e) and (iii) amendments to Dealer's Form BD.
e. Each party's obligations under these indemnification provisions shall
survive any termination of this Agreement.
10. TERMINATION; AMENDMENT
----------------------
a. In addition to the automatic termination of this Agreement
specified in Section 1.c. of this Agreement, each party to this Agreement may
unilaterally cancel its participation in this Agreement by giving thirty (30)
days prior written notice to the other party. In addition, each party to this
Agreement may terminate this Agreement immediately by giving written notice to
the other party of that other party's material breach of this Agreement. Such
notice shall be deemed to have been given and to be effective on the date on
which it was either delivered personally to the other party or any officer or
member thereof, or was mailed postpaid or delivered to a telegraph office for
transmission to the other party's designated person at the addresses shown
herein or in the most recent NASD Manual.
b. This Agreement shall terminate immediately upon the appointment of a
Trustee under the Securities Investor Protection Act or any other act of
insolvency by Dealer.
c. The termination of this Agreement by any of the foregoing means
shall have no effect upon transactions entered into prior to the effective date
of termination and shall
A-8
<PAGE>
not relieve Dealer of its obligations, duties and indemnities specified in this
Agreement. A trade placed by Dealer subsequent to its voluntary termination of
this Agreement will not serve to reinstate the Agreement. Reinstatement, except
in the case of a temporary suspension of Dealer, will only be effective upon
written notification by Distributor.
d. This Agreement is not assignable or transferable and will
terminate automatically in the event of its "assignment," as defined in the
Investment Company Act of 1940, as amended and the rules, regulations and
interpretations thereunder. The Distributor may, however, transfer any of its
duties under this Agreement to any entity that controls or is under common
control with Distributor.
e. This Agreement may be amended by Distributor at any time by
written notice to Dealer. Dealer's placing of an order or accepting payment of
any kind after the effective date and receipt of notice of such amendment shall
constitute Dealer's acceptance of such amendment.
11. DISTRIBUTOR'S REPRESENTATIONS AND WARRANTIES
--------------------------------------------
Distributor represents and warrants that:
a. It is a limited liability company duly organized and existing and
in good standing under the laws of the state of Delaware and is duly registered
or exempt from registration as a broker-dealer in all states and jurisdictions
in which it provides services as principal underwriter and distributor for the
Funds.
b. It is a member in good standing of the NASD.
c. It is empowered under applicable laws and by Distributor's charter
and by-laws to enter into this Agreement and perform all activities and services
of the Distributor provided for herein and that there are no impediments, prior
or existing, regulatory, self-regulatory, administrative, civil or criminal
matters affecting Distributor's ability to perform under this Agreement.
d. All requisite actions have been taken to authorize Distributor to
enter into and perform this Agreement.
12. ADDITIONAL DEALER REPRESENTATIONS AND WARRANTIES
------------------------------------------------
In addition to the representations and warranties found elsewhere in
this Agreement, Dealer represents and warrants that:
a. It is duly organized and existing and in good standing under the
laws of the state, commonwealth or other jurisdiction in which Dealer is
organized and that Dealer will not offer Shares of any Fund for sale in any
state or jurisdiction where such Shares may not be legally sold or where Dealer
is not qualified to act as a broker-dealer.
A-9
<PAGE>
b. It is empowered under applicable laws and by Dealer's organizational
documents to enter into this Agreement and perform all activities and services
of the Dealer provided for herein and that there are no impediments, prior or
existing, regulatory, self-regulatory, administrative, civil or criminal matters
affecting Dealer's ability to perform under this Agreement.
c. All requisite actions have been taken to authorize Dealer to enter into
and perform this Agreement.
d. It is not, at the time of the execution of this Agreement, subject to
any enforcement or other proceeding with respect to its activities under state
or federal securities laws, rules or regulations.
13. SETOFF; DISPUTE RESOLUTION; GOVERNING LAW
-----------------------------------------
a. Should any of Dealer's concession accounts with Distributor have a
debit balance, Distributor shall be permitted to offset and recover the amount
owed from any other account Dealer has with Distributor, without notice or
demand to Dealer.
b. In the event of a dispute concerning any provision of this
Agreement, either party may require the dispute to be submitted to binding
arbitration under the commercial arbitration rules and procedures of the NASD.
The parties agree that, to the extent permitted under such arbitration rules and
procedures, the arbitrators selected shall be from the securities industry.
Judgment upon any arbitration award may be entered by any state or federal court
having jurisdiction.
c. This Agreement shall be governed and construed in accordance with
the laws of the state of New Jersey, not including any provision which would
require the general application of the law of another jurisdiction.
14. INVESTIGATIONS AND PROCEEDINGS
------------------------------
The parties to this Agreement agree to cooperate fully in any
securities regulatory investigation or proceeding or judicial proceeding with
respect to each's activities under this Agreement and promptly to notify the
other party of any such investigation or proceeding.
15. CAPTIONS
--------
All captions used in this Agreement are for convenience only, are not
a party hereof, and are not to be used in construing or interpreting any aspect
hereof.
16. ENTIRE UNDERSTANDING
--------------------
This Agreement contains the entire understanding of the parties hereto
with respect to the subject matter contained herein and supersedes all previous
agreements. This Agreement shall be binding upon the parties hereto when signed
by Dealer and accepted by Distributor.
A-10
<PAGE>
17. SEVERABILITY
------------
Whenever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law.
If, however, any provision of this Agreement is held under applicable law to be
invalid, illegal, or unenforceable in any respect, such provision shall be
ineffective only to the extent of such invalidity, and the validity, legality
and enforceability of the remaining provisions of this Agreement shall not be
affected or impaired in any way.
18. ENTIRE AGREEMENT
----------------
This Agreement contains the entire understanding of the parties hereto
with respect to the subject matter contained herein and supersedes all previous
agreements and/or understandings of the parties. This Agreement shall be binding
upon the parties hereto when signed by Dealer and accepted by Distributor.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year set forth below.
PRUDENTIAL INVESTMENT MANAGEMENT
SERVICES LLC
By: ________________________________
Name:________________________________
Title:_______________________________
Date:________________________________
DEALER: _____________________________
By: ________________________________
(Signature)
Name: ______________________________
Title: _____________________________
Address:_____________________________
_____________________________
_____________________________
Telephone: _________________________
NASD CRD # ________________________
Prudential Dealer # ________________
(Internal Use Only)
Date: ______________________________
A-11
<PAGE>
EXHIBIT 99.M1
PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
Amended and Restated
Distribution and Service Plan
(Class A Shares)
--------------
Introduction
------------
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Rule 2830 of the Conduct
Rules of the National Association of Securities Dealers, Inc. (NASD) has been
adopted by Prudential Distressed Securities Fund, Inc. (the Fund) and by
Prudential Investment Management Services LLC, the Fund's distributor (the
Distributor).
The Fund has entered into a distribution agreement pursuant to which the
Fund will employ the Distributor to distribute Class A shares issued by the Fund
(Class A shares). Under the Plan, the Fund intends to pay to the Distributor,
as compensation for its services, a distribution and service fee with respect to
Class A shares.
A majority of the Board of Directors of the Fund, including a
majority of those Directors who are not "interested persons" of the
Fund (as defined in the Investment Company Act) and who have no direct or
indirect financial interest in the operation of this Plan or any agreements
related to it (the Rule 12b-1 Directors), have determined by votes cast
in person at a meeting called for the purpose of voting on this Plan that there
is a reasonable likelihood that adoption and continuation of this Plan will
benefit the Fund and its shareholders. Expenditures under this Plan by the Fund
for Distribution Activities (defined below) are primarily
1
<PAGE>
intended to result in the sale of Class A shares of the Fund within the meaning
of paragraph (a)(2) of Rule 12b-1 promulgated under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
The Plan
--------
The material aspects of the Plan are as follows:
1. Distribution Activities
-----------------------
The Fund shall engage the Distributor to distribute Class A shares of the
Fund and to service shareholder accounts using all of the facilities of the
Distributor's distribution network, including sales personnel and branch office
and central support systems, and also using such other qualified broker-dealers
and financial institutions as the Distributor may select, including Prudential
Securities Incorporated (Prudential Securities) and Pruco Securities Corporation
(Prusec). Services provided and activities undertaken to distribute Class A
shares of the Fund are referred to herein as "Distribution Activities."
2. Payment of Service Fee
-----------------------
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class A shares (service
fee). The Fund shall
2
<PAGE>
calculate and accrue daily amounts payable by the Class A shares of the Fund
hereunder and shall pay such amounts monthly or at such other intervals as the
Board of Directors may determine.
3. Payment for Distribution Activities
-----------------------------------
The Fund shall pay to the Distributor as compensation for its services a
distribution fee, together with the service fee (described in Section 2 hereof),
of .30 of 1% per annum of the average daily net assets of the Class A shares of
the Fund for the performance of Distribution Activities. The Fund shall
calculate and accrue daily amounts payable by the Class A shares of the Fund
hereunder and shall pay such amounts monthly or at such other intervals as the
Board of Directors may determine. Amounts payable under the Plan shall
be subject to the limitations of Rule 2830 of the NASD Conduct Rules.
Amounts paid to the Distributor by the Class A shares of the Fund will not
be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class A shares according to the
ratio of the sales of Class A shares to the total sales of the Fund's shares
over the Fund's fiscal year or such other allocation method approved by the
Board of Directors. The allocation of distribution expenses among
classes will be subject to the review of the Board of Directors.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
3
<PAGE>
(a) sales commissions and trailer commissions paid to, or on account of,
account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
Distribution Activities, including central office and branch expenses;
(c) amounts paid to Prudential Securities or Prusec for performing
services under a selected dealer agreement between Prudential
Securities or Prusec and the Distributor for sale of Class A shares of
the Fund, including sales commissions, trailer commissions paid to, or
on account of, agents and indirect and overhead costs associated with
Distribution Activities;
(d) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund prospectuses,
statements of additional information and periodic financial reports
and sales literature to persons other than current shareholders of the
Fund; and
(e) sales commissions (including trailer commissions) paid to, or on
account of, broker-dealers and financial institutions (other than
Prudential Securities or Prusec) which have entered into selected
dealer agreements with the Distributor with respect to Class A shares
of the Fund.
4. Quarterly Reports; Additional Information
-----------------------------------------
An appropriate officer of the Fund will provide to the Board of
Directors of the Fund for review, at least quarterly, a written report
specifying in reasonable detail the amounts expended for Distribution Activities
(including payment of the service fee) and the purposes for which such
expenditures were made in compliance with the requirements of Rule 12b-1. The
Distributor will provide to the Board of Directors of the Fund such
additional information as the Board shall from time to time reasonably request,
including information about Distribution Activities undertaken or to be
undertaken by the Distributor.
4
<PAGE>
The Distributor will inform the Board of Directors of the Fund of
the commissions and account servicing fees to be paid by the Distributor to
account executives of the Distributor and to broker-dealers and financial
institutions which have selected dealer agreements with the Distributor.
5. Effectiveness; Continuation
---------------------------
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class A shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities of
the Class A shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the Board of Directors of the Fund and a majority of the
Rule 12b-1 Directors by votes cast in person at a meeting called for
the purpose of voting on the continuation of the Plan.
6. Termination
-----------
This Plan may be terminated at any time, without the payment of any
penalty, by a majority of the Rule 12b-1 Directors, or by vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class A shares of the Fund, or by the Distributor, on sixty
(60) days' written notice to the other party. This Plan shall automatically
terminate in the event of its assignment.
7. Amendments
----------
5
<PAGE>
The Plan may not be amended to change the combined service and distribution
fees to be paid as provided for in Sections 2 and 3 hereof so as to increase
materially the amounts payable under this Plan unless such amendment shall be
approved by the vote of a majority of the outstanding voting securities (as
defined in the Investment Company Act) of the Class A shares of the Fund. All
material amendments of the Plan shall be approved by a majority of the Board of
Directors of the Fund and a majority of the Rule 12b-1
Directors by votes cast in person at a meeting called for the purpose
of voting on the Plan.
8. Rule 12b-1 Directors
-----------------------------
While the Plan is in effect, the selection and nomination of the
Directors shall be committed to the discretion of the Rule 12b-1
Directors.
9. Records
-------
The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.
Dated: February 6, 1996
Amended: June 1, 1998
6
<PAGE>
EXHIBIT 99.M2
PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
Amended and Restated
Distribution and Service Plan
(Class B Shares)
--------------
Introduction
------------
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Rule 2830 of the Conduct
Rules of the National Association of Securities Dealers, Inc. (NASD) has been
adopted by Prudential Distressed Securities Fund, Inc. (the Fund) and by
Prudential Investment Management Services LLC, the Fund's distributor (the
Distributor).
The Fund has entered into a distribution agreement pursuant to which the
Fund will employ the Distributor to distribute Class B shares issued by the Fund
(Class B shares). Under the Plan, the Fund wishes to pay to the Distributor, as
compensation for its services, a distribution and service fee with respect to
Class B shares.
A majority of the Board of Directors of the Fund, including a majority who
are not "interested persons" of the Fund (as defined in the Investment Company
Act) and who have no direct or indirect financial interest in the operation of
this Plan or any agreements related to it (the Rule 12b-1 Directors), have
determined by votes cast in person at a meeting called for the purpose of voting
on this Plan that there is a reasonable likelihood that adoption and
continuation of this Plan will benefit the Fund and its shareholders.
Expenditures under this Plan by the Fund for Distribution Activities (defined
below) are primarily intended to result in the sale of Class B shares
1
<PAGE>
of the Fund within the meaning of paragraph (a)(2) of Rule 12b-1 promulgated
under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
The Plan
--------
The material aspects of the Plan are as follows:
1. Distribution Activities
-----------------------
The Fund shall engage the Distributor to distribute Class B shares of the
Fund and to service shareholder accounts using all of the facilities of the
Distributor's distribution network including sales personnel and branch office
and central support systems, and also using such other qualified broker-dealers
and financial institutions as the Distributor may select, including Prudential
Securities Incorporated (Prudential Securities) and Pruco Securities Corporation
(Prusec). Services provided and activities undertaken to distribute Class B
shares of the Fund are referred to herein as "Distribution Activities."
2. Payment of Service Fee
----------------------
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class B shares (service
fee). The Fund shall
2
<PAGE>
calculate and accrue daily amounts payable by the Class B shares of the Fund
hereunder and shall pay such amounts monthly or at such other intervals as the
Board of Directors may determine.
3. Payment for Distribution Activities
-----------------------------------
The Fund shall pay to the Distributor as compensation for its services a
distribution fee of .75 of 1% per annum of the average daily net assets of the
Class B shares of the Fund for the performance of Distribution Activities. The
Fund shall calculate and accrue daily amounts payable by the Class B shares of
the Fund hereunder and shall pay such amounts monthly or at such other intervals
as the Board of Directors may determine. Amounts payable under the Plan shall
be subject to the limitations of Rule 2830 of the NASD Conduct Rules.
Amounts paid to the Distributor by the Class B shares of the Fund will not
be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class B shares according to the
ratio of the sale of Class B shares to the total sales of the Fund's shares over
the Fund's fiscal year or such other allocation method approved by the Board of
Directors. The allocation of distribution expenses among classes will be
subject to the review of the Board of Directors. Payments hereunder will be
applied to distribution expenses in the order in which they are incurred, unless
otherwise determined by the Board of Directors.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
3
<PAGE>
(a) sales commissions (including trailer commissions) paid to, or on
account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
performance of Distribution Activities including central office and
branch expenses;
(c) amounts paid to Prudential Securities or Prusec for performing
services under a selected dealer agreement between Prudential
Securities or Prusec and the Distributor for sale of Class B shares of
the Fund, including sales commissions and trailer commissions paid to,
or on account of, agents and indirect and overhead costs associated
with Distribution Activities;
(d) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund prospectuses,
statements of additional information and periodic financial reports
and sales literature to persons other than current shareholders of the
Fund; and
(e) sales commissions (including trailer commissions) paid to, or on
account of, broker-dealers and other financial institutions (other
than Prudential Securities or Prusec) which have entered into selected
dealer agreements with the Distributor with respect to Class B shares
of the Fund.
4. Quarterly Reports; Additional Information
-----------------------------------------
An appropriate officer of the Fund will provide to the Board of Directors
of the Fund for review, at least quarterly, a written report specifying in
reasonable detail the amounts expended for Distribution Activities (including
payment of the service fee) and the purposes for which such expenditures were
made in compliance with the requirements of Rule 12b-1. The Distributor will
provide to the Board of Directors of the Fund such additional information as
they shall from time to time reasonably request, including information about
Distribution Activities undertaken or to be undertaken by the Distributor.
4
<PAGE>
The Distributor will inform the Board of Directors of the Fund of the
commissions and account servicing fees to be paid by the Distributor to account
executives of the Distributor and to broker-dealers and other financial
institutions which have selected dealer agreements with the Distributor.
5. Effectiveness; Continuation
---------------------------
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class B shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities of
the Class B shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the Board of Directors of the Fund and a majority of the Rule 12b-1
Directors by votes cast in person at a meeting called for the purpose of voting
on the continuation of the Plan.
6. Termination
-----------
This Plan may be terminated at any time, without the payment of any
penalty, by a majority of the Rule 12b-1 Directors, or by vote of a majority of
the outstanding voting securities (as defined in the Investment Company Act) of
the Class B shares of the Fund, or by the Distributor, on sixty (60) days'
written notice to the other party. This Plan shall automatically terminate in
the event of its assignment.
7. Amendments
----------
The Plan may not be amended to change the combined service and distribution
expenses to be paid as provided for in Sections 2 and 3 hereof so as to increase
5
<PAGE>
materially the amounts payable under this Plan unless such amendment shall be
approved by the vote of a majority of the outstanding voting securities (as
defined in the Investment Company Act) of the Class B shares of the Fund. All
material amendments of the Plan shall be approved by a majority of the Board of
Directors of the Fund and a majority of the Rule 12b-1 Directors by votes cast
in person at a meeting called for the purpose of voting on the Plan.
8. Rule 12b-1 Directors
--------------------
While the Plan is in effect, the selection and nomination of the Rule 12b-1
Directors shall be committed to the discretion of the Rule 12b-1 Directors.
9. Records
-------
The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.
Dated: February 6, 1996
Amended: June 1, 1998
6
<PAGE>
EXHIBIT 99.M3
PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
Amended and Restated
Distribution and Service Plan
(Class C Shares)
--------------
Introduction
------------
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Rule 2830 of the Conduct
Rules of the National Association of Securities Dealers, Inc. (NASD) has been
adopted by Prudential Distressed Securities Fund, Inc. (the Fund) and by
Prudential Investment Management Services LLC, the Fund's distributor (the
Distributor).
The Fund has entered into a distribution agreement pursuant to which the
Fund will employ the Distributor to distribute Class C shares issued by the Fund
(Class C shares). Under the Plan, the Fund wishes to pay to the Distributor, as
compensation for its services, a distribution and service fee with respect to
Class C shares.
A majority of the Board of Directors of the Fund, including a majority who
are not "interested persons" of the Fund (as defined in the Investment Company
Act) and who have no direct or indirect financial interest in the operation of
this Plan or any agreements related to it (the Rule 12b-1 Directors), have
determined by votes cast in person at a meeting called for the purpose of voting
on this Plan that there is a reasonable likelihood that adoption and
continuation of this Plan will benefit the Fund and its shareholders.
Expenditures under this Plan by the Fund for Distribution Activities (defined
below) are primarily intended to result in the sale of Class C shares
1
<PAGE>
of the Fund within the meaning of paragraph (a)(2) of Rule 12b-1 promulgated
under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
The Plan
--------
The material aspects of the Plan are as follows:
1. Distribution Activities
-----------------------
The Fund shall engage the Distributor to distribute Class C shares of the
Fund and to service shareholder accounts using all of the facilities of the
Distributor's distribution network including sales personnel and branch office
and central support systems, and also using such other qualified broker-dealers
and financial institutions as the Distributor may select, including Prudential
Securities Incorporated (Prudential Securities) and Pruco Securities Corporation
(Prusec). Services provided and activities undertaken to distribute Class C
shares of the Fund are referred to herein as "Distribution Activities."
2. Payment of Service Fee
----------------------
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class C shares (service
fee). The Fund shall
2
<PAGE>
calculate and accrue daily amounts payable by the Class C shares of the Fund
hereunder and shall pay such amounts monthly or at such other intervals as the
Board of Directors may determine.
3. Payment for Distribution Activities
-----------------------------------
The Fund shall pay to the Distributor as compensation for its services a
distribution fee of .75 of 1% per annum of the average daily net assets of the
Class C shares of the Fund for the performance of Distribution Activities. The
Fund shall calculate and accrue daily amounts payable by the Class C shares of
the Fund hereunder and shall pay such amounts monthly or at such other intervals
as the Board of Directors may determine. Amounts payable under the Plan shall
be subject to the limitations of Rule 2830 of the NASD Conduct Rules.
Amounts paid to the Distributor by the Class C shares of the Fund will not
be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class C shares according to the
ratio of the sale of Class C shares to the total sales of the Fund's shares over
the Fund's fiscal year or such other allocation method approved by the Board of
Directors. The allocation of distribution expenses among classes will be
subject to the review of the Board of Directors. Payments hereunder will be
applied to distribution expenses in the order in which they are incurred, unless
otherwise determined by the Board of Directors.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
(a) sales commissions (including trailer commissions) paid to, or on
3
<PAGE>
account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
performance of Distribution Activities including central office and
branch expenses;
(c) amounts paid to Prudential Securities or Prusec for performing
services under a selected dealer agreement between Prudential
Securities or Prusec and the Distributor for sale of Class C shares of
the Fund, including sales commissions and trailer commissions paid to,
or on account of, agents and indirect and overhead costs associated
with Distribution Activities;
(d) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund prospectuses,
statements of additional information and periodic financial reports
and sales literature to persons other than current shareholders of the
Fund; and
(e) sales commissions (including trailer commissions) paid to, or on
account of, broker-dealers and other financial institutions (other
than Prudential Securities or Prusec) which have entered into selected
dealer agreements with the Distributor with respect to Class C shares
of the Fund.
4. Quarterly Reports; Additional Information
-----------------------------------------
An appropriate officer of the Fund will provide to the Board of Directors
of the Fund for review, at least quarterly, a written report specifying in
reasonable detail the amounts expended for Distribution Activities (including
payment of the service fee) and the purposes for which such expenditures were
made in compliance with the requirements of Rule 12b-1. The Distributor will
provide to the Board of Directors of the Fund such additional information as
they shall from time to time reasonably request, including information about
Distribution Activities undertaken or to be undertaken by the Distributor.
The Distributor will inform the Board of Directors of the Fund of the
commissions
4
<PAGE>
and account servicing fees to be paid by the Distributor to account executives
of the Distributor and to broker-dealers and other financial institutions which
have selected dealer agreements with the Distributor.
5. Effectiveness; Continuation
---------------------------
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class C shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities of
the Class C shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the Board of Directors of the Fund and a majority of the Rule 12b-1
Directors by votes cast in person at a meeting called for the purpose of voting
on the continuation of the Plan.
6. Termination
-----------
This Plan may be terminated at any time, without the payment of any
penalty, by a majority of the Rule 12b-1 Directors, or by vote of a majority of
the outstanding voting securities (as defined in the Investment Company Act) of
the Class C shares of the Fund, or by the Distributor, on sixty (60) days'
written notice to the other party. This Plan shall automatically terminate in
the event of its assignment.
7. Amendments
----------
The Plan may not be amended to change the combined service and distribution
expenses to be paid as provided for in Sections 2 and 3 hereof so as to increase
materially the amounts payable under this Plan unless such amendment shall be
5
<PAGE>
approved by the vote of a majority of the outstanding voting securities (as
defined in the Investment Company Act) of the Class C shares of the Fund. All
material amendments of the Plan shall be approved by a majority of the Board of
Directors of the Fund and a majority of the Rule 12b-1 Directors by votes cast
in person at a meeting called for the purpose of voting on the Plan.
8. Rule 12b-1 Directors
--------------------
While the Plan is in effect, the selection and nomination of the Rule 12b-1
Directors shall be committed to the discretion of the Rule 12b-1 Directors.
9. Records
-------
The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.
Dated: February 6, 1996
Amended: June 1, 1998
6
<PAGE>
EXHIBIT 99.O
PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
--------------------------------------------
(the Fund)
AMENDED AND RESTATED
PLAN PURSUANT TO RULE 18F-3
The Fund hereby adopts this plan pursuant to Rule 18f-3 under the
Investment Company Act of 1940 (the 1940 Act), setting forth the separate
arrangement and expense allocation of each class of shares. Any material
amendment to this plan is subject to prior approval of the Board of
Directors/Trustees, including a majority of the independent Directors/Trustees.
CLASS CHARACTERISTICS
CLASS A SHARES: Class A shares are subject to a high initial sales charge and a
- -------------- distribution and/or service fee pursuant to Rule 12b-1 under
the 1940 Act (Rule 12b-1 fee) not to exceed .30 of 1% per annum
of the average daily net assets of the class. The initial sales
charge is waived or reduced for certain eligible investors.
CLASS B SHARES: Class B shares are not subject to an initial sales charge but
- -------------- are subject to a high contingent deferred sales charge
(declining from 5% to zero over a six-year period) which will
be imposed on certain redemptions and a Rule 12b-1 fee not to
exceed 1% per annum of the average daily net assets of the
class. The contingent deferred sales charge is waived for
certain eligible investors. Class B shares automatically
convert to Class A shares approximately seven years after
purchase.
CLASS C SHARES: Class C shares issued before November 2, 1998 are not subject
- -------------- to an initial sales charge but are subject to a 1% contingent
deferred sales charge which will be imposed on certain
redemptions within the first 12 months after purchase and a
Rule 12b-1 fee not to exceed 1% per annum of the average daily
net assets of the class. Class C shares issued on or after
November 2, 1998 are subject to a low initial sales charge and
a 1% contingent deferred sales charge which will be imposed on
certain redemptions within the first 18 months after purchase
and a Rule 12b-1 fee not to exceed 1% per annum of the average
daily net assets of the class.
Class Z SHARES: Class Z shares are not subject to either an initial or
- -------------- contingent deferred sales charge nor are they subject to any
Rule 12b-1 fee.
<PAGE>
INCOME AND EXPENSE ALLOCATIONS
Income, any realized and unrealized capital gains and losses, and expenses
not allocated to a particular class, will be allocated to each class on the
basis of the net asset value of that class in relation to the net asset
value of the Fund.
DIVIDENDS AND DISTRIBUTIONS
Dividends and other distributions paid by the Fund to each class of shares,
to the extent paid, will be paid on the same day and at the same time, and
will be determined in the same manner and will be in the same amount,
except that the amount of the dividends and other distributions declared
and paid by a particular class may be different from that paid by another
class because of Rule 12b-1 fees and other expenses borne exclusively by
that class.
EXCHANGE PRIVILEGE
Holders of Class A Shares, Class B Shares, Class C Shares and Class Z
Shares shall have such exchange privileges as set forth in the Fund'
current prospectus. Exchange privileges may vary among classes and among
holders of a Class.
CONVERSION FEATURES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be
effected at relative net asset value without the imposition of any
additional sales charge.
GENERAL
A. Each class of shares shall have exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and shall
have separate voting rights on any matter submitted to shareholders in
which the interests of one class differ from the interests of any other
class.
B. On an ongoing basis, the Directors/Trustees, pursuant to their fiduciary
responsibilities under the 1940 Act and otherwise, will monitor the Fund
for the existence of any material conflicts among the interests of its
several
<PAGE>
classes. The Directors/Trustees, including a majority of the independent
Directors/Trustees, shall take such action as is reasonably necessary to
eliminate any such conflicts that may develop. Prudential Investments Fund
Management LLC, the Fund's Manager, will be responsible for reporting any
potential or existing conflicts to the Directors/Trustees.
C. For purposes of expressing an opinion on the financial statements of the
Fund, the methodology and procedures for calculating the net asset value
and dividends/distributions of the Fund's several classes and the proper
allocation of income and expenses among such classes will be examined
annually by the Fund's independent auditors who, in performing such
examination, shall consider the factors set forth in the relevant auditing
standards adopted, from time to time, by the American Institute of
Certified Public Accountants.
Dated: August 26, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> PRUDENTIAL DISTRESSED SECURITIES FUND, INC. (CLASS A)
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 8301679
<INVESTMENTS-AT-VALUE> 9101659
<RECEIVABLES> 1892398
<ASSETS-OTHER> 113029
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 11107086
<PAYABLE-FOR-SECURITIES> 223538
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 117359
<TOTAL-LIABILITIES> 340897
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8713758
<SHARES-COMMON-STOCK> 252540
<SHARES-COMMON-PRIOR> 516528
<ACCUMULATED-NII-CURRENT> 626056
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 626395
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 799980
<NET-ASSETS> 10766189
<DIVIDEND-INCOME> 13388
<INTEREST-INCOME> 691166
<OTHER-INCOME> 0
<EXPENSES-NET> 76197
<NET-INVESTMENT-INCOME> 628357
<REALIZED-GAINS-CURRENT> 626730
<APPREC-INCREASE-CURRENT> (172924)
<NET-CHANGE-FROM-OPS> 1082163
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (256273)
<DISTRIBUTIONS-OF-GAINS> (97806)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2951641
<NUMBER-OF-SHARES-REDEEMED> (1073655)
<SHARES-REINVESTED> 324242
<NET-CHANGE-IN-ASSETS> 2930312
<ACCUMULATED-NII-PRIOR> 258664
<ACCUMULATED-GAINS-PRIOR> 465952
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 31655
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (36924)
<AVERAGE-NET-ASSETS> 2202000
<PER-SHARE-NAV-BEGIN> 15.19
<PER-SHARE-NII> 1.06
<PER-SHARE-GAIN-APPREC> 1.08
<PER-SHARE-DIVIDEND> (0.66)
<PER-SHARE-DISTRIBUTIONS> (0.17)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 16.50
<EXPENSE-RATIO> 1.25
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> PRUDENTIAL DISTRESSED SECURITIES FUND, INC. (CLASS B)
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 8301679
<INVESTMENTS-AT-VALUE> 9101659
<RECEIVABLES> 1892398
<ASSETS-OTHER> 113029
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 11107086
<PAYABLE-FOR-SECURITIES> 223538
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 117359
<TOTAL-LIABILITIES> 340897
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8713758
<SHARES-COMMON-STOCK> 252540
<SHARES-COMMON-PRIOR> 516528
<ACCUMULATED-NII-CURRENT> 626056
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 626395
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 799980
<NET-ASSETS> 10766189
<DIVIDEND-INCOME> 13388
<INTEREST-INCOME> 691166
<OTHER-INCOME> 0
<EXPENSES-NET> 76197
<NET-INVESTMENT-INCOME> 628357
<REALIZED-GAINS-CURRENT> 626730
<APPREC-INCREASE-CURRENT> (172924)
<NET-CHANGE-FROM-OPS> 1082163
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (256273)
<DISTRIBUTIONS-OF-GAINS> (97806)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2951641
<NUMBER-OF-SHARES-REDEEMED> (1073655)
<SHARES-REINVESTED> 324242
<NET-CHANGE-IN-ASSETS> 2930312
<ACCUMULATED-NII-PRIOR> 258664
<ACCUMULATED-GAINS-PRIOR> 465952
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 31655
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (36924)
<AVERAGE-NET-ASSETS> 5283000
<PER-SHARE-NAV-BEGIN> 15.16
<PER-SHARE-NII> 1.17
<PER-SHARE-GAIN-APPREC> 0.92
<PER-SHARE-DIVIDEND> (0.61)
<PER-SHARE-DISTRIBUTIONS> (0.17)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 16.47
<EXPENSE-RATIO> 2.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> PRUDENTIAL DISTRESSED SECURITIES FUND, INC. (CLASS C)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-END> NOV-30-1997
<INVESTMENTS-AT-COST> 6879280
<INVESTMENTS-AT-VALUE> 7852184
<RECEIVABLES> 72001
<ASSETS-OTHER> 82235
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 8006420
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 170543
<TOTAL-LIABILITIES> 170543
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 6511530
<SHARES-COMMON-STOCK> 516528
<SHARES-COMMON-PRIOR> 870267
<ACCUMULATED-NII-CURRENT> 253972
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 97471
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 972904
<NET-ASSETS> 7835877
<DIVIDEND-INCOME> 74540
<INTEREST-INCOME> 394937
<OTHER-INCOME> 0
<EXPENSES-NET> 210813
<NET-INVESTMENT-INCOME> 258664
<REALIZED-GAINS-CURRENT> 465952
<APPREC-INCREASE-CURRENT> 1413109
<NET-CHANGE-FROM-OPS> 2137725
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (228312)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 909156
<NUMBER-OF-SHARES-REDEEMED> (5475625)
<SHARES-REINVESTED> 216983
<NET-CHANGE-IN-ASSETS> (2440073)
<ACCUMULATED-NII-PRIOR> 163021
<ACCUMULATED-GAINS-PRIOR> (368481)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 60949
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (15056)
<AVERAGE-NET-ASSETS> 1100000
<PER-SHARE-NAV-BEGIN> 11.79
<PER-SHARE-NII> 0.39
<PER-SHARE-GAIN-APPREC> 3.24
<PER-SHARE-DIVIDEND> (0.26)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 15.16
<EXPENSE-RATIO> 2.79
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
