Prudential World Fund, Inc.
o Global Series
o International Stock Series
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Prospectus dated January 16, 1997
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Prudential World Fund, Inc. (the Fund) is an open-end, diversified management
investment company. The Fund consists of two series: Global Series and
International Stock Series (individually, a Series and collectively, the
Series).
The Global Series' investment objective is to seek long-term growth of capital,
with income as a secondary objective. THE Global Series seeks to achieve its
objective through investment in a diversified portfolio of securities which will
consist of marketable securities of U.S. and non-U.S. issuers. Global Series may
invest in all types of common stocks and equivalents (such as convertible debt
securities and warrants), preferred stocks, bonds and other debt obligations,
including money market instruments, of foreign and domestic companies and
governments, governmental agencies and international organizations.
International Stock Series' investment objective is to achieve long-term growth
of capital through investment in equity securities of foreign issuers. Income is
a secondary objective.
International Stock Series seeks to achieve its objective primarily through
investment in a diversified portfolio of securities which will consist of equity
securities of foreign issuers. International Stock Series will, under normal
circumstances, invest at least 65% of the value of its total assets in common
stocks and preferred stocks of issuers located in at least three foreign
countries. International Stock Series may invest up to 35% of its total assets
in (i) other equity-related securities of foreign issuers; (ii) common stocks,
preferred stocks, and other equity-related securities of U.S. issuers; (iii)
investment grade debt securities of domestic and foreign corporations,
governments, governmental entities, and supranational entities; and (iv)
high-quality domestic money market instruments and short-term fixed income
securities.
Each Series also may engage in derivative transactions, such as those involving
stock options, options on debt securities, options on stock indices, and foreign
currency futures contracts and options thereon so as to hedge its portfolio and
to attempt to enhance return. There can be no assurance that either Series'
investment objective will be achieved. See "How the Fund Invests--Investment
Objectives and Policies." The Fund's address is Gateway Center Three, 100
Mulberry Street, Newark, New Jersey 07102-4077, and its telephone number is
(800) 225-1852.
Either Series is not intended to constitute a complete investment program.
Because of its objective and policies, including its international orientation,
each Series may be considered of a speculative nature and subject to greater
investment risks than are assumed by certain other investment companies which
invest solely in domestic securities. See "How the Fund Invests--Risks and
Special Considerations."
This Prospectus sets forth concisely the information about each Series that a
prospective investor should know before investing. Additional information about
each Series has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated January 16, 1997, which information
is incorporated herein by reference (is legally considered a part of this
Prospectus) and is available without charge upon request to the Fund, at the
address or telephone number noted above.
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Investors are advised to read this Prospectus and retain it for future
reference.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
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SERIES HIGHLIGHTS
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The following summary is intended to highlight certain information contained in
this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
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What are the Global Series and the International Stock Series?
Each Series is a mutual fund. A mutual fund pools the resources of
investors by selling its shares to the public and investing the proceeds of such
sale in a portfolio of securities designed to achieve its investment objective.
Technically, each Series is a series of Prudential World Fund, Inc., an
open-end, diversified management investment company.
What are each Series' Investment Objective?
Global Series: Global Series' investment objective is to seek long-term
growth of capital with income as a secondary objective. Global Series seeks to
achieve its objective through investment in a diversified portfolio of
marketable securities of U.S. and non-U.S. issuers. There can be no assurance
that Global Series' objective will be achieved. See "How the Fund
Invests--Investment Objectives and Policies" at page 12.
International Stock Series: International Stock Series' investment
objective is to achieve long-term growth of capital through investment in equity
securities of foreign issuers. Income is a secondary objective. International
Stock Series' seeks to achieve its objective primarily through investment in a
diversified portfolio of equity securities of foreign issuers. There can be no
assurance that International Stock Series' objective will be achieved. See "How
the Fund Invests--Investment Objectives and Policies" at page 12.
Risk Factors and Special Characteristics
Global Series: While the Global Series is not required to maintain any
particular geographic or currency mix of its investments, under normal
circumstances Global Series intends to maintain investments in a minimum of four
countries, which may include the United States. Global Series may, from time to
time, invest up to 65% of its assets in companies and governments located in any
one country. Global Series may invest in all types of common stocks and
equivalents, preferred stocks, bonds and other debt obligations of foreign and
domestic companies, governments, government agencies and international
organizations. See "How the Fund Invests--Investment Objectives and Policies" at
page 12. Investing in securities of foreign companies and countries involves
certain considerations and risks not typically associated with investing in U.S.
Government Securities and those of domestic companies. See "How the Fund
Invests--Risks and Special Considerations" at page 21. Global Series may also
engage in hedging and return enhancement strategies, including derivatives, the
purchase and sale of put and call options, foreign currency forward contracts,
options and futures transactions and related short-term trading. See "How the
Fund Invests--Hedging and Return Enhancement Strategies" at page 16.
International Stock Series: While the International Stock Series is not
required to maintain any particular geographic or currency mix of its
investments, under normal circumstances International Stock Series intends to
invest at least 65% of its total assets in common stocks and preferred stocks of
issuers located in at least three foreign countries. International Stock Series
may invest up to 35% of its total assets in (i) other equity-related securities
of foreign issuers; (ii) common stocks, preferred stocks, and other
equity-related securities of U.S. issuers; (iii) investment grade debt
securities of domestic and foreign corporations, governments, governmental
entities, and supranational entities; and (iv) high-quality domestic money
market instruments and short-term fixed income securities. See "How the Fund
Invests--Investment Objectives and Policies" at page 12. Investing in securities
of foreign companies and countries involves certain considerations and risks not
typically associated with investing in U.S. Government Securities and those of
domestic companies. See "How the Fund Invests--Risks and Special Considerations"
at page 21. International Stock Series may also engage in hedging and return
enhancement strategies, including derivatives, the purchase and sale of put and
call options, foreign currency forward contracts, options and futures
transactions and related short-term trading. See "How the Fund Invests--Hedging
and Return Enhancement Strategies" at page 15.
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2
<PAGE>
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Who Manages the Series?
Prudential Mutual Fund Management LLC (PMF or the Manager) is the Manager
of the Fund and is compensated for its services at an annual rate of .75 of 1%
of Global Series average daily net assets and 1% of International Stock Series
average daily net assets. As of November 30, 1996, PMF served as manager or
administrator to 62 investment companies, including 40 mutual funds, with
aggregate assets of approximately $53.4 billion. The Prudential Investment
Corporation (PIC or a Subadviser) furnishes investment advisory services in
connection with the management of Global Series under a Subadvisory Agreement
with PMF. See "How the Fund is Managed--Manager" at page 22. Mercator Asset
Management, L.P. (Mercator or, together with PIC, the Subadvisers and
individually, a Subadviser) furnishes investment advisory services in connection
with the management of International Stock Series under a Subadvisory Agreement
with PMF. See "How the Fund is Managed--Manager" at page 22.
Who Distributes the Fund's Shares?
Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Fund's Class A, Class B, Class C and Class Z shares and is
paid an annual distribution and service fee which is currently being charged at
the rate of .25 of 1% of the average daily net assets of the Class A shares, and
at the annual rate of up to 1% of the average daily net assets of each of the
Class B and Class C shares. Prudential Securities incurs the expense of
distributing each Series' Class Z shares under a Distribution Agreement with the
Fund, none of which is reimbursed or paid for by the Series. See "How the Fund
is Managed--Distributor" at page 23.
What is the Minimum Investment?
The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares. There is no minimum initial investment
requirement for investors who qualify to purchase Class Z shares. The minimum
subsequent investment is $100 for all classes, except for Class Z shares for
which there is no such minimum. There is no minimum investment requirement for
certain retirement and employee savings plans or custodial accounts for the
benefit of minors and for purchases made in connection with the "Best Minds"
program sponsored by the Distributor. For purchases made through the Automatic
Savings Accumulation Plan the minimum initial and subsequent investment is $50.
See "Shareholder Guide--How to Buy Shares of the Series" at page 29 and
"Shareholder Guide--ShareholdeR Services" at page 39.
How Do I Purchase Shares?
You may purchase shares of a Series through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from each Series, through its
transfer agent, Prudential Mutual Fund Services LLC (PMFS or the Transfer
Agent) at the net asset value per share (NAV) next determined after receipt of
your purchase order by the Transfer Agent or Prudential Securities plus a sales
charge which may be imposed either (i) at the time of purchase (Class A shares)
or (ii) on a deferred basis (Class B or Class C shares). Class Z shares are
offered to a limited group of investors at net asset value without any sales
charge. See "How the Fund Values Its Shares" at page 25 and "Shareholder
Guide--How to Buy Shares of the Fund" at page 29.
What Are My Purchase Alternatives?
Each Series offers four classes of shares:
o Class A Shares: Sold with an initial sales charge of up to 5% of the
offering price.
o Class B Shares: Sold without an initial sales charge but are subject to
a contingent deferred sales charge or CDSC (declining
from 5% to zero of the lower of the amount invested or
the redemption proceeds) which will be imposed on
certain redemptions made within six years of purchase.
Although Class B shares are subject to higher ongoing
distribution-related expenses than Class A shares,
Class B shares will automatically convert to Class A
shares (which are subject to lower ongoing
distribution-related expenses) approximately seven
years after purchase.
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3
<PAGE>
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o Class C Shares: Sold without an initial sales charge and, for one year
after purchase, are subject to a 1% CDSC on
redemptions. Like Class B shares, Class C shares are
subject to higher ongoing distribution-related expenses
than Class A shares but do not convert to another
class.
o Class Z Shares: Sold without either an initial or contingent deferred
sales charge to a limited group of investors. Class Z
shares are not subject to any ongoing service or
distribution--related expenses.
See "Shareholder Guide--Alternative Purchase Plan" at page 30.
How Do I Sell My Shares?
You may redeem shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order. However,
the proceeds of redemptions of Class B and Class C shares may be subject to a
CDSC. See "Shareholder Guide--How to Sell Your Shares" at page 34.
How are Dividends and Distributions Paid?
Each Series expects to pay dividends of net investment income and make
distributions of any net capital gains at least annually. Dividends and
distributions will be automatically reinvested in additional shares of the
respective Series at NAV without a sales charge unless you request that they be
paid to you in cash. See "Taxes, Dividends and Distributions" at page 26.
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4
<PAGE>
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FUND EXPENSES--GLOBAL SERIES
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<TABLE>
<CAPTION>
Shareholder Transactions Expenses+ Class A Shares Class B Shares Class C Shares Class Z Shares**
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) .......... 5% None None None
Maximum Sales Load or Deferred Sales Load
Imposed on Reinvested Dividends .............. None None None None
Deferred Sales Load (as a percentage of original
purchase price or redemption proceeds,
whichever is lower) .......................... None 5% during the first year, 1% on redemptions None
decreasing by 1% annually made within one
to 1% in the fifth and sixth year of purchase
years and 0% the seventh
year*
Redemption Fees ................................. None None None None
Exchange Fees ................................... None None None None
<CAPTION>
Annual Fund Operating Expenses
(as a percentage of average net assets) Class A Shares Class B Shares Class C Shares Class Z Shares
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Management Fees ............................ .75% .75% .75% .75%
12b-1 Fees (after reduction) ............... .25%++ .92% 1.00% None
Other Expenses ............................. .45% .45% .45% .45%
---- ---- ---- ----
Total Fund Operating Expenses
(after reduction) ........................ 1.45% 2.12% 2.20% 1.20%
==== ==== ==== ====
</TABLE>
1 3 5 10
Example Year Years Years Years
---- ----- ----- -----
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period:
Class A .................................... $64 $94 $125 $215
Class B .................................... $72 $96 $124 $220
Class C .................................... $32 $69 $118 $253
Class Z .................................... $12 $38 $ 66 $145
You would pay the following expenses on the same
investment, assuming no redemption:
Class A .................................... $64 $94 $125 $215
Class B .................................... $22 $66 $114 $220
Class C .................................... $22 $69 $118 $253
Class Z .................................... $ $ $ $
The example should not be considered a representation of past or future
expenses. The above example is based on data for the Global Series' fiscal year
ended October 31, 1996.
The purpose of this table is to assist investors in understanding the various
costs and expenses that an investor in the Global Series will bear, whether
directly or indirectly. For more complete descriptions of the various costs and
expenses, see "How the Fund is Managed". "Other Expenses" includes operating
expenses of the Global Series such as Directors' and professional fees,
registration fees, reports to shareholders, transfer agency and custodian fees
and franchise taxes.
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* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion
Feature--Class B Shares."
** Estimated based on expenses expected to have been incurred if Class Z
shares had been in existence throughout the entire fiscal year ended
October 31, 1996.
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and asset-based
sales charges on shares of the Global Series may not exceed 6.25% of total
gross sales, subject to certain exclusions. This 6.25% limitation is
imposed on the Global Series rather than on a per shareholder basis.
Therefore long-term shareholders of the Global Series may pay more in total
sales charges than the economic equivalent of 6.25% of such shareholders'
investment in such shares. See "How the Fund is Managed--Distributor."
++ Although the Class A Distribution and Service Plan provides that the Global
Series may pay up to an annual rate of .30 of 1% of the average daily net
assets of the Class A Shares, the Distributor has agreed to limit its
distribution fees with respect to Class A shares of the Fund to .25 of 1%
of the average daily net assets value of the Class A shares for the fiscal
year ending October 31, 1997. Total operating expenses without such
limitation would be 1.50%. See "How the Fund is Managed--Distributor."
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5
<PAGE>
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FUND EXPENSES--INTERNATIONAL STOCK SERIES
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<TABLE>
<CAPTION>
Shareholder Transactions Expenses+ Class A Shares Class B Shares Class C Shares Class Z Shares
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) .......... 5% None None None
Maximum Sales Load or Deferred Sales Load
Imposed on Reinvested Dividends .............. None None None None
Deferred Sales Load (as a percentage of original
purchase price or redemption proceeds,
whichever is lower) .......................... None 5% during the first year, 1% on redemptions None
decreasing by 1% annually made within one
to 1% in the fifth and sixth year of purchase
years and 0% the seventh
year*
Redemption Fees ................................. None None None None
Exchange Fees ................................... None None None None
<CAPTION>
Annual Fund Operating Expenses
(as a percentage of average net assets) Class A Shares Class B Shares Class C Shares Class Z Shares
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Management Fees ............................ 1.00% 1.00% 1.00% 1.00%
12b-1 Fees (after reduction) ............... .25%++ 1.00% 1.00% None
Other Expenses ............................. .52% .52% .52% .52%
---- ---- ---- ----
Total Series Operating Expenses
(after reduction) ........................ 1.77% 2.52% 2.52% 1.52%
==== ==== ==== ====
</TABLE>
1 3 5 10
Example Year Years Years Years
---- ----- ----- -----
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period:
Class A ................................... $67 $103 $141 $248
Class B ................................... $76 $108 $144 $259
Class C ................................... $36 $ 78 $134 $286
Class Z ................................... $15 $ 48 $ 83 $181
You would pay the following expenses on the same
investment, assuming no redemption:
Class A ................................... $67 $103 $141 $248
Class B ................................... $26 $ 78 $134 $259
Class C ................................... $26 $ 78 $134 $286
Class Z ................................... $15 $ 48 $ 83 $181
The above example is based on expenses expected to have been incurred if the
International Stock Series had been in existence during the entire fiscal year
ended October 31, 1996. The example should not be considered a representation of
past or future expenses. Actual expenses may be greater or less than those
shown.
The purpose of this table is to assist investors in understanding the various
costs and expenses that an investor in International Stock Series will bear,
whether directly or indirectly. For more complete descriptions of the various
costs and expenses, see "How the Fund is Managed". "Other Expenses" includes
operating expenses of the International Stock Series, for the fiscal year ended
October 31, 1996, such as Directors' and professional fees, registration fees,
reports to shareholders, transfer agency and custodian fees and franchise taxes.
- ----------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion
Feature--Class B Shares."
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and asset-based
sales charges on shares of the International Stock Series may not exceed
6.25% of total gross sales, subject to certain exclusions. This 6.25%
limitation is imposed on the International Stock Series rather than on a
per shareholder basis. Therefore long-term shareholders of the
International Stock Series may pay more in total sales charges than the
economic equivalent of 6.25% of such shareholders' investment in such
shares. See "How the Fund is Managed--Distributor."
++ Although the Class A Distribution and Service Plan provides the Series may
pay a distribution fee of up to .30 of 1% per annum of the average daily
net assets of the Class A Shares, the Distributor has agreed to limit its
distribution fees with respect to Class A shares of the Series to no more
than .25 of 1% of the average daily net assets of the Class A shares for
the fiscal year ending October 31, 1997. Total operating expenses of the
Class A shares without such limitation would be 1.82%.
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6
<PAGE>
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FINANCIAL HIGHLIGHT--GLOBAL SERIES
(for a share outstanding throughout each of the indicated periods)
(Class A Shares)
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The following financial highlights have been audited by Deloitte & Touche
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
following financial highlights contain selected data for a Global Series Class A
share of common stock outstanding, total return, ratios to average net assets
and other supplemental data for the periods indicated. The information is based
on data contained in the financial statements. Further performance information
is contained in the annual report which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
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<TABLE>
<CAPTION>
Class A
------------------------------------------------------------------------------
January 22,
1990(d)
Year ended October 31, through
----------------------------------------------------------------- October 31,
1996 1995(b) 1994(b) 1993(b) 1992(b) 1991(b) 1990(b)
---------- ---------- --------- -------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .. $ 15.52 $ 14.89 $ 13.17 $ 9.58 $ 10.08 $ 9.19 $ 10.38
-------- -------- ------- ------- ------- ------- -------
Income from investment operations:
Net investment income (loss) .......... -- .01 (.04) 0.02 0.03 0.07 0.12
Net realized and unrealized gain (loss)
on investment and foreign currency
transactions ........................ 1.83 .81 1.76 3.57 (.53) 1.02 (1.31)
-------- -------- ------- ------- ------- ------- -------
Total from investment operations ...... 1.83 .82 1.72 3.59 (.50) 1.09 (1.19)
-------- -------- ------- ------- ------- ------- -------
Less distributions:
Dividends from net investment income .. -- -- -- -- -- (0.16) --
Distributions from net realized gains
on investment and foreign currency
transactions ........................ (.73) (.19) -- -- -- (0.04) --
-------- -------- ------- ------- ------- ------- -------
Total distributions ................... (.73) (.19) -- -- -- (0.20) --
-------- -------- ------- ------- ------- ------- -------
Net asset value, end of period ........ $ 16.62 $ 15.52 $ 14.89 $ 13.17 $ 9.58 $ 10.08 $ 9.19
======== ======== ======= ======= ======= ======= =======
TOTAL RETURN(c) ....................... 12.33% 5.74% 13.06% 37.47% (4.96)% 12.11% (11.46)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) ....... $234,700 $222,002 $73,815 $42,021 $13,973 $14,154 $ 8,727
Average net assets (000) .............. $222,948 $174,316 $58,455 $21,409 $14,758 $10,593 $ 7,151
Ratios to average net assets:
Expenses, including distribution fees 1.45% 1.51% 1.55% 1.56% 1.71% 1.72% 1.57%(a)
Expenses, excluding distribution fees 1.20% 1.26% 1.30% 1.36% 1.51% 1.52% 1.37%(a)
Net investment income (loss) ........ (0.04)% .10% (0.29)% 0.20% 0.22% 0.65% 1.61%(a)
Portfolio turnover rate ............... 52% 50% 49% 69% 58% 126% 35%
Average commission rate per share ..... $ 0.0366 N/A N/A N/A N/A N/A N/A
</TABLE>
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(a) Annualized.
(b) Based on average shares outstanding, by class.
(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on
thelast day of each period reported and includes reinvestment of dividends
and distributions. Total returns for periods of less than a full year are
notannualized.
(d) Commencement of offering of Class A shares.
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7
<PAGE>
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FINANCIAL HIGHLIGHTS--GLOBAL SERIES
(for a share outstanding throughout each of the indicated periods)
(Class B Shares)
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The following financial highlights have been audited by Deloitte & Touche
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
following financial highlights contain selected data for a Global Series
Class B share of common stock outstanding, total return, ratios to average
net assets and other supplemental data for the periods indicated. The
information is based on data contained in the financial statements. Further
performance information is contained in the annual report which may be
obtained without charge. See "Shareholder Guide--Shareholder
Services--Reports to Shareholders."
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<TABLE>
<CAPTION>
Class B
-----------------------------------------------------------------------------------
Year ended October 31,
-----------------------------------------------------------------------------------
1996 1995(a) 1994(a) 1993(a) 1992(a) 1991(a) 1990(a)
-------- -------- --------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of period ....... $ 15.03 $ 14.53 $ 12.94 $ 9.47 $ 10.05 $ 9.14 $ 10.46
-------- -------- -------- -------- -------- -------- --------
Income from investment operations:
Net investment income (loss) ............... (.08) (.11) (.13) (0.04) (0.05) -- 0.05
Net realized and unrealized gain (loss)
on investment and foreign currency
transactions .............................. 1.74 .80 1.72 3.51 (0.53) 1.02 (1.10)
-------- -------- -------- -------- -------- -------- --------
Total from investment operations ........... 1.66 .69 1.59 3.47 (0.58) 1.02 (1.05)
-------- -------- -------- -------- -------- -------- --------
Less distributions:
Dividends from net investment
income .................................... -- -- -- -- -- (0.07) (0.18)
Distributions paid to shareholders from
net realized gains on investment
and foreign currency transactions ......... (.73) (.19) -- -- -- (0.04) (0.09)
-------- -------- -------- -------- -------- -------- --------
Total distributions ........................ (.73) (.19) -- -- -- (0.11) (0.27)
-------- -------- -------- -------- -------- -------- --------
Net asset value, end of period ............. $ 15.96 $ 15.03 $ 14.53 $ 12.94 $ 9.47 $ 10.05 $ 9.14
======== ======== ======== ======== ======== ======== ========
TOTAL RETURN(c) ............................ 11.57% 4.98% 12.29% 36.64% (5.77)% 11.29% (10.43)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) ............ $326,978 $268,498 $410,520 $251,133 $178,438 $249,582 $261,555
Average net assets (000) ................... $294,230 $287,656 $345,771 $183,741 $210,464 $253,866 $328,467
Ratios to average net assets:
Expenses, including distribution
fees ..................................... 2.12% 2.19% 2.24% 2.24% 2.40% 2.44% 2.23%
Expenses, excluding distribution fees 1.20% 1.27% 1.31% 1.36% 1.51% 1.53% 1.37%
Net investment income (loss) .............. (.67)% (.84)% (0.97)% (0.39)% (0.47)% (0.01)% 0.51%
Portfolio turnover rate .................... 52% 50% 49% 69% 58% 126% 35%
Average commission rate per share .......... $ 0.0366 N/A N/A N/A N/A N/A N/A
</TABLE>
Class B
--------------------------------------
Year ended October 31,
--------------------------------------
1989(a) 1988(b)(a) 1987(a)
-------- ---------- ---------
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of period .... $ 10.09 $ 9.86 $ 9.96
-------- -------- --------
Income from investment operations:
Net investment income (loss) ............ 0.15 0.17+ 0.06
Net realized and unrealized gain (loss)
on investment and foreign currency
transactions ........................... 0.53 1.11 0.79
-------- -------- --------
Total from investment operations ........ 0.68 1.28 0.85
-------- -------- --------
Less distributions:
Dividends from net investment
income ................................. (0.19) (0.07) --
Distributions paid to shareholders from
net realized gains on investment
and foreign currency transactions ...... (0.12) (0.98) (0.95)
-------- -------- --------
Total distributions ..................... (0.31) (1.05) (0.95)
-------- -------- --------
Net asset value, end of period .......... $ 10.46 $ 10.09 $ 9.86
======== ======== ========
TOTAL RETURN(c) ......................... 6.92% 13.58% 8.81%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) ......... $385,578 $523,743 $628,542
Average net assets (000) ................ $448,737 $571,420 $697,486
Ratios to average net assets:
Expenses, including distribution
fees .................................. 1.82% 1.86%(d) 1.96%
Expenses, excluding distribution fees 1.34% 1.17%(d) 1.14%
Net investment income (loss) ........... 1.45% 1.71%(d) 0.52%
Portfolio turnover rate ................. 60% 82% 135%
Average commission rate per share ....... N/A N/A N/A
- ----------
(a) Based on average shares outstanding, by class.
(b) On March 1, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as investment adviser and since
then has acted as manager of the Fund. See "Manager" in the Statement of
Additional Information.
(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions.
(d) Net of expense subsidy or reimbursement.
- --------------------------------------------------------------------------------
8
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS--GLOBAL SERIES
(for a share outstanding throughout each of the indicated periods)
(Class C and Z Shares)
- --------------------------------------------------------------------------------
The following financial highlights have been audited by Deloitte & Touche
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
following financial highlights contain selected data for a Global Series Class
C--and Class Z share of common stock outstanding, total return, ratios to
average net assets and other supplemental data for the period indicated. The
information is based on data contained in the financial statements. Further
performance information is contained in the annual report which may be obtained
without charge. See "Shareholder Guide--Shareholder Services--Reports to
Shareholders."
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class Z
--------------------------------------------- -----------------
Year Ended August 1, 1994(d) March 1, 1996(e)
October 31, through through
1996 1995(b) October 31, 1994(b) October 31, 1996
----------- ----------- ------------------- ------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .. $ 15.03 $14.53 $ 12.94 $ 15.42
Income from investment operations:
Net investment loss ................... (.05) (.11) (.03) .06
Net realized and unrealized gain on
investment and foreign currency
transactions ........................ 1.71 .80 1.62 1.18
------- ------ ------- -------
Total from investment operations ...... 1.66 .69 1.59 1.24
------- ------ ------- -------
Less distributions:
Dividends from net investment income .. -- -- -- --
Distributions paid to shareholders
from net realized gains on investment
and foreign currency transactions ... (.73) (.19) -- (.01)
------- ------ ------- -------
Total distributions ................... (.73) (.19) -- (.01)
------- ------ ------- -------
Net asset value, end of period ........ $ 15.96 $15.03 $ 14.53 $ 16.65
======= ====== ======= =======
TOTAL RETURN(c) ....................... 11.57% 4.98% 3.56% 12.30%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) ....... $ 7,693 $3,733 $ 1,205 $40,416
Average net assets (000) .............. $ 5,516 $2,284 $ 630 $26,452
Ratios to average net assets:
Expenses, including distribution fees 2.20% 2.25% 2.63%(a) 1.20%(a)
Expenses, excluding distribution fees 1.20% 1.25% 1.63%(a) 1.20%(a)
Net investment income (loss) ......... (.72)% (.76)% (1.21)%(a) 55%(a)
Portfolio turnover rate ............... 52% 50% 49% 52%
Average commission rate per share ..... $0.0366 N/A N/A $0.0366
</TABLE>
- ----------
(a) Annualized.
(b) Based on average shares outstanding, by class.
(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of the period reported and includes reinvestment of dividends and
distributions. Total return for the period less than a full year is not
annualized.
(d) Commencement of offering of Class C shares.
(e) Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------
9
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHT--INTERNATIONAL STOCK SERIES
(for a share outstanding throughout each of the indicated periods)
(Class A and B Shares)
- --------------------------------------------------------------------------------
The following financial highlights have been audited by Deloitte & Touche
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
following financial highlights contain selected data for an International Stock
Series Class A and B share of common stock outstanding, total return, ratios to
average net assets and other supplemental data for the periods indicated. The
information is based on data contained in the financial statements. Further
performance information is contained in the annual report which may be obtained
without charge. See "Shareholder Guide--Shareholder Services--Reports to
Shareholders."
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B
----------------------------- ---------------------------
October 1, September 23, October 1, September 23,
1996 1996(a) 1996 1996(a)
Through Through Through Through
October 31, September 30, October 31, September 30,
1996 1996(d) 1996 1996(d)
------------ -------------- ----------- --------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .. $16.48 $16.54 $16.47 $16.54
------ ------ ------ ------
Income from investment operations:
Net investment income (loss) .......... (.01) -- (.02) --
Net realized and unrealized gain (loss)
on investment and foreign currency
transactions ........................ .12 (.06) .12 (.07)
------ ------ ------ ------
Total from investment operations ...... .11 (.06) .10 (.07)
------ ------ ------ ------
Net asset value, end of period ........ $16.59 $16.48 $16.57 $16.47
====== ====== ====== ======
TOTAL RETURN(c) ....................... .67% (.36)% .61% (.42)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) ....... $5,169 $ 199 $1,922 $ 199
Average net assets (000) .............. $2,793 $ 199 $ 313 $ 199
Ratios to average net assets:(b)
Expenses, including distribution fees 2.05% 2.46% 2.80% 3.21%
Expenses, excluding distribution fees 1.80% 2.21% 1.80% 2.21%
Net investment income (loss) ........ (1.03)% .75% (1.78)% 0%
Portfolio turnover rate ............... 4% 15% 4% 15%
Average commission rate per share ..... $.0256 $.0222 $.0256 $.0222
</TABLE>
- ----------
(a) Commencement of offering of Class A and Class B shares.
(b) Annualized.
(c) Total return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total return for periods of
less than a full year are not annualized.
(d) International Stock Fund, a Mercator managed series of Prudential Dryden
Fund (formerly The Prudential Institutional Fund), the accounting survivor
of International Stock Series had a fiscal year of September 30.
International Stock Series has a fiscal year of October 31.
- --------------------------------------------------------------------------------
10
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS--INTERNATIONAL STOCK SERIES
(for a share outstanding throughout each of the indicated periods)
(Class C and Z Shares)
- --------------------------------------------------------------------------------
The following financial highlights have been audited by Deloitte & Touche
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
following financial highlights contain selected data for an International Stock
Series Class C and Class Z share of common stock outstanding, total return,
ratios to average net assets and other supplemental data for the period
indicated. The information is based on data contained in the financial
statements. Further performance information is contained in the annual report
which may be obtained without charge. See "Shareholder Guide--Shareholder
Services--Reports to Shareholders."
<TABLE>
<CAPTION>
Class C Class Z
-------------------------- ---------------------------------------------------------
October 1, September 23, October 1,
1996 1996(b) 1996
Through Through Through Year Ended September 30,
October 31, September 30, October 31, --------------------------------------------
1996 1996(h) 1996 1996(g)(h) 1995(h) 1994(h)
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE(b):
Net asset value, beginning of period ......... $16.47 $16.54 $ 16.48 $ 15.25 $ 14.84 $ 12.35
------ ------ -------- -------- -------- --------
Income from investment operations:
Net investment loss .......................... (.02) -- (.01) .22 .18(c) .13(c)
Net realized and unrealized gain on investment
and foreign currency transactions ........... .12 (.07) .12 1.20 .66 2.54
------ ------ -------- -------- -------- --------
Total from investment operations ............. .10 (.07) .11 1.42 .84 2.67
------ ------ -------- -------- -------- --------
Less distributions:
Dividends from net investment income ......... -- -- -- (.19) (.10) (.03)
Distributions paid to shareholders from
net realized gains on investment and
foreign currency transactions .............. -- -- -- -- (.33) (.15)
------ ------ -------- -------- -------- --------
Total distributions .......................... -- -- -- (.19) (.43) (.18)
------ ------ -------- -------- -------- --------
Net asset value, end of period ............... $16.57 $16.47 $ 16.59 $ 16.48 $ 15.25 $ 14.84
====== ====== ======== ======== ======== ========
TOTAL RETURN(c) .............................. .61% (.42)% .67% 9.44% 5.95% 21.71%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) .............. $ 200(f) $ 199(f) $190,428 $188,386 $136,685 $102,824
Average net assets (000) ..................... $ 202(f) $ 199(f) $191,228 $161,356 $118,927 $ 68,476
Ratios to average net assets:
Expenses, including distribution fees ...... 2.80%(d) 3.21%(d) 1.80%(d) 1.61%(c) 1.60%(c) 1.60%(c)
Expenses, excluding distribution fees ...... 1.80%(d) 2.21%(d) 1.80%(d) 1.61%(c) 1.60%(c) 1.60%(c)
Net investment income (loss) ............... (1.78)%(d) 0%(d) (.78)%(d) 1.58%(c) 1.58%(c) 1.08%(c)
Portfolio turnover rate ...................... 4% 15% 4% 15% 20% 21%
Average commission rate per share ............ $.0256 $.0222 $ .0256 $ .0222 N/A N/A
</TABLE>
Class Z
-------------
November 5,
1992(a)
Through
September 30,
1993(h)
PER SHARE OPERATING PERFORMANCE(b):
Net asset value, beginning of period ......... $ 10.00
-------
Income from investment operations:
Net investment loss .......................... .16(c)
Net realized and unrealized gain on investment
and foreign currency transactions ........... 2.21
-------
Total from investment operations ............. 2.37
-------
Less distributions:
Dividends from net investment income ......... (.02)
Distributions paid to shareholders from
net realized gains on investment and
foreign currency transactions .............. --
-------
Total distributions .......................... (.02)
-------
Net asset value, end of period ............... $ 12.35
=======
TOTAL RETURN(c) .............................. 23.74%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) .............. $31,708
Average net assets (000) ..................... $14,491
Ratios to average net assets:
Expenses, including distribution fees ...... 1.60%(c)/(d)
Expenses, excluding distribution fees ...... 1.60%(c)/(d)
Net investment income (loss) ............... 1.44%(c)/(d)
Portfolio turnover rate ...................... 15%
Average commission rate per share ............ N/A
- ----------
(a) Commencement of investment operations. International Stock Fund, a Mercator
managed series of Prudential Dryden Fund (formerly The Prudential
Institutional Fund) commenced investment operations on November 5, 1992. On
September 20, 1996, the assets and liabilities of that fund were
transferred to the International Stock Series in exchange solely for Class
Z shares of the International Stock Series. Immediately prior to the
transfer, International Stock Series had no assets. The investment
objectives and policies of each of the funds were substantially similar and
Mercator served as investment adviser to each fund. International Stock
Fund serves as the accounting survivor of the International Stock Series
and, as such, financial data is shown from November 5, 1992.
(b) Commencement of offering of Class C shares.
(c) Net of expense/recovery.
(d) Annualized.
(e) Total return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total return for periods of
less than a full year are not annualized. Total return includes the effect
of expense subsidiaries/recoveries, as applicable.
(f) Figures are actual and are not rounded to the nearest thousand.
(g) On September 20, 1996, the Manager changed from Prudential Institutional
Fund Management, Inc. to Prudential Mutual Fund Management LLC, each
company being an indirect wholly-owned subsidiary of The Prudential
Insurance Company of America.
(h) International Stock Fund, a Mercator managed series of Prudential Dryden
Fund (formerly The Prudential Institutional Fund), the accounting survivor
of International Stock Series had a fiscal year of September 30.
International Stock Series, has a fiscal year of October 31.
- --------------------------------------------------------------------------------
11
<PAGE>
- --------------------------------------------------------------------------------
HOW THE FUND INVESTS
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES
GLOBAL SERIES
The investment objective of Global Series is to seek long-term growth of
capital, with income as a secondary objective. Global Series will seek to
achieve its objectives through investment in a diversified portfolio of
securities which will consist of marketable securities of U.S. and non-U.S.
issuers. Marketable securities are those for which market quotations are readily
available. There can be no assurance that Global Series will achieve its
investment objective. See "Investment Objectives and Policies" in the Statement
of Additional Information.
Global Series' investment objective is a fundamental policy and, therefore,
may not be changed without the approval of the holders of a majority of Global
Series' outstanding voting securities as defined in the Investment Company Act
of 1940 (the Investment Company Act). Global Series' policies that are not
fundamental may be modified by the Fund's Board of Directors.
Global Series may invest in all types of common stocks and equivalents
(such as convertible debt securities and warrants), preferred stocks, bonds and
other debt obligations, including money market instruments, of foreign and
domestic companies and governments, governmental agencies and international
organizations. Global Series may also invest in stock options, options on debt
securities, options on currencies, options on stock indices, stock index futures
and options on stock index futures.
Although Global Series is not required to maintain any particular
geographic or currency mix of its investments, nor required to maintain any
particular proportion of stocks, bonds or other securities in its portfolio,
Global Series, in view of its investment objective, presently expects to invest
its assets primarily in common stocks of U.S. and non-U.S. issuers. Global
Series may, however, invest substantially or primarily in debt securities of
U.S. and non-U.S. issuers when it appears that the capital appreciation
available from investments in such securities will equal or exceed the capital
appreciation available from investments in equity securities, or when Global
Series is temporarily in a defensive position. Global Series will purchase
"investment grade" debt including convertible debt obligations. See "Fixed
Income Securities" below.
Global Series is intended to provide investors with the opportunity to
invest in a portfolio of securities of companies and governments located
throughout the world. In making the allocation of assets among the various
countries and geographic regions, Global Series' investment adviser ordinarily
considers such factors as prospects for relative economic growth between foreign
countries; expected levels of inflation and interest rates; government policies
influencing business conditions; the range of individual investment
opportunities available to international investors; and other pertinent
financial, tax, social, political and national factors--all in relation to the
prevailing prices of securities in each country or region.
Investments may be made in companies based in (or governments of or within)
the Pacific Basin (such as Japan, Australia, Singapore, Malaysia and Hong Kong)
and Western Europe (such as the United Kingdom, Germany, Switzerland, the
Netherlands, France, Belgium, Spain and Scandinavia), as well as the United
States, Canada and such other areas and countries as the investment adviser may
determine from time to time. The Fund intends to maintain investments in a
minimum of four countries, which may include the United States, but may, from
time to time, invest up to 65% of its assets in companies and governments
located in any one country. Moreover should extraordinary market conditions
warrant, Global Series may temporarily be invested primarily in securities of
U.S. issuers.
Global Series may invest in securities not listed on securities exchanges.
These securities will generally have an established market (such as the
over-the-counter market), the depth and liquidity of which may vary from time to
time and from security to security. In addition, Global Series may invest to a
limited extent in securities of companies which have been in existence for less
than three years, in securities for which market quotations are not readily
available and in securities of other registered investment companies. See
"Investment Restrictions" in the Statement of Additional Information.
In analyzing companies for investment, the investment adviser ordinarily
looks for one or more of the following characteristics: prospects for
above-average earnings growth per share; high return on invested capital;
healthy balance sheet; sound financial and
12
<PAGE>
accounting policies and overall financial strength; strong competitive
advantages; effective research and product development and marketing; efficient
service; pricing flexibility; strength of management; and general operating
characteristics which will enable the companies to compete successfully in their
marketplace--all in relation to the prevailing prices of the securities of such
companies.
* * * *
INTERNATIONAL STOCK SERIES
The investment objective of the International Stock Series is to achieve
long-term growth of capital through investment in equity securities of foreign
companies. Income is a secondary objective. There can be no assurance that
International Stock Series will achieve its investment objective. See
"Investment Objectives and Policies" in the Statement of Additional Information.
International Stock Series' investment objective is a fundamental policy
and, therefore, may not be changed without the approval of the holders of a
majority of International Stock Series' outstanding voting securities as defined
in the Investment Company Act. International Stock Series' policies that are not
fundamental may be modified by the Fund's Board of Directors.
International Stock Series will, under normal circumstances, invest at
least 65% of the value of its total assets in common stocks and preferred stocks
of issuers located in at least three foreign countries. International Stock
Series will invest primarily in seasoned companies (i.e., companies with an
established operating record of 3 years or greater) that are incorporated,
organized, or that do business primarily outside the United States.
International Stock Series will invest in securities of such foreign issuers
through direct market purchases on foreign stock exchanges and established
over-the-counter markets as well as through the purchase of American Depository
Receipts (ADRs), European Depository Receipts (EDRs) or other similar
securities.
International Stock Series intends to broadly diversify its holdings among
issuers located in developed and developing countries having national financial
markets. Mercator, the Subadviser for International Stock Series, believes that
broad diversification provides a prudent means of reducing volatility while
permitting International Stock Series to take advantage of the potentially
different movements of major equity markets. While International Stock Series
may invest anywhere outside the United States, it expects that most of its
investments will be made in securities of issuers located in developed countries
in North America, Western Europe, and the Pacific Basin. In allocating
International Stock Series' investments among different countries and geographic
regions, Mercator will consider such factors as relative economic growth,
expected levels of inflation, government policies affecting business conditions,
and market trends throughout the world. In selecting companies within those
countries and geographic regions, Mercator seeks to identify those companies
that are best positioned and managed to benefit from the factors listed above.
International Stock Series does not currently expect to invest 25% or more
of its net assets in any one country. For temporary defensive purposes,
International Stock Series may invest up to 100% of its assets in common stocks,
preferred stocks and other equity-related securities of U.S. issuers.
International Stock Series may invest up to 35% of the value of its total
assets in: (i) other equity-related securities of foreign issuers; (ii) common
stocks, preferred stocks and other equity-related securities of U.S. issuers;
(iii) investment grade debt securities of domestic and foreign corporations,
governments, governmental entities, and supranational entities (such as the
Asian Development Bank, the European Coal and Steel Community, the European
Economic Community, and the International Bank for Reconstruction and
Development (the "World Bank")); and (iv) high-grade foreign or domestic money
market instruments and short-term fixed income securities. International Stock
Series' use of money market instruments and short-term fixed income securities
generally will reflect the Subadviser's overall measure of optimism relating to
the global equity markets, and International Stock Series will use such
securities to reduce downside volatility during uncertain or declining market
conditions.
In order to invest uncommitted cash balances, maintain liquidity to meet
redemptions, or for hedging or return enhancement purposes, International Stock
Series may: (i) enter into repurchase agreements, when-issued, delayed-delivery
and forward commitment transactions; (ii) lend its portfolio securities; and
(iii) purchase and sell put and call options on any securities in which it may
invest and options on any securities index based on securities in which
International Stock Series may invest. In order to attempt to reduce risks
associated with currency fluctuations, International Stock Series may (i)
purchase and sell currency spot
13
<PAGE>
contracts; (ii) purchase and sell currency futures contracts and currency
forward contracts; and (iii) purchase and sell put and call options on
currencies and on foreign currency futures contracts. See "Hedging and Return
Enhancement Strategies."
International Stock Series may hold a portion of its assets in money market
instruments in amounts designed to pay expenses, to meet anticipated
redemptions, pending investments or to margin its purchases and sales of futures
contracts in accordance with its objective and policies. These instruments may
be purchased on a forward commitment, when-issued or delayed-delivery basis. In
addition, International Stock Series may for temporary defensive purposes
invest, without limitation, in high-quality money market instruments.
International Stock Series may also purchase non-investment grade fixed income
securities and retain investments grade fixed income securities that have been
downgraded to non-improvement grade provided that no more than 5% of the
International Stock Series' net assets is invested in non-investment grade fixed
income securities, which are considered to be high risk securities, i.e. "junk"
bonds. See "Fixed Income Securities" below and "Investment Objectives and
Policies" in the Additional Information for a fuller description of these
securities.
* * * *
Equity-Related Securities. Each Series may invest in equity-related
securities. Equity-related securities are common stock, preferred stock, rights,
warrants and debt securities or preferred stock which are convertible into or
exchangeable for common stock or preferred stock.
With respect to equity-related securities, each Series may purchase ADRs.
ADRs are U.S. dollar-denominated certificates issued by a United States bank or
trust company and represent the right to receive securities of a foreign issuer
deposited in a domestic bank or foreign branch of a United States bank and
traded on a United States exchange or in an over-the-counter market. Generally,
ADRs are in registered form. There are no fees imposed on the purchase or sale
of ADRs when purchased from the issuing bank or trust company in the initial
underwriting, although the issuing bank or trust company may impose charges for
the collection of dividends and the conversion of ADRs into the underlying
securities. Investment in ADRs has certain advantages over direct investment in
the underlying foreign securities since: (i) ADRs are U.S. dollar-denominated
investments that are registered domestically, easily transferable, and for which
market quotations are readily available; and (ii) issuers whose securities are
represented by ADRs are usually subject to auditing, accounting, and financial
reporting standards comparable to those of domestic issuers.
Fixed Income Securities. Each Series may purchase "investment grade" debt
including convertible debt obligations. Investment grade debt obligations are
bonds rated within the four highest quality grades as determined by Moody's
Investors Service (Moody's) (currently Aaa, Aa, A and Baa for bonds, MIGI, MIG2,
MIG3 and MIG4 for notes and P-1 for commercial paper), or Standard & Poor's
Ratings Group (S&P) (currently AAA, AA, A and BBB for bonds, SP-1 and SP-2 for
notes and A-1 for commercial paper), or by another nationally recognized
statistical rating organization (NRSRO) or in unrated securities of equivalent
quality. Securities rated Baa by Moody's or BBB by S&P, although considered to
be investment grade, lack outstanding investment characteristics and, in fact,
have speculative characteristics. Lower rated securities are subject to a
greater risk of loss of principal and interest. Debt securities may be subject
to price volatility due to such factors as interest rate sensitivity, market
perception of the creditworthiness of the issuer and general market.
International Stock Series may purchase non-investment grade fixed income
securities and retain investment grade fixed income securities that have been
downgraded to non-investment grade provided that no more than 5% of
International Stock Series' net assets is invested in non-investment grade fixed
income securities. Non-investment grade securities are rated lower than BBB/Baa
(or an equivalent rating by any NRSRO) or, if not rated, are deemed by the
Mercator to be of comparable investment quality and are commonly referred to as
high risk or high yield securities, i.e. "junk" bond. High yield securities are
generally riskier than higher quality securities and are subject to more credit
risk, including risk of default, and are more volatile than higher quality
securities. In addition, such securities may have less liquidity and experience
more price fluctuation than higher quality securities. See the discussion of
corporate bond ratings in "Description of S&P, Moodys and Duff & Phelps Ratings"
in the Appendix to the Statement of Additional Information.
The maturity of fixed income securities may be considered long (ten plus
years), intermediate (three to ten years) or short term (three years of less).
In general, the principal values of longer-term securities fluctuate more widely
in response to changes in interest rates than those of shorter-term securities,
providing greater opportunity for capital gain or risk of capital loss. A
decline in interest rates usually produces an increase in the value of debt
securities, while an increase in interest rates generally reduces their value.
U.S. Government Securities. Each Series may invest in fixed income
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. Obligations of the U.S. Government consist of various types
of marketable securities issued by the U.S.
14
<PAGE>
Treasury, i.e., bills, notes and bonds, and are direct obligations of the U.S.
Government. Obligations of agencies and instrumentalities of the U.S. Government
are not direct obligations of the U.S. Government and are either: (i) guaranteed
by the U.S. Treasury (e.g., Government National Mortgage Association ("GNMA")
mortgage-backed securities); (ii) supported by the issuing agency's or
instrumentality's right to borrow from the U.S. Treasury at the discretion of
the U.S. Treasury (e.g., Federal National Mortgage Association ("FNMA") Discount
Notes); or (iii) supported by only the issuing agency's or instrumentality's
credit (e.g., each of the Federal Home Loan Banks).
HEDGING AND RETURN ENHANCEMENT STRATEGIES
Each Series may also engage in various portfolio strategies, including
derivatives, to reduce certain risks of its respective investments and to
attempt to enhance return. Each Series, and thus its investors, may lose money
through the unsuccessful use of these strategies. These strategies include the
purchase and sale of put and call options on any security in which a Series may
invest and options on any securities index based on securities in which a Series
may invest, In order to reduce the risks associated with currency fluctuations,
a Series may (i) purchase and sell currency spot contracts, (ii) purchase and
sell currency futures contracts and currency forward contracts, and (iii)
purchase and sell put and call options on currencies and on foreign currency
contracts. Additionally, the Global Series may purchase and sell stock index
futures and options thereon. The Subadvisers will use such techniques as market
conditions warrant. Each Series' ability to use these strategies may be limited
by market conditions, regulatory limits and tax considerations and there can be
no assurance that any of these strategies will succeed. See "Investment
Objectives and Policies" in the Statement of Additional Information. New
financial products and risk management techniques continue to be developed and a
Series may use these new investments and techniques to the extent consistent
with its investment objective and policies.
Options Transactions
Options on Securities and Securities Indices. Each Series may purchase and
sell put and call options on any securities in which it may invest or options on
any securities index based on securities in which the Series may invest. Each
Series is also authorized to enter into closing purchase and sale transactions
in order to realize gains or minimize losses on options sold or purchased by the
Series.
A call option on equity securities gives the purchaser, in exchange for a
premium paid, the right for a specified period of time to purchase the
securities subject to the option at a specified price (the "exercise price" or
"strike price"). 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 to the purchaser upon receipt of
the exercise price. When a Series writes a call option, the Series gives up the
potential for gain on the underlying securities in excess of the exercise price
of the option during the period that the option is open.
A put option on equity securities gives the purchaser, in return for a
premium, the right, for a specified period of time, to sell the securities
subject to the option to the writer of the put at the specified exercise price.
The writer of the put option, in return for the premium, has the obligation,
upon exercise of the option, to acquire the securities underlying the option at
the exercise price. A Series as the writer of a put option might, therefore, be
obligated to purchase underlying securities for more than their current market
price.
Each Series will write only "covered" options. A written option is covered
if, as long as a Series 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 liquid assets in an amount equal to or greater than
its obligation under the option. Under the first circumstance; a Series' losses
are limited because it owns the underlying security or currency; under the
second circumstance, in the case of a written call option, a Series' losses are
potentially unlimited. See "Investment Objectives and Policies--Options on
Securities and Securities Indices" in the Statement of Additional Information.
Options on securities indices are similar to options on equity securities
except that, rather than the right to take or make delivery of the securities at
a specified price, an option on a securities index gives the holder the right,
in return for a premium paid,
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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. The writer of an index option, in return for the premium, is obligated
to pay the amount of cash due upon exercise of the option.
A Series may purchase and sell put and call options on securities indices
for hedging against a decline in the value of the securities owned by such
Series or against an increase in the market value of the type of securities in
which such Series may invest. Securities index options are designed to reflect
price fluctuations in a group of securities or segment of the securities market
rather than price fluctuations in a single security. Options on securities
indices are similar to options on securities, except that the exercise of
securities index options requires cash payments and does not involve the actual
purchase or sale of securities. Purchasing or selling securities index options
is subject to the risk that the value of its portfolio securities may not change
as much as or more than the index because such Series' investments generally
will not match the composition of the index. See "Investment Objectives and
Policies--Options on Securities and Securities Indices" in the Statement of
Additional Information.
Over-the-Counter Options. Each Series may also purchase and write (i.e.,
sell) put and call options on equity and debt securities, on currencies and on
stock indices in the over-the-counter market (OTC options). Unlike
exchange-traded options, OTC options are contracts between a Series and its
counterparty without the interposition of any clearing organization. Thus, the
value of an OTC option is particularly dependent on the financial viability of
the OTC counterparty. A Series' ability to purchase and write OTC options may be
limited by market conditions, regulatory limits and tax considerations. There
are certain risks associated with investments in OTC options. See "Investment
Objectives and Policies--Special Risks of Purchasing OTC Options" in the
Statement of Additional Information.
Stock Index Futures
Global Series may purchase and sell stock index futures which are traded on
a commodities exchange or board of trade for certain hedging and risk management
purposes in accordance with regulations of the Commodity Futures Trading
Commission.
A stock index futures contract is an agreement in which one party agrees to
deliver to another an amount of cash equal to a specific dollar amount times the
difference between a specific stock index at the close of the last trading day
of the contract and the price at which the agreement is made. No physical
delivery of the underlying stocks in the index is made. Global Series may not
purchase or sell stock index futures if, immediately thereafter, more than
one-third of its net assets would be hedged. In addition, except in the case of
a call written and held on the same index, Global Series will write call options
on indices or sell stock index futures only if the amount resulting from the
multiplication of the then current level of the index (or indices) upon which
the options or futures contract(s) is based, the applicable multiplier(s), and
the number of futures or options contracts which would be outstanding would not
exceed one-third of the value of Global Series' net assets. The Global Series
also may not purchase or sell stock index futures for risk management purposes
if immediately thereafter the sum of the amount of margin deposits on the Global
Series' existing futures positions and premiums paid for such options would
exceed 5% of the liquidation value of Global Series' total assets. Global
Series' may purchase and sell stock index futures, without limitation, for bona
fide hedging purposes.
Global Series successful use of stock index futures contracts and options
on indices depends upon its ability to predict the direction of the market
underlying the index and is subject to various additional risks. The correlation
between movements in the price of the stock index future and the price of the
securities being hedged is imperfect and there is a risk that the value of the
securities being hedged may increase or decrease at a greater rate than the
related futures contract, resulting in losses to Global Series. Certain futures
exchanges or boards of trade have established daily limits on the amount that
the price of a futures contract or related options may vary, either up or down,
from the previous day's settlement price. These daily limits may restrict the
Global Series' ability to purchase or sell certain futures contracts or related
options on any particular day. In addition, if Global Series purchases futures
to hedge against market advances before it can invest in common stock in an
advantageous manner and the market declines, Global Series might create a loss
on the futures contract. In addition, the ability of Global Series to close out
a futures position or an option depends on a liquid secondary market. There is
no assurance that liquid secondary markets will exist for any particular futures
contract or option at any particular time. See "Investment Objectives and
Policies" in the Statement of Additional Information.
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Global Series' ability to enter into stock index futures and listed options
is limited by the requirements of the Internal Revenue Code of 1986, as amended
(the Internal Revenue Code), for qualification as a regulated investment
company. See "Taxes" in the Statement of Additional Information.
Limitations On Options and Futures Contracts
Global Series will not (a) write puts having aggregate exercise prices
greater than 25% of total assets, or (b) purchase (i) put options on foreign
currencies or (ii) call options on foreign currencies if, after any such
purchase, the aggregate premiums paid for such options would exceed 10% of the
Global Series' total assets. There are no other limitations on the amount of
foreign currencies that may be hedged, and no limitations on the use of assets
to cover options, except that the aggregate value of the obligations underlying
put options will not exceed 50% of the Global Series' assets. Requirements for
qualification as a regulated investment company under the Internal Revenue Code
may limit the Global Series' ability to engage in transactions in options on
foreign currencies. See "Taxes" in the Statement of Additional Information.
Risks of Hedging and Return Enhancement Strategies
Participation in the options or futures markets involves investment risks
and transaction costs to which a Series would not be subject absent the use of
these strategies. A Series, and thus its investors, may lose money through the
unsuccessful use of these strategies. If a Subadviser's prediction of movements
in the direction of the securities markets is inaccurate, the adverse
consequences to the Series managed by such Subadviser may leave such Series in a
worse position than if such strategies were not used. Risks inherent in the use
of options futures include (1) dependence on such Subadviser's ability to
predict correctly movements in the direction of specific securities being hedged
or the movement in stock indices; (2) imperfect correlation between the price of
options and futures and options thereon and movements in the prices of the
securities 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 a Series 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 a Series to sell a portfolio security at a
disadvantageous time, due to the need for such Series to maintain "cover" or to
segregate securities in connection with hedging transactions. See "Investment
Objectives and Policies" and "Taxes" in the Statement of Additional Information.
Forward Foreign Currency Exchange Contracts
A forward foreign currency exchange contract involves an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These contracts are traded in the
interbank market conducted directly between currency traders (typically large
commercial banks) and their customers. A forward contract generally has no
deposit requirements, and no commissions are charged for such trades. See
"Investment Objectives and Policies--Foreign Currency Forward Contracts, Options
and Futures Transactions" in the Statement of Additional Information.
When a Series invests in foreign securities, such Series may enter into
forward contracts in several circumstances to protect the value of its
portfolio. A Series may not use forward contracts to generate income, although
the use of such contracts may incidentally generate income. There is no
limitation on the value of forward contracts into which a Series may enter.
However, a Series' 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 a Series generally arising in connection with the
purchase or sale of its portfolio securities and accruals of interest or
dividends receivable and Series' expenses. Position hedging is the sale of a
foreign currency with respect to portfolio security positions denominated or
quoted in that currency. A Series will not speculate in forward contracts. A
Series may not position hedge with respect to a particular currency for an
amount greater than the aggregate market value (determined at the time of making
any sale of a forward contract) of securities held in its portfolio denominated
or quoted in, or currently convertible into, such currency.
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When a Series enters into a contract for the purchase or sale of a security
denominated in a foreign currency, or when a Series anticipates the receipt in a
foreign currency of dividends or interest payments on a security which it holds,
such Series may desire to "lock in" the U.S. dollar price of the security or the
U.S. dollar equivalent of such dividend or interest payment, as the case may be.
By entering into a forward contract for a fixed amount of dollars for the
purchase or sale of the amount of foreign currency involved in the underlying
transaction, a Series will be able to protect itself against a possible loss
resulting from an adverse change in the relationship between the U.S. dollar and
the subject foreign currency during the period between the date on which the
security is purchased or sold, or on which the dividend or interest payment is
declared, and the date on which such payments are made or received.
Additionally, when the Subadviser believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, a
Series may enter into a forward contract, for a fixed amount of dollars, to sell
the amount of foreign currency approximating the value of some or all of the
portfolio securities of such Series denominated in such foreign currency.
Requirements under the Internal Revenue Code for qualification as a regulated
investment company may limit a Series' ability to engage in transactions in
forward contracts. See "Taxes" in the Statement of Additional Information.
Futures Contracts On Foreign Currencies and Options On Futures Contracts
Each Series may buy and sell futures contracts on foreign currencies and
groups of foreign currencies (futures contracts) such as the European Currency
Unit and related options thereon to protect against the effect of adverse
changes on foreign currencies. A Series will engage in transactions in only
those futures contracts and options thereon that are traded on a commodities
exchange or a board of trade. A "sale" of a futures contract means the
assumption of a contractual obligation to deliver the specified amount of
foreign currency at a specified price in a specified future month. A "purchase"
of a futures contract means the assumption of a contractual obligation to
acquire the currency called for by the contract at a specified price in a
specified future month. At the time a futures contract is purchased or sold, a
Series must allocate cash or securities as a deposit payment (initial margin).
Thereafter, the futures contract is valued daily and the payment of "variation
margin" may be required, resulting in such Series' providing or receiving cash
that reflects any decline or increase in the contract's value, a process known
as "marking to market".
Each Series intends to engage in futures contracts on foreign currencies
and options on these futures transactions as a hedge against changes in the
value of the currencies to which the Series is subject or to which the Series
expects to be subject in connection with future purchases, in accordance with
the rules and regulations of the Commodity Futures Trading Commission (the
CFTC). Each Series also intends to engage in such transactions when they are
economically appropriate for the reduction of risks inherent in its ongoing
management. A Series, however and thus its investors, may lose money through the
unsuccessful use of these strategies.
Options On Foreign Currencies
Each Series may purchase and write put and call options on foreign
currencies traded over-the-counter, on securities exchanges or boards of trade
(foreign and domestic) for hedging purposes in a manner similar to that in which
forward foreign currency exchange contracts and futures contracts on foreign
currencies will be employed. Options on foreign currencies are similar to
options on stock, except that a Series has the right to take or make delivery of
a specified amount of foreign currency, rather than stock.
A Series may purchase and write options to hedge such Series' portfolio
securities denominated in foreign currencies. If there is a decline in the
dollar value of a foreign currency in which a Series' portfolio securities are
denominated, the dollar value of such securities will decline even though the
foreign currency value remains the same. See "Risks and Special Considerations"
below. To hedge against the decline of the foreign currency, a Series may
purchase put options on such foreign currency. If the value of the foreign
currency declines, the gain realized on the put option would offset, in whole or
in part, the adverse effect such decline would have on the value of the
portfolio securities. Alternatively, a Series may write a call option on the
foreign currency. If the value of the foreign currency declines, the option
would not be exercised and the decline in the value of the portfolio securities
denominated in such foreign currency would be offset in part by the premium such
Series received for the option.
If, on the other hand, a Subadviser anticipates purchasing a foreign
security and also anticipates a rise in the value of such foreign currency
(thereby increasing the cost of such security), the Series managed by it may
purchase call options on the foreign currency. The
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purchase of such options could offset, at least partially, the effects of the
adverse movements of the exchange rates. Alternatively, a Series could write a
put option on the currency and, if the exchange rates move as anticipated, the
option would expire unexercised.
Risks of Investing In Foreign Currency, Forward Contracts, Options and Futures
A Series' successful use of forward foreign currency exchange contracts,
options on foreign currencies, futures contracts on foreign currencies and
options on such contracts depends upon the respective Subadviser's ability to
predict the direction of the market and political conditions, which requires
different skills and techniques than predicting changes in the securities
markets generally. For instance, if the value of the securities being hedged
moves in a favorable direction, the advantage to a Series would be wholly or
partially offset by a loss in the forward contracts or futures contracts.
Further, if the value of the securities being hedged does not change, a Series'
net income would be less than if such Series had not hedged since there are
transactional costs associated with the use of these investment practices.
These practices are subject to various additional risks. The correlation
between movements in the price of options and futures contracts and the price of
the currencies being hedged is imperfect. The use of these instruments will
hedge only the currency risks associated with investments in foreign securities,
not market risks. In addition, if a Series purchases these instruments to hedge
against currency advances before it invests in securities denominated in such
currency and the currency market declines, such Series might incur a loss on the
futures contract. A Series' ability to establish and maintain positions will
depend on market liquidity. The ability of a Series to close out a futures
position or an option depends upon a liquid secondary market. There is no
assurance that liquid secondary markets will exist for any particular futures
contract or option at any particular time. See "Risks of Transactions in Stock
Options" and "Risks of Transactions in Futures Contracts" under "Investment
Objectives and Policies" in the Statement of Additional Information.
OTHER INVESTMENT PRACTICES
Repurchase Agreements
A Series may enter into repurchase agreements, whereby the seller of a
security agrees to repurchase that security from such Series at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time such Series' money
is invested in the security. Each Series' repurchase agreements will at all
times be fully collateralized in an amount at least equal to the resale price.
The instruments held as collateral are valued daily, and if the value of the
instruments declines, a Series will require additional collateral. In the event
of bankruptcy or default of certain sellers of repurchase agreements, a Series
could experience costs and delays in liquidating the underlying security held as
collateral and might incur a loss if such collateral declines in value during
this period. Each Series may participate in a joint repurchase account managed
by Prudential Mutual Fund Management LLC.
Segregated and Futures Accounts. Each Series will establish a segregated
account with State Street Bank and Trust Company (State Street or Custodian) in
which it will maintain cash and liquid assets equal in value to its obligations
in respect of potential leveraged transactions including, as applicable, forward
contracts, when-issued and delayed-delivery securities, repurchase and reverse
repurchase agreements, foward rolls, dollar rolls, and written options (unless
otherwise covered). The assets deposited in the segregated account will be
marked-to-market daily. Under a recently adopted SEC rule, each Series may place
and maintain cash, securities and similar investments with a futures commissions
merchant in amounts necessary to effect such Series' transactions in
exchange-traded futures contracts and options thereon, provided certain
conditions are satisfied. Until such rule is effective, and possibly thereafter,
each Series will utilize a segregated account with its Custodian to maintain
cash and liquid assets in connection with its futures contracts and options
thereon.
Forward Rolls, Dollar Rolls and Reverse Repurchase Agreements
International Stock Series may commit up to 20% of the value of its net
assets to investment techniques such as dollar rolls, forward rolls and reverse
repurchase agreements. A forward roll is a transaction in which the
International Stock Series sells a security to a
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financial institution, such as a bank or broker-dealer, and simultaneously
agrees to repurchase the same or similar security from the institution at a
later date at an agreed-upon price. With respect to mortgage-related securities,
such transactions are often called "dollar rolls." In dollar roll transactions,
the mortgage-related securities that are repurchased will bear the same coupon
rate as those sold, but generally will be collateralized by different pools of
mortgages with different prepayment histories than those sold. During the roll
period, the International Stock Series forgoes principal and interest paid on
the securities and is compensated by the difference between the current sales
price and the forward price for the future purchase as well as by interest
earned on the cash proceeds of the initial sale. A "covered roll" is a specific
type of dollar roll for which there is an offsetting cash position or a cash
equivalent security position which matures on or before the forward settlement
date of the dollar roll transaction.
Reverse repurchase agreements involve sales by the International Stock
Series of portfolio securities to a financial institution concurrently with an
agreement by the International Stock Series to repurchase the same securities at
a later date at a fixed price. During the reverse repurchase agreement period,
the International Stock Series continues to receive principal and interest
payments on these securities.
Reverse repurchase agreements, forward rolls and dollar rolls involve the
risk that the market value of the securities purchased by the International
Stock Series with the proceeds of the initial sale may decline below the price
of the securities the International Stock Series has sold but is obligated to
repurchase under the agreement. In the event the buyer of securities under a
reverse repurchase agreement, forward roll or dollar roll files for bankruptcy
or becomes insolvent, the International Stock Series' use of the proceeds from
the agreement may be restricted pending a determination by the other party, or
its trustee or receiver, whether to enforce the International Stock Series'
obligations to repurchase the securities. The staff of the SEC has taken the
position that reverse repurchase agreements, forward rolls and dollar rolls are
to be treated as borrowings for purposes of the percentage limitations discussed
in the section entitled "Borrowings" below. The International Stock Series
expects that under normal conditions most of the borrowings of the International
Stock Series will consist of such investment techniques rather than bank
borrowings. See "Investment Objectives and Policies--Borrowings" in the
Statement of Additional Information.
When-Issued and Delayed-Delivery Securities
Each Series may purchase securities on a when-issued or delayed-delivery
basis. When-issued or delayed-delivery transactions arise when securities are
purchased or sold by a Series with payment and delivery taking place in the
future in order to secure what is considered to be an advantageous price and
yield to such Series at the time of entering into the transaction. When-issued
and delayed-delivery securities involve a risk of loss if the value of the
security to be purchased declines prior to the settlement date or increases in
value and there is a failure to deliver the security.
Liquidity Puts
The International Stock Series may purchase instruments together with the
right to resell the instruments at an agreed-upon price or yield, within a
specified period prior to the maturity date of the instruments. This instrument
is commonly known as a "liquidity put" or a "tender option bond".
Illiquid Securities
The Global Series may hold up to 5%, and the International Stock Series may
hold up to 15%, of its net assets in illiquid securities. Illiquid securities
include repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable in securities markets
either within or outside of the United States. Restricted securities eligible
for resale pursuant to Rule 144A under the Securities Act of 1933, as amended
(the Securities Act), and privately placed commercial paper that have a readily
available market are not considered illiquid for purposes of this limitation. A
Series' investment in Rule 144A securities could have the effect of increasing
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing Rule 144A securities. The Series' Subadvisers
will monitor the liquidity of such restricted securities under the supervision
of the Manager and the Board of Directors. Repurchase agreements subject to
demand are deemed to have a maturity equal to the applicable notice period.
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The staff of the SEC has taken the position, which each Series intends to
follow, that purchased OTC options and the assets used as "cover" for written
OTC options are illiquid securities unless the Series and the counterparty have
provided for the Series, at the Series' election, to unwind the over-the-counter
option. The exercise of such an option ordinarily would involve the payment by
the Series of an amount designed to reflect the counterparty's economic loss
from an early termination, but does allow the Series to treat the assets used as
"cover" as "liquid". The Series will also treat non-U.S. Government IOs and POs
as illiquid so long as the staff of the SEC maintains its position that such
securities are illiquid. See "Investment Objectives and Policies--Illiquid
Securities" in the Statement of Additional Information.
Securities Lending
Each Series may lend its portfolio securities to brokers or dealers, banks,
or other recognized institutional borrowers of securities, provided that the
borrower at all times maintains collateral in an amount equal to at least 100%
of the market value of the securities loaned. During the time a Series'
securities are on loan, the borrower will pay such Series an amount equivalent
to any dividend or interest paid on such securities and such Series may invest
any cash collateral it receives and earn additional income, or it may receive an
agreed-upon amount of interest income from the borrower. In these transactions,
there are risks of delay in recovery and in some cases even loss of rights in
the collateral should the borrower of the securities fail financially. Each
Series may lend up to 30% of the value of its total assets. Loans are subject to
termination at the option of a Series or the borrower. A Series may pay
reasonable finders', administrative and custodial fees in connection with a loan
of its securities and may share the interest earned on collateral with the
borrower.
Borrowings
Each Series may borrow an amount equal to no more than 20% of the value of
its total assets to take advantage of investment opportunities, for temporary,
extraordinary, or emergency purposes or for the clearance of transactions and
may pledge up to 20% of the value of its total assets to secure such borrowings.
Portfolio Turnover
Each Series anticipates that its annual portfolio turnover rate will not
exceed 100% in normal circumstances.
RISKS AND SPECIAL CONSIDERATIONS
Investing in securities of foreign companies and countries involves certain
risks and considerations which are not typically associated with investing in
U.S. Government securities and those of domestic companies. Foreign companies
are not generally subject to uniform accounting, auditing and financial
standards and requirements comparable to those applicable to U.S. companies.
There may also be less government supervision and regulation of foreign
securities exchanges, brokers and listed companies than exists in the United
States. Dividends paid by foreign issuers may be subject to withholding and
other foreign taxes which may decrease the net return on such investments as
compared to dividends and interest paid to each Series by the U.S. Government or
by domestic companies. In addition, there may be the possibility of
expropriations, confiscatory taxation, political, economic or social instability
or diplomatic developments which could affect assets of a Series held in foreign
countries.
There may be less publicly available information about foreign companies
and governments compared to reports and ratings published about U.S. companies.
Foreign securities markets have substantially less volume than the New York
Stock Exchange and securities of some foreign companies are less liquid and more
volatile than securities of comparable U.S. companies. Brokerage commissions and
other transaction costs on foreign securities exchanges are generally higher
than in the United States.
Shareholders should be aware that 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, described above, may be greater with respect
to investments in developing countries.
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INVESTMENT RESTRICTIONS
Each Series is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Such fundamental policies
cannot be changed without the approval of the holders of a majority of the
relevant Series' outstanding voting securities. See "Investment Restrictions" in
the Statement of Additional Information.
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HOW THE FUND IS MANAGED
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The Fund has a Board of Directors which, in addition to overseeing the
actions of the Series' Manager, Subadvisers and Distributor, as set forth below,
decides upon matters of general policy. The Series' Manager conducts and
supervises the daily business operations of the Series. Each Series' Subadviser
furnishes daily investment advisory services.
MANAGER
Prudential Mutual Fund Management LLC (PMF or the Manager), Gateway Center
Three, 100 Mulberry Street, Newark New Jersey 07102-4077, is the Manager of each
Series and is compensated for its services at an annual rate of .75 of 1% of
Global Series average daily net assets and 1% of the International Stock Series'
average daily net assets. PMF is organized in New York as a limited liability
company. It is the successor of Prudential Mutual Fund Management, Inc., which
transferred its assets to PMF in September 1996. See "Manager" in the Statement
of Additional Information.
As of November 30, 1996, PMF served as the manager of 40 open-end
investment companies, constituting all of the Prudential Mutual Funds, and as
manager or administrator of 22 closed-end investment companies, with aggregate
assets of approximately $53.4 billion.
PMF is a wholly-owned subsidiary of The Prudential Insurance Company of
America (Prudential), a major diversified insurance and financial services
company.
Under the Management Agreement with the Fund, PMF manages the investment
operations of the Fund and also administers the corporate affairs. See "Manager"
in the Statement of Additional Information.
SUBADVISERS
Global Series: Under a Subadvisory Agreement between PMF and The Prudential
Investment Corporation (PIC or a Subadviser), PIC furnishes investment advisory
services in connection with the management of the Fund and is reimbursed by PMF
for its reasonable costs and expenses incurred in providing such services. Under
the Management Agreement, PMF continues to have responsibility for all
investment advisory services and supervises PIC's performance of such services.
PIC is an indirect, wholly-owned subsidiary of Prudential.
The current portfolio manager of Global Series is Daniel J. Duane, a
Managing Director and Chief Investment Officer for Global Equity Investments of
Prudential Mutual Fund Investment Management, a unit of (PIC). Mr. Duane has
responsibility for the day-to-day management of the Global Series' portfolio.
Mr. Duane has been employed by PIC as a portfolio manager since 1990. He was
formerly with First Investors Asset Management from 1986 to 1990 as senior
portfolio manager and head of global equity investments. Mr. Duane is a
Chartered Financial Analyst. Mr. Duane also serves as the portfolio manager of
the Prudential Series Fund Global Equity Portfolio, Prudential Europe Growth
Fund, Inc. and Prudential Pacific Growth Fund, Inc.
Consistent with the investment objectives and policies of Global Series,
Mr. Duane evaluates the economic climate in various countries and focuses on
growth-oriented global equity investments. He seeks to identify long-term themes
and changing economic conditions that, in his opinion, will lead to earnings
growth. His portfolio management style can be referred to as "bottom up" in that
his primary focus is on individual stocks. He evaluates historical business
trends in the United States when looking for long-term
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investment opportunities abroad (the "rear view mirror" analysis). He generally
maintains exposure to major world stock markets and, under normal market
conditions, seeks to keep the portfolios fully invested. Mr. Duane consults with
a team of regional equity analysts who provide research on existing holdings of
Global Series and on potential acquisitions.
International Stock Series: Under a Subadvisory Agreement between PMF and
Mercator Asset Management, L.P. (Mercator or, together with PIC, the
Subadvisers, and individually, a subadviser), Mercator furnishes investment
advisory services in connection with the management of the Series and is
compensated by PMF for its services at an annual rate of .75 of 1% of
International Stock Series' average daily net assets up to and including $50
million, .60 of 1% of International Stock Series' average daily net assets in
excess of $50 million and up to and including $300 million and .45 of 1% of
International Stock Series' average daily net assets in excess of $300 million.
Pursuant to a subadvisory agreement between PMF and PIC, PIC provides investment
advisory services to the International Stock Series with respect to (i) the
management of short-term assets, including cash, money market instruments and
repurchase agreements and (ii) the lending of portfolio securities in connection
with the management of the International Stock Series. For these services, PMF
will reimburse PIC for reasonable costs and expenses incurred by PIC determined
in a manner acceptable to PMF.
Under the International Stock Series' Subadvisory Agreement, Mercator,
subject to the supervision of PMF, is responsible for managing the assets of
International Stock Series in accordance with its investment objective,
investment program and policies. Mercator determines what securities and other
instruments are purchased and sold for International Stock Series and is
responsible for obtaining and evaluating financial data relevant to
International Stock Series.
Peter F. Spano is responsible for the day-to-day management of the
portfolio of the Series. Mr. Spano has managed the portfolio of the
International Stock Series since its inception in November 1992 and has been
employed as a portfolio manager with Mercator since its founding in 1984.
Mercator is a registered investment adviser and a Delaware limited
partnership with approximately $2.0 billion in assets under management as of
December 31, 1996. Mercator's general partners are four Florida corporations:
JZT Corp., PXS Corp., KXB Corp. and MXW Corp. Mercator's limited partner is The
Prudential Asset Management Company, Inc., a wholly-owned indirect subsidiary of
Prudential. John G. Thompson, Peter F. Spano, Kenneth B. Brown, and Michael A.
Williams are the sole shareholders of JZT Corp., PXS Corp., KXB Corp. and MXW
Corp., respectively. The address of each of the general partners is 2400 East
Commercial Blvd., Suite 810, Fort Lauderdale, Florida 33308. Mercator serves as
adviser to various institutional investors and mutual funds.
DISTRIBUTOR
Prudential Securities Incorporated (Prudential Securities or PSI), One
Seaport Plaza, New York, New York 10292, is a corporation organized under the
laws of the State of Delaware and serves as the distributor of theClass A, Class
B, Class C and Class Z shares of the Fund. It is an indirect, wholly-owned
subsidiary of Prudential.
Under separate Distribution and Service Plans (the Class A Plan, the Class
B Plan and the Class C Plan, collectively, the Plans) adopted on behalf of each
Series under Rule 12b-1 under the Investment Company Act and a distribution
agreement (the Distribution Agreement), Prudential Securities (also, the
Distributor) incurs the expenses of distributing the Fund's Class A, Class B and
Class C shares. Prudential Securities also incurs the expenses of distributing
the Fund's Class Z shares under the Distribution Agreement, none of which is
reimbursed or paid for by the Fund. These expenses include commissions and
account servicing fees paid to, or on account of, financial advisers of
Prudential Securities and representatives of Pruco Securities Corporation
(Prusec), an affiliated broker-dealer, commissions and account servicing fees
paid to, or on account of, other broker-dealers or financial institutions (other
than national banks) which have entered into agreements with the Distributor,
advertising expenses, the cost of printing and mailing prospectuses to potential
investors and indirect and overhead costs of Prudential Securities and Prusec
associated with the sale of Fund shares, including lease, utility,
communications and sales promotion expenses.
Under the Plans, each Series 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
23
<PAGE>
service fees, a Series will not be obligated to pay any additional expenses. If
the Distributor's expenses are less than such distribution and service fees, it
will retain its full fees and realize a profit.
Under the Class A Plan, each Series may pay Prudential Securities for its
distribution-related activities with respect to Class A shares at an annual rate
of up to .30 of 1% of the average daily net assets of the Class A shares. The
Class A Plan provides that (i) up to .25 of 1% of the average daily net assets
of the Class A shares may be used to pay for personal service and/or the
maintenance of shareholder accounts (service fee) and (ii) total distribution
fees (including the service fee of up to .25 of 1%) may not exceed .30 of 1% of
the average daily net assets of the Class A shares.
Under the Class B Plans, Global Series pays Prudential Securities for its
distribution-related activities with respect to Class B shares at an annual rate
of .75 of 1% of average daily net assets of the Class B shares up to the level
of the average daily net assets of the Global Series as of February 26, 1986,
plus 1% of average daily net assets of the Class B shares in excess of such
level, and International Stock Series pays Prudential Securities for its
distribution-related activities with respect to Class B shares at an annual rate
of 1% of average daily net assets of the Class B shares. Under the Class C Plan,
each Series pays Prudential Securities for its distribution-related activities
with respect to the Class C shares at an annual rate of 1% of average daily net
assets of Class C shares. The Global Series Class B Plan provides for the
payment to Prudential Securities of (i) an asset-based sales charge of .50 of 1%
of the average daily net assets of the Class B shares of such Series up to the
level of the average daily net assets of such Series on February 28, 1996, plus
.75 of 1% of the average daily net assets of the Class B shares of such Series
in excess of such level and (ii) a service fee of .25 of 1% of the average daily
net assets of the Class B shares of such Series. International Stock Series'
Class B Plan and each Series, Class C Plans provide for the payment to
Prudential Securities of (i) an asset-based sales charge of .75 of 1% of the
average daily net assets of the Class B and Class C shares, respectively, and
(ii) a service fee of .25 of 1% of the average daily net assets of the Class B
and Class C shares, respectively. The service fee is used to pay for personal
service and/or the maintenance of shareholders' accounts. Prudential Securities
also receives contingent deferred sales charges from certain redeeming
shareholders. See "Shareholder Guide--How to Sell Your Shares--Contingent
Deferred Sales Charges."
Distribution expenses attributable to the sale of Class A, Class B or Class
C shares of a Series will be allocated to each class based upon the ratio of
sales of each class to the sales of Class A, Class B and Class C shares of such
Series other than expenses allocable to a particular class. The distribution fee
and sales charge of one class will not be used to subsidize the sale of another
class.
Each Plan provides that it shall continue in effect from year to year
provided that a majority of the Board of Directors of the Fund, including a
majority of the Directors who are not "interested persons" of the Fund (as
defined in the Investment Company Act) and who have no direct or indirect
financial interest in the operation of the Plan or any agreement related to the
Plan (the Rule 12b-1 Directors), vote annually to continue the Plan. Each Plan
may be terminated at any time by vote of a majority of the Rule 12b-1 Directors
or of a majority of the outstanding shares of the applicable class of the Series
to which the Plan relates. A Series will not be obligated to pay distribution
and service fees incurred under any Plan if it is terminated or not continued.
In addition to distribution and service fees paid by each Series under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers (including Prudential
Securities) and other persons which distribute shares of the Fund (including
Class Z shares). Such payment may be calculated by reference to the net asset
value of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. governing maximum sales charges. See "Distributor" in
the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the entry of an SEC Administrative Order
which stated that PSI's conduct violated the federal securities laws, directed
PSI to cease and desist from violating the federal securities laws, pay civil
penalties, and adopt certain remedial measures to address the violations.
24
<PAGE>
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition
of a $10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action.
In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling 1-800-225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
each Series' assets which are held by State Street Bank & Trust Company, an
independent custodian, are separate and distinct from PSI.
FEE WAIVERS AND SUBSIDY
PMF 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 a Series. Fee waivers
and expense subsidies will increase a Series' total return.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant
for the Series provided that the commissions, fees or other remuneration it
receives are fair and reasonable. See "Portfolio Transactions and Brokerage" in
the Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and, in that capacity, maintains certain financial and accounting books and
records pursuant to an agreement with the Fund. Its mailing address is P.O. Box
1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services LLC, (PMFS), Raritan Plaza One, Edison,
New Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and in
those capacities maintains certain books and records for the Series. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
- --------------------------------------------------------------------------------
HOW THE FUND VALUES ITS SHARES
- --------------------------------------------------------------------------------
Each Series' 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. For
valuation purposes, quotations of foreign securities in a foreign currency are
converted to U.S. dollar equivalents. The Board of Directors of the Fund has
fixed the specific time of day for the computation of each Series' net asset
value to be as of 4:15 P.M., New York time.
25
<PAGE>
Portfolio securities are valued based on market quotations or, if not
readily available, at fair value as determined in good faith under procedures
established by the Funds' Board of Directors. See "Net Asset Value" in the
Statement of Additional Information.
Each Series will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by it or days on which changes in the value
of its portfolio securities do not materially affect the NAV. The New York Stock
Exchange is closed on the following holidays: New Year's Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. See "Net Asset Value" in the Statement of Additional Information.
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
NAVs and dividends. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A shares as a result of the larger
distribution-related fee to which Class B and Class C shares are subject. The
NAV of Class Z shares of a Series will generally be higher than the NAV of the
other three classes of such Series because Class Z shares are not subject to any
distribution and/or service fees. It is expected, however, that the NAV of each
class of a Series will tend to converge immediately after the recording of
dividends of such Series, if any, which will differ by approximately the amount
of the distribution and/or service fee expense accrual differential among the
classes of such Series.
- --------------------------------------------------------------------------------
HOW THE FUND CALCULATES PERFORMANCE
- --------------------------------------------------------------------------------
From time to time a Series may advertise its total return (including
"average annual" total return and "aggregate" total return) and yield in
advertisements or sales literature. Total return and yield are calculated
separately for Class A, Class B, Class C and Class Z shares. These figures are
based on historical earnings and are not intended to indicate future
performance. The "total return" shows how much an investment in a Series would
have increased (decreased) over a specified period of time (i.e., one, five or
ten years or since inception of such Series) assuming that all distributions and
dividends by such Series were reinvested on the reinvestment dates during the
period and less all recurring fees. The "aggregate" total return reflects actual
performance over a stated period of time. "Average annual" total return is a
hypothetical rate of return that, if achieved annually, would have produced the
same aggregate total return if performance had been constant over the entire
period. "Average annual" total return smoothes out variations in performance and
takes into account any applicable initial or contingent deferred sales charges.
Neither "average annual" total return nor "aggregate" total return takes into
account any federal or state income taxes which may be payable upon redemption.
The "yield" refers to the income generated by an investment in a Series over a
one-month or 30-day period. This income is then "annualized"; that is, the
amount of income generated by the investment during that 30-day period is
assumed to be generated each 30-day period for twelve periods and is shown as a
percentage of the investment. The income earned on the investment is also
assumed to be reinvested at the end of the sixth 30-day period. A Series may
also include comparative performance information in advertising or marketing
such Series' shares. Such performance information may include data from Lipper
Analytical Services, Inc., Morningstar Publications, Inc., other industry
publications, business periodicals, and market indices. See "Performance
Information" in the Statement of Additional Information. Further performance
information is contained in each Series' annual and semi-annual reports to
shareholders, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
- --------------------------------------------------------------------------------
TAXES, DIVIDENDS AND DISTRIBUTIONS
- --------------------------------------------------------------------------------
Taxation of a Series
The Fund has elected to qualify and intends to remain qualified as a
regulated investment company under the Internal Revenue Code. Accordingly, each
Series will not be subject to federal income taxes on its net investment income
and capital gains, if any, that it distributes to its shareholders. See "Taxes"
in the Statement of Additional Information.
26
<PAGE>
Each Series may, from time to time, invest in Passive Foreign Investment
Companies (PFICs). In general, PFICs are foreign corporations that own mostly
passive assets or that derive 75% or more of their income from passive sources.
A Series' investment in PFICs may subject such Series to federal income taxes
and a charge in the nature of interest with respect to certain gains and income
realized by such Series. Under proposed Treasury regulations, a Series would be
able to avoid such taxes and interest by electing to "mark to market" its
investments in PFICs, i.e., treat them as sold for fair market value at the end
of the year. See "Taxes" in the Statement of Additional Information."
Under the Internal Revenue Code, special rules apply to the treatment of
certain options, futures and forward contracts (Section 1256 contracts). At the
end of each year, such investments held by each Series will be required to be
"marked to market" for federal income tax purposes, i.e., treated as having been
sold at market value. Sixty percent of any capital gain or loss recognized on
these "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. See "Taxes" in the Statement of Additional Information.
Taxation of Shareholders
Any dividends out of net taxable investment income, together with
distributions of net short-term capital gains (i.e., the excess of net
short-term capital gains over net long-term capital losses) distributed to
shareholders, will be taxable as ordinary income to the shareholder whether or
not reinvested. Any net long-term capital gains (i.e., the excess of net
long-term capital gains over net short-term capital losses) distributed to
shareholders will be taxable as such to the shareholders, whether or not
reinvested and regardless of the length of time a shareholder has owned his or
her shares. The maximum long-term capital gains rate for individuals is 28%. The
maximum long-term capital gains rate for corporate shareholders is currently the
same as the maximum tax rate for ordinary income.
Dividends paid by a Series will be eligible for the 70% dividends-received
deduction for corporate shareholders to the extent that such Series' income is
derived from certain dividends received from domestic corporations. Capital
gains distributions are not eligible for the 70% dividends-received deduction.
Under legislation proposed by the Clinton Administration, the dividends-received
deduction allowed to corporate shareholders would be reduced from 70% to 50% of
eligible dividends and would be subject to additional limitations. It is
currently uncertain whether, when or in what form these proposals or other
changes to the dividends-received deduction will be enacted into law.
Any loss realized on a sale, redemption or exchange of shares of the Fund
by a shareholder will be disallowed to the extent the shares are replaced within
a 61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
A shareholder who acquires shares of a Series and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to take
into account certain sales charges incurred in acquiring such shares for
purposes of calculating gain or loss realized upon a sale or exchange of shares
of such Series.
Distributions by a Series to a shareholder that is a qualified retirement
plan would generally not be taxable to participants in the plan. Distributions
from a qualified retirement plan (or non-qualified arrangement) to a participant
or beneficiary are subject to special rules. These rules vary greatly with
individual situations, and potential investors are therefore urged to consult
with their own tax advisers.
The Fund has obtained opinions of counsel to the effect that neither (i)
the conversion of Class B shares into Class A shares nor (ii) the exchange of
Class B or Class C shares for Class A or Class Z shares or the exchange of Class
A shares for Class Z shares constitutes a taxable event for federal income tax
purposes. However, such opinions are not binding on the Internal Revenue
Service.
Shareholders are advised to consult their own tax advisers regarding
specific questions as to federal, state or local taxes. See "Taxes" in the
Statement of Additional Information.
Withholding Taxes
Under U.S. Treasury Regulations, each Series is required to withhold and
remit to the U.S. Treasury 31% of dividend, capital gain income and redemption
proceeds on the accounts of those shareholders who fail to furnish their tax
identification numbers on IRS Form W-9 (or IRS Form W-8 in the case of certain
foreign shareholders) with the required certifications regarding the
shareholder's status under the federal income tax law. Dividends of net
investment income and net short-term capital gains to a foreign shareholder will
generally be subject to U.S. withholding tax at the rate of 30% (or lower treaty
rate).
Investment income received by a Series from sources within foreign
countries may be subject to foreign income taxes withheld at source. If a Series
should have more than 50% of the value of its assets invested in securities of
foreign corporations at the close of its
27
<PAGE>
taxable year, which is each Series' present intention, such Series may elect to
permit its shareholders to take, either as a credit or as a deduction, their
proportionate share of the foreign income taxes paid, subject to generally
applicable limitations.
Dividends and Distributions
Each Series expects to distribute annually to its shareholders all of its
net investment income and any net capital gains. Dividends paid by a Series with
respect to each class of its shares, to the extent any dividends are paid, will
be calculated in the same manner, at the same time, on the same day and will be
in the same amount except that each class will bear its own distribution
charges, generally resulting in lower dividends for Class B and Class C shares.
Distribution of net capital gains, if any, will be paid in the same amount for
each class of shares. See "How the Fund Values its Shares."
Dividends and distributions will be paid in additional shares of the
relevant Series based on the NAV of each class of such Series on the record
date, or such other date as the Board of Directors may determine, unless the
shareholder elects in writing not less than five business days prior to the
record date to receive such dividend and distributions in cash. Such election
should be submitted to Prudential Mutual Fund Services, LLC, Attention: Account
Maintenance, P.O. Box 15015, New Brunswick, New Jersey 08906-5015. The Fund will
notify each shareholder after the close of the Fund's taxable year both of the
dollar amount and the taxable status of that year's dividends and distributions
on a per share basis. If you hold shares through Prudential Securities, you
should contact your financial adviser to elect to receive dividends and
distributions in cash.
When a Series goes "ex-dividend," the NAV of each class of such Series is
reduced by the amount of the dividend or distribution allocable to each class.
If you buy shares just prior to the ex-dividend date (which generally occurs
four business days prior to the record date), the price you pay will include the
dividend or distribution and a portion of your investment will be returned to
you as a taxable distribution. You should, therefore, consider the timing of
dividends and distributions when making your purchases.
- --------------------------------------------------------------------------------
GENERAL INFORMATION
- --------------------------------------------------------------------------------
DESCRIPTION OF COMMON STOCK
Prudential World Fund, Inc. (the Fund) was incorporated in Maryland on
February 28, 1984. The Fund is authorized to issue 1 billion shares of common
stock, $.01 par value per share, which are currently divided into two portfolios
or series, the Global Series and the International Stock Series, each of which
consists of 500 million authorized shares. The shares of each Series are divided
into four classes, designated Class A, Class B, Class C and Class Z common
stock, each consisting of 125 million authorized shares. Each class of common
stock of each Series represents an interest in the same assets of the Series to
which such shares relate and is identical in all respects except that (i) each
class (with the exception of Class Z shares) is subject to different sales
charges and distribution and/or service fees), which may affect performance,
(ii) each class has exclusive voting rights on any matter submitted to
shareholders that relates solely to its arrangements and has separate voting
rights on any matter submitted to shareholders in which the interests of one
class differ from the interests of any other class, (iii) each class has a
different exchange privilege, (iv) only Class B shares have a conversion feature
and (v) Class Z shares are offered exclusively for sale to a limited group of
investors. In accordance with the Fund's Articles of Incorporation, the Board of
Directors may authorize the creation of additional series and classes within
such series, with such preferences, privileges, limitations and voting and
dividend rights as the Board of Directors may determine.
The Board of Directors may increase or decrease the number of authorized
shares without the approval of shareholders. Shares of each Series, when issued,
are fully paid, nonassessable, fully transferable and redeemable at the option
of the holder. Shares are also redeemable at the option of a Series under
certain circumstances as described under "Shareholder Guide--How to Sell Your
Shares." Each share of each class of common stock of a Series is equal as to
earnings, assets and voting privileges, except as noted above, and each class
(with the exception of Class Z shares which are not subject to any distribution
or service fees) bears the expenses related to the
28
<PAGE>
distribution of its shares. Except for the conversion feature applicable to the
Class B shares, there are no conversion, preemptive or other subscription
rights. In the event of liquidation, each share of common stock of a Series is
entitled to its portion of all of such Series' assets after all debt and
expenses of such Series have been paid. Since Class B and Class C shares of a
Series generally bear higher distribution expenses than Class A shares of such
Series, the liquidation proceeds to shareholders of those classes are likely to
be lower than to Class A shareholders of such Series and to Class Z shareholders
of such Series 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 annual meetings
of shareholders unless, for example, the election of Directors is required to be
acted on by shareholders under the Investment Company Act. Shareholders have
certain rights, including the right to call a meeting upon a vote of 10% of the
Fund's outstanding shares for the purpose of voting on the removal of one or
more Directors or to transact any other business. ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which
has been incorporated by reference herein, does not contain all the information
set forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act. Copies of the Registration Statement may be obtained at a
reasonable charge from the SEC or may be examined, without charge, at the office
of the SEC in Washington, D.C.
- --------------------------------------------------------------------------------
SHAREHOLDER GUIDE
- --------------------------------------------------------------------------------
HOW TO BUY SHARES OF THE FUND
You may purchase shares of either Series through Prudential Securities,
Prusec or directly from the Fund through its Transfer Agent, Prudential Mutual
Fund Services LLC (PMFS or the Transfer Agent), Attention: Investment Services,
P.O. Box 15020, New Brunswick, New Jersey 08906-5020. Participants in programs
sponsored by Prudential Retirement Services should contact their client
representative for more information about Class Z shares. The purchase price per
share is the NAV next determined following receipt of an order by the Transfer
Agent or Prudential Securities plus a sales charge which, at your option, may be
imposed either (i) at the time of purchase (Class A shares) or (ii) on a
deferred basis (Class B or Class C shares). Class Z shares are offered to a
limited group of investors at net asset value without any sales charge. See
"Alternative Purchase Plan" below. See also "How the Fund Values its Shares."
Application forms can be obtained from PMFS, Prudential Securities or
Prusec. If a stock certificate is desired, it must be requested in writing for
each transaction. Certificates are issued only for full shares. Shareholders who
hold their shares through Prudential Securities will not receive stock
certificates.
The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares, except that the minimum initial investment
for Class C shares may be waived from time to time. There is no minimum initial
investment requirement for investors who qualify to purchase Class Z shares. The
minimum subsequent investment is $100 for all classes, except for Class Z shares
for which there is no such minimum. All minimum investment requirements are
waived for certain retirement and employee savings plans or custodial accounts
for the benefit of minors and for purchases made in connection with the "Best
Minds" program sponsored by the Distributor. For purchases through the Automatic
Savings Accumulation Plan, the minimum initial and subsequent investment is $50.
See "Shareholder Services."
Each Series reserves the right to reject any purchase order (including an
exchange into a Series) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares."
Your dealer is responsible for forwarding payment promptly to a Series. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the investment.
29
<PAGE>
Transactions in Series' shares may be subject to postage and handling
charges imposed by your dealer.
Purchase By Wire. For an initial purchase of shares of a Series by wire,
you must first telephone PMFS at (800) 225-1852 (toll-free) to receive an
account number. The following information will be requested: your name, address,
tax identification number, class election, dividend distribution election,
amount being wired and wiring bank. Instructions should then be given by you to
your bank to transfer funds by wire to State Street Bank and Trust Company
(State Street), Boston, Massachusetts, Custody and Shareholder Services
Division, Attention: Prudential World Fund, Inc. (Global Series or International
Stock Series, as the case may be), specifying on the wire the account number
assigned by PMFS and your name and identifying the sales charge alternative
(Class A, Class B, Class C or Class Z shares).
If you arrange for receipt by State Street of federal funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Series as of that day. See "Net Asset Value" in the
Statement of Additional Information.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential World Fund, Inc.,
(Global Series or International Stock Series) Class A, Class B, Class C or Class
Z shares and your name and individual account number. It is not necessary to
call PMFS to make subsequent purchase orders utilizing federal funds. The
minimum amount which may be invested by wire is $1,000.
ALTERNATIVE PURCHASE PLAN
Each Series offers four classes of shares (Class A, Class B, Class C and
Class Z shares) which allow you to choose the most beneficial sales charge
structure for your individual circumstances given the amount of the purchase,
the length of time you expect to hold the shares and other relevant
circumstances (Alternative Purchase Plan).
<TABLE>
<CAPTION>
Annual 12b-1 Fees
(as a % of average daily
Sales Charge net assets) Other Information
-------------------------------------- -------------------------- ---------------------------------------
<S> <C> <C> <C>
Class A Maximum initial sales charge of 5% of .30 of 1% (Currently Initial sales charge waived or reduced
the public offering price being charged at a rate for certain purchases
of .25 of 1%)
Class B Maximum contingent deferred sales 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser of approximately seven years after
the amount invested or the redemption purchase
proceeds; declines to zero after six
years
Class C Maximum CDSC of 1% of the lesser 1% Shares do not convert to another class
of the amount invested or the redemption proceeds on redemptions
made within one year of purchase
Class Z None None Sold to a limited group of investors
</TABLE>
Each class of shares of a Series represents an interest in the same
portfolio of investments of such Series and is identical in all respects except
that (i) each class is subject to different sales charges and distribution
and/or service fees (except for Class Z shares, which are not subject to any
sales charge or distribution and/or service fee), which may affect performance,
(ii) each class has exclusive voting rights on any matter submitted to
shareholders that relates solely to its arrangements and has separate voting
rights on any matter submitted to shareholders in which the interests of one
class differ from the interest of any other class, (iii) each class has a
different exchange privilege, (iv) only Class B shares have a conversion feature
and (v) Class Z shares are offered exclusively for sale to a limited group of
investors. See "How to Exchange Your Shares" below. The income attributable to
each class and the dividends payable on the shares of
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each class will be reduced by the amount of the distribution fee (if any) of
each class. Class B and Class C shares bear the expenses of a higher
distribution fee which will generally cause them to have higher expense ratios
and to pay lower dividends than the Class A and Class Z shares.
Financial advisers and other sales agents who sell shares of a Series will
receive different compensation for selling Class A, Class B, Class C and Class Z
shares and will generally receive more compensation initially for selling Class
A and Class B shares than for selling Class C or Class Z shares.
In selecting a purchase alternative, you should consider, among other
things, (1) the length of time you expect to hold your investment, (2) the
amount of any applicable sales charge (whether imposed at the time of purchase
or redemption) and distribution-related fees, as noted above, (3) whether you
qualify for any reduction or waiver of any applicable sales charge, (4) the
various exchange privileges among the different classes of shares (see "How to
Exchange Your Shares" below) and (5) that Class B shares automatically convert
to Class A shares approximately seven years after purchase (see "Conversion
Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Series:
If you intend to hold your investment in a Series for less than 7 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 5% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for 7 years or more and do not
qualify for a reduced sales charge on Class A shares, since Class B shares
convert to Class A shares approximately 7 years after purchase and because all
of your money would be invested initially in the case of Class B shares, you
should consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B and Class C shares for the higher
cumulative annual distribution-related fee on those shares to exceed the initial
sales charge plus cumulative annual distribution-related fee on Class A shares.
This does not take into account the time value of money, which further reduces
the impact of the higher Class B or Class C distribution-related fee on the
investment, fluctuations in net asset value, the effect of the return on the
investment over this period of time or redemptions when the CDSC is applicable.
All purchases of $1 million or more, either as part of a single investment
or under Rights of Accumulation or Letters of Intent, must be for Class A shares
unless the purchaser is eligible to purchase Class Z shares. See "Reduction and
Waiver of Initial Sales Charges" and "Class Z Shares" below.
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Class A Shares
The offering price of Class A shares for investors choosing the initial
sales charge alternative is the next determined NAV plus a sales charge
(expressed as a percentage of the offering price and of the amount invested) as
shown in the following table:
Sales Charge As Sales Charge As Dealer Concession
Percentage of Percentage of Net as Percentage of
Amount of Purchase Offering Price Amount Invested Offering Price
-------------------- --------------- ----------------- -----------------
$0 to $24,999 5.00% 5.26% 4.75%
$25,000 to $49,999 4.50 4.71 4.25
$50,000 to $99,999 4.00 4.17 3.75
$100,000 to $249,999 3.25 3.36 3.00
$250,000 to $499,999 2.50 2.56 2.40
$500,000 to $999,999 2.00 2.04 1.90
$1,000,000 and above None None None
The Distributor may reallow the entire initial sales charge to dealers.
Selling dealers may be deemed to be underwriters, as that term is defined in the
Securities Act.
In connection with the sale of Class A shares at NAV (without payment of an
initial sales charge), the Manager, the Distributor or one of their affiliates
will pay dealers, financial advisers and other persons which distribute shares a
finders' fee based on a percentage of the net asset value of shares sold by such
persons.
Reduction and Waiver of Initial Sales Charges. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Series and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Series
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.
Benefit Plans. Class A shares may be purchased at NAV, without payment of
an initial sales charge, by pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the Internal
Revenue Code (collectively, Benefit Plans), provided that the Benefit Plan has
existing assets of at least $1 million invested in shares of Prudential Mutual
Funds (excluding money market funds other than those acquired pursuant to the
exchange privilege) or 250 eligible employees or participants. In the case of
Benefit Plans whose accounts are held directly with the Transfer Agent or
Prudential Securities and for which the Transfer Agent or Prudential Securities
does individual account recordkeeping (Direct Account Benefit Plans) and
Benefit Plans sponsored by PSI or its subsidiaries (PSI or Subsidiary Prototype
Benefit Plans), Class A shares may be purchased at NAV by participants who are
repaying loans made from such plans to the participant.
PruArray and SmartPath Plans. Class A shares may be purchased at NAV by
certain savings, retirement and deferred compensation plans, qualified or
non-qualified under the Internal Revenue Code, including pension,
profit-sharing, stock-bonus or other employee benefit plans under Section 401 of
the Internal Revenue Code and deferred compensation and annuity plans under
Sections 457 and 403(b)(7) of the Internal Revenue Code that participate in the
Prudential's PruArray and SmartPath Programs (benefit plan recordkeeping
services) (hereafter referred to as a PruArray or SmartPath Plan); provided that
the plan has at least $1 million in existing assets or 250 eligible employees or
participants. The term "existing assets" for this purpose includes stock issued
by a PruArray or SmartPath Plan sponsor, shares of non-money market Prudential
Mutual Funds and shares of certain unaffiliated non-money market mutual funds
that participate in the PruArray or SmartPath Program (Participating Funds).
"Existing assets" also include shares of money market funds acquired by exchange
from a Participating Fund, monies invested in The Guaranteed Interest Account, a
group annuity insurance product issued by Prudential, and units of The Stable
Value Fund, an unaffiliated bank collective fund. Class A shares may also be
purchased at NAV by plans that have monies invested in The Guaranteed Interest
Account (GIA) and The Stable Value Fund (SVF), provided (i) the purchase is made
with the proceeds of a redemption from either GIA or SVF and (ii) Class A shars
are an investment option of the plan.
PruArray Association Benefit Plans. Class A shares are also offered at net
asset value to Benefit Plans or non-qualified plans sponsored by employers which
are members of a common trade, professional or membership association
("Association") that participate in the PruArray Program provided that the
Association enters into a written agreement with Prudential. Such Benefit Plans
or non-qualified plans may purchase Class A shares at net asset value without
regard to the assets or number of participants in the
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individual employer's qualified Plan(s) or non-qualified plans so long as the
employers in the Association (i) have retirement pIan assets in the aggregate of
at least $1 million or 250 participants in the aggregate and (ii) maintain their
accounts with the Fund's transfer agent.
PruArray Savings Program. Class A shares are also offered at net asset
value to employees of companies that enter into a written agreement with
Prudential Retirement Services to participate in the PruArray Savings Program.
Under this Program, a limited number of Prudential Mutual Funds are available
for purchase at net asset value by Individual Retirement Accounts and Savings
Accumulation Plans of the company's employees. The Program is available only to
(i) employees who open an IRA or Savings Accumulation Plan account with the
Fund's transfer agent and (ii) spouses of employees who open an IRA account with
the Fund's transfer agent. The Program is offered to companies that have at
least 250 eligible employees.
Special Rules Applicable to Retirement Plans. After a Benefit Plan,
participant in the PruArray Savings Program or PruArray or SmartPath Plan
qualifies to purchase Class A shares at NAV, all subsequent purchases will be
made at NAV.
Other Waivers. In addition, Class A shares may be purchased at NAV, through
Prudential Securities or the Transfer Agent, by the following persons: (a)
officers and current and former Directors/Trustees of the Prudential Mutual
Funds (including the Fund), (b) employees of Prudential Securities and PMF and
their subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer Agent, (c)
employees of subadvisers of the Prudential Mutual Funds provided that purchases
at NAV are permitted by such person's employer, (d) Prudential, employees and
special agents of Prudential and its subsidiaries and all persons who have
retired directly from active service with Prudential or one of its subsidiaries,
(e) registered representatives and employees of dealers who have entered into a
selected dealer agreement with Prudential Securities provided that purchases at
NAV are permitted by such person's employer and (f) investors who have a
business relationship with a financial adviser who joined Prudential Securities
from another investment firm, provided that (i) the purchase is made within 180
days of the commencement of the financial adviser's employment at Prudential
Securities, or within one year in the case of Benefit Plans, (ii) the purchase
is made with proceeds of a redemption of shares of any open-end fund sponsored
by the financial adviser's previous employer (other than a money market fund or
other no-load fund which imposes a distribution or service fee of .25 of 1% or
less) and (iii) the financial adviser served as the client's broker on the
previous purchases.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions. See "Purchase and
Redemption of Series Shares--Reduction and Waiver of Initial Sales
Charges--Class A Shares" in the Statement of Additional Information.
Class B and Class C Shares
The offering price of Class B and Class C shares for investors choosing one
of the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges." The Distributor will pay sales
commissions of up to 4% of the purchase price of Class B shares to dealers,
financial advisers and other persons who sell Class B shares at the time of sale
from its own resources. This facilitates the ability of the Fund to sell the
Class B shares without an initial sales charge being deducted at the time of
purchase. The Distributor anticipates that it will recoup its advancement of
sales commissions from the combination of the CDSC and the distribution fee. See
"Distributor." In connection with the sale of Class C shares, the Distributor
will pay dealers, financial advisers and other persons which distribute Class C
shares a sales commission of up to 1% of the purchase price at the time of the
sale.
Class Z Shares
Class Z shares are available for purchase by (i) pension, profit sharing or
other employee benefit plans qualified under Section 401 of the Internal Revenue
Code, deferred compensation and annuity plans under Sections 457 and 403(b)(7)
of the Internal Revenue Code, and non-qualified plans for which the relevant
Series is an available option (collectively, Benefit Plans), provided such
Benefit Plans (in combination with other plans sponsored by the same employer or
group of related employers) have at least $50 million in defined contribution
assets; (ii) participants in any fee-based program sponsored by Prudential
Securities (or one of its affiliates) which includes
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<PAGE>
mutual funds as investment options and for which the relevant Series is an
available option; and (iii) investors who were, or had executed a letter of
intent to become, shareholders of any series of Prudential Dryden Fund (Dryden
Fund) had on or before one or more series of Dryden Fund reorganized or who on
that date have investments in certain products for which Dryden Fund provided
exchangeability. After a Benefit Plan qualifies to purchase Class Z shares, all
subsequent purchases will be for Class Z shares.
In 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 based on a percentage of the net asset
value of shares sold by such persons.
For more information about shares of either Series contact your Prudential
Securities financial adviser or Prusec representative or telephone the Fund at
(800) 225-1852. Participants in programs sponsored by Prudential Retirement
Services should contact their client representative for more information about
Class Z shares.
HOW TO SELL YOUR SHARES
You can redeem shares of a Series at any time for cash at the NAV next
determined after the redemption request is received in proper form by the
Transfer Agent or Prudential Securities. See "How the Fund Series Values Its
Shares." In certain cases, however, redemption proceeds will be reduced by the
amount of any applicable contingent deferred sales charge, as described below.
See "Contingent Deferred Sales Charges" below.
If you hold shares of a Series through Prudential Securities, you must
redeem your shares by contacting your Prudential Securities financial adviser.
If you hold shares in non-certificate form, a written request for redemption
signed by you exactly as the account is registered is required. If you hold
certificates, the certificates, signed in the name(s) shown on the face of the
certificates, must be received by the Transfer Agent in order for the redemption
request to be processed. If redemption is requested by a corporation,
partnership, trust or fiduciary, written evidence of authority acceptable to the
Transfer Agent must be submitted before such request will be accepted. All
correspondence and documents concerning redemptions should be sent to the Fund
in care of its Transfer Agent, Prudential Mutual Fund Services, Inc., Attention:
Redemption Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to
a person other than the record owner, (c) are to be sent to an address other
than the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Prudential Preferred Financial Services offices. In the
case of redemptions from a PruArray or SmartPath Plan, if the proceeds of the
redemption are invested in another investment option of the plan, in the name of
the record holder and at the same address as reflected in the Transfer Agent's
records, a signature guarantee is not required.
Payment for shares presented for redemption will be made by check within
seven days after receipt by the Transfer Agent of the certificate and/or written
request except as indicated below. If you hold shares through Prudential
Securities, payment for shares presented for redemption will be credited to your
Prudential Securities account, unless you indicate otherwise. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by a Series of securities owned by it is not reasonably
practicable or it is not reasonably practicable for a Series fairly to determine
the value of its net assets, or (d) during any other period when the SEC, by
order, so permits; provided that applicable rules and regulations of the SEC
shall govern as to whether the conditions prescribed in (b), (c) or (d) exist.
Payment for redemption of recently purchased shares will be delayed until
the relevant Series or its Transfer Agent has been advised that the purchase
check has been honored, up to 10 calendar days from the time of receipt of the
purchase check by the Transfer Agent. Such delay may be avoided by purchasing
shares by wire or by certified or official bank check.
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<PAGE>
Redemption In Kind. If the Board of Directors determines that it would be
detrimental to the best interests of the remaining shareholders of a Series to
make payment wholly or partly in cash, each Series may pay the redemption price
in whole or in part by a distribution in kind of securities from the investment
portfolio of each Series, in lieu of cash, in conformity with applicable rules
of the SEC. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How Each Series Values Its Shares." If
your shares are redeemed in kind, you would incur transaction costs in
converting the assets into cash. Each Series, however, has elected to be
governed by Rule 18f-1 under the Investment Company Act, pursuant to which each
Series is obligated to redeem shares solely in cash up to the lesser of $250,000
or 1% of the net asset value of the relevant Series during any 90-day period for
any one shareholder.
Involuntary Redemption. In order to reduce expenses of a Series, 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. A Series will give
such shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any such involuntary redemption.
90-Day Repurchase Privilege. If you redeem your shares of a Series 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 same Series at the
net asset value next determined after the order is received, which must be
within 90 days after the date of the redemption. Any contingent deferred sales
charge or 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 Series' Transfer Agent, either
directly or through Prudential Securities, at the time the repurchase privilege
is exercised to adjust your account for the CDSC you previously paid.
Thereafter, any redemptions will be subject to the CDSC applicable at the time
of the redemption. See "Contingent Deferred Sales Charge" below. Exercise of the
repurchase privilege may affect federal tax treatment of any gain realized upon
redemption. For more information on the rule which disallows a loss on the sale
or exchange of shares of the Portfolio which are replaced, see "Taxes, Dividends
and Distributions."
Contingent Deferred Sales Charges
Redemptions of Class B shares will be subject to a contingent deferred
sales charge or CDSC declining from 5% to zero over a six-year period. Class C
shares redeemed within one year of purchase will be subject to a 1% CDSC. The
CDSC will be deducted from the redemption proceeds and reduce the amount paid to
you. The CDSC will be imposed on any redemption by you which reduces the current
value of your Class B or Class C shares to an amount which is lower than the
amount of all payments by you for shares during the preceding six years, in the
case of Class B shares, and one year, in the case of Class C shares. A CDSC will
be applied on the lesser of the original purchase price or the current value of
the shares being redeemed. Increases in the value of your shares or shares
acquired through reinvestment of dividends or distributions are not subject to a
CDSC. The amount of any contingent deferred sales charge will be paid to and
retained by the Distributor. See "How the Fund is Managed--Distributor" above
and "Waiver of the Contingent Deferred Sales Charges--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of your shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchase of shares, all payments
during a month will be aggregated and deemed to have been made on the last day
of the month. The CDSC will be calculated from the first day of the month after
the initial purchase, excluding the time shares were held in a money market
fund. See "How to Exchange Your Shares."
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<PAGE>
The following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:
Contingent Deferred Sales
Charge as a Percentage of
Year Since Purchase Dollars Invested or
Payment Made Redemption Proceeds
------------------- --------------------------
First .............................. 5.0%
Second ............................. 4.0%
Third .............................. 3.0%
Fourth ............................. 2.0%
Fifth .............................. 1.0%
Sixth .............................. 1.0%
Seventh ............................ None
In determining whether a CDSC is applicable to a redemption, the
calculation will be made in a manner that results in the lowest possible rate.
It will be assumed that the redemption is made first of amounts representing
shares acquired pursuant to the reinvestment of dividends and distributions;
then of amounts representing the increase in net asset value above the total
amount of payments for the purchase of a Series' shares made during the
preceding six years (five years for Class B shares purchased prior to January
22, 1990); thenof amounts representing the cost of shares held beyond the
applicable CDSC period; and finally, of amounts representing the cost of shares
held for the longest period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares of a Series at $10 per
share for a cost of $1,000. Subsequently, you acquired 5 additional Class B
shares of such Series through dividend reinvestment. During the second year
after the purchase you decided to redeem $500 of your investment. Assuming at
the time of the redemption the NAV had appreciated to $12 per share, the value
of your Class B shares would be $1,260 (105 shares at $12 per share). The CDSC
would not be applied to the value of the reinvested dividend shares and the
amount which represents appreciation ($260). Therefore, $240 of the $500
redemption proceeds ($500 minus $260) would be charged at a rate of 4% (the
applicable rate in the second year after purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the
gain or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
Waiver of the Contingent Deferred Sales Charges--Class B Shares. The CDSC
will be waived in the case of a redemption following the death or disability of
a shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), or a trust, at the time of death or initial
determination of disability, provided that the shares were purchased prior to
death or disability.
The CDSC will also be waived in the case of a total or partial redemption
in connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include: (i) in the case of a
tax-deferred retirement plan, a lump-sum or other distribution after retirement;
(ii) in the case of an IRA or Section 403(b) custodial account, a lump-sum or
other distribution after attaining age 59 1/2; and (iii) a tax-free return of an
excess contribution or plan distributions following the death or disability of
the shareholder, provided that the shares were purchased prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service (i.e.,
following voluntary or involuntary termination of employment or following
retirement). Under no circumstances will the CDSC be waived on redemptions
resulting from the termination of a tax-deferred retirement plan, unless such
redemptions otherwise qualify for a waiver as described above.
In the case of Direct Account and PSI or Subsidiary Prototype Benefit
Plans, the CDSC will also be waived on the 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.
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In addition, the CDSC will be waived on redemptions of shares held by
Directors of the Fund.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec, at the time of redemption, that you are entitled to waiver
of the CDSC and provide the Transfer Agent with such supporting documentation as
it may deem appropriate. The waiver will be granted subject to confirmation of
your entitlement. See "Purchase and Redemption of Series Shares--Waiver of the
Contingent Deferred Sales Charge--Class B Shares" in the Statement of Additional
Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares of a Series will automatically convert to Class A shares of
such Series 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 each Series tracks amounts paid rather than the number of shares
bought on each purchase of Class B shares, the number of Class B shares eligible
to convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (i.e., $1,000
divided by $2,100 (47.62%) multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share net asset value of the Class A shares may be
higher than that of the Class B shares at the time of conversion. Thus, although
the aggregate dollar value will be the same, you may receive fewer Class A
shares than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been made
on the last day of the month, or for Class B shares acquired through exchange,
or a series of exchanges, on the last day of the month in which the original
payment for purchases of such Class B shares was made. For Class B shares
previously exchanged for shares of a money market fund, the time period during
which such shares were held in the money market fund will be excluded. For
example, Class B shares held in a money market fund for one year will not
convert to Class A shares until approximately eight years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase of
such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B and Class C shares
will not constitute "preferential dividends" under the Internal Revenue Code and
(ii) that the conversion of shares does not constitute a taxable event. The
conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If the conversions are suspended,
Class B shares of the Fund will continue to be subject, possibly indefinitely,
to their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
As a shareholder of a Series you have an exchange privilege with certain
other Prudential Mutual Funds, including one or more specified money market
funds, subject to the minimum investment requirement of such
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funds. Class A, Class B, Class C and Class Z shares may be exchanged for Class
A, Class B, Class C and Class Z shares, respectively, of another fund on the
basis of the relative NAV. No sales charge will be imposed at the time of the
exchange. Any applicable CDSC payable upon the redemption of shares exchanged
will be calculated from the first day of the month after the initial purchase,
excluding the time shares were held in a money market fund. Class B and Class C
shares may not be exchanged into money market funds other than Prudential
Special Money Market Fund, Inc. For purposes of calculating the seven-year
holding period applicable to the Class B conversion feature, the time period
during which Class B shares were held in a money market fund will be excluded.
See "Conversion Feature--Class B Shares" above. An exchange will be treated as a
redemption and purchase for tax purposes. See "Shareholder Investment
Account--Exchange Privilege" in the Statement of Additional Information.
In order to exchange shares by telephone, you must authorize the telephone
exchange privilege 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 Series at 1 (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. None of the Fund, a Series or their 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. (The Fund, a
Series or its agents could be subject to liability if they fail to employ
reasonable procedures.) All exchanges will be made on the basis of the relative
NAV of the funds next determined after the request is received in good order.
The Exchange Privilege is available only in states where the exchange may
legally be made.
If you hold shares through Prudential Securities or through a dealer which
has entered into a selected dealer agreement with the Series' Distributor, you
must exchange your shares by contacting your financial adviser.
If you hold certificates, the certificates, signed in the name(s) shown on
the face of the certificates, must be returned in order for the shares to be
exchanged. See "How to Sell Your Shares" above.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
In periods of severe market or economic conditions the telephone exchange
of shares may be difficult to implement and shareholders should make exchanges
by mail by writing to Prudential Mutual Fund Services, Inc., at the address
noted above.
Special Exchange Privilege. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV (see "Alternative
Purchase Plan -- Class A Shares -- Reduction and Waiver of Initial Sales
Charges" above) and to shareholders who qualify to purchase Class Z shares (see
"Alternative Purchase Plan--Class Z Shares" above). Under this exchange
privilege, amounts representing any Class B and Class C shares (which are not
subject to a CDSC) held in such a shareholder's account will be automatically
exchanged for Class A shares for shareholders who qualify to purchase Class A
shares at NAV on a quarterly basis, unless the shareholder elects otherwise.
Similarly, shareholders who qualify to purchase Class Z shares will have their
Class B and Class C shares which are not subject to a CDSC and their Class A
shares exchanged for Class Z shares on a quarterly basis. Eligibility for this
exchange privilege will be calculated on the business day prior to the date of
the exchange. Amounts representing Class B or Class C shares which are not
subject to a CDSC include the following: (1) amounts representing Class B or
Class C shares acquired pursuant to the automatic reinvestment of dividends and
distributions, (2) amounts representing the increase in the net asset value
above the total amount of payments for the purchase of Class B or Class C shares
and (3) amounts representing Class B or Class C shares held beyond the
applicable CDSC period. Class B and Class C shareholders must notify the
Transfer Agent either directly or through Prudential Securities or Prusec that
they are eligible for this special exchange privilege.
Participants in any fee-based program for which the relevant Series is an
available option will have their Class A shares, if any, exchanged for Class Z
shares when they elect to have those assets become a part of the fee-based
program. Upon leaving the program (whether voluntarily or not), such Class Z
shares (and, to the extent provided for in the program, Class Z shares acquired
through participation in the program) will be exchanged for Class A shares at
net asset value. Similarly, participants in PSI's 401(k) Plan, an
38
<PAGE>
employee benefit plan sponsored by Prudential Securities Incorporated (the PSI
401(k) Plan), for which the Fund's Class Z shares are an available option and
who wish to transfer their Class Z shares out of the PSI 401(k) Plan following
separation from service (i.e., voluntary or involuntary termination of
employment or retirement) will have their Class Z shares exchanged for Class A
shares at NAV.
Each Series reserves the right to reject any exchange order including
exchanges (and market timing transactions) which are of a size and/or frequency
engaged in by one or more accounts acting in concert or otherwise, that have or
may have an adverse effect on the ability of a Subadviser to manage the relevant
portfolio. The determination that such exchanges or activity may have an adverse
effect and the determination to reject any exchange order shall be in the
discretion of the Manager and the relevant Subadviser.
The Exchange Privilege is not a right and may be suspended, modified or
terminated on 60 days' notice to shareholders.
SHAREHOLDER SERVICES
In addition to the exchange privilege, as a shareholder in a Series, you
can take advantage of the following additional services and privileges:
Automatic Reinvestment of Dividends and/or Distributions Without Sales
Charge. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Series at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
Prudential Securities, you should contact your financial adviser.
Automatic Savings Accumulation Plan (ASAP). Under ASAP you may make regular
purchases of a Series' shares in amounts as little as $50 via an automatic debit
to a bank account or Prudential Securities account (including a Command
Account). For additional information about this service, you may contact your
Prudential Securities financial adviser, Prusec representative or the Transfer
Agent directly.
Best Minds Program. The Distributor sponsors the Best Minds program
pursuant to which the total dollar amount of a client's investment in the
program will be allocated equally among shares of the Series and other
Prudential Mutual Funds. For more information about this program, you should
contact your Prudential Securities financial adviser or Prusec representative.
Tax Deferred Retirement Plans. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7) of the Code are available
through the Distributor. These plans are for use by both self-employed
individuals and corporate employers. These plans permit either self-direction of
accounts by participants, or a pooled account arrangement. Information regarding
the establishment of these plans, the administration, custodial fees and other
details is available from Prudential Securities or the Transfer Agent. If you
are considering adopting such a plan, you should consult with your own legal or
tax adviser with respect to the establishment and maintenance of such a plan.
Systematic Withdrawal Plan. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges." See also "Shareholder Investment
Account--Systematic Withdrawal Plan" in the Statement of Additional Information.
Reports to Shareholders. Global Series or International Stock Series, as
the case may be, will send you annual and semi-annual reports. The financial
statements appearing in annual reports are audited by independent accountants.
In order to reduce duplicate mailing and printing expenses each Series will
provide one annual report and semi-annual shareholder report and annual
prospectus per household. You may request additional copies of such reports by
calling (800) 225-1852 or by writing to the Series at Gateway Center Three, 100
Mulberry Street, Newark, New Jersey 07102-4077. In addition, monthly unaudited
financial data is available upon request from the Series.
Shareholder Inquiries. Inquiries should be addressed to the Fund at Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, or by
telephone, at 1-800-225-1852 or, from outside the U.S.A., at 1-908-417-7555
(collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
39
<PAGE>
ANNUALIZED TOTAL RETURNS
(after investment advisory fees) as of 9/30/95
1-year 3-years 5-years 10-years
------ ------- ------- --------
Mercator 10.4% 13.7% 11.1% 12.9%
MSCI EAFE Index 8.9% 8.4% 8.5% 9.0%
Source: Mercator Asset Management, Subadviser to the International Stock Series.
THE COMPOSITE PERFORMANCE RESULTS PRESENTED ABOVE ARE THOSE OF MERCATOR ASSET
MANAGEMENT (MERCATOR), NOT OF EITHER SERIES, AND SHOULD NOT BE INTERPRETED AS
INDICATIVE OF THE FUTURE PERFORMANCE OF EITHER SERIES. As of September, 1996,
the Mercator Portfolio was comprised of 16 clients (including 2 mutual funds,
one of which is International Stock Series) having aggregate net assets of
approximately $2.0 billion. Mercator's clients' investment objectives, policies
and strategies are substantially similar to those of the International Stock
Series, although, unlike the International Stock Series, many of such clients
are not subject to certain investment limitations, diversification requirements
and other restrictions imposed by law upon mutual funds, which, if applicable to
all Mercator clients, may have adversely affected composite performance.
Composite performance results reflect reinvestment of dividends and other
earnings and are stated after taking into account investment advisory fees and,
in the case of the two mutual funds only, other fund expenses. Performance
results of the non-mutual fund clients included in the composite do not reflect
the deduction of operating expenses of mutual funds, such as distribution (Rule
12b-1) fees, or any applicable sales charges. Performance shown represents the
time-weighted rate of return for all clients participating in the Mercator
Portfolio for at least one full calendar quarter and conforms to the standards
set by the Association for Investment Management and Research.
The Morgan Stanley Capital International (MSCI) EAFE Index is an unmanaged,
weighted market capitalization index that reflects stock market performance in
Europe, Australasia and the Far East. The index includes reinvestment of
dividends, net of withholding taxes. Investors can not buy or invest directly in
market indices or averages. Foreign investing involves special risks including
currency fluctuations and political, social and economic change.
A-1
<PAGE>
TOTAL RETURNS
(after investment advisory fees)
YEAR MERCATOR MSCI EAFE INDEX
---- -------- ---------------
1986 53.3% 69.9%
1987 6.7 24.9
1988 34.9 28.6
1989 22.6 10.8
1990 -12.9 -23.2
1991 13.8 12.5
1992 -6.8 -11.9
1993 42.4 32.9
1994 3.9 8.1
1995 10.3 11.6
1996 3Q 0.5 -0.1
1996 YLD (9/30/96) 10.4 4.6
Source: Mercator Asset Management, Subadviser to the International Stock Series.
THE COMPOSITE PERFORMANCE RESULTS PRESENTED ABOVE ARE THOSE OF MERCATOR ASSET
MANAGEMENT (MERCATOR), NOT OF EITHER SERIES, AND SHOULD NOT BE INTERPRETED AS
INDICATIVE OF THE FUTURE PERFORMANCE OF EITHER SERIES. As of September, 1996,
the Mercator Portfolio was comprised of 16 clients (including 2 mutual funds,
one of which is International Stock Series) having aggregate net assets of
approximately $2.0 billion. Mercator's clients' investment objectives, policies
and strategies are substantially similar to those of the International Stock
Series, although, unlike the International Stock Series, many of such clients
are not subject to certain investment limitations, diversification requirements
and other restrictions imposed by law upon mutual funds, which, if applicable to
all Mercator clients, may have adversely affected composite performance.
Composite performance results reflect reinvestment of dividends and other
earnings and are stated after taking into account investment advisory fees and,
in the case of the two mutual funds only, other fund expenses. Performance
results of the non-mutual fund clients included in the composite do not reflect
the deduction of operating expenses of mutual funds, such as distribution (Rule
12b-1) fees, or any applicable sales charges. Performance shown represents the
time-weighted rate of return for all clients participating in the Mercator
Portfolio for at least one full calendar quarter and conforms to the standards
set by the Association for Investment Management and Research.
The Morgan Stanley Capital International (MSCI) EAFE Index is an unmanaged,
weighted market capitalization index that reflects stock market performance in
Europe, Australasia and the Far East. The index includes reinvestment of
dividends, net of withholding taxes. Investors can not buy or invest directly in
market indices or averages. Foreign investing involves special risks including
currency fluctuations and political, social and economic change.
A-2
<PAGE>
- --------------------------------------------------------------------------------
THE PRUDENTIAL MUTUAL FUND FAMILY
- --------------------------------------------------------------------------------
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Fund at 1
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
- -------------------------------------------
Taxable Bond Funds
- -------------------------------------------
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
The BlackRock Government Income Trust
- -------------------------------------------
Tax-Exempt Bond Funds
- -------------------------------------------
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
- -------------------------------------------
Global Funds
- -------------------------------------------
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
The Global Government Plus Fund, Inc.
The Global Total Health Fund, Inc.
Global Utility Fund, Inc.
- -------------------------------------------
Equity Funds
- -------------------------------------------
Prudential Allocation Fund
Balanced Portfolio
Strategy Portfolio
Prudential Distressed Securities Fund, Inc.
Prudential Dryden Fund
Prudential Active Balance Fund
Prudential Stock Index Fund
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Jennison Series Fund, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Multi-Sector Fund, Inc.
Prudential Small Companies Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
- -------------------------------------------
Money Market Funds
- -------------------------------------------
o Taxable Money Market Funds
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
o Tax-Free Money Market Funds
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
o Command Funds
Command Money Fund
Command Government Fund
Command Tax-Free Fund
o Institutional Money Market Funds
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
B-1
<PAGE>
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations, other than those
contained in this Prospectus, in connection with the offer contained herein,
and, if given or made, such other information or representations must not be
relied upon as having been authorized by the Fund or the Distributor. This
Prospectus does not constitute an offer by the Fund or by the Distributor to
sell or a solicitation of any offer to buy any of the securities offered
hereby in any jurisdiction to any person to whom it is unlawful to make such
offer in such jurisdiction.
================================================================================
TABLE OF CONTENTS
Page
----
SERIES HIGHLIGHTS .......................................................... 2
Risk Factors and Special Characteristics .................................. 2
FUND EXPENSES .............................................................. 5
HOW THE FUND INVESTS ....................................................... 12
Investment Objectives and Policies ........................................ 12
Hedging and Return Enhancement Strategies ................................. 15
Other Investment Practices ................................................ 19
Risks and Special Considerations .......................................... 21
Investment Restrictions ................................................... 22
HOW THE FUND IS MANAGED .................................................... 22
Manager ................................................................... 22
Subadvisers ............................................................... 22
Distributor ............................................................... 23
Fee Waivers and Subsidy ................................................... 25
Portfolio Transactions .................................................... 25
Custodian and Transfer and Dividend Disbursing Agent ...................... 25
HOW THE FUND VALUES ITS SHARES ............................................. 25
HOW THE FUND CALCULATES PERFORMANCE ........................................ 26
TAXES, DIVIDENDS AND DISTRIBUTIONS ......................................... 26
GENERAL INFORMATION ........................................................ 28
Description of Common Stock ............................................... 28
Additional Information .................................................... 29
SHAREHOLDER GUIDE .......................................................... 29
How to Buy Shares of the Fund ............................................. 29
Alternative Purchase Plan ................................................. 30
How to Sell Your Shares ................................................... 34
Conversion Feature--Class B Shares ........................................ 37
How to Exchange Your Shares ............................................... 37
Shareholder Services ...................................................... 39
INFORMATION ABOUT MERCATOR ASSET MANAGEMENT ................................ A-1
THE PRUDENTIAL MUTUAL FUND FAMILY .......................................... B-1
================================================================================
115A 444010J
- --------------------------------------------------------------------------------
CUSIP NOS.:
GLOBAL SERIES INT'L STOCK SERIES
Class A ........... 743969107 743969503
Class B ........... 743969206 743969602
Class C ........... 743969305 743969701
Class Z ........... 743969404 743969800
- --------------------------------------------------------------------------------
Prudential
World
Fund, Inc.
o Global Series
- ----------------------------
o International
Stock Series
PROSPECTUS
January 16, 1997
[Logo] Prudential
Investments
<PAGE>
PRUDENTIAL WORLD FUND, INC.
o Global Series
o International Stock Series
Statement of Additional Information
January 16, 1997
Prudential World Fund, Inc. (the Fund) is an open-end, diversified
management investment company presently consisting of two series.
Global Series' investment objective is to seek long-term growth of capital,
with income as a secondary objective. Global Series will seek to achieve its
objective through investment in a diversified portfolio of securities which will
consist of marketable securities of U.S. and non-U.S. issuers. Global Series may
invest in all types of common stocks and equivalents (such as convertible debt
securities and warrants), preferred stocks, bonds and other debt obligations,
including money market instruments, of foreign and domestic companies and
governments, governmental agencies and international organizations. There can be
no assurance that Global Series' investment objective will be achieved. See
"Investment Objectives and Policies."
International Stock Series' investment objective is to achieve long-term
growth of capital through investment in equity securities of foreign issuers.
Income is a secondary objective. International Stock Series will seek to achieve
its objective primarily through investment in a diversified portfolio of
securities which will consist of equity securities of foreign issuers.
International Stock Series will, under normal circumstances, invest at least 65%
of the value of its total assets in common stocks and preferred stocks of
issuers located in at least three foreign countries. International Stock Series
may invest up to 35% of its total assets in (i) other equity-related securities
of foreign issuers; (ii) common stocks, preferred stocks, and other
equity-related securities of U.S. issuers; (iii) investment grade debt
securities of domestic and foreign corporations, governments, governmental
entities, and supranational entities; and (iv) high-quality domestic money
market instruments and short-term fixed income securities. There can be no
assurance that International Stock Series' investment objective will be
achieved. See "Investment Objectives and Policies."
The Fund's address is Gateway Center Three, 100 Mulberry Street, Newark,
New Jersey 07102-4077, and its telephone number is (800) 225-1852.
Prior to June 21, 1996, the name of the Fund was Prudential Global Fund,
Inc.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Fund's Prospectus, dated January 16, 1997, a copy
of which may be obtained from the Fund at the address noted above.
TABLE OF CONTENTS
Cross-reference
to page in
Page Prospectus
---- --------------
Investment Objectives and Policies B-2 12
Investment Restrictions B-14 22
Directors and Officers B-16 22
Manager B-20 22
Distributor B-21 23
Net Asset Value B-23 25
Portfolio Transactions and Brokerage B-24 25
Purchase and Redemption of Series Shares B-25 25
Shareholder Investment Account B-28 29
Performance Information B-31 39
Taxes B-33 26
Custodian, Transfer and Dividend Disbursing Agent and
Independent Accountants B-36 25
Financial Statements--Global Series B-37 --
Independent Auditors' Report B-49 --
Financial Statements--International Stock Series B-50 --
Independent Auditors' Report B-63 --
Appendix--General Investment Information App-1 --
Appendix--Historical Performance Data App-2 --
Appendix--Information Relating to The Prudential App-6 --
Appendix--Description of S&P, Moody's and
Duff & Phelps Ratings App-9 --
- --------------------------------------------------------------------------------
MF115B-1
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Global Series: The investment objective of the Global Series is to seek
long-term growth of capital, with income as a secondary objective. Global Series
will seek to achieve its objective through investment in a diversified portfolio
of securities which consist of marketable securities of U.S. and non-U.S.
issuers. Global Series may invest in all types of common stocks and equivalents
(such as convertible debt securities and warrants), preferred stocks, bonds and
other debt obligations, including money market instruments, of foreign and
domestic companies and governments, governmental agencies and international
organizations. Global Series has no fixed policy with respect to portfolio
turnover; however, it is anticipated that Global Series' annual portfolio
turnover rate will not normally exceed 100%, though Global Series is not
restricted from investing in short-term obligations. There can be no assurance
that Global Series' investment objective will be achieved. For a further
description of the Global Series' investment objective and policies, see "How
the Fund Invests--Investment Objectives and Policies" in the Prospectus.
International Stock Series: The investment objective of International Stock
Series is to seek long-term growth of capital through investment in equity
securities of foreign issuers. Income is a secondary objective. International
Stock Series will seek to achieve its objective primarily through investment in
a diversified portfolio of securities which will consist of equity securities of
foreign issuers. International Stock Series will, under normal circumstances,
invest at least 65% of the value of its total assets in common stocks and
preferred stocks of issuers located in at least three foreign countries.
International Stock Series may invest up to 35% of its total assets in (i) other
equity-related securities of foreign issuers; (ii) common stocks, preferred
stocks, and other equity-related securities of U.S. issuers; (iii) investment
grade debt securities of domestic and foreign corporations, governments,
governmental entities, and supranational entities; and (iv) high-quality
domestic money market instruments and short-term fixed income securities.
Although International Stock Series does not purchase securities with a view to
rapid turnover, there are no limitations on the length of time that securities
must be held by International Stock Series and International Stock Series'
annual portfolio turnover rate may vary significantly from year to year. A
higher portfolio turnover rate may involve correspondingly greater transaction
costs, which would be borne directly by International Stock Series, as well as
additional realized gains and/or losses to shareholders. There can be no
assurance that International Stock Series' investment objective will be
achieved. For a further description of International Stock Series' investment
objective and policies, see "How the Fund Invests--Investment Objectives and
Policies" in the Prospectus.
U.S. Government Securities
Securities issued or guaranteed by the U.S. Government or one of its
agencies, authorities or instrumentalities in which each Series may invest
include debt obligations of varying maturities issued by the U.S. Treasury or
issued or guaranteed by an agency or instrumentality of the U.S. Government,
including the Federal Housing Administration, Farmers' Home Administration,
Export-Import Bank of the U.S. Small Business Administration, Government
National Mortgage Association ("GNMA"), General Services Administration, Central
Bank for Cooperatives, Federal Farm Credit Banks, Federal Home Loan Banks,
Federal Home Loan Mortgage Corporation ("FHLMC"), Federal Intermediate Credit
Banks, Federal Land Banks, Federal National Mortgage Association ("FNMA"),
Maritime Administration, Tennessee Valley Authority, District of Columbia Armory
Board, Student Loan Marketing Association and Resolution Trust Corporation.
Direct obligations of the U.S. Treasury include a variety of securities that
differ in their interest rates, maturities and dates of issuance. Because the
U.S. Government is not obligated by law to provide support to an instrumentality
that it sponsors, a Series will invest in obligations issued by an
instrumentality of the U.S. Government only if the relevant Series' Subadviser
determines that the instrumentality's credit risk does not render its securities
unsuitable for investment by the relevant Series. For further information, see
"Mortgage-Related Securities" below.
Repurchase Agreements and Reverse Repurchase Agreements
Each Series may enter into repurchase agreements, and International Stock
Series may enter into reverse repurchase agreements, with banks and securities
dealers which meet the creditworthiness standards established by the Board of
Directors ("Qualified Institutions"). The relevant Subadviser will monitor the
continued creditworthness of Qualified Institutions, subject to the oversight of
the Manager and the Board of Directors. These agreements permit a Series to keep
all its assets earning interest while retaining "overnight" flexibility to
pursue investment of a longer-term nature.
The use of repurchase agreements and reverse repurchase agreements involves
certain risks. For example, if the seller of securities under a repurchase
agreement defaults on its obligation to repurchase the underlying securities, as
a result of its bankruptcy or otherwise, a Series will seek to dispose of such
securities, which action could involve costs or delays. If the seller becomes
insolvent and subject to liquidation or reorganization under applicable
bankruptcy or other laws, a Series' ability to dispose of the underlying
securities may be restricted. Finally, it is possible that a Series may not be
able to substantiate its interest
B-2
<PAGE>
in the underlying securities. To minimize this risk, the securities underlying
the agreement will be held by the Custodian at all times in an amount at least
equal to the repurchase price, including accrued interest. If the counterparty
fails to resell or repurchase the securities, a Series may suffer a loss to the
extent proceeds from the sale of the underlying collateral are less than the
repurchase price. Reverse repurchase agreements involve the risk that the market
value of the securities retained in lieu of sale by a Series may decline below
the price of the securities such Series has sold but is obligated to repurchase.
Fixed Income Securities
In general, the ratings of Moody's Investors Service ("Moody's"), Standard
& Poor's Ratings Services ("S&P Ratings"), Duff and Phelps, Inc. ("Duff &
Phelps") and other nationally recognized statistical rating organizations
("NRSROs") represent the opinions of those organizations as to the quality of
debt obligations that they rate. These ratings are relative and subjective, are
not absolute standards of quality and do not evaluate the market risk of
securities. These ratings will be among the initial criteria used for the
selection of portfolio securities. Among the factors that the rating agencies
consider are the long-term ability of the issuer to pay principal and interest
and general economic trends.
Subsequent to its purchase by a Series, an issue of debt obligations may
cease to be rated or its rating may be reduced below the minimum required for
purchase by the Series. Neither event will require the sale of the debt
obligation by a Series, but such Series' Subadviser will consider the event in
its determination of whether such Series should continue to hold the obligation.
In addition, to the extent that the ratings change as a result of changes in
rating organizations or their rating systems or owing to a corporate
restructuring of Moody's, S&P Ratings, Duff & Phelps or other NRSRO, a Series
will attempt to use comparable ratings as standards for its investments in
accordance with its investment objectives and policies. The Appendix to this
Statement of Additional Information contains further information concerning the
ratings of Moody's, S&P Ratings and Duff & Phelps and their significance.
Each Series may invest, to a limited extent, in debt securities rated in
the lowest category of investment grade debt (i.e., Baa by Moody's or BBB by S&P
Ratings). These securities may have speculative characteristics, and changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than is the case with higher
grade bonds.
Non-investment grade fixed income securities are rated lower than Baa/BBB
(or the equivalent rating or, if not rated, determined by the Subadviser to be
of comparable quality to securities so rated) and are commonly referred to as
high risk or high yield securities or "junk" bonds. High yield securities are
generally riskier than higher quality securities and are subject to more credit
risk, including risk of default, and the prices of such securities are more
volatile than higher quality securities. Such securities may also have less
liquidity than higher quality securities. International Stock Series is not
authorized to invest in excess of 5% of its net assets in non-investment grade
fixed income securities. Global Series will invest only in investment grade
fixed income securities.
The markets in which medium and lower-rated securities (or unrated
securities that are equivalent to medium and lower-rated securities) are traded
are generally more limited than those in which higher-rated securities are
traded. The existence of limited markets may make it more difficult for
International Stock Series to obtain accurate market quotations for purposes of
valuing its portfolio and calculating its net asset value. Moreover, the lack of
a liquid trading market may restrict the availability of debt securities for
International Stock Series to purchase and may also have the effect of limiting
the ability of International Stock Series to sell debt securities at their fair
value either to meet redemption requests or to respond to changes in the economy
or the financial markets.
Lower-rated fixed income securities present risks based on payment
expectations. If an issuer calls the obligation for redemption, International
Stock Series may have to replace the security with a lower-yielding security,
resulting in a decreased return for investors. Also, as the principal value of
fixed income securities moves inversely with movements in interest rates, in the
event of rising interest rates, the value of the securities held by
International Stock Series may decline proportionately more than if the Series
consisted of higher-rated securities. Investments in zero coupon bonds may be
more speculative and subject to greater fluctuations in value due to changes in
interest rates than bonds that pay interest currently. If International Stock
Series experiences unexpected net redemptions, it may be forced to sell its
higher-rated bonds, resulting in a decline in the overall credit quality of the
securities held by International Stock Series and increasing the exposure of
International Stock Series to the risks of lower-rated securities.
When-Issued and Delayed Delivery Securities
To secure prices deemed advantageous at a particular time, each Series may
purchase securities on a when-issued or delayed delivery basis, in which case
delivery of the securities occurs beyond the normal settlement period; payment
for or
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delivery of the securities would be made at the same time or prior to the
reciprocal delivery or payment by the other party to the transaction. A Series
will enter into when-issued or delayed delivery transactions for the purpose of
acquiring securities and not for the purpose of leverage. When-issued securities
purchased by a Series may include securities purchased on a "when, as and if
issued" basis under which the issuance of the securities depends on the
occurrence of a subsequent event, such as approval of a merger, corporate
reorganization or debt restructuring.
Securities purchased on a when-issued or delayed delivery basis may expose
a Series to risk because the securities may experience fluctuations in value
prior to their actual delivery. A Series does not accrue income with respect to
a when-issued or delayed-delivery security prior to its stated delivery date.
Purchasing securities on a when-issued or delayed delivery basis may involve the
additional risk that the yield available in the market when the delivery takes
place may be higher than that obtained in the transaction itself.
Forward Rolls and Dollar Rolls
Forward roll and dollar roll transactions involve the risk that the market
value of the securities sold by International Stock Series may decline below the
repurchase price of those securities. At the time International Stock Series
enters into a forward roll transaction, it will place in a segregated account
with its Custodian cash and liquid assets having a value equal to the repurchase
price (including accrued interest). "Liquid Assets" as used in the Fund's
Prospectus and Statement of Additional Information, include U.S. Government
securities, equity securities, investment grade debt obligations or other liquid
unencumbered assets.
Mortgage-Related Securities
Mortgage-backed securities may be classified as private, governmental or
government related, depending on the issuer or guarantor. Private
mortgage-backed securities represent pass-through pools consisting principally
of conventional residential mortgage loans created by non-governmental issuers,
such as commercial banks, savings and loan associations and private mortgage
insurance companies. Governmental mortgage-backed securities are backed by the
full faith and credit of the United States. GNMA, the principal U.S. guarantor
of such securities, is a wholly-owned corporate instrumentality of the United
States within the Department of Housing and Urban Development. Pass-through
securities issued by FNMA are guaranteed as to timely payment of principal and
interest by FNMA, which guarantee is not backed by the full faith and credit of
the U.S. Government. FHLMC is a corporate instrumentality of the United States,
the stock of which is owned by the Federal Home Loan Banks. Participation
certificates representing interests in mortgages from FHLMC's national portfolio
are guaranteed as to the timely payment of interest and ultimate, but generally
not timely, collection of principal by FHLMC. The obligations of the FHLMC under
its guarantee are obligations solely of FHLMC and are not backed by the full
faith and credit of the U.S. Government.
Each Series expects that private and governmental entities may create
mortgage loan pools offering pass-through investments in addition to those
described above. The mortgages underlying these securities may be alternative
mortgage instruments, that is, mortgage instruments whose principal or interest
payments may vary or whose terms to maturity may be shorter than previously
customary. As new types of mortgage-backed securities are developed and offered
to investors, each Series, consistent with its investment objective and
policies, will consider making investments in those new types of securities.
Each Series may also invest in pass-through securities backed by adjustable
rate mortgages that have been issued by GNMA, FNMA and FHLMC or private issuers.
These securities bear interest at a rate that is adjusted monthly, quarterly or
annually. The prepayment experience of the mortgages underlying these securities
may vary from that for fixed rate mortgages.
The average maturity of pass-through pools of mortgage-related securities
varies with the maturities of the underlying mortgage instruments. In addition,
a pool's stated maturity may be shortened by unscheduled payments on the
underlying mortgages. Factors affecting mortgage prepayments include the level
of interest rates, general economic and social conditions, the location of the
mortgaged property and age of the mortgage. Because prepayment rates of
individual pools vary widely, it is not possible to predict accurately the
average life of a particular pool. Common practice is to assume that prepayments
will result in an average life ranging from two to ten years for pools of fixed
rate 30-year mortgages. Pools of mortgages with other maturities or different
characteristics will have varying average life assumptions.
Because prepayments of principal generally occur when interest rates are
declining, it is likely that a Series will have to reinvest the proceeds of
prepayments at lower interest rates than those at which the assets were
previously invested. If this occurs, a Series' yield will correspondingly
decline. Thus, mortgage-related securities may have less potential for capital
appreciation in periods of falling interest rates than other fixed-income
securities of comparable maturity, although these securities may have a
comparable risk of decline in market value in periods of rising interest rates.
To the extent that a Series purchases mortgage-related securities at a premium,
unscheduled prepayments, which are made at par, will result in a loss equal to
any unamortized premium.
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Government stripped mortgage-related interest-only ("IOs") and principal
only ("POs") securities are currently traded in an over-the-counter market
maintained by several large investment banking firms. There can be no assurance
that a Series will be able to effect a trade of IOs or POs at a time when it
wishes to do so. A Series will acquire IOs and POs only if, in the opinion of
the Series' Subadviser, a secondary market for the securities exists at the time
of acquisition, or is subsequently expected. A Series will treat IOs and POs
that are not U.S. Government securities as illiquid and will limit its
investments in these securities, together with other illiquid investments, in
order not to hold more than 5% in the case of Global Series, and 15% in the case
of International Series, of its net assets in illiquid securities. With respect
to IOs and POs that are issued by the U.S. Government, a Subadviser, subject to
the supervision of the Manager and the Board of Directors, may determine that
such securities are liquid, if they determine the securities can be disposed of
promptly in the ordinary course of business at a value reasonably close to that
used in the calculation of net asset value per share.
Investing in IOs and POs involves the risks normally associated with
investing in government and government agency mortgage-related securities. In
addition, the yields on IOs and POs are extremely sensitive to the prepayment
experience on the mortgage loans underlying the certificates collateralizing the
securities. If a decline in the level of prevailing interest rates results in a
rate of principal prepayments higher than anticipated, distributions of
principal will be accelerated, thereby reducing the yield to maturity on IOs and
increasing the yield to maturity on POs. Sufficiently high prepayment rates
could result in a Series not fully recovering its initial investment in an IO.
Mortgage-related securities may not be readily marketable. To the extent
any of these securities are not readily marketable in the judgment of a Series'
Subadviser, the investment restriction limiting such Series' investment in
illiquid instruments will apply.
Collateralized Mortgage Obligations
Each Series also may invest in, among other things, parallel pay CMOs and
Planned Amortization Class CMOs (PAC Bonds). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier. PAC Bonds generally require payments of a
specified amount of principal on each payment date. PAC Bonds always are
parallel pay CMOs with the required principal payment on such securities having
the highest priority after interest has been paid to all classes.
In reliance on SEC rules and orders, the Series' investments in certain
qualifying CMOs, including CMOs that have elected to be treated as Real Estate
Mortgage Investment Conduits (REMICs), are not subject to the Investment Company
Act of 1940, as amended (Investment Company Act), limitation on acquiring
interests in other investment companies. In order to be able to rely on the
SEC's interpretation, the CMOs and REMICs must be unmanaged, fixed-asset issuers
that (i) invest primarily in mortgage-backed securities, (ii) do not issue
redeemable securities, (iii) operate under general exemptive orders exempting
them from all provisions of the Investment Company Act, and (iv) are not
registered or regulated under the Investment Company Act as investment
companies. To the extent that a Series selects CMOs or REMICs that do not meet
the above requirements, the Series may not invest more than 10% of its assets in
all such entities and may not acquire more than 3% of the voting securities of
any single such entity.
Asset-Backed Securities
The value of these securities may change because of changes in the market's
perception of the creditworthiness of the servicing agent for the pool, the
originator of the pool, or the financial institution providing credit support
enhancement for the pool.
Securities Lending
Each Series will enter into securities lending transactions only with
Qualified Institutions. A Series will comply with the following conditions
whenever it lends securities: (i) such Series must receive at least 100% cash
collateral or equivalent securities from the borrower; (ii) the value of the
loan is "marked-to-market" on a daily basis; (iii) such Series must be able to
terminate the loan at any time; (iv) such Series must receive reasonable
interest on the loan, as well as any dividends, interest or other distributions
on the loaned securities and any increase in market value; (v) the Series may
pay only reasonable custodian fees in connection with the loan; and (vi) voting
rights on the loaned securities may pass to the borrower except that, if a
material event adversely affecting the investment in the loaned securities
occurs, such Series must terminate the loan and regain the right to vote the
securities. A Series may pay reasonable finder's, administrative and custodial
fees in connection with a loan of its securities. In these transactions, there
are risks of delay in recovery and in some cases even of loss of rights in the
collateral should the borrower of the securities fail financially.
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Borrowing
Each Series may borrow from time to time, at its Subadviser's discretion,
to take advantage of investment opportunities, when yields on available
investments exceed interest rates and other expenses of related borrowing, or
when, in such Subadviser's opinion, unusual market conditions otherwise make it
advantageous for the Series to increase its investment capacity. A Series will
only borrow when there is an expectation that it will benefit after taking into
account considerations such as interest income and possible losses upon
liquidation. Borrowing by a Series creates an opportunity for increased net
income but, at the same time, creates risks, including the fact that leverage
may exaggerate rate changes in the net asset value of such Series' shares and in
the yield on the Series. International Stock Series does not intend to borrow
more than 5% of its total assets for investment purposes, although it may borrow
up to 20% of the value of its total assets for temporary, extraordinary or
emergency purposes and for the clearance of transactions.
Securities of Foreign Issuers
The value of a Series' foreign investments may be significantly affected by
changes in currency exchange rates. The dollar value of a foreign security
generally decreases when the value of the dollar rises against the foreign
currency in which the security is denominated and tends to increase when the
value of the dollar falls against such currency. In addition, the value of the
Series' assets may be affected by losses and other expenses incurred in
converting between various currencies in order to purchase and sell foreign
securities and by currency restrictions and exchange control regulation.
The economies of many of the countries in which a Series may invest are not
as developed as the economy of the U.S. and may be subject to significantly
different forces. Political or social instability, expropriation or confiscatory
taxation, and limitations on the removal of funds or other assets, could also
adversely affect the value of investments.
Foreign companies are generally not subject to the regulatory controls
imposed on U.S. issuers and, in general, there is less publicly available
information about foreign securities than is available about domestic
securities. Many foreign companies are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to domestic companies. Income from foreign
securities owned by a Series may be reduced by a withholding tax at the source
which would reduce dividend income payable to shareholders.
Brokerage commission rates in foreign countries, which are generally fixed
rather than subject to negotiation as in the U.S. are likely to be higher. The
securities markets in many of the countries in which a Series may invest will
have substantially less trading volume than the principal U.S. markets. As a
result, the securities of some companies in these countries may be less liquid
and more volatile than comparable U.S. securities. There is generally less
government regulation and supervision of foreign stock exchanges, brokers and
issuers which may make it difficult to enforce contractual obligations.
Liquidity Puts
International Stock Series may purchase instruments together with the right
to resell the instruments at an agreed-upon price or yield, within a specified
period prior to the maturity date of the instruments. This instrument is
commonly known as a "put bond" or a "tender option bond."
Consistent with International Stock Series' investment objective,
International Stock Series may purchase a put so that it will be fully invested
in securities while preserving the necessary liquidity to purchase securities on
a when-issued basis, to meet unusually large redemptions and to purchase at a
later date securities other than those subject to the put. The Series will
generally exercise the puts or tender options on their expiration date when the
exercise price is higher than the current market price for the related fixed
income security. Puts or tender options may be exercised prior to the expiration
date in order to fund obligations to purchase other securities or to meet
redemption requests. These obligations may arise during periods in which
proceeds from sales of International Stock Series' shares and from recent sales
of portfolio securities are insufficient to meet such obligations or when the
funds available are otherwise allocated for investment. In addition, puts may be
exercised prior to the expiration date in the event the Subadvisor for the
International Stock Series revises its evaluation of the creditworthiness of the
issuer of the underlying security. In determining whether to exercise puts or
tender options prior to their expiration date and in selecting which puts or
tender options to exercise in such circumstances, International Stock Series'
Subadviser considers, among other things, the amount of cash available to
International Stock Series, the expiration dates of the available puts or tender
options, any future commitments for securities purchases, the yield, quality and
maturity dates of the underlying securities, alternative investment
opportunities and the desirability of retaining the underlying securities in
International Stock Series.
These instruments are not deemed to be "put options" for purposes of
International Stock Series' investment restrictions.
Options on Securities and Securities Indices
A number of risk factors are associated with options transactions. There is
no assurance that a liquid secondary market on an options exchange will exist
for any particular option, at any particular time. If a Series is unable to
effect a closing purchase
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transaction with respect to covered options it has written, such Series will not
be able to sell the underlying securities or dispose of assets held in a
segregated account until the options expire or are exercised. Similarly, if a
Series is unable to effect a closing sale transaction with respect to options it
has purchased, it would have to exercise the options in order to realize any
profit and may incur transaction costs upon the purchase or sale of underlying
securities. The ability to terminate over-the-counter ("OTC") option positions
is more limited than the ability to terminate exchange-traded option positions
because the Series would have to negotiate directly with a counterparty. In
addition, with OTC options, there is a risk that the counterparty in such
transactions will not fulfill its obligations.
A Series pays brokerage commissions or spreads in connection with its
options transactions, as well as for purchases and sales of underlying
securities. The writing of options could result in significant increases in a
Series' turnover rate. A Series' transactions in options may be limited by the
requirements of the Internal Revenue Code for qualification as a regulated
investment company. Global Series will not write put options on indices.
The risks of investment in index options may be greater than options on
securities. Because index options are settled in cash, when a Series writes a
call option on an index it cannot provide in advance for its potential
settlement obligations by acquiring and holding the underlying securities. The
Series can offset some of the risk of writing a call index option position by
holding a diversified portfolio of securities similar to those on which the
underlying index is based. However, a Series cannot, as a practical matter,
acquire and hold a portfolio containing exactly the same securities as underlie
the index and, as a result, bears a risk that the value of the securities held
will vary from the value of the index.
Even if a Series could assemble a securities portfolio that exactly
reproduced the composition of the underlying index, it still would not be fully
covered from a risk standpoint because of the "timing risk" inherent in writing
index options. When an index option is exercised, the amount of cash that the
holder is entitled to receive is determined by the difference between the
exercise price and the closing index level on the date when the option is
exercised. As with other kinds of options, the Series as the call writer will
not know that it has been assigned until the next business day at the earliest.
The time lag between exercise and notice of assignment poses no risk for the
writer of a covered call on a specific underlying security, such as a common
stock, because there the writer's obligation is to deliver the underlying
security, not to pay its value as of a fixed time in the past. So long as the
writer already owns the underlying security, it can satisfy its settlement
obligations by simply delivering it, and the risk that its value may have
declined since the exercise date is borne by the exercising holder. In contrast,
even if the writer of an index call holds securities that exactly match the
composition of the underlying index, it will not be able to satisfy its
assignment obligations by delivering those securities against payment of the
exercise price. Instead, it will be required to pay cash in an amount based on
the closing index value on the exercise date; and by the time it learns that it
has been assigned, the index may have declined, with a corresponding decline in
the value of its securities portfolio. This "timing risk" is an inherent
limitation on the ability of index call writers to cover their risk exposure by
holding securities positions.
If a Series has purchased an index option and exercises it before the
closing index value for that day is available, it runs the risk that the level
of the underlying index may subsequently change. If such a change causes the
exercised option to fall out-of-the-money, the relevant Series will be required
to pay the difference between the closing index value and the exercise price of
the option (times the applicable multiplier) to the assigned writer.
A Series will not purchase put options or call options if, after any such
purchase, the aggregate premiums paid for such options would exceed 20% of such
Series' net assets. The aggregate value of the obligations underlying put
options will not exceed 25% of the relevant Series' net assets.
Except as described below, the Global Series will write call options on
indices only if on such date it holds a portfolio of stocks at least equal to
the value of the index times the multiplier times the number of contracts. When
the Global Series writes a call option on a broadly-based stock market index,
the Global Series will segregate or put into escrow with its Custodian, or
pledge to a broker as collateral for the option, cash, U.S. Government
securities, liquid high-grade debt securities or a portfolio of stocks
substantially replicating the movement of the index, in the judgment of the
Global Series' investment adviser, with a market value at the time the option
is written of not less than 100% of the current index value times the multiplier
times the number of contracts.
If the Global Series has written an option on an industry or market segment
index, it will segregate or put into escrow with its Custodian, or pledge to a
broker as collateral for the option, at least ten "qualified securities," which
are securities of an issuer in such industry or market segment, with a market
value at the time the option is written of not less than 100% of the current
index value times the multiplier times the number of contracts. Such securities
will include stocks which represent at least 50% of the weighting of the
industry or market segment index and will represent at least 50% of the Global
Series' holdings in that industry or market segment. No individual security
will represent more than 25% of the amount so segregated, pledged or escrowed.
If at the close of business on any day the market value of such qualified
securities so segregated, escrowed or pledged falls below 100% of the current
index value times the multiplier times the number of contracts, the Global
Series will so segregate, escrow or
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pledge an amount in cash, Treasury bills or other high-grade short-term
obligations equal in value to the difference. In addition, when the Global
Series writes a call on an index which is in-the-money at the time the call is
written, the Global Series will segregate with its Custodian or pledge to the
broker as collateral cash, short-term U.S. Government securities or other
high-grade, short-term debt obligations equal in value to the amount by which
the call is in-the-money times the multiplier times the number of contracts. Any
amount segregated pursuant to the foregoing sentence may be applied to the
Global Series' obligation to segregate additional amounts in the event that the
market value of the qualified securities falls below 100% of the current index
value times the multiplier times the number of contracts. A "qualified security"
is an equity security which is listed on a national securities exchange or
listed on the National Association of Securities Dealers Automated Quotation
System against which the Global Series has not written a stock call option and
which has not been hedged by the Global Series by the sale of stock index
futures. However, if the Global Series holds a call on the same index as the
call written where the exercise price of the call held is equal to or less than
the exercise price of the call written or greater than the exercise price of the
call written if the difference is maintained by the Fund in cash, Treasury bills
or other high-grade, short-term obligations in a segregated account with its
Custodian, it will not be subject to the requirements described in this
paragraph.
Options Transactions. A Series would normally purchase call options to
attempt to hedge against an increase in the market value of the type of
securities in which the Series may invest. The purchase of a call option would
entitle a Series, in return for the premium paid, to purchase specified
securities at a specified price, upon exercise of the option, during the option
period. A Series would ordinarily realize a gain if, during the options period,
the value of such securities exceeds the sum of the exercise price, the premium
paid and transaction costs; otherwise, the Series would realize a loss on the
purchase of the call option. A Series may also write a put option, which can
serve as a limited long hedge because increases in value of the hedged
investment would be offset to the extent of the premium received for writing the
option. However, if the security depreciates to a price lower than the exercise
price of the put option, it can be expected that the option will be exercised
and the Series will be obligated to buy the security at more than its market
value.
A Series would normally purchase put options to hedge against a decline in
the market value of securities in its portfolio ("protective puts"). The
purchase of a put option would entitle a Series, in exchange for the premium
paid, to sell specified securities at a specified price, upon exercise of the
option, during the option period. Gains and losses on the purchase of protective
puts would tend to be offset by countervailing changes in the value of
underlying Series' securities. A Series would ordinarily realize a gain if,
during the option period, the value of the underlying securities decreases below
the exercise price sufficiently to cover the premium and transaction costs;
otherwise, a Series would realize a loss on the purchase of the put option. A
Series may also write a call option, which can serve as a limited short hedge
because decreases in value of the hedged investment would be offset to the
extent of the premium received for writing the option. However, if the security
appreciates to a price higher than the exercise price of the call option, it can
be expected that the option will be exercised and the Series will be obligated
to sell the security at less than its market value.
Risks of Transactions in Stock Options. Writing of options involves the
risk that there will be no market in which to effect a closing transaction. An
option position may be closed out only on an exchange which provides a secondary
market for an option of the same series. Although a Series will generally write
only those options for which there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange will
exist for any particular option, or at any particular time, and for some options
no secondary market on an exchange may exist. If a Series 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.
Risks of Options on Indices. A Series' purchase and sale of options on
indices will be subject to risks described above under "Risks of Transactions in
Stock Options." In addition, the distinctive characteristics of options on
indices create certain risks that are not present with stock options.
Because the value of an index option depends upon movements in the level of
the index rather than the price of a particular stock, whether a Series will
realize a gain or loss on the purchase or sale of an option on an index depends
upon movements in the level of stock prices in the stock market generally or in
an industry or market segment rather than movements in the price of a particular
stock. Accordingly, successful use by a Series of options on indices would be
subject to a Subadviser's ability to predict correctly movements in the
direction of the stock market generally or of a particular industry. This
requires different skills and techniques than predicting changes in the price of
individual stocks.
Index prices may be distorted if trading of certain stocks included in the
index is interrupted. Trading in the index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number of
stocks included in the index. If this occurred, a Series would not be able to
close out options which it had purchased or written and, if restrictions on
exercise were imposed, may be unable to exercise an option it holds, which could
result in substantial losses to such Series. It is each Series' policy to
purchase or write options only on indices which include a number of stocks
sufficient to minimize the likelihood of a trading halt in the index.
Trading in index options commenced in April 1983 with the S&P 100 option
(formerly called the CBOE 100). Since that time a number of additional index
option contracts have been introduced including options on industry indices.
Although the markets
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for certain index option contracts have developed rapidly, the markets for
other index options are still relatively illiquid. The ability to establish and
close out positions on such options will be subject to the development and
maintenance of a liquid secondary market. It is not certain that this market
will develop in all index option contracts. A Series will not purchase or sell
any index option contract unless and until, in the relevant Subadviser's
opinion, the market for such options has developed sufficiently that such risk
in connection with such transactions is no greater than such risk in connection
with options on stocks.
Special Risks of Writing Calls on Indices. Because exercises of index
options are settled in cash, a call writer such as the Series cannot determine
the amount of its settlement obligations in advance and, unlike call writing on
specific stocks, cannot provide in advance for, or cover, its potential
settlement obligations by acquiring and holding the underlying securities.
Global Series will write call options on indices only under the circumstances
described under the circumstances described above under "Options on Securities
and Securities Indices".
Price movements in a Series' portfolio probably will not correlate
precisely with movements in the level of the index and, therefore, a Series
bears the risk that the price of the securities held by the Series may not
increase as much as the index. In such event, a Series would bear a loss on the
call which is not completely offset by movements in the price of the its
portfolio. It is also possible that the index may rise when a Series' portfolio
of stocks does not rise. If this occurred, the relevant Series would experience
a loss on the call which is not offset by an increase in the value of its
portfolio and might also experience a loss in its portfolio. However, because
the value of a diversified portfolio will, over time, tend to move in the same
direction as the market, movements in the value of the Series' portfolio in the
opposite direction as the market would be likely to occur for only a short
period or to a small degree.
Unless a Series has other liquid assets which are sufficient to satisfy the
exercise of a call, it would be required to liquidate portfolio securities in
order to satisfy the exercise. Because an exercise must be settled within hours
after receiving the notice of exercise, if such Series fails to anticipate an
exercise, it may have to borrow (in amounts not exceeding 20% of such Series'
total assets) pending settlement of the sale of securities in its portfolio and
would incur interest charges thereon.
When a Series has written a call, there is also a risk that the market may
decline between the time such Series has a call exercised against it, at a price
which is fixed as of the closing level of the index on the date of exercise, and
the time such Series is able to sell securities in its portfolio. As with stock
options, a Series will not learn that an index option has been exercised until
the day following the exercise date but, unlike a call on stock where a Series
would be able to deliver the underlying securities in settlement, such Series
may have to sell part of its stock portfolio in order to make settlement in
cash, and the price of such stocks might decline before they can be sold. This
timing risk makes certain strategies involving more than one option
substantially more risky with index options than with stock options. For
example, even if an index call which a Series has written is "covered" by an
index call held by such Series with the same strike price, such Series will bear
the risk that the level of the index may decline between the close of trading on
the date the exercise notice is filed with the clearing corporation and the
close of trading on the date the Series exercises the call it holds or the time
such Series sells the call which in either case would occur no earlier than the
day following the day the exercise notice was filed.
Special Risks of Purchasing Puts and Calls on Indices. If a Series holds an
index option and exercises it before final determination of the closing index
value for that day, it runs the risk that the level of the underlying index may
change before closing. If such a change causes the exercised option to fall
out-of-the-money, such Series will be required to pay the difference between the
closing index value and the exercise price of the option (times the applicable
multiple) to the assigned writer. Although such Series may be able to minimize
this risk by withholding exercise instructions until just before the daily cut
off time or by selling rather than exercising an option when the index level is
close to the exercise price, it may not be possible to eliminate this risk
entirely because the cut off times for index options may be earlier than those
fixed for other types of options and may occur before definitive closing index
values are announced. Global Series will not write put options on indices.
Special Risks of Purchasing OTC Options. When a Series writes an OTC
option, it generally will be able to close out the OTC option prior to its
expiration only by entering into a closing purchase transaction with the dealer
with which the relevant Series originally wrote the OTC option. Any such
cancellation, if agreed to, may require the relevant Series to pay a premium to
the counterparty. While a Series will enter into OTC options only with dealers
which agree to, and which are expected to be capable of, entering into closing
transactions with such Series, there can be no assurance that such Series will
be able to liquidate an OTC option at a favorable price at any time prior to
expiration. Until a Series is able to effect a closing purchase transaction in a
covered OTC call option the such Series has written, it will not be able to
liquidate securities used as cover until the option expires or is exercised or
different cover is substituted. Alternatively, a Series could write an OTC call
option to, in effect, close an existing OTC call option or write an OTC put
option to close its position on an OTC put option. However, the Series would
remain exposed to each counterparty's credit risk on the put or call until such
option is exercised or expires. There is no guarantee that a Series will be able
to write put or call options, as the case may be, that would effectively close
an existing position. In the event of insolvency of the counterparty, a Series
may be unable to liquidate an OTC option.
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In entering into OTC options, a Series will be exposed to the risk that the
counterparty will default on, or be unable to complete, due to bankruptcy or
otherwise, its obligation on the option. In such event, a Series may lose the
benefit of the transaction. The value of an OTC option to a Series is dependent
upon the financial viability of the counterparty. If a Series decides to enter
into transactions in OTC options, the relevant Subadviser will take into account
the credit quality of counterparties in order to limit the risk of default by
the counterparty.
Stock Index Futures. Global Series will engage in transactions in stock
index futures contracts as a hedge against changes resulting from market
conditions in the values of securities which are held in Global Series'
portfolio or which it intends to purchase. Global Series will engage in such
transactions when they are economically appropriate for the reduction of risks
inherent in the ongoing management of Global Series. [The Global Series may not
purchase or sell stock index futures if, immediately thereafter, more than
one-third of its net assets would be hedged and, in addition, except as
described above in the case of a call written and held on the same index, will
write call options on indices or sell stock index futures only if the amount
resulting from the multiplication of the then current level of the index (or
indices) upon which the option or future contract(s) is based, the applicable
multiplier(s), and the number of futures or options contracts which would be
outstanding, would not exceed one-third of the value of Global Series' net
assets]. Global Series also may not purchase or sell stock index futures for
risk management purposes if, immediately thereafter, the sum of the amount of
margin deposits on Global Series' existing futures positions and premiums paid
for such options would exceed 5% of the liquidation value of the Global Series'
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 stock index futures
for bona fide hedging purposes. In instances involving the purchase of stock
index futures contracts by the Global Series, an amount of cash, short-term U.S.
Government securities or other high-grade short-term debt obligations, equal to
the market value of the futures contracts, may be deposited in a segregated
account with the Fund's Custodian and/or in a margin account with a broker to
collateralize the position and thereby insure that the use of such futures is
unleveraged.
Under regulations of the Commodity Exchange Act, investment companies
registered under the Investment Company Act of 1940, as amended (the Investment
Company Act), are exempt from the definition of "community pool operator,"
subject to compliance with certain conditions. The exemption is conditioned upon
a requirement that all commodity futures or commodity options transactions
constitute bona fide hedging transactions within the meaning of the CFTC's
regulations. The Global Series will use stock index futures and options on
futures as described herein in a manner consistent with this requirement. The
Global Series may also enter into commodity futures or commodity options
contracts for income enhancement and risk management purposes if the aggregate
initial margin and option premiums do not exceed 5% of the liquidation value of
Global Series' total assets.
Foreign Currency Forward Contracts, Options and Futures Transactions
There is no limitation on the value of forward contracts into which a
Series may enter. However, a Series' transactions 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 a Series generally arising
in connection with the purchase or sale of its securities and accruals of
interest or dividends receivable and Series expenses. Position hedging is the
sale of a foreign currency with respect to security positions denominated or
quoted in that currency. A Series may not position hedge with respect to a
particular currency for an amount greater than the aggregate market value
(determined at the time of making any sale of a forward contract) of securities,
denominated or quoted in, or currently convertible into, such currency. A
forward contract generally has no deposit requirements, and no commissions are
charged for such trades.
A Series may enter into a forward contract to hedge against risk in the
following circumstances: (i) during the time period when such Series contracts
for the purchase or sale of a security denominated in a foreign currency, or
(ii) when such Series anticipates the receipt in a foreign currency of dividends
or interest payments on a security which it holds. By entering into a forward
contract for a fixed amount of dollars for the purchase or sale of the amount of
foreign currency involved in the underlying transaction, such Series will be
able to protect itself against a possible loss resulting from an adverse change
in the relationship between the U.S. dollar and the subject foreign currency
during the period between the date on which the security is purchased or sold,
or on which the dividend or interest payment is declared, and the date on which
such payments are made or received. Additionally, when a Series' Subadviser
believes that the currency of a particular foreign country may suffer a
substantial decline against the U.S. dollar, such Series 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 securities of a Series
denominated in such foreign currency. Further, a Series may enter into a
forward contract in one foreign currency, or basket of currencies, to hedge
against the decline or increase in value in another foreign currency. Use of a
different currency or basket of currencies magnifies the risk that movements in
the price of the forward contract will not correlate or will correlate
unfavorably with the foreign currency being hedged.
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Forward currency contracts (i) are traded in an interbank market conducted
directly between currency traders (typically commercial banks or other financial
institutions) and their customers, (ii) generally have no deposit requirements
and (iii) are typically consummated without payment of any commissions. Failure
by a Series' counterparty to make or take delivery of the underlying currency at
the maturity of the forward contract would result in the loss to such Series of
any expected benefit of the transaction.
As is the case with futures contracts, purchasers and sellers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures, by selling or purchasing, respectively, an
instrument identical to the instrument purchased or sold. Secondary markets
generally do not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward currency contracts only
by negotiating directly with the counterparty. Thus, there can be no assurance
that a Series will in fact be able to close out a forward currency contract at a
favorable price prior to maturity. In addition, in the event of insolvency of
the counterparty, a Series might be unable to close out a forward currency
contract at any time prior to maturity. In either event, such Series would
continue to be subject to market risk with respect to the position, and would
continue to be required to maintain a position in the securities or currencies
that are the subject of the hedge or to maintain cash or securities in a
segregated account.
A Series may purchase and write put and call options on foreign currencies
traded on securities exchanges or boards of trade (foreign and domestic) and OTC
options for hedging purposes in a manner similar to that in which forward
foreign currency exchange contracts and futures contracts on foreign currencies
will be employed. Options on foreign currencies are similar to options on
securities, except that a Series has the right to take or make delivery of a
specified amount of foreign currency, rather than securities.
Generally, OTC foreign currency options used by a Series are European-style
options. This means that the option is only exercisable immediately prior to its
expiration. This is in contrast to American-style options, which are exercisable
at any time prior to the expiration date of the option.
If a Series' Subadviser anticipates purchasing a foreign security and also
anticipates a rise in the value of such foreign currency (thereby increasing the
cost of such security), such Series may purchase call options or write put
options on the foreign currency. A Series could also enter into a long forward
contract or a long futures contract on such currency, or purchase a call option,
or write a put option, on a currency futures contract. The use of such
instruments could offset, at least partially, the effects of the adverse
movements of the exchange rates.
Foreign Currency Strategies--Special Considerations
A Series may use options on foreign currencies, futures on foreign
currencies, options on futures on foreign currencies and forward currency
contracts, to hedge against movements in the values of the foreign currencies in
which such Series' securities are denominated. Such currency hedges can protect
against price movements in a security that a Series owns or intends to acquire
that are attributable to changes in the value of the currency in which it is
denominated. Such hedges do not, however, protect against price movements in the
securities that are attributable to other causes.
A Series might seek to hedge against changes in the value of a particular
currency when no futures contract, forward contract or option involving that
currency is available or one of such contracts is more expensive than certain
other contracts. In such cases, a Series may hedge against price movements in
that currency by entering into a contract on another currency or basket of
currencies, the values of which such Series' Subadvisor believes will have a
positive correlation to the value of the currency being hedged. The risk that
movements in the price of the contract will not correlate perfectly with
movements in the price of the currency being hedged is magnified when this
strategy is used.
The value of futures contracts, options on futures contracts, forward
contracts and options on foreign currencies depends on the value of the
underlying currency relative to the U.S. dollar. Because foreign currency
transactions occurring in the interbank market might involve substantially
larger amounts than those involved in the use of futures contracts, forward
contracts or options, a Series could be disadvantaged by dealing in the odd-lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirements that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the futures contracts or options until they
reopen.
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Settlement of futures contracts, forward contracts and options involving
foreign currencies might be required to take place within the country issuing
the underlying currency. Thus, a Series might be required to accept or make
delivery of the underlying foreign currency in accordance with any U.S. or
foreign regulations regarding the maintenance of foreign banking arrangements by
U.S. residents and might be required to pay any fees, taxes and charges
associated with such delivery assessed in the issuing country.
Covered Forward Currency Contracts, Futures Contracts and Options
Transactions using forward currency contracts, futures contracts and
options (other than options that the Series has purchased) expose a Series to an
obligation to another party. A Series will not enter into any such transactions
unless it owns either (1) an offsetting ("covered") position in securities,
currencies, or other options, forward currency contracts or futures contracts,
or (2) liquid assets with a value sufficient at all times to cover its potential
obligations not covered as provided in (1) above. The Series will comply with
SEC guidelines regarding cover for these instruments and, if the guidelines so
require, set aside cash or liquid assets in a segregated account with its
Custodian in the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding forward currency contract, futures contract or
option is open, unless they are replaced with similar assets. As a result, the
commitment of a large portion of the Series' assets to cover segregated accounts
could impede portfolio management or the Series' ability to meet redemption
requests or other current obligations.
Limitations on Purchase and Sale of Options on Foreign Currencies and
Futures Contracts on Foreign Currencies
Global Series will not (a) write puts having aggregate exercise prices
greater than 25% of total net assets; or (b) purchase (i) put options on
currencies or futures contracts on foreign currencies or (ii) call options on
foreign currencies if, after any such purchase, the aggregate premiums paid for
such options would exceed 10% of Global Series' total net assets.
Risks of Transactions in Options on Foreign Currencies
An option position may be closed out only on an exchange, board of trade or
other trading facility which provides a secondary market for an option of the
same series. Although a Series will generally purchase or write only those
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market on an exchange will exist for any
particular option, or at any particular time, and for some options no secondary
market on an exchange or otherwise may exist. In such event it might not be
possible to effect closing transactions in particular options, with the result
that a Series would have to exercise its options in order to realize any profits
and would incur brokerage commissions upon the exercise of call options and upon
the subsequent disposition of underlying currencies acquired through the
exercise of call options or upon the purchase of underlying currencies for the
exercise of put options. If a Series as a covered call option writer is unable
to effect a closing purchase transaction in a secondary market, it will not be
able to sell the underlying currency until the option expires or it delivers the
underlying currency upon exercise.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or a clearing
corporation may not at all times be adequate to handle current trading volume;
or (vi) one or more exchanges could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that exchange (or in the class or series of options) would cease to exist,
although outstanding options on that exchange that had been issued by a clearing
corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms. There is no assurance that higher
than anticipated trading activity or other unforeseen events might not, at
times, render certain of the facilities of any of the clearing corporations
inadequate, and thereby result in the institution by an exchange of special
procedures which may interfere with the timely execution of customers' orders.
The Series intend to purchase and sell only those options which are cleared by
a clearinghouse whose facilities are considered to be adequate to handle the
volume of options transactions.
Risks of Options on Foreign Currencies
Options on foreign currencies involve the currencies of two nations and,
therefore, developments in either or both countries can affect the values of
options on foreign currencies. Risks include those described in the Prospectus
under "How the Fund Invests--Risks and Special Considerations," including
government actions affecting currency valuation and the movements of
B-12
<PAGE>
currencies from one country to another. The quality of currency underlying
option contracts represent odd lots in a market dominated by transactions
between banks; this can mean extra transaction costs upon exercise. Options
markets may be closed while round-the-clock interbank currency markets are open,
and this can create price and rate discrepancies.
Risks of Transactions in Futures Contracts
There are several risks in connection with the use of futures contracts as
a hedging device. Due to the imperfect correlation between the price of futures
contracts and movements in the currency or group of currencies, the price of a
futures contract may move more or less than the price of the currencies being
hedged. Therefore, a correct forecast of currency rates, market trends or
international political trends by the Manager or a Subadviser may still not
result in a successful hedging transaction.
Although a Series will purchase or sell futures contracts only on exchanges
where there appears to be an adequate secondary market, there is no assurance
that a liquid secondary market on an exchange will exist for any particular
contract or at any particular time. Accordingly, there can be no assurance that
it will be possible, at any particular time, to close a futures position. In the
event a Series could not close a futures position and the value of such
position declined, such Series would be required to continue to make daily cash
payments of variation margin. There is no guarantee that the price movements of
the portfolio securities denominated in foreign currencies will, in fact,
correlate with the price movements in the futures contracts and thus provide an
offset to losses on a futures contract. Currently, futures contracts are
available on the Australian Dollar, British Pound, Canadian Dollar, Japanese
Yen, Swiss Franc, Deutsche Mark and Eurodollar.
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 Series' futures or
options transactions constitute bona fide hedging transactions within the
meaning of the Commodity Futures Trading Commission's (CFTC's) regulations. The
Series will use currency futures and options on futures in a manner consistent
with this requirement. The Series may also enter into futures or related options
contracts for income enhancement and risk management purposes if the aggregate
initial margin and option premiums do not exceed 5% of the liquidation value of
the relevant Series' total assets.
Successful use of futures contracts by a Series is also subject to the
ability of such Series' Manager or Subadviser to predict correctly movements in
the direction of markets and other factors affecting currencies generally. For
example, if a Series has hedged against the possibility of an increase in the
price of securities in its portfolio and the price of such securities increases
instead, such Series will lose part or all of the benefit of the increased value
of its securities because it will have offsetting losses in its futures
positions. In addition, in such situations, if such Series has insufficient cash
to meet daily variation margin requirements, it may need to sell securities to
meet such requirements. Such sales of securities may be, but will not
necessarily be, at increased prices which reflect the rising market. A Series
may have to sell securities at a time when it is disadvantageous to do so.
The hours of trading of futures contracts may not conform to the hours
during which a Series may trade the underlying securities. To the extent that
the futures markets close before the securities markets, significant price and
rate movements can take place in the securities markets that cannot be reflected
in the futures markets.
Options on Futures Contracts
An option on a futures contract gives the purchaser the right, but not the
obligation, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the option exercise period. The writer of the
option is required upon exercise to assume an offsetting futures position (a
short position if the option is a call and a long position if the option is a
put). Upon exercise of the option, the assumption of offsetting futures
positions by the writer and holder of the option will be accompanied by delivery
of the accumulated cash balance in the writer's futures margin account which
represents the amount by which the market price of the futures contract, at
exercise, exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract. Currently options can
be purchased or written with respect to futures contracts on the Australian
Dollar, British Pound, Canadian Dollar, Japanese Yen, Swiss Franc, Deutsche Mark
and Eurodollar.
The holder or writer of an option may terminate its position by selling or
purchasing an option of the same series. There is no guarantee that such closing
transactions can be effected.
Illiquid Securities
Global Series may hold up to 5%, and International Stock Series may hold up
to 15%, of its net assets in illiquid securities. Illiquid securities include
repurchase agreements which have a maturity of longer than seven days and
securities that are illiquid
B-13
<PAGE>
by virtue of the absence of a readily available market or legal or
contractual restrictions on resale. Historically, illiquid securities have
included securities subject to contractual or legal restrictions on resale
because they have not been registered under the Securities Act of 1933, as
amended ("Securities Act"), securities which are otherwise not readily
marketable and repurchase agreements having a maturity of longer than seven
days. Securities which have not been registered under the Securities Act are
referred to as private placements or restricted securities and are purchased
directly from the issuer or in the secondary market. Mutual funds do not
typically hold a significant amount of these restricted or other illiquid
securities because of the potential for delays on resale and uncertainty in
valuation. Limitations on resale may have an adverse effect on the marketability
of portfolio securities and a mutual fund might be unable to dispose of
restricted or other illiquid securities promptly or at reasonable prices and
might thereby experience difficulty satisfying redemptions within seven days. A
mutual fund might also have to register such restricted securities in order to
dispose of them resulting in additional expense and delay. Adverse market
conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments.
Rule 144A of 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 Subadvisers anticipate that the market for certain
restricted securities such as institutional commercial paper will expand further
as a result of this new regulation and the development of automated systems for
the trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the NASD.
Restricted securities eligible for resale pursuant to Rule 144A and
commercial paper for which there is a readily available market will not be
deemed illiquid. The Subadvisers will monitor the liquidity of such restricted
securities, subject to the supervision of the Manager and the Board of
Directors. In reaching liquidity decisions, Subadvisers will consider, among
other things, the following factors: (1) the frequency of trades and quotes for
the security; (2) the number of dealers wishing to purchase or sell the security
and the number of other potential purchasers; (3) dealer undertakings to make a
market in the security; and (4) the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of the transfer). In addition, in order
for commercial paper that is issued in reliance on Section 4(2) of the
Securities Act to be considered liquid, (i) it must be rated in one of the two
highest rating categories by at least two NRSROs, or if only one NRSRO rates the
securities, by that NRSRO, or, if unrated, be of comparable quality in the view
of the relevant Subadviser, 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.
Other Investment Techniques
Each Series may take advantage of opportunities in the area of options and
futures contracts and any other derivative instruments that are not presently
contemplated for use by it or that are not currently available but that may be
developed, to the extent such opportunities are both consistent with its
investment objective and legally permissible for it. Before entering into such
transactions or making any such investment, a Series will provide appropriate
disclosure in its Prospectus.
INVESTMENT RESTRICTIONS
The investment restrictions listed below have been adopted by the indicated
Series as fundamental policies, except as otherwise indicated. Under the
Investment Company Act, a fundamental policy of a Series may not be changed
without the vote of a majority of the outstanding voting securities of such
Series. As defined in the Investment Company Act, a "majority of a Fund's
outstanding voting securities" means the lesser of (i) 67% of the shares
represented at a meeting at which more than 50% of the outstanding shares are
present in person or represented by proxy or (ii) more than 50% of the
outstanding shares. For purposes of the following limitations: (i) all
percentage limitations apply immediately after a purchase or initial investment;
and (ii) any subsequent change in any applicable percentage resulting from
market fluctuations does not require elimination of any asset from a Series.
Global Series may not:
1. Purchase securities on margin (but Global Series may obtain such
short-term credits as may be necessary for the clearance of transactions);
provided that the deposit or payment by Global Series of initial or maintenance
margin in connection with futures or options is not considered the purchase of a
security on margin.
B-14
<PAGE>
2. Make short sales of securities or maintain a short position.
3. Issue senior securities, borrow money or pledge its assets, except that
Global Series may borrow up to 20% of the value of its total assets (calculated
when the loan is made) for temporary, extraordinary or emergency purposes or for
the clearance of transactions. Global Series may pledge up to 20% of the value
of its total assets to secure such borrowings. For the purpose of this
restriction, obligations of the Fund to Directors pursuant to deferred
compensation arrangements, the purchase and sale of securities on a when-issued
or delayed delivery basis, the purchase and sale of forward foreign exchange
contracts, options and futures contracts and any collateral arrangements with
respect to the purchase and sale of forward foreign exchange contracts, options
and futures contracts are not deemed to be the issuance of a senior security or
a pledge of assets.
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
Global Series' total assets, more than 5% of Global Series' total assets (taken
at current value) would then be invested in securities of a single issuer, or
(ii) more than 25% of Global Series' total assets (taken at current value) would
be invested in a single industry.
5. Purchase any security if as a result the Global Series would then hold
more than 10% of the outstanding voting securities of an issuer.
6. Buy or sell commodities or commodity contracts or real estate or invest
in real estate, although it may purchase or sell securities which are secured by
real estate and securities of companies which invest or deal in real estate (for
the purposes of this restriction, stock options, options on debt securities,
options on stock indices, stock indices futures, options on stock index futures,
futures contracts on currencies, options on such contracts and forward foreign
exchange contracts are not deemed to be a commodity or commodity contract).
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.
8. Make investments for the purpose of exercising control or management.
9. Invest in securities of other registered investment companies, except by
purchases in the open market involving only customary brokerage commissions and
as a result of which not more than 10% of its total assets (determined at the
time of investment) would be invested in such securities, 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, although it may invest in the common stocks 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 Global Series' total assets).
12. Purchase warrants if as a result the Fund would then have more than 5%
of its total assets (taken at current value) invested in warrants.
International Stock Series may not:
1. Purchase any security if, as a result, with respect to 75% of
International Stock Series' total assets, more than 5% of the value of its total
assets (determined at the time of investment) would then be invested in the
securities of any one issuer.
2. Purchase a security if more than 10% of the outstanding voting
securities of any one issuer would be held by International Stock Series.
3. Purchase a security if, as a result, 25% or more of the value of its
total assets (determined at the time of investment) would be invested in
securities of one or more issuers having their principal business activities in
the same industry. This restriction does not apply to obligations issued or
guaranteed by the United States Government, its agencies or instrumentalities.
4. Purchase or sell real estate or interests therein (including limited
partnership interests), although International Stock Series may purchase
securities of issuers which engage in real estate operations and securities
which are secured by real estate or interests therein.
5. Purchase or sell commodities or commodity futures contracts, except that
International Stock Series may purchase and sell financial futures contracts and
options thereon and that forward contracts are not deemed to be commodities or
commodity futures contracts.
6. Purchase oil, gas or other mineral leases, rights or royalty contracts
or exploration or development programs, except that International Stock Series
may invest in the securities of companies which operate, invest in or sponsor
such programs.
7. Issue senior securities, borrow money or pledge its assets, except that
International Stock Series may borrow from banks or through forward rolls,
dollar rolls or reverse repurchase agreements up to 20% of the value of its
total assets to take
B-15
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advantage of investment opportunities, for temporary, extraordinary or
emergency purposes, or for the clearance of transactions and may pledge up to
20% 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; the purchase and sale of options, financial futures
contracts and options thereon; the entry into repurchase agreements and
collateral and margin arrangements with respect to any of the foregoing, will
not be deemed to be a pledge of assets nor the issuance of senior securities.
8. Make loans except by the purchase of fixed income securities in which
International Stock Series may invest consistently with its investment objective
and policies or by use of reverse repurchase and repurchase agreements, forward
rolls, dollar rolls and securities lending arrangements.
9. Make short sales of securities.
10. Purchase securities on margin, except for such short-term loans as are
necessary for the clearance of purchases of portfolio securities. (For the
purpose of this restriction, the deposit or payment by International Stock
Series of initial or maintenance margin in connection with financial futures
contracts is not considered the purchase of a security on margin.)
11. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, the Series may be deemed to be an
underwriter under certain federal securities laws. International Stock Series
has no limit with respect to investments in restricted securities.
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of a Series' 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 a Series'
asset coverage for borrowings falls below 300%, the Series will take prompt
action to reduce its borrowings, as required by applicable law.
DIRECTORS AND OFFICERS
Position with Principal Occupation
Name, Address and Age(1) Fund During Past Five Years
- ------------------------ ------------- ----------------------
Edward D. Beach (71) Director President and Director of BMC Fund,
Inc., a closed-end investment
company; prior thereto, Vice
Chairman of Broyhill Furniture
Industries, Inc.; Certified
Public Accountant; Secretary and
Treasurer of Broyhill Family
Foundation, Inc.; Chairman of the
Board of Trustees of Mars Hill
College.
Stephen C. Eyre (73) Director Executive Director of The John A.
Hartford Foundation, Inc.
(charitable foundation) (since
May 1985); Director of Faircom,
Inc.; Trustee Emeritus of Pace
University.
Delayne Dedrick Gold (58) Director Marketing and Management
Consultant.
* Robert F. Gunia (49) Vice President Comptroller, Prudential Investments
and Director (since May 1996); Senior Vice
President (since March 1987) of
Prudential Securities
Incorporated (Prudential
Securities); Director (since June
1987), Prudential Mutual Fund
Services, Inc. (PMFS); Executive
Vice President and Treasurer PMF,
and formerly Chief Administrative
Officer (July 1990-September
1996), Director (January
1989-September 1996), Executive
Vice President, Treasurer and
Chief Financial Officer (June
1987-September 1996) of
Prudential Mutual Fund
Management, Inc., Vice President
and Director of The Asia Pacific
Fund, Inc. (since May 1989).
Don G. Hoff (60) Director Chairman and Chief Executive
Officer of Intertec, Inc.
(investments) since 1980;
Chairman and CEO of EHS, Inc.;
Director of Innovative Capital
Management, Inc., The Asia
Pacific Fund, Inc. and The
Greater China Fund, Inc.
B-16
<PAGE>
Position with Principal Occupation
Name, Address and Age(1) Fund During Past Five Years
- ------------------------ ------------- ----------------------
Robert E. LaBlanc (62) Director President of Robert E. LaBlanc
Associates, Inc.
(telecommunications) since 1981;
formerly General Partner at
Salomon Brothers; formerly Vice
Chairman of Continental Telecom;
Director of Storage Technology
Corporation, Titan Corporation,
Tribune Company; Trustee of
Manhattan College.
* Mendel A. Melzer (35) Director Chief Investment Officer (since
September1996); formerly Chief
Financial Officer (November
1995-October 1996) of Prudential
Investments; formerly 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),
Senior Vice President of
Prudential Capital Corporation
(July 1989-April 1991); Chairman
and Director of Prudential Series
Fund, Inc.
* Richard A. Redeker (53) President and Employee of Prudential Investments,
Director former President, Chief Executive
Officer and Director (October
1993-September 1996) of PMF;
former Executive Vice President,
Director and Member of the
Operating Committee
(1993-September 1996). Prudential
Securities; Director (since
October 1993) of Prudential
Securities Group, Inc.; formerly
Senior Executive Vice President
and Director of Kemper Financial
Services, Inc. (September
1978-September 1993).
Robin B. Smith (57) Director Chairman (since August 1996) and
Chief Executive Officer (since
January 1988), formerly President
(September 1981-August 1996) of
Publishers Clearing House;
Director of BellSouth
Corporation, The Omnicom Group,
Inc., Texaco Inc., Spring
Industries Inc. and Kmart
Corporation.
Stephen Stoneburn (53) Director President and Chief Executive
Officer of Quadrant Media Corp.
(a publishing company) (since
June 1996); formerly President of
Argus Integrated Media, Inc.
(June 1995-June 1996); formerly
Senior Vice President and
Managing Director, Cowles
Business Media (January
1993-1995); prior thereto, Senior
Vice President (January 1991-
1992) and Publishing Vice
President (May 1989-December
1990) of Gralla Publications (a
division of United Newspapers,
U.K.); formerly Senior Vice
President of Fairchild
Publications, Inc.
Nancy H. Teeters (66) Director Economist; formerly Vice President
and Chief Economist (March 1986-
June 1990) of International
Business Machines Corporation;
former Member of the Board of
Governors of the Horace Rackham
School of Graduate Studies of the
University of Michigan; Director
of Inland Steel Corporation
(since July 1991).
David W. Drasnin (58) Vice President Vice President and Branch Manager
39 Public Square of Prudential Securities.
Suite 500
Wilkes Barre, PA
S. Jane Rose (50) Secretary Senior Vice President and Senior
Counsel of PMF; Senior Vice
President and Senior Counsel of
Prudential Securities (since July
1992); formerly Vice President
and Associate General Counsel of
Prudential Securities.
B-17
<PAGE>
Position with Principal Occupation
Name, Address and Age(1) Fund During Past Five Years
- ------------------------ ------------- ----------------------
Ellyn C. Vogin (35) Assistant Vice President and Associate
Secretary General Counsel of Prudential
Securities and PMF (since March
1995); prior thereto, associated
with the law firm of Fulbright &
Jaworski L.L.P.
Grace C. Torres (37) Treasurer and First Vice President (since March
Principal 1994) of PMF; First Vice
Financial and President (since March 1994) of
Accounting Prudential Securities; Vice
Officer President of Bankers Trust (July
1989-March 1994).
Stephen M. Ungerman (43) Assistant First Vice President (since
Treasurer February 1993) of PMF; Tax
Director of Prudential
Investments and the Private Asset
Group of The Prudential Insurance
Company of America (since March
1996); prior thereto, Senior Tax
Manager of Price Waterhouse LLP
(1981-January 1993).
- ----------
(1) Unless otherwise noted, the address for each of the above persons is
c/o Prudential Mutual Fund Management LLC, Gateway Center Three,
100 Mulberry Street, 9th Floor, Newark, New Jersey 07102-4077.
* Interested director, as defined in the Investment Company Act, by reason of
his affiliation with Prudential Securities or PMF.
Directors and officers of the Fund are also trustees, directors and officers
of some or all of the other investment companies distributed by Prudential
Securities.
The officers conduct and supervise the daily business operations of the
Fund, while the Directors, in addition to their functions set forth under
"Manager" and "Distributor," review such actions and decide on general policy.
The Fund pays each of its Directors who is not an "affiliated" person of PMF
annual compensation of $12,000, in addition to certain out-of-pocket expenses.
The chairman of the Audit Committee receives an additional $4,000 per year.
Directors may receive their Directors' fees pursuant to a deferred fee
agreement with the Fund. Under the terms of such agreement, the Fund accrues
daily the amount of Directors' fees which accrue interest at a rate equivalent
to the prevailing rate applicable to 90-day U.S. Treasury Bills at the beginning
of each calendar quarter or, pursuant to an SEC exemptive order, at the daily
rate of return of the Fund (the Fund rate). Payment of the interest so accrued
is also deferred and accruals become payable at the option of the Director. The
Fund's obligation to make payments of deferred Directors' fees, together with
interest thereon, is a general obligation of the Fund.
The 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, Messrs. Beach
and Eyre, Jacobs and Owens are scheduled to retire on December 31, 1999 and
1998, respectively.
Pursuant to the terms of 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.
B-18
<PAGE>
The following table sets forth the aggregate compensation paid by the Fund
for the fiscal year ended October 31, 1996 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
Prudential Mutual Fund Management LLC (Fund Complex) for the calendar year ended
December 31, 1995. In October 1996, shareholders elected a new Board of
Directors. Below is listed all Directors who have served the Fund during its
most recent fiscal year, as well as the new Directors who took office after the
shareholder meeting in October.
Compensation Table
<TABLE>
<CAPTION>
Total
Pension or Compensation
Retirement From Fund
Aggregate Benefits Accrued Estimated Annual and Fund
Compensation As Part of Fund Benefits Upon Complex Paid
Name and Position From Fund Expenses Retirement to Directors
----------------- --------- -------- ---------- ------------
<S> <C> <C> <C> <C>
Edward D. Beach--Director -- None N/A $183,500(22/43)*
Stephen C. Eyre--Director $12,000 None N/A $ 41,000(4/5)*
Delayne D. Gold--Director $12,000 None N/A $183,250(24/45)*
Robert F. Gunia (1)--Director -- None N/A $ 0
Don G. Hoff--Director $12,000 None N/A $ 50,625(5/6)*
Harry A. Jacobs, Jr. (1)--Former Director -- None N/A $ 0
Sidney R. Knafel--Former Director $12,000 None N/A $ 35,500(4/5)*
Robert F. LaBlanc--Director $12,000 None N/A $ 35,500(4/5)*
Mendel A. Melzer (1)--Director -- None N/A $ 0
Thomas A. Owens, Jr.--Former Director $12,000 None N/A $ 87,000(12/13)*
Richard A. Redeker (1)--Director -- None N/A $ 0
Robin B. Smith--Director $12,000 None N/A $100,741(10/19)*
Stephen Stoneburn--Director -- None N/A $ 44,875(7/7)*
Nancy H. Teeters--Director -- None N/A $107,500(13/31)*
Clay T. Whitehead--Former Director $12,000 None N/A $ 35,500(4/5)*
</TABLE>
- ----------
(1) Directors who are "interested" do not receive compensation from Fund
Complex (including the Fund).
* Indicates number of funds/portfolios in Fund Complex (including the Fund)
to which aggregate compensation relates.
As of December 27, 1996, the Directors and officers of the Fund, as a
group, owned less than 1% of the outstanding common stock of the Fund.
As of December 27, 1996, there were no beneficial owners, directly or
indirectly, of more than 5% of the outstanding common stock of Global Series and
the beneficial owners, directly or indirectly, of more than 5% of the
outstanding common stock of International Stock Series were: Prudential Employee
Savings Plan, Att. Maria Preta, 71 Hanover Road, Florham Park, New Jersey held
9,058,801 Class Z shares (or approximately 76% of the outstanding Class Z
shares); Prudential Trust Company, FBO Pru-DC Trust Accounts, Att. John Surdy,
30 Scranton Office Park, Moosic, Pennsylvania held 2,791,175 Class Z shares (or
approximately 23% of the outstanding Class Z shares); Prudential Securities
Inc., FA, Philip J. Hines & Linda M. Hines, 298 Avenue O SE, Winter Haven,
Florida held 402 Class A shares (or approximately 52% of the outstanding Class A
shares); Prudential Securitiess C/F, Frank Scoggins, IRA DTD 07/02/85, 7622
Rockpoint Drive, Austin, Texas held 6,717 Class A shares (or approximately 86%
of the outstanding Class A shares); Mrs. Joyce Childers, 1705 Pond Crk.,
Draffin, Kentucky held 581 Class A shares (or approximately 75% of the
outstanding Class A shares); Mrs. Barbara Williams & Mr. John Williams JTTEN,
4140 E. 173rd Street, Cleveland, Ohio held 286 Class B shares (or approximately
17% of the outstanding Class B shares); Prudential Securities Inc. FA, Patricia
A. White, No Address Available held 1,122 Class B shares (or approximately 67%
of the outstanding Class B shares); Mr. David Pesacov, 505 Marlin Road, No. Palm
Beach, Florida held 238 Class B shares (or approximately 14% of the outstanding
Class B shares).
As of December 27, 1996, with respect to the Global Series, Prudential
Securities was the record holder for other beneficial owners of 13,908 Class A
shares (less than 1% of the outstanding Class A shares), 14,402,058 Class B
shares (or approximately 66% of the outstanding Class B shares); 396,520 Class C
shares (or approximately 77% of the outstanding Class C shares) and 3,035 Class
Z shares (less than 1% of the outstanding Class Z shares) of the Fund. In the
event of any meetings of shareholders, Prudential Securities will forward, or
cause the forwarding of, proxy materials to the beneficial owners for which it
is the record holder. As of December 27, 1996, with respect to International
Stock Series, Prudential Securities was the record holder for other beneficial
owners of 7,705 Class A shares (or approximately 100% of the outstanding Class A
shares), 1,695 Class B shares (or approximately 99% of the outstanding Class B
shares); and did not hold any Class C or Class Z shares for other beneficial
owners.
B-19
<PAGE>
MANAGER
The manager of each Series is Prudential Mutual Fund Management LLC (PMF or
the Manager), Gateway Center Three, 100 Mulberry Street, Newark, New Jersey
07102-4077. PMF serves as manager to substantially all of the other investment
companies that, together with the Series, comprise the "Prudential Mutual
Funds." See "How the Fund is Managed" in the Prospectus. As of November 30,
1996 PMF managed and/or administered open-end and closed-end management
investment companies with assets of approximately $53.4 billion and, according
to the Investment Company Institute, as of August 31, 1996, the Prudential
Mutual Funds were the 17th largest family of mutual funds in the United States.
PMF is a subsidiary of Prudential Securities Incorporated and The
Prudential Insurance Company of America (Prudential). PMF has three wholly-owned
subsidiaries: Prudential Mutual Fund Distributors, Inc., Prudential Mutual Fund
Services, Inc. (PMFS or the Transfer Agent) and Prudential Mutual Fund
Investment Management, Inc. PMFS 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 Agreements with the Fund with respect to each
Series (the Management Agreement), PMF, subject to the supervision of the Fund's
Board of Directors and in conformity with the stated policies of each Series,
manages both the investment operations of the Series and the composition of the
Series' portfolio, including the purchase, retention, disposition and loan of
securities. In connection therewith, PMF is obligated to keep certain books and
records of the Series. PMF also administers the Series' corporate affairs and,
in connection therewith, furnishes the Series with office facilities, together
with those ordinary clerical and bookkeeping services which are not being
furnished by State Street Bank and Trust Company, the Fund's custodian, and
PMFS, the Fund's transfer and dividend disbursing agent. The management services
of PMF for the Series are not exclusive under the terms of the Management
Agreement and PMF is free to, and does, render management services to others.
For its services, PMF receives, pursuant to the Management Agreement, a fee
at an annual rate of .75% of Global Series average daily net assets and 1% of
International Stock Series' average daily net assets. The fee is computed daily
and payable monthly. The Management Agreement also provides that, in the event
the expenses of a Series (including the fees of PMF, but excluding interest,
taxes, brokerage commissions, distribution fees and litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of a Series' 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 a Series' shares are
qualified for offer and sale, the compensation due to PMF will be reduced by the
amount of such excess. Reductions in excess of the total compensation payable to
PMF will be paid by PMF to the Fund. Currently, each Series believes that there
are no such expense limitations.
In connection with its management of the corporate affairs of each Series,
PMF bears the following expenses:
(a) the salaries and expenses of all of its and a Series' personnel
except the fees and expenses of Directors who are not affiliated persons of
PMF or the Series' investment adviser;
(b) all expenses incurred, by PMF or by a Series in connection with
managing the ordinary course of such Series' business, other than those
assumed by such Series as described below;
(c) with respect to the Global Series, the costs and expenses payable
to The Prudential Investment Corporation (PIC) pursuant to the subadvisory
agreement between PMF and PIC;
(d) with respect to International Stock Series, the costs and
expenses payable to Mercator Asset Management, L.P. (Mercator) pursuant to
the subadvisory agreement between PMF and Mercator; and
(e) with respect to International Stock Series, the costs and expenses
payable to PIC pursuant to a subadvisory agreement between PMF and PIC.
Under the terms of the Management Agreements, each Series 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 such Series' 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 each Series and of pricing such Series' shares,
(d) the charges and expenses of legal counsel and independent accountants for
such Series, (e) brokerage commissions and any issue or transfer taxes
chargeable to such Series in connection with its securities transactions, (f)
all taxes and corporate fees payable by such Series to governmental agencies,
(g) the fees of any trade associations of which such Series may be a member, (h)
the cost of stock certificates representing shares of such Series, (i) the cost
of fidelity and liability insurance, (j) the fees and expenses involved in
registering and maintaining registration of such Series and of its shares with
the Securities and Exchange Commission, registering such Series and qualifying
its shares under state securities laws, including the preparation and printing
of the Fund's registration statements and prospectuses for such purposes, (k)
allocable communications expenses with respect to investor services and all
expenses of shareholders' and Directors' meetings and of
B-20
<PAGE>
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 such Series' business and (m) distribution
fees.
The Management Agreements provide that PMF will not be liable for any error
of judgment or for any loss suffered by a Series 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 Agreements provide 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 Agreements will
continue in effect for a period of more than two years from the date of
execution only so long as such continuance is specifically approved at least
annually in conformity with the Investment Company Act. For the fiscal years
ended October 31, 1996, 1995 and 1994, PMF received management fees of
$4,118,594, $3,481,921 and $3,032,864, respectively, from Global Series and
$162,415 for the period October 1, 1996 through October 31, 1996 from the newer
International Stock Series.
With respect to Global Series, PMF has entered into a Subadvisory Agreement
(the Subadvisory Agreement) with PIC (the Subadviser), a wholly-owned subsidiary
of The Prudential Insurance Company of America (Prudential). The Subadvisory
Agreement provides that PIC will furnish investment advisory services in
connection with the management of the Global Series. In connection therewith,
PIC is obligated to keep certain books and records of the Global Series. PMF
continues to have responsibility for all investment advisory services pursuant
to the Management Agreement and supervises PIC's performance of such services.
PIC is reimbursed by PMF for the reasonable costs and expenses incurred by PIC
in furnishing those services. Investment advisory services are provided to the
Global Series by a unit at PIC, known as Prudential Mutual Fund Investment
Management.
With respect to International Stock Series, PMF has entered into a
Subadvisory Agreement (the Subadvisory Agreement) with Mercator. Dedicated to
global and international common stock investing, Mercator was initially founded
in 1984 by senior professionals formerly associated with Templeton Investment
Counsel as Mercator Asset Management, Inc. ("Mercator, Inc."). On November 30,
1995, Mercator, a limited partnership organized under the laws of the State of
Delaware, assumed the investment advisory business of Mercator, Inc. As of
December 31, 1996, Mercator had approximately $2.0 billion in assets under
management. The Subadvisory Agreement provides that Mercator will furnish
investment advisory services in connection with the management of the
International Stock Series. In connection therewith, Mercator is obligated to
keep certain books and records of the International Stock Series. PMF continues
to have responsibility for all investment advisory services pursuant to the
Management Agreement and supervises Mercator's performance of such services.
With respect to International Stock Series, and pursuant to a subadvisory
agreement with PMF, PIC provides investment advisory services to such Series
with respect to (i) the management of short-term assets, including cash, money
market instruments and repurchase agreements and (ii) the lending of portfolio
securities in connection with the management of the International Stock Series.
For these services, PMF will reimburse PIC for reasonable costs and expenses
incurred by PIC determined in a manner acceptable to PMF.
Each 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 relevant Management Agreement. Each Subadvisory Agreement may
be terminated by the Fund, PMF, or (i) with respect to International Stock
Series, Mercator or PIC and (ii) with respect to Global Series, PIC, upon not
more than 60 days', nor less than 30 days', written notice. Each Subadvisory
Agreement provides that it will continue in effect for a period of more than two
years from its execution only so long as such continuance is specifically
approved at least annually in accordance with the requirements of the Investment
Company Act.
DISTRIBUTOR
Prudential Securities Incorporated, One Seaport Plaza, New York, New York
10292 (Prudential Securities), acts as the distributor of the shares of the
Series.
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
on behalf of each Series under Rule 12b-1under the Investment Company Act and a
distribution agreement (the Distribution Agreement), Prudential Securities (the
Distributor) incurs the expenses of distributing the Fund's Class A, Class B and
Class C shares. Prudential Securities serves as the Distributor of the Class Z
shares and incurs the expenses of distributing the Series' Class Z shares under
the Distribution Agreement with the Fund, none of which are reimbursed by or
paid for by either Series. See "How the Fund is Managed--Distributor" in the
Prospectus.
Each Series Class A Plan provides that (i) up to .25 of 1% of the average
daily net assets of the Class A shares of such Series may be used to pay for
personal service and the maintenance of shareholder accounts (service fee) and
(ii) total distribution fees (including the service fee of .25 of 1%) may not
exceed .30 of 1% of the average daily net assets of the Class A shares of such
Series. The Global Series' Class B Plan provides that (i) up to .25 of 1% of the
average daily net assets of the Class B shares of such Series may be paid as a
service fee and (ii) .50 of 1% (not including the service fee) per annum of such
Series' average daily net
B-21
<PAGE>
assets up to the level of average daily net assets as of February 26, 1986, plus
.75 of 1% of the average daily net assets of the Class B shares of such Series
in excess of such level may be used as compensation for distribution-related
expenses with respect to the Class B shares of such Series. The International
Stock Series' Class B Plan provides that (i) up to .25 of 1% of the average
daily net assets of the Class B shares of such Series may be paid as a service
fee and (ii) .75 of 1% (not including the service fee) per annum of such Series'
average daily net assets may be used as compensation for distribution-related
expenses with respect to the Class B shares (asset-based sales charge). Each
Series Class C Plan provides that (i) up to .25 of 1% of the average daily net
assets of the Class C shares of such Series may be paid as a service fee and
(ii) .75 of 1% (not including the service fee) per annum of such Series' average
daily net assets may be used as compensation for distribution-related expenses
with respect to the Class C shares (asset-based sales charge).
Prudential Securities will also receive the proceeds of contingent deferred
sales charges paid by holders of Class B and Class C shares upon certain
redemptions of Class B and Class C shares. See "Shareholder Guide--How to Sell
Your Shares--Contingent Deferred Sales Charges" in the Prospectus.
The Class A, Class B and Class C Plans continue in effect from year to
year, provided that each such continuance is approved at least annually by a
vote of the Board of Directors, including a majority vote of the Rule 12b-1
Directors, cast in person at a meeting called for the purpose of voting on such
continuance. The Plans may each be terminated at any time, without penalty, by
the vote of a majority of the Rule 12b-1 Directors or by the vote of the holders
of a majority of the outstanding shares of the applicable class of the Series to
which such Plan relates. The Plans may not be amended to increase materially the
amounts to be spent for the services described therein without approval by the
shareholders of the applicable class (by both Class A and Class B shareholders,
voting separately, in the case of material amendments to the Class A Plan), and
all material amendments are required to be approved by the Board of Directors in
the manner described above. Each Plan will automatically terminate in the event
of its assignment. A Series will not be contractually obligated to pay expenses
incurred under any Plan if it is terminated or not continued.
Pursuant to each Plan, the Board of Directors will review at least
quarterly a written report of the distribution expenses incurred on behalf of
each class of shares of a Series by the Distributor. The report includes an
itemization of the distribution expenses and the purposes of such expenditures.
In addition, as long as the Plans remain in effect, the selection and nomination
of Rule 12b-1 Directors shall be committed to the Rule 12b-1 Directors.
Pursuant to the Distribution Agreement, the Fund has agreed to indemnify
Prudential Securities to the extent permitted by applicable law against certain
liabilities under the Securities Act of 1933, as amended.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators in 51 jurisdictions and the NASD to resolve
allegations that PSI sold interests in more than 700 limited partnerships (and a
limited number of other types of securities) from January 1, 1980 through
December 31, 1990, in violation of securities laws to persons for whom such
securities were not suitable in light of the individuals' financial condition or
investment objectives. It was also alleged that the safety, potential returns
and liquidity of the investments had been misrepresented. The limited
partnerships principally involved real estate, oil and gas producing properties
and aircraft leasing ventures. The SEC Order (i) included findings that PSI's
conduct violated the federal securities laws and that an order issued by the SEC
in 1986 requiring PSI to adopt, implement and maintain certain supervisory
procedures had not been complied with; (ii) directed PSI to cease and desist
from violating the federal securities laws and imposed a $10 million civil
penalty; and (iii) required PSI to adopt certain remedial measures including the
establishment of a Compliance Committee of its Board of Directors. Pursuant to
the terms of the SEC settlement, PSI established a settlement fund in the amount
of $330,000,000 and procedures, overseen by a court approved Claims
Administrator, to resolve legitimate claims for compensatory damages by
purchasers of the partnership interests. PSI has agreed to provide additional
funds, if necessary, for that purpose. PSI's settlement with the state
securities regulators included an agreement to pay a penalty of $500,000 per
jurisdiction. PSI consented to a censure and to the payment of a $5,000,000 fine
in settling the NASD action. In settling the above referenced matters, PSI
neither admitted nor denied the allegations asserted against it.
On January 18, 1994, PSI agreed to the entry of a Final Consent Order and a
Parallel Consent Order by the Texas Securities Commissioner. The firm also
entered into a related agreement with the Texas Securities Commissioner. The
allegations were that the firm had engaged in improper sales practices and other
improper conduct resulting in pecuniary losses and other harm to investors
residing in Texas with respect to purchases and sales of limited partnership
interests during the period of January 1, 1980 through December 31, 1990.
Without admitting or denying the allegations, PSI consented to a reprimand,
agreed to cease and desist from future violations, and to provide voluntary
donations to the State of Texas in the aggregate amount of $1,500,000. The firm
agreed to suspend the creation of new customer accounts, the general
solicitation of new accounts, and the offer for sale of securities in or from
PSI's North Dallas office to new customers during a period of twenty consecutive
business days, and agreed that its other Texas offices would be subject to the
same restrictions for a period of five consecutive business days. PSI also
agreed to institute training programs for its securities salesmen in Texas.
B-22
<PAGE>
On October 27, 1994, Prudential Securities Group, Inc. and PSI entered into
agreements with the United States Attorney deferring prosecution (provided PSI
complies with the terms of the agreement for three years) for any alleged
criminal activity related to the sale of certain limited partnership programs
from 1983 to 1990. In connection with these agreements, PSI agreed to add the
sum of $330,000,000 to the Fund established by the SEC and executed a
stipulation providing for a reversion of such funds to the United States Postal
Inspection Service. PSI further agreed to obtain a mutually acceptable outside
director to sit on the Board of Directors of PSG and the Compliance Committee of
PSI. The new director also serves as an independent "ombudsman" whom PSI
employees can call anonymously with complaints about ethics and compliance.
Prudential Securities reports any allegations or instances of criminal conduct
and material improprieties to the new director. The new director will submit
compliance reports which identify all such allegations or instances of criminal
conduct and material improprieties every three months and will continue to do so
for a three-year period.
NASD Maximum Sales Charge Rule. Pursuant to rules of the NASD, the
Distributor is required to limit aggregate initial sales charges, deferred sales
charges and asset-based sales charges to 6.25% of total gross sales of each
class of shares. Interest charges on unreimbursed distribution expenses equal to
the prime rate plus one percent per annum may be added to the 6.25% limitation.
Sales from the reinvestment of dividends and distributions are not included in
the calculation of the 6.25% limitation. The annual asset-based sales charge on
shares of a Series may not exceed .75 of 1% per class. The 6.25% limitation
applies to a Series 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.
NET ASSET VALUE
Under the Investment Company Act, the Board of Directors is responsible for
determining in good faith the fair value of securities of the Fund. In
accordance with procedures adopted by the Board of Directors, the value of
investments listed on a securities exchange and NASDAQ National Market System
securities (other than options on stock and stock indices) are valued at the
last sales price on the day of valuation, or, if there was no sale on such day,
the mean between the last bid and asked prices on such day, as provided by a
pricing service. Corporate bonds (other than convertible debt securities) and
U.S. Government securities that are actively traded in the over-the-counter
market, including listed securities for which the primary market is believed to
be over-the-counter, are valued on the basis of valuations provided by a pricing
service which uses information with respect to transactions in bonds, quotations
from bond dealers, agency ratings, market transactions in comparable securities
and various relationships between securities in determining value. Convertible
debt securities that are actively traded in the over-the-counter market,
including listed securities for which the primary value is believed to be
over-the-counter, are valued at the mean between the last reported bid and asked
prices provided by principal market makers or independent pricing agents. Other
securities will be valued at the mean of the most recently quoted bid and asked
prices in the over-the-counter market. Options on stock and stock indices traded
on an exchange are valued at the mean between the most recently quoted bid and
asked prices on the respective exchange and futures contracts and options
thereon are valued at their last sales prices as of the close of the commodities
exchange or board of trade. Quotations of foreign securities in a foreign
currency are converted to U.S. dollar equivalents at the current rate obtained
from a recognized bank or dealer and forward currency exchange contracts are
valued at the current cost of covering or offsetting such contracts. Should an
extraordinary event, which is likely to affect the value of the security, occur
after the close of an exchange on which a portfolio security is traded, such
security will be valued at fair value considering factors determined in good
faith by the investment adviser under procedures established by and under the
general supervision of the Fund's Board of Directors.
Securities or other assets for which market quotations are not readily
available are valued at their fair value as determined in good faith by the
Board of Directors. Short-term debt securities are valued at cost, with interest
accrued or discount amortized to the date of maturity, if their original
maturity was 60 days or less, unless this is determined by the Board of
Directors not to represent fair value. Short-term securities with remaining
maturities of more than 60 days, for which market quotations are readily
available, are valued at their current market quotations as supplied by an
independent pricing agent or principal market maker. A Series will compute its
net asset value at 4:15 P.M., New York time, on each day the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem such Series' shares have been received or days on which changes in the
value of such Series' portfolio securities do not affect net asset value. In the
event the New York Stock Exchange closes early on any business day, the net
asset value of a Series' shares shall be determined at a time between such
closing and 4:15 P.M., New York time.
Net asset value is calculated separately for each class of each Series. The
net asset value of Class B and Class C shares of a Series will generally be
lower than the net asset value of Class A and Class Z shares of such Series as a
result of the larger distribution-related fee to which Class B and Class C
shares are subject. The net asset value of Class Z shares of each Series will
generally be higher than the net asset value of Class A, Class B or Class C
shares of such Series as a result of the fact that the Class Z shares
B-23
<PAGE>
are not subject to any distribution or service fee. It is expected, however,
that the net asset value per share of each class will tend to converge
immediately after the recording of dividends which will differ by approximately
the amount of the distribution expense accrual differential among the classes.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for decisions to buy and sell securities,
options and futures contracts for the Series, the selection of brokers, dealers
and futures commission merchants to effect the transactions and the negotiation
of brokerage commissions, if any. Purchases and sales of securities, options or
futures on a national securities exchange or board of trade are effected through
brokers or futures commission merchants who charge a negotiated commission for
their services; 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. The term "Manager" as used in this section
includes the Subadvisers.
In the over-the-counter market, securities 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 may be purchased directly from an issuer, in which case no
commissions or discounts are paid. The Series will not deal with Prudential
Securities or any affiliate in any transaction in which Prudential Securities or
any affiliate acts as principal. Thus, they will not deal in over-the-counter
securities with Prudential Securities acting as market maker, and they will not
execute a negotiated trade with Prudential Securities if execution involves
Prudential Securities' acting as principal with respect to any part of a Series'
order.
Portfolio securities may not be purchased from any underwriting or selling
syndicate of which Prudential Securities (or any affiliate), during the
existence of the syndicate, is a principal underwriter (as defined in the
Investment Company Act), except in accordance with rules of the SEC. This
limitation, in the opinion of each Series, will not significantly affect the
Series' ability to pursue its present investment objective. However, in the
future, in other circumstances, a Series 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 Series, the Manager is
required to give primary consideration to obtaining the most favorable price and
efficient execution. This means that the Manager will seek to execute each
transaction at a price and commission, if any, which provide the most favorable
total cost or proceeds reasonably attainable in the circumstances. While the
Manager generally seeks reasonably competitive spreads or commissions, the
Series will not necessarily be paying the lowest spread or commission available.
Within the framework of this policy, the Manager will consider research and
investment services provided by brokers, dealers or futures commission merchants
who effect or are parties to portfolio transactions of the Series, the Manager
or its clients. Such research and investment services are those which brokerage
houses customarily provide to institutional investors and include statistical
and economic data and research reports on particular companies and industries.
Such services are used by the Manager in connection with all of its investment
activities, and some of such services obtained in connection with the execution
of transactions for the Series may be used in managing other investment
accounts. Conversely, brokers, dealers or futures commission merchants
furnishing such services may be selected for the execution of transactions of
such other accounts, whose aggregate assets are far larger than those of the
Series, and the services furnished by such brokers, dealers or futures
commission merchants may be used by the Manager in providing investment
management for the Series. Commission rates are established pursuant to
negotiations with the broker, dealer or futures commission merchant based on the
quality and quantity of execution services provided by the broker, dealer or
futures commission merchant in the light of generally prevailing rates. The
Manager is authorized to pay higher commissions on brokerage transactions for
the Series to brokers, dealers or futures commission merchants other than
Prudential Securities in order to secure research and investment services
described above, subject to review by the Fund's Board of Directors from time to
time as to the extent and continuation of this practice. The allocation of
orders among brokers, dealers and futures commission merchants and the
commission rates paid are reviewed periodically by the Fund's Board of
Directors.
Subject to the above considerations, Prudential Securities may act as a
broker or futures commission merchant for the Fund. In order for Prudential
Securities (or any affiliate) to effect any portfolio transactions for the
Series, the commissions,fees or other remuneration received by Prudential
Securities (or any affiliate) must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other brokers or futures
commission merchants in connection with comparable transactions involving
similar securities or futures being purchased or sold on a securities exchange
or board of trade during a comparable period of time. This standard would allow
Prudential Securities (or any affiliate) to receive no more than the
remuneration which would be expected to be received by an unaffiliated broker in
a commensurate arm's-length transaction. Furthermore, the Board
B-24
<PAGE>
of Directors of the Fund, including a majority of the noninterested directors,
has adopted procedures which are reasonably designed to provide that any
commissions, fees or other remuneration paid to Prudential Securities (or any
affiliate) are consistent with the foregoing standard. In accordance with
Section 11(a) of the Securities Exchange Act of 1934, Prudential Securities may
not retain compensation for effecting transactions on a national securities
exchange for the Series unless the Series has expressly authorized the retention
of such compensation. Prudential Securities must furnish to each Series at least
annually a statement setting forth the total amount of all compensation retained
by Prudential Securities from transactions effected for such Series during the
applicable period. Brokerage transactions with Prudential Securities (or any
affiliate) are also subject to such fiduciary standards as may be imposed upon
Prudential Securities (or such affiliate) by applicable law.
The table presented below shows certain information regarding the payment
of commissions by Global Series, including the amount of such commissions paid
to Prudential Securities, for the three year period ended October 31, 1996.
<TABLE>
<CAPTION>
Fiscal Years ended October 31,
------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Total brokerage commissions paid by the Fund .... $1,544,620 $1,246,558 $1,646,300
Total brokerage commissions paid to
Prudential Securities ......................... $ 40,100 $ 20,800 $ 2,200
Percentage of total brokerage commissions
paid to Prudential Securities ................. 2.6% 1.7% 0.1%
</TABLE>
Of the total brokerage commissions, $1,521,566 or 98.39% were paid to
firms which provided research, statistical or other services to PMF during the
fiscal year ended October 31, 1996. PMF has not separately identified a portion
of such brokerage commissions as allocable to the provision of such research,
statistical or other services.
The table presented below shows certain information regarding the payment
of commissions by International Stock Series, including the amount of such
commissions paid to Prudential Securities, for the following periods:
<TABLE>
<CAPTION>
October 1, 1996 Fiscal Years ended September 30,
Through --------------------------------------
October 31, 1996 1996 1995 1994
---------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Total brokerage commissions paid by the Fund .... $45,574 $241,164 $232,505 $266,993
Total brokerage commissions paid to
Prudential Securities ......................... $ 0 $ 0 $ 0 $ 0
Percentage of total brokerage commissions
paid to Prudential Securities ................. 0% 0% 0% 0%
</TABLE>
Of the total brokerage commissions, none were paid to firms which provided
research, statistical or other services to PMF during the fiscal year ended
October 31, 1996. PMF has not separately identified a portion of such brokerage
commissions as allocable to the provision of such research, statistical or other
services.
PURCHASE AND REDEMPTION OF SERIES SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share plus a sales charge which, at the election of the
investor, may be imposed either (i) at the time of purchase (Class A shares) or
(ii) on a deferred basis (Class B or Class C shares). Class Z shares of the Fund
are offered to a limited group of investors at net asset value without any sales
charges. See "Shareholder Guide--How to Buy Shares of the Fund" in the
Prospectus.
Each class represents an interest in the same assets of such Series and is
identical in all respects except that (i) each class is subject to different
sales charges and distribution and/or service fees (except for Class Z shares,
which are not subject to any sales charge or distribution and/or service fee),
which may affect performance, (ii) each class has exclusive voting rights on any
matter submitted to shareholders that relates solely to its arrangements and has
separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of any other class, (iii) each
class has a different exchange privilege, (iv) only Class B shares have a
conversion feature and (v) Class Z shares are offered exclusively for sale to a
limited group of investors. See "Distributor" and "Shareholder Investment
Account--Exchange Privilege."
B-25
<PAGE>
Specimen Price Make-up
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares are sold at a maximum sales charge of 5% and Class
B*, Class C* and Class Z shares are sold at net asset value. Using each Series'
net asset value at October 31, 1996, the maximum offering price of a Series'
shares as follows:
International
Global Series Stock Series
------------- ------------
Class A
Net asset value and redemption price per
Class A share $15.52 $16.59
Maximum sales charge (5% of offering price) .82 .87
Offering price to public $16.34 $17.46
Class B
Net asset value, offering price and redemption
price per Class B share* $15.03 $16.57
Class C
Net asset value, offering price and redemption
price per Class C share* $15.03 $16.57
Class Z
Net asset value, offering price and redemption
price per Class Z share $15.52 $16.59
- ----------
* Class B and Class C shares are subject to a contingent deferred sales charge
on certain redemptions. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus.
Reduction and Waiver of Initial Sales Charges--Class A Shares
Combined Purchase and Cumulative Purchase Privilege. If an investor or
eligible group of related investors purchases Class A shares of a Series
concurrently with Class A shares of other Prudential Mutual Funds, the purchases
may be combined to take advantage of the reduced sales charges applicable to
larger purchases. See the table of break points under "Shareholder
Guide--Alternative Purchase Plan" in the Prospectus.
An eligible group of related Series investors includes any combination of
the following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's and spouse's Individual Retirement Account (IRA);
(d) any company controlled by the individual (a person, entity or group
that holds 25% or more of the outstanding voting securities of a
company will be deemed to control the company, and a partnership will
be deemed to be controlled by each of its general partners);
(e) a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children;
(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse; and
(g) one or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Series investors may include the
following: an employer (or group of related employers) and one or more
retirement plans of such employer or employers (an employer controlling,
controlled by or under common control with another employer is deemed related to
that employer).
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will be granted
subject to confirmation of the investor's holdings. The Combined Purchase and
Cumulative Purchase Privilege does not apply to individual participants in any
retirement or group plans.
Rights of Accumulation. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of related
investors, as described above under "Combined Purchase and Cumulative Purchase
Privilege," may aggregate the value of their existing holdings of the shares of
the Series 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.
B-26
<PAGE>
However, the value of shares held directly with the Transfer Agent and through
Prudential Securities will not be aggregated to determine the reduced sales
charge. All shares must be held either directly with the Transfer Agent or
through Prudential Securities. The value of existing holdings for purposes of
determining the reduced sales charge is calculated using the maximum offering
price (net asset value plus maximum sales charge) as of the previous business
day. See "How the Fund Values Its Shares" in the Prospectus. The Distributor
must be notified at the time of purchase that the investor is entitled to a
reduced sales charge. The reduced sales charge will be granted subject to
confirmation of the investor's holdings. Rights of accumulation are not
available to individual participants in any retirement or group plans.
Letters of Intent. Reduced sales charges are also available to investors
(or an eligible group of related investors), including retirement and groups
plans, who enter into a written Letter of Intent providing for the purchase,
within a thirteen-month period, of shares of the Portfolio and shares of other
Prudential Mutual Funds (Investment Letter of Intent). Retirement and group
plans may also qualify to purchase Class A shares at net asset value by entering
into a Letter of Intent whereby they agree to enroll, within a thirteen-month
period, a specified number of eligible employees or participants (Participant
Letter of Intent).
For purposes of the Investment Letter of Intent, all shares of each
Portfolio and shares of other Prudential Mutual Funds (excluding money market
funds other than those acquired pursuant to the exchange privilege) which were
previously purchased and are still owned are also included in determining the
applicable reduction. However, the value of shares held directly with the
Transfer Agent and through Prudential Securities will not be aggregated to
determine the reduced sales charge. All shares must be held either directly with
the Transfer Agent or through Prudential Securities.
A Letter of Intent permits a purchaser, in the case of an Investment Letter
of Intent, to establish a total investment goal to be achieved by any number of
investments over a thirteen-month period and, in the case of a Participant
Letter of Intent, to establish minimum eligible employee or participant goal
over a thirteen-month period. Each investment made during the period, in the
case of an Investment Letter of Intent, will receive the reduced sales charge
applicable to the amount represented by the goal, as if it were a single
investment. In the case of a Participant Letter of Intent, each investment made
during the period will be made at net asset value. Escrowed Class A shares
totaling 5% of the dollar amount of the Letter of Intent will be held by the
Transfer Agent in the name of the purchaser, except in the case of retirement
and group plans where the employer or plan sponsor will be responsible for
paying any applicable sales charge. The effective date of an Investment Letter
of Intent (except in the case of retirement and group plans) may be back-dated
up to 90 days, in order that any 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 a Series 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 thesales charge otherwise applicable to
the purchases made during this period and sales charges actually paid. Such
paymentmay 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 a Portfolio 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 plans.
Waiver of the Contingent Deferred Sales Charge--Class B Shares
The Contingent Deferred Sales Charge is waived under circumstances
described in the Prospectus. See "Shareholder Guide--How to Sell Your
Shares--Waiver of Contingent Deferred Sales Charges--Class B Shares" in the
Prospectus. In connection with these waivers, the Transfer Agent will require
you to submit the supporting documentation set forth below.
Category of Waiver Required Documentation
Death A copy of the shareholder's
death certificate or, in the
case of a trust, a copy of the
grantor's death certificate,
plus a copy of the trust
agreement identifying the
grantor.
Disability--An individual will A copy of the Social Security
be considered disabled if he Administration award letter or
or she is unable to engage in a letter from a physician on
any substantial gainful the physician's letterhead
activity by reason of any stating that the shareholder
medically determinable (or, in the case of a trust,
physical or mental impairment the grantor) is permanently
which can be expected to disabled. The letter must also
result in death or to be of indicate the date of
long-continued and indefinite disability.
duration.
B-27
<PAGE>
Distribution from an IRA or A copy of the distribution
403(b) Custodial Account form from the custodial firm
indicating (i) the date of
birth of the shareholder and
(ii) that the shareholder is
over age 591/2 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.
The Transfer Agent reserves the right to request such additional documents
as it may deem appropriate.
Quantity Discount--Class B Shares Purchased Prior to August 1, 1994
The CDSC is reduced on redemptions of Class B shares of Global Series
purchased prior to August 1, 1994 if, immediately after a purchase of such
shares, the aggregate cost of all Class B shares of Global Series owned by you
in a single account exceeded $500,000. For example, if you purchased $100,000 of
Class B shares of Global Series and the following year purchased an additional
$450,000 of Class B shares with the result that the aggregate cost of your Class
B shares of Global Series following the second purchase was $550,000, the
quantity discount would be available for the second purchase of $450,000 but not
for the first purchase of $100,000. The quantity discount will be imposed at the
following rates depending on whether the aggregate value exceeded $500,000 or $1
million:
Contingent Deferred Sales Charge
as a Percentage of Dollars Invested
or Redemption Proceeds
Year Since Purchase ----------------------------------------
Payment Made $500,001 to $1 million Over $1 million
------------ ---------------------- ---------------
First 3.0% 2.0%
Second 2.0% 1.0%
Third 1.0% 0%
Fourth and thereafter 0% 0%
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of a Series' 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. Each Series makes
available to the shareholders the following privileges and plans.
Automatic Reinvestment of Dividends and/or Distributions
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the Series at the net
asset value per share at the close of business on the record date. An investor
may direct the Transfer Agent in writing not less than five full business days
prior to the record date to have subsequent dividends and/or distributions sent
in cash rather than reinvested. In the case of recently purchased shares for
which registration instructions have not been received on the record date, cash
payment will be made directly to the dealer. Any shareholder who receives a cash
payment representing a dividend or distribution may reinvest such distribution
at net asset value by returning the check or the proceeds to the Transfer Agent
within 30 days after the payment date. Such investment will be made at the net
asset value per share next determined after receipt of the check or proceeds by
the Transfer Agent. Such shareholder will receive credit for any CDSC paid in
connection with the amount of proceeds being reinvested.
Exchange Privilege
Each Series makes available to its shareholders the privilege of exchanging
their shares of the Series 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 a Series. All exchanges are
made on the basis of relative net asset value next determined after receipt of
an order in proper form. An exchange
B-28
<PAGE>
will be treated as a redemption and purchase for tax purposes. Shares may be
exchanged for shares of another fund only if shares of such fund may legally be
sold under applicable state laws. For retirement and group plans having a
limited menu of Prudential Mutual Funds, the Exchange Privilege is available for
those funds eligible for investment in the particular program.
It is contemplated that the exchange privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
Class A. Shareholders of a Series may exchange their Class A shares for Class A
shares of certain other Prudential Mutual Funds, shares of Prudential Structured
Maturity Fund and Prudential Government Securities Trust (Short-Intermediate
Term Series) and shares of the money market funds specified below. No fee or
sales load will be imposed upon the exchange. Shareholders of money market funds
who acquired such shares upon exchange of Class A shares may use the Exchange
Privilege only to acquire Class A shares of the Prudential Mutual Funds
participating in the Exchange Privilege.
The following money market funds participate in the Class A Exchange
Privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential Money Mart Assets
Prudential Tax-Free Money Fund
Class B and Class C. Shareholders of a Series may exchange their Class B and
Class C shares for Class B and Class C shares, respectively, of certain other
Prudential Mutual Funds and shares of Prudential Special Money Market Fund, a
money market fund. No CDSC will be payable upon such exchange, but a CDSC may be
payable upon the redemption of Class B and Class C shares acquired as a result
of the exchange. The applicable sales charge will be that imposed by the fund in
which shares were initially purchased and the purchase date will be deemed to be
the date of the initial purchase, rather than the date of the exchange.
Class B and Class C shares of a Series may also be exchanged for shares of
an eligible money market fund without imposition of any CDSC at the time of
exchange. Upon subsequent redemption from such money market fund or after
re-exchange into a Series, such shares may 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 a Series from a money market fund during the month
(and are held in a Series at the end of the month), the entire month will be
included in the CDSC holding period. Conversely, if shares are exchanged into a
money market fund prior to the last day of the month (and are held in the money
market fund on the last day of the month), the entire month will be excluded
from the CDSC holding period. For purposes of calculating the seven year holding
period applicable to the Class B conversion feature, the time period during
which Class B shares were held in a money market fund will be excluded.
At any time after acquiring shares of other funds participating in the
Class B and Class C exchange privilege, a shareholder may again exchange those
shares (and any reinvested dividends and distributions) for Class B and Class C
shares of a Series, respectively, without subjecting such shares to any CDSC.
Shares of any fund participating in the Class B or Class C exchange privilege
that were acquired through reinvestment of dividends or distributions may be
exchanged for Class B or Class C shares of other funds, respectively, without
being subject to any CDSC.
Class Z. Class Z shares may be exchanged for Class Z shares of other
Prudential Mutual Funds.
Additional details about the Exchange Privilege and prospectuses for each
of the Prudential Mutual Funds are available from the Series' Transfer Agent,
Prudential Securities or Prusec. The Exchange Privilege may be modified,
terminated or suspended on sixty days' notice, and any fund, including a Series,
or the Distributor, has the right to reject any exchange application relating to
such fund's shares.
B-29
<PAGE>
Dollar Cost Averaging
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more shares
when the price is low and fewer shares when the price is high. The average cost
per share is lower than it would be if a constant number of shares were bought
at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2011, the cost of four years at a private
college could reach $210,000 and over $90,000 at a public university.(1)
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(2)
Period of
Monthly investments: $100,000 $150,000 $200,000 $250,000
-------------------- -------- -------- -------- --------
25 Years $ 110 $ 165 $ 220 $ 275
20 Years 176 264 352 440
15 Years 296 444 592 740
10 Years 555 833 1,110 1,388
5 Years 1,371 2,057 2,742 3,428
See "Automatic Savings Accumulation Plan."
- ----------
(1) Source information concerning the costs of education at public and
private universities is available from The College Board Annual Survey of
Colleges, 1993. Average costs for private institutions include tuition, fees,
room and board for the 1993-1994 academic year.
(2) The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not intended
to reflect the performance of an investment in shares of the Series. The
investment return and principal value of an investment will fluctuate so that an
investor's shares when redeemed may be worth more or less than their original
cost.
Automatic Savings Accumulation Plan (ASAP)
Under ASAP, an investor may arrange to have a fixed amount automatically
invested in shares of a Series monthly by authorizing his or her bank account or
Prudential Securities Account (including a Command Account) to be debited to
invest specified dollar amounts in shares of such Series. The investor's bank
must be a member of the Automatic Clearing House System. Stock certificates are
not issued to ASAP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, Prudential Securities or Prusec.
Systematic Withdrawal Plan
A systematic withdrawal plan is available to shareholders through
Prudential Securities or the Transfer Agent. Such withdrawal plan provides for
monthly or quarterly checks in any amount, except as provided below, up to the
value of the shares in the shareholder's account. Withdrawals of Class B or
Class C shares may be subject to a CDSC. See "Shareholder Guide--How to Sell
Your Shares--Contingent Deferred Sales Charges" in the Prospectus.
In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account value applies, (ii) withdrawals may not be for less than $100 and (iii)
the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at net asset
value on shares held under this plan. See "Shareholder Investment
Account--Automatic Reinvestment of Dividends and/or Distributions."
Prudential Securities and the Transfer Agent act as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may be
terminated at any time, and the Distributor reserves the right to initiate a fee
of up to $5 per withdrawal, upon 30 days' written notice to the shareholder.
Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
B-30
<PAGE>
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 charge applicable to (i) the purchase of Class
A shares and (ii) the withdrawal of Class B and Class C shares. Each shareholder
should consult his or her own tax adviser with regard to the tax consequences of
the systematic withdrawal plan, particularly if used in connection with a
retirement plan.
Tax-Deferred Retirement Plans
Various qualified retirement plans, including a 401(k) Plan, self-directed
individual retirement accounts and "tax sheltered accounts" under Section
403(b)(7) of the Internal Revenue Code are available through the Distributor.
These plans are for use by both self-employed individuals and corporate
employers. These plans permit either self-direction of accounts by participants
or a pooled account arrangement. Information regarding the establishment of
these plans, the administration, custodial fees and other details are available
from Prudential Securities or the Transfer Agent.
Investors who are considering the adoption of such a plan should consult
with their own legal counsel or tax adviser with respect to the establishment
and maintenance of any such plan.
Tax-Deferred Retirement Accounts
Individual Retirement Accounts. An individual retirement account (IRA)
permits the deferral of federal income tax on income earned in the account until
the earnings are withdrawn. The following chart represents a comparison of the
earnings in a personal savings account with those in an IRA, assuming a $2,000
annual contribution, an 8% rate of return and a 39.6% federal income tax bracket
and shows how much more retirement income can accumulate within an IRA as
opposed to a taxable individual savings account.
Tax-Deferred Compounding(1)
Contributions Personal
Made Over: Savings IRA
------------- -------- --------
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
- ----------
(1) The chart is for illustrative purposes only and does not represent the
performance of a Series or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated. Earnings in
the IRA account will be subject to tax when withdrawn from the account.
Mutual Fund Programs
From time to time, a Series 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 promoted 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. A Series 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 the program. Since the allocation of portfolios included in the program may
not be appropriate for all investors, investors should consult their Prudential
Securities Financial Adviser or Prudential/Pruco Securities Representative
concerning the appropriate blend of portfolios for them. If investors elect to
purchase the individual mutual funds that constitute the program in an
investment ratio different from that offered by the program, the standard
minimum investment requirements for the individual mutual funds will apply.
PERFORMANCE INFORMATION
Average Annual Total Return. A Series may from time to time advertise its
average annual total return. Average annual total return is determined
separately for Class A, Class B, Class C and Class Z shares. See "How the Fund
Calculates Performance" in the Prospectus.
B-31
<PAGE>
Average annual total return is computed according to the following formula:
P(1+T)^n = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value at the end of the 1, 5 or 10 year
periods (or fractional portion thereof) of a hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10 year periods.
Average annual total return takes into account any applicable initial or
contingent deferred sales charge but does not take into account any federal or
state income taxes that may be payable upon redemption.
Global Series: The average annual total return for Class A shares for the
one year, five year and and since inception (January 22, 1990) periods ended
October 31, 1996 were 6.7%, 10.8% and 7.7%, respectively, with and without the
subsidy of expenses. The average annual total return with respect to the Class B
shares of Global Series for the one, five and ten year periods ended on October
31, 1996 was 6.6%, 11.0% and 13.1%, respectively. The average annual total
return with respect to the Class B shares of Global Series for the ten year
period ended on October 31, 1995, would have been slightly lower without the
subsidy of expenses. See "Manager" above, and "How the Fund is Managed -- Fee
Waivers and Subsidy" in the Prospectus. The average annual total return for
Class C shares for the one year and since-inception period (August 1, 1994)
ended October 31, 1996 was 10.6% and 9.0%, respectively. The average annual
total return for Class Z shares of Global Series for the since-inception period
ended October 31, 1996 was 12.30%.
International Stock Series: Class A, Class B and Class C shares were first
offered in September 1996. The average annual total return for Class Z shares
for the one year, three year and since inception (November 5, 1992) periods
ended October 31, 1996 were 12.31%, 10.68% and 15.20%, respectively.
Yield. A Series may from time to time advertise its yield as calculated
over a 30-day period. Yield is calculated separately for Class A, Class B, Class
C and Class Z shares. This yield will be computed by dividing the Series' 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:
YIELD = 2[((a-b)/cd+1)^6-1]
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
Yield fluctuates and an annualized yield quotation is not a representation
by the Series as to what an investment in the Series will actually yield for any
given period. Yields for a Series 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 such Series income and expenses.
Aggregate Total Return. A Series may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B,
Class C and Class Z shares. See "How the Fund Calculates Performance" in the
Prospectus.
Aggregate total return represents the cumulative change in the value of an
investment in the Series and is computedaccording to the following formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of $1000.
ERV = ending redeemable value at the end of the 1, 5 or 10 year
periods (or fractional portion thereof) of a hypothetical $1000
payment made at the beginning of the 1, 5 or 10 year periods.
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.
Global Series: The aggregate total return with respect to the Class A
shares of Global Series for the one year, five year and since-inception period
(January 22, 1990) ended October 31, 1996 were 12.3%, 75.5% and 74.2%,
respectively, with and without the subsidy of expenses. The aggregate total
return with respect to the Class B shares of Global Series for the one, five and
ten year periods ended on October 31, 1996 were 11.6%, 69.3% and 123.1%,
respectively. The aggregate total return with respect to the Class B shares of
Global Series for the ten year period ended on October 31, 1996, would have been
slightly lower
B-32
<PAGE>
without the subsidy of expenses. See "Manager" above, and "How the Fund is
Managed -- Fee Waivers and Subsidy" in the Prospectus. The aggregate total
return for Class C shares for the one year and since-inception period (August 1,
1994) ended October 31, 1996 were 12.6% and 21.3%, respectively. The aggregate
total return for Class Z shares of Global Series for the since-inception period
ended October 31, 1996 was 8.06%.
International Stock Series: The aggregate total return with respect to the
Class A shares of International Stock Series for the since-inception period
(September 23, 1996) ended October 31, 1996 was 0.30%. The aggregate total
return with respect to the Class B shares of the International Stock for the
since-inception period (September 23, 1996) ended on October 31, 1996 was 0.18%.
The aggregate total return with respect to the Class C shares of the Fund for
the since-inception period (September 23, 1996) ended on October 31, 1996 was
0.18%. The aggregate total return for Class Z shares for the one year, three
year and since-inception period (November 5, 1992) ended October 31, 1996 were
12.31%, 35.59% and 75.80%, respectively.
From time to time, the performance of a Series may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long term and the rate of inflation.(1)
----------------------------------
PERFORMANCE
COMPARISON OF DIFFERENT
TYPES OF INVESTMENTS
OVER THE LONG TERM
(1/1926 - 12/1994)
----------------------------------
Common Stocks 10.2%
Long-Term Govt. Bonds 4.8%
Inflation 3.1%
- ----------
(1) Source: Ibbotson Associates, Stocks, Bonds, Bills and Inflation--1995
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.
TAXES
Each Series has elected to qualify and intends to remain qualified as a
regulated investment company under the Internal Revenue Code for each taxable
year. Accordingly, a Series must, among other things, (a) derive at least 90% of
its gross income from dividends, interest, proceeds from loans of securities and
gains from the sale or other disposition of securities or foreign currencies, or
other income (including, but not limited to, gains from options, futures or
forward contracts) derived with respect to its business of investing in such
securities or currencies; (b) derive less than 30% of its gross income from the
sale or other disposition of securities or certain options, futures and forward
contracts held less than three months; and (c) diversify its holdings so that,
at the end of each fiscal quarter, (i) at least 50% of the value of its assets
is represented by cash, U.S. Government securities, securities of other
regulated investment companies and other securities, with such other securities
limited in respect of any one issuer to an amount not greater than 5% of such
Series' assets, and not greater than 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 or
the securities of other regulated investment companies). These requirements may
limit a Series' ability to invest in other types of assets.
As a regulated investment company, a Series will not be subject to federal
income tax on its net investment income and capital gains, if any, that it
distributes to its shareholders, provided (among other things) that at least 90%
of the Series' net investment income (including net short-term) capital gains
earned in the taxable year is distributed. Each Series intends to
B-33
<PAGE>
distribute annually to its shareholders all of its taxable net investment
income, which includes dividends, interest and any net short-term capital gains
in excess of net long-term capital losses. The Board of Directors of the Fund
will determine once a year whether to distribute any net long-term capital gains
in excess of any net short-term capital losses. In determining the amount of
capital gains to be distributed, any capital loss carryovers from prior years
will be offset against capital gains. A 4% nondeductible excise tax will be
imposed on a Series to the extent such Series does not meet certain distribution
requirements by the end of each calendar year.
Gains or losses attributable to foreign currency contracts, or to
fluctuations in exchange rates between the time a Series accrues income,
expenses or other liabilities denominated in a foreign currency and the time
such Series actually collects such income or pays such liabilities, are treated
as ordinary income or ordinary loss for federal income tax purposes. Similarly,
gains or losses on the disposition of debt securities held by a Series, if any,
denominated in a foreign currency, to the extent attributable to fluctuations in
exchange rates between the acquisition and disposition dates are also treated as
ordinary income or loss.
Gains or losses on sales of securities by a Series 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 a Series acquires a put or
writes a call thereon. 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 generally be treated as gains and
losses from the sale of securities. If an option written by a Series on
securities lapses or is terminated through a closing transaction, such as a
purchase by a Series of the option from its holder, a Series will generally
realize short-term capital gain or loss, depending on whether the premium income
is greater or less than the amount paid by such Series in the closing
transaction. If securities are sold by a Series pursuant to the exercise of a
call option written by it, such Series will include the premium received in the
sale proceeds of the securities delivered in determining the amount of gain or
loss on the sale. The requirement that a Series derive less than 30% of its
gross income from gains from the sale of stocks or securities held less than
three months may limit such Series' ability to write or acquire options. Certain
of a Series' transactions may be subject to wash sale and short sale provisions
of the Internal Revenue Code which may, among other things, require such Series
to defer losses. In addition, debt securities acquired by a Series may be
subject to original issue discount and market discount rules which may, among
other things, cause such Series to accrue income in advance of the receipt of
cash with respect to interest.
Special rules apply to most options on stock indices, futures contracts and
options thereon, and forward foreign currency exchange contracts in which the
Series may invest. See "Investment Objectives and Policies." These investments
generally will constitute Section 1256 contracts and will be required to
be"marked to market" for federal income tax purposes at the end of the Series'
taxable year, i.e., treated as having been sold at market value. Sixty percent
of any capital 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.
Forward currency contracts, options and futures contracts entered into by a
Series may create "straddles" for federal income tax purposes, and may affect
the character and timing of gains or losses realized by a Series on such
contracts or options or on the underlying securities. Straddles may also result
in the loss of the holding period of underlying property, and therefore a
Series' ability to enter into forward currency contracts, options and futures
contracts may be limited by the 30% of gross income test described above. Other
special rules may apply to positions held as part of a straddle; in particular,
the deductibility of interest or other charges incurred to purchase or carry
such positions may be limited.
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 a Series acquires and
holds stock in a PFIC beyond the end of the year of its acquisition, such Series
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 such Series distributes the PFIC
income as a taxable dividend to its shareholders. If a Series elects to treat
any PFIC in which it invests as a "qualified electing fund," then in lieu of the
foregoing tax and interest obligation, such Series 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 such
Series; those amounts would be subject to the distribution requirements
applicable to such Series described above. It may be very difficult, if not
impossible, to make this election because of certain requirements thereof. Under
proposed Treasury regulations, if a Series does not or cannot elect to treat
such a PFIC as a "qualified electing fund", such Series can make a
"mark-to-market" election, i.e., treat the shares of the PFIC as sold on the
last day of such Series' taxable year, and thus avoid the special tax and
interest charge. The gains a Series recognizes from the mark-to-market election
would be included as ordinary income in the net investment income such Series
must distribute to shareholders, notwithstanding that such Series would receive
no cash in respect of such gains.
Dividends of net investment income will be taxable to a U.S. shareholder as
ordinary income regardless of whether such shareholder receives such dividends
in additional shares or in cash. Dividends received from a Series will be
eligible for the
B-34
<PAGE>
dividends-received deduction for corporate shareholders only to the extent that
a Series' income is derived from certain dividends-received from domestic
corporations. The amount of dividends qualifying for the dividends-received
deduction will be designated as such in a written notice to shareholders mailed
not later than 60 days after the end of a Series' taxable year. Distributions of
net long-term capital gains, if any, will be taxable as long-term capital gains
regardless of whether the shareholder receives such distribution in additional
shares or in cash and regardless of how long the shareholder has held a Series'
shares, and will not be eligible for the dividends received deduction for
corporations. Any gain or loss realized upon a sale or redemption of a Series
shares by a shareholder who is not a dealer in securities will be treated as
long-term capital gain or loss if the shares have been held for more than one
year and otherwise as short-term capital gain or loss. However, any loss
realized by a shareholder upon the sale of shares in the Series held for six
months or less will be treated as a long-term capital loss to the extent of any
net long-term capital gain distributions received by the shareholder.
Additionally, any loss realized on a sale, redemption or exchange of shares of
the Series 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.
Any dividends or capital gains distributions received by a shareholder will
have the effect of reducing the net asset value of the Series' shares by the
exact amount of the dividend or capital gains distribution. If the net asset
value of the shares should be reduced below a shareholder's cost as a result of
a dividend or capital gains distribution, such dividend or capital gains
distribution, although constituting a return of capital, will be taxable as
described above. Prior to purchasing shares of the Series, therefore, the
investor should carefully consider the impact of dividends or capital gains
distributions which are expected to be or have been announced.
Distributions of net investment income made to a nonresident alien
individual, a nonresident alien fiduciary of a foreign estate or trust, foreign
corporation or foreign partnership (foreign shareholder) will be subject to U.S.
withholding tax at a rate of 30% (or lower treaty rate), unless the dividends
are effectively connected with the U.S. trade or business of the shareholder and
the shareholder complies with certain filing requirements. Gains realized upon
the sale or redemption of shares of the Series by a foreign shareholder and
distributions of net long-term capital gains to a foreign shareholder will
generally not be subject to U.S. income tax unless the gain is effectively
connected with a trade or business carried on by the shareholder within the
United States or, in the case of a shareholder who is a nonresident alien
individual, the shareholder is present in the United States for more than 182
days during the taxable year and certain other conditions are met. In the case
of a foreign shareholder who is a nonresident alien individual, the Series may
be required to withhold U.S. federal income tax at the rate of 31% of
distributions of net long-term capital gains unless IRS Form W-8 is provided. If
distributions are effectively connected with a U.S. trade or business carried on
by a foreign shareholder, distributions of net investment income and net
long-term capital gains will be subject to U.S. income tax at the graduated
rates applicable to U.S. citizens or domestic corporations. Transfers by gift of
shares of the Series by a foreign shareholder who is a nonresident alien
individual will not be subject to U.S. federal gift tax, but the value of the
shares of the Series held by such a shareholder at his death will be includable
in his gross estate for U.S. federal estate tax purposes. The tax consequences
to a foreign shareholder entitled to claim the benefits of an applicable tax
treaty may be different from those described herein. Foreign shareholders are
advised to consult their own tax advisers with respect to the particular tax
consequences to them of an investment in the Series.
Income received by the Series from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. It is impossible to determine the effective rate of
foreign tax in advance since the amount of the Series' assets to be invested in
various countries is not known.
If the Series is liable for foreign taxes, the Series expects to meet the
requirements of the Internal Revenue Code for "passing-through" to its
shareholders foreign income taxes paid, but there can be no assurance that the
Series will be able to do so. Under the Internal Revenue Code, if more than 50%
of the value of the Series' total assets at the close of its taxable year
consists of stock or securities of foreign corporations, the Series will be
eligible and may file an election with the Internal Revenue Service to
"pass-through" to the Series' shareholders the amount of foreign income taxes
paid by the Series. Pursuant to this election shareholders will be required to:
(i) include in gross income (in addition to taxable dividends actually received)
their pro rata share of the foreign income taxes paid by the Series; (ii) treat
their pro rata share of foreign income taxes as paid by them; and (iii) either
deduct their pro rata share of foreign income taxes in computing their taxable
income or, subject to certain limitations, use it as a foreign tax credit
against U.S. income taxes imposed on foreign source income. For this purpose,
the portion of dividends paid by the Series from its foreign source income will
be treated as such. No deduction for foreign taxes may be claimed by a
shareholder who does not itemize deductions. A shareholder that is a nonresident
alien individual or foreign corporation may be subject to U.S. withholding tax
on the income resulting from the election described in this paragraph, but may
not be able to claim a credit or deduction against such tax for the foreign
taxes treated as having been paid by such shareholder. A tax-exempt shareholder
will not ordinarily benefit from this election. The amount of foreign taxes for
which a shareholder may claim a credit in
B-35
<PAGE>
any year will generally be subject to various limitations including a separate
limitation for "passive income," which includes, among other things, dividends,
interest and certain foreign currency gains.
Each shareholder will be notified within 60 days after the close of the
Series' taxable year whether the foreign income taxes paid by the Series will
"pass-through" for that year and, if so, such notification will designate (a)
the shareholder's portion of the foreign income taxes paid to each such country
and (b) the portion of the dividend which represents income derived from sources
within each such country.
The per share dividends on Class B and Class C shares will be lower than
the per share dividends on Class A or Class Z shares as a result of the higher
distribution-related fee applicable to the Class B and Class C shares. The per
share distributions of net capital gains, if any, will be paid in the same
amount for Class A, Class B, Class C and Class Z shares. See "Net Asset Value."
Distributions may be subject to additional state and local taxes.
Pennsylvania Personal Property Tax. The Fund has received a written letter
of determination from the Pennsylvania Department of Revenue that the Global
Series will be subject to the Pennsylvania foreign franchise and corporate net
income tax by reason of the Global Series' business activities in Pennsylvania.
Accordingly, it is believed the Global Series' shares are exempt from
Pennsylvania personal property taxes. The Global Series anticipates that it will
continue such business activities but reserves the right to suspend them at any
time,resulting in the termination of the exemption.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT AND
INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for each Series' 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 each Series' foreign assets held outside the United
States. See "How the Fund is Managed -- Custodian and Transfer and Dividend
Disbursing Agent" in the Prospectus.
Prudential Mutual Fund Services, LLC (PMFS), Raritan Plaza One, Edison,
New Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of each
Series. Its mailing address is P.O. Box 15005, New Brunswick, New Jersey
08906-5005. PMFS is a wholly-owned subsidiary of PMF. PMFS provides customary
transfer agency services to the Series, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, payment of dividends and distributions, and related
functions. For these services, PMFS receives an annual fee per shareholder
account, a new account set-up fee for each manually-established account and a
monthly inactive zero balance account fee per shareholder account. PMFS is also
reimbursed for its out-of-pocket expenses, including but not limited to
postage,stationery, printing, allocable communications expenses and other costs.
For the fiscal year ended October 31, 1996, Global Series incurred fees of
approximately $1,297,000 for the services of PMFS. For the period September 23,
1996 through October 31, 1996, International Series incurred fees of
approximately $33,400 for the services of PMFS.
Deloitte & Touche LLP, Two World Financial Center, New York, New York
10281, serves as the Series' independent accountants, and in that capacity
audits each Series' annual financial statements.
B-36
<PAGE>
PRUDENTIAL WORLD FUND, INC.
Portfolio of Investments as of October 31, 1996 GLOBAL SERIES
- ----------------------------------------------------------------
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ----------------------------------------------------------------
LONG-TERM INVESTMENTS--94.6%
COMMON STOCKS--94.4%
- ----------------------------------------------------------------
Argentina--0.6%
433,000 Banco Frances Rio Plata (Banking) $ 3,789,508
- ----------------------------------------------------------------
Australia--5.4%
430,100 Brambles Industries, Ltd. (Business
& Public Services) 7,120,635
525,974 Broken Hill Proprietary Co., Ltd.
(Other energy sources) 6,978,822
828,619 Coca-Cola Amatil, Ltd. (Beverages &
Tobacco) 11,388,260
3,000,000 Duke Group (Precious Metals) 0
1,720,800 Publishing & Broadcasting, Ltd.
(Broadcasting & Publishing) 7,742,510
-------------
33,230,227
- ----------------------------------------------------------------
Belgium--0.7%
5,500 Bekaert SA (Building Materials &
Components) 4,443,360
- ----------------------------------------------------------------
Federal Republic of Germany--4.4%
185,000 Hoechst AG (Chemicals) 6,943,749
11,420 Linde AG (Machinery & Engineering) 7,056,119
49,900 SAP AG (Computer Software &
Services) 6,741,910
113,000 Siemens AG (Electrical &
Electronics) 5,827,622
-------------
26,569,400
- ----------------------------------------------------------------
Finland--1.0%
132,800 Nokia Corp. (Telecommunications
Equipment) 6,123,115
- ----------------------------------------------------------------
France--4.8%
19,350 Carrefour (Retail) 10,717,679
20,796 Imetal SA (Misc. Materials &
Commodities) 3,235,926
39,400 Legrand SA (Electrical &
Electronics) 6,823,077
18,300 Plastic Omnium (Automobiles & Auto
Parts) $ 1,515,591
10,000 SGS Thomson Microelectronics NV*
(Electronic Components) 528,895
105,100 Valeo SA (Automobiles & Auto Parts) 6,295,330
-------------
29,116,498
- ----------------------------------------------------------------
Hong Kong--7.3%
7,201,213 CDL Hotels International Ltd.
(Leisure & Tourism) 3,725,311
2,715,000 Citic Pacific, Ltd. (Multi-Industry) 13,202,452
2,102,000 Guoco Group, Ltd. (Banking) 11,118,673
928,000 Hutchison Whampoa, Ltd.
(Multi-Industry) 6,480,950
1,738,000 New World Development Co., Ltd.
(Property Development) 10,114,844
-------------
44,642,230
- ----------------------------------------------------------------
Ireland--1.1%
810,300 Bank of Ireland (Banking) 6,659,097
- ----------------------------------------------------------------
Italy--2.3%
96,300 Gucci Group NV (Retail) 6,644,700
3,559,600 Telecom Italia Mobile SpA*
(Telecommunications-Unregulated) 7,335,682
-------------
13,980,382
- ----------------------------------------------------------------
Japan--15.3%
247,000 Daibiru Corp. (Property Investment) 2,795,858
313,000 Eisai Co., Ltd. (Health & Personal
Care) 5,602,773
402,000 Honda Motor Co., Ltd. (Automobiles &
Auto Parts) 9,594,525
473,000 JGC Corp. (Construction) 4,980,476
38,500 Keyence Corp. (Electronic Components
& Instruments) 4,459,264
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-37
<PAGE>
PRUDENTIAL WORLD FUND, INC.
Portfolio of Investments as of October 31, 1996 GLOBAL SERIES
- ----------------------------------------------------------------
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ----------------------------------------------------------------
Japan (cont'd.)
45,000 Kokusai Denshin Denwa Co., Ltd.
(Utilities Telephones) $ 3,889,352
708,000 Mitsui Fudosan Co., Ltd. (Property
Investment) 8,759,531
148,700 Namco Ltd. (Recreation & Other
Consumer Goods) 4,449,322
780,000 Nichirei Corp. (Miscellaneous
Industrial) 4,660,905
26,300 Nippon TV Network (Broadcasting &
Publishing) 7,615,496
792,000 Nissan Chemical Industries
(Chemicals) 4,663,116
674,000 Nissan Motor Co., Ltd.* (Automobiles
& Auto Parts) 5,092,037
880 Nissen Co., Ltd. (Retail) 7,336
583,000 Onward Kashiyama & Co., Ltd.
(Textile-Apparel Manufacturing) 8,133,813
174,000 Sony Corp. (Appliances & Household
Durables) 10,427,938
340,000 Toyota Motor Corp. (Automobiles &
Auto Parts) 8,025,271
-------------
93,157,013
- ----------------------------------------------------------------
Malaysia--3.1%
4,320,000 IJM Corporation Berhad
(Construction) 9,404,314
1,837,000 Renong Berhad (Multi-Industry) 2,893,829
1,132,000 Resorts World Berhad (Leisure &
Tourism) 6,496,735
-------------
18,794,878
- ----------------------------------------------------------------
Mexico--2.3%
664,000 Apasco, SA (Building Materials &
Components) 4,077,193
1,848,200 Cifra, SA de CV* (Retail) 2,380,889
1,003,200 Fomento Economico Mexicano, SA de CV
(Beverages & Tobacco) 3,067,429
240,000 Kimberly-Clark de Mexico, SA de CV
(Forest Products & Paper) 4,661,654
-------------
14,187,165
Netherlands--2.9%
26,600 Heineken NV (Beverages & Tobacco) $ 5,016,062
40,300 Nutricia Verenigde Bedrijven NV
(Food & Household Products) 5,643,328
41,025 Royal Dutch Petroleum Co. (Energy
Sources) 6,763,477
-------------
17,422,867
- ----------------------------------------------------------------
New Zealand--0.1%
384,863 Fletcher Challenge Forestry, Ltd.
(Forest Products & Paper) 642,119
- ----------------------------------------------------------------
Singapore--3.2%
529,100 Overseas Chinese Banking Corp., Ltd.
(Banking) 6,047,930
853,000 Overseas Union Bank (Banking) 5,813,845
1,083,250 Sembawang Maritime, Ltd. (Energy
Equipment & Services) 2,860,980
1,915,000 Wing Tai Holdings (Property
Development) 4,704,224
-------------
19,426,979
- ----------------------------------------------------------------
Spain--1.9%
29,600 Banco Popular Espanol SA (Banking) 5,646,805
247,862 Centros Commerciale Pryca (Retail) 5,680,373
-------------
11,327,178
- ----------------------------------------------------------------
Sweden--5.4%
271,000 Allgon AB (Electronic Components) 5,495,496
132,800 Astra AB (Health & Personal Care) 6,051,676
84,200 Hennes & Mauritz AB (Retail) 10,884,237
187,200 Mo och Domsjo AB (Forest Products &
Paper) 5,146,841
678,000 Skandinaviska Enskilda Banken
(Banking) 5,664,333
-------------
33,242,583
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-38
<PAGE>
PRUDENTIAL WORLD FUND, INC.
Portfolio of Investments as of October 31, 1996 GLOBAL SERIES
- ----------------------------------------------------------------
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ----------------------------------------------------------------
United Kingdom--11.6%
1,131,000 British Sky Broadcasting PLC
(Broadcasting & Publishing) $ 10,619,805
820,000 Dixons Group PLC (Retail) 7,345,972
715,900 GKN PLC (Automobiles & Auto Parts) 13,385,990
750,000 Hays PLC (Business & Public
Services) 6,285,598
304,000 Reed International PLC (Broadcasting
& Publishing) 5,659,496
722,900 Siebe PLC (Machinery & Engineering) 11,340,530
608,300 Standard Chartered PLC (Banking) 6,563,107
2,451,290 Vodafone Group PLC
(Telecommunications-Unregulated) 9,494,012
-------------
70,694,510
- ----------------------------------------------------------------
United States--21.0%
188,000 Baker Hughes Inc. (Oil & Gas
Equipment & Services) 6,697,500
121,000 Case Corp. (Machinery & Equipment) 5,626,500
177,400 Cisco Systems, Inc.* (Computer
Software & Services) 10,976,625
317,000 Companhia Brasileira De Distribuicao
(ADR) (Retail) 6,260,750
104,700 Disney (Walt) Co. (Leisure &
Tourism) 6,897,112
317,882 Mattel, Inc. (Recreation & Other
Consumer Goods) 9,178,843
335,800 MCI Communications Corp. (Utilities
Telephones) 8,436,975
92,100 Microsoft Corp.* (Computer Software
& Services) 12,640,725
227,800 Mirage Resorts, Inc.* (Leisure &
Tourism) 5,011,600
76,000 Mobil Corp. (Energy Sources) 8,873,000
74,800 Motorola, Inc. (Electrical &
Electronics) 3,440,800
286,500 Oracle Systems Corp.* (Computer
Software & Services) 12,122,531
101,800 SGS Thomson Microelectronics NV*
(Electronic Components) 5,331,775
123,500 Texas Instruments Inc. (Electronic
Components & Instruments) 5,943,438
124,000 Tiffany & Co. (Retail) 4,588,000
141,000 Time Warner, Inc. (Broadcasting &
Publishing) $ 5,252,250
86,000 Transocean Offshore Inc. (Oil & Gas
Exploration/Production) 5,439,500
160,800 Viacom Inc.* (Broadcasting &
Publishing) 5,246,100
-------------
127,964,024
-------------
Total common stocks
(cost US$457,006,447) 575,413,133
-------------
Warrants
WARRANTS*--0.2%
- ----------------------------------------------------------------
Malaysia
229,625 Renong Berhad
expiring Nov. '00 @ MYR4.10
(Multi-Industry) 93,613
- ----------------------------------------------------------------
Singapore--0.2%
324,400 United Overseas Bank, Ltd.
expiring June '97 @ SGD3.34
(Banking) 1,151,580
-------------
Total warrants
(cost US$1,685,011) 1,245,193
-------------
Total long-term investments
(cost US$458,691,458) 576,658,326
-------------
Principal
Amount
(000)
SHORT-TERM INVESTMENTS--1.7%
- ----------------------------------------------------------------
Repurchase Agreement--1.7%
Joint Repurchase Agreement Account,
$10,702 5.548%, 11/01/96
(cost US$10,702,000; Note 5) 10,702,000
-------------
- ----------------------------------------------------------------
Total Investments--96.3%
(cost US$469,393,458; Note 4) 587,360,326
Other assets in excess of
liabilities--3.7% 22,426,775
-------------
Net Assets--100% $ 609,787,101
-------------
-------------
</TABLE>
- ---------------
*Non-income producing security.
ADR--American Depository Receipt
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-39
<PAGE>
PRUDENTIAL WORLD FUND, INC.
Statement of Assets and Liabilities GLOBAL SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Assets October 31, 1996
Investments, at value (cost US$469,393,458)............................................................... $587,360,326
Foreign currency, at value (cost US$16,357,706)........................................................... 16,251,872
Cash...................................................................................................... 150,081
Receivable for Fund shares sold........................................................................... 12,772,062
Dividends and interest receivable......................................................................... 1,079,227
Receivable for investments sold........................................................................... 228,820
Deferred expenses and other assets........................................................................ 14,097
----------------
Total assets........................................................................................... 617,856,485
----------------
Liabilities
Payable for investments purchased......................................................................... 5,916,647
Payable for Fund shares reacquired........................................................................ 857,859
Accrued expenses.......................................................................................... 524,515
Management fee payable.................................................................................... 385,716
Distribution fee payable.................................................................................. 312,201
Withholding taxes payable................................................................................. 72,446
----------------
Total liabilities...................................................................................... 8,069,384
----------------
Net Assets................................................................................................ $609,787,101
----------------
----------------
Net assets were comprised of:
Common stock, at par................................................................................... $ 375,232
Paid-in capital in excess of par....................................................................... 443,721,827
----------------
444,097,059
Undistributed net investment income.................................................................... 1,692,769
Accumulated net realized gain on investments and foreign currency transactions......................... 46,116,378
Net unrealized appreciation on investments and foreign currencies...................................... 117,880,895
----------------
Net assets, October 31, 1996.............................................................................. $609,787,101
----------------
----------------
Class A:
Net asset value and redemption price per share
($234,699,764 / 14,125,276 shares of common stock issued and outstanding)........................... $16.62
Maximum sales charge (5% of offering price)............................................................ .87
----------------
Maximum offering price to public....................................................................... $17.49
----------------
----------------
Class B:
Net asset value, offering price and redemption price per share
($326,977,505 / 20,487,988 shares of common stock issued and outstanding)........................... $15.96
----------------
----------------
Class C:
Net asset value, offering price and redemption price per share
($7,693,316 / 482,078 shares of common stock issued and outstanding)................................ $15.96
----------------
----------------
Class Z:
Net asset value, offering price and redemption price per share
($40,416,516 / 2,427,885 shares of common stock issued and outstanding)............................. $16.65
----------------
----------------
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-40
<PAGE>
PRUDENTIAL WORLD FUND, INC.
GLOBAL SERIES
Statement of Operations
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income October 31, 1996
<S> <C>
Income
Dividends (net of foreign withholding
taxes of $833,471)................... $ 7,259,756
Interest................................ 713,180
----------------
Total income......................... 7,972,936
----------------
Expenses
Management fee.......................... 4,118,594
Distribution fee--Class A............... 557,370
Distribution fee--Class B............... 2,714,436
Distribution fee--Class C............... 55,155
Transfer agent's fees and expenses...... 1,328,000
Custodian's fees and expenses........... 430,000
Reports to shareholders................. 384,000
Registration fees....................... 114,000
Directors' fees and expenses............ 88,000
Legal fees and expenses................. 65,000
Audit fees and expenses................. 52,000
Insurance expense....................... 12,872
Miscellaneous........................... 16,001
----------------
Total operating expenses............. 9,935,428
----------------
Net investment loss........................ (1,962,492)
----------------
Realized and Unrealized Gain (Loss)
on Investments and Foreign Currency
Transactions
Net realized gain on:
Investment transactions................. 46,102,357
Foreign currency transactions........... 3,727,733
----------------
49,830,090
----------------
Net change in unrealized
appreciation/depreciation on:
Investments............................. 19,925,606
Foreign currencies...................... (4,059,414)
----------------
15,866,192
----------------
Net gain on investments and foreign
currencies.............................. 65,696,282
----------------
Net Increase in Net Assets
Resulting from Operations.................. $ 63,733,790
----------------
----------------
</TABLE>
PRUDENTIAL WORLD FUND, INC.
GLOBAL SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended October 31,
in Net Assets 1996 1995
<S> <C> <C>
Operations
Net investment loss........ $ (1,962,492) $ (2,260,923)
Net realized gain on
investment and foreign
currency transactions... 49,830,090 25,315,122
Net change in unrealized
appreciation/depreciation
of investments and
foreign currencies...... 15,866,192 1,174,619
---------------- -------------
Net increase in net assets
resulting from
operations.............. 63,733,790 24,228,818
---------------- -------------
Net equalization credits...... -- 712,010
---------------- -------------
Distributions paid to
shareholders from net
realized gains on
investments and foreign
currency transactions
Class A.................... (10,616,171) (1,006,573)
Class B.................... (12,843,895) (5,394,512)
Class C.................... (187,931) (20,921)
Class Z.................... (30,717) --
---------------- -------------
(23,678,714) (6,422,006)
---------------- -------------
Fund share transactions (net
of share conversions)
(Note 6)
Proceeds from shares
sold.................... 639,187,000 323,054,908
Net asset value of shares
issued in reinvestment
of distributions........ 22,475,256 6,072,122
Cost of shares
reacquired.............. (586,163,045) (338,953,005)
---------------- -------------
Net increase (decrease) in net
assets from Fund share
transactions............... 75,499,211 (9,825,975)
---------------- -------------
Total increase................ 115,554,287 8,692,847
Net Assets
Beginning of year............. 494,232,814 485,539,967
---------------- -------------
End of year................... $ 609,787,101 $ 494,232,814
---------------- -------------
---------------- -------------
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-41
<PAGE>
PRUDENTIAL WORLD FUND, INC.
Notes to Financial Statements GLOBAL SERIES
- --------------------------------------------------------------------------------
Prudential World Fund, Inc. is registered under the Investment Company Act of
1940, as an open-end, diversified management investment company and currently
consists of two series: the Global Series (the "Fund") and the International
Stock Series. At the time of the name change from Prudential Global Fund, Inc.
to Prudential World Fund, Inc., the assets of the Global Fund were designated
Global Series. The investment objective of the Fund is to seek long-term capital
growth, with income as a secondary objective, by investing in a diversified
portfolio of securities consisting of marketable securities of U.S. and non-U.S.
issuers.
- ------------------------------------------------------------
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: Securities traded on an exchange (whether domestic or
foreign) are valued at the last reported sales price on the primary exchange on
which they are traded. Securities traded in the over-the-counter market
(including securities listed on exchanges for which a last sales price is not
available) are valued at the average of the last reported bid and asked prices.
Short-term securities which mature in more than 60 days are valued based upon
current market quotations. Short-term securities which mature in 60 days or less
are valued at amortized cost which approximates market value.
In connection with transactions in repurchase agreements with U.S. financial
institutions, it is the Fund's policy that its custodian or designated
subcustodians, as the case may be 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.
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 as reported by a major bank;
(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 fiscal year, 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 fiscal year end. Similarly, the Fund does not
isolate the effect of changes in foreign exchange rates from the fluctuations
arising from changes in the market prices of long-term portfolio securities sold
during the fiscal year.
Net realized gains on foreign currency transactions of $3,727,733 represent net
foreign exchange gains or losses from holdings of foreign currencies, currency
gains or losses realized between the trade and settlement dates on security
transactions, and the difference between the amounts of dividends, interest and
foreign taxes recorded on the Fund's books and the U.S. dollar equivalent
amounts actually received or paid. Net unrealized currency gains and losses from
valuing foreign currency denominated assets and liabilities (other than
investments) at fiscal year end exchange rates are reflected as a component of
net unrealized appreciation on investments and 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.
Forward Currency Contracts: A forward currency contract is a commitment to
purchase or sell a foreign currency at a future date at a negotiated forward
rate. The Fund enters into forward currency contracts in order to hedge its
exposure to changes in foreign currency exchange rates on its foreign portfolio
holdings or on specific receivables and payables denominated in a foreign
currency. The contracts are valued daily at current exchange rates and any
unrealized gain or loss is included in net unrealized appreciation or
depreciation on investments. Gain or loss is realized on the settlement date of
the contract equal to the difference between the settlement value of the
original and renegotiated forward contracts. This gain or loss, if any, is
included in net realized gain (loss) on foreign currency transactions. Risks may
arise upon entering into these contracts from the potential inability of the
counterparties to meet the terms of their contracts.
Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses from investment and
currency transactions are calculated on the identified cost basis.
- --------------------------------------------------------------------------------
B-42
<PAGE>
PRUDENTIAL WORLD FUND, INC.
Notes to Financial Statements GLOBAL SERIES
- --------------------------------------------------------------------------------
Dividend income is recorded on the ex-dividend date, and interest income is
recorded on an accrual basis. 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.
Equalization: Effective November 1, 1995, the Fund discontinued the accounting
practice of equalization. Equalization is a practice whereby a portion of the
proceeds from sales and costs of repurchases of capital shares, equivalent on a
per share basis to the amount of distributable net investment income on the date
of the transaction, is credited or charged to undistributed net investment
income. The balance of $3,655,851 of undistributed net investment income at
October 31, 1995, resulting from equalization was transferred to paid-in capital
in excess of par. Such reclassification has no effect on net assets, results of
operations, or net asset value per share.
Reclassification of Capital Accounts: The Fund accounts and reports for
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 by
$3,926,050, decrease accumulated net realized gain on investments and foreign
currency transactions by $3,727,733 and decrease paid-in capital by $198,317 for
the year ended October 31, 1996.
Dividends and Distributions: The Fund expects to pay dividends of net investment
income and distributions of net realized capital and currency gains, if any,
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. These differences are primarily due to differing treatments for
foreign currency transactions.
Federal Income Taxes: It is the Fund's policy to continue to meet the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to shareholders.
Therefore, no federal income tax provision is required.
Withholding taxes on foreign dividends, interest and capital gains have been
provided for in accordance with the Fund's understanding of the applicable
country's tax rules and rates.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual Fund Management LLC
(``PMF''). Pursuant to this agreement, PMF has responsibility for all investment
advisory services and supervises the subadviser's performance of such services.
PMF 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. PMF pays for the cost of the subadviser's
services, the compensation of officers of the Fund, occupancy and certain
clerical and bookkeeping costs of the Fund. The Fund bears all other costs and
expenses.
The management fee paid PMF is computed daily and payable monthly, at an annual
rate of .75 of 1% of the average daily net assets of the Fund.
The Fund had a distribution agreement with Prudential Mutual Fund Distributors,
Inc. (``PMFD''), which acted as the distributor of the Class A shares of the
Fund through January 1, 1996. Effective January 2, 1996 Prudential Securities
Incorporated (``PSI'') became the distributor of the Class A shares of the Fund
and is serving the Fund under the same terms and conditions as under the
arrangement with PMFD. PSI is also distributor of the Class B, Class C and Class
Z shares of the Fund. The Fund compensated PMFD and PSI for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution, (the ``Class A, B and C Plans'') regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
Pursuant to the Class A Plan, the Fund compensated PMFD during the period
November 1, 1995 through January 1, 1996 and thereafter PSI with respect to
Class A shares for distribution-related activities at an annual rate of up to
.30 of 1% of the average daily net assets of the Class A shares. Pursuant to the
Class B and C Plans, the Fund compensated PSI for distribution-related
activities at the annual rate of .75 of 1% of the average daily net assets of
Class B shares up to the level of average daily net assets as of February 26,
1986, plus 1% of the average daily net assets in excess of such level of the
Class B shares and 1% of average daily net assets of Class C shares. Payments
made pursuant to the Plans were .25 of 1%, .92% of 1% and 1% of the average
daily net assets of Class A, B and C shares, respectively, for the year ended
October 31, 1996.
PMFD and PSI have advised the Fund that they have received approximately
$283,800 in front-end sales charges resulting from sales of Class A
- -------------------------------------------------------------------------------
B-43
<PAGE>
PRUDENTIAL WORLD FUND, INC.
Notes to Financial Statements GLOBAL SERIES
- --------------------------------------------------------------------------------
shares during the year ended October 31, 1996. From these fees, PMFD and PSI
paid such sales charges to affiliated broker-dealers, which in turn paid
commissions to sales persons and incurred other distribution costs.
PSI has advised the Fund that for the year ended October 31, 1996, it received
approximately $732,100 in contingent deferred sales charges imposed upon certain
redemptions by Class B and C shareholders.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
- ------------------------------------------------------------
Note 3. Other Transactions With Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly owned subsidiary of
PMF, serves as the Fund's transfer agent and during the year ended October 31,
1996, the Fund incurred fees of approximately $1,297,000 for the services of
PMFS. As of October 31, 1996, approximately $111,300 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.
For the year ended October 31, 1996, PSI and/or its foreign affiliates earned
approximately $40,100 in brokerage commissions from portfolio transactions
executed on behalf of the Fund.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the year ended October 31, 1996 were $307,901,802 and $272,113,751,
respectively.
The United States federal income tax basis of the Fund's investments is
substantially the same as for financial reporting purposes and, accordingly, as
of October 31, 1996 net unrealized appreciation for federal income tax purposes
was $117,966,868 (gross unrealized appreciation--$139,904,299; gross unrealized
depreciation--$21,937,431).
- ------------------------------------------------------------
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 October 31, 1996, the Fund
had a 1.25% undivided interest in the repurchase agreements in the joint
account. The undivided interest for the Fund represents $10,702,000 in principal
amount. As of such date, each repurchase agreement in the joint account and the
value of the collateral therefor were as follows:
Bear Stearns & Co., 5.53%, in the principal amount of $277,000,000, repurchase
price $277,042,550, due 11/1/96. The value of the collateral including accrued
interest is $282,667,606.
CS First Boston Corp., 5.56%, in the principal amount of $100,000,000,
repurchase price $100,015,444, due 11/1/96. The value of the collateral
including accrued interest is $102,000,453.
Deutsche Bank Securities Corp., 5.55%, in the principal amount of $175,000,000,
repurchase price $175,026,799, due 11/1/96. The value of the collateral
including accrued interest is $178,500,400.
Morgan Stanley & Co., Inc., 5.65%, in the principal amount of $26,585,000,
repurchase price $26,589,172, due 11/1/96. The value of the collateral including
accrued interest is $27,128,601.
Smith Barney Inc., 5.55%, in the principal amount of $277,000,000, repurchase
price $277,042,704, due 11/1/96. The value of the collateral including accrued
interest is $282,541,278.
- -------------------------------------------------------------------------------
B-44
<PAGE>
PRUDENTIAL WORLD FUND, INC.
Notes to Financial Statements GLOBAL SERIES
- --------------------------------------------------------------------------------
Note 6. Capital
The Fund offers Class A, Class B, Class C shares and Class Z. 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.
Effective March 1, 1996, the Fund commenced offering Class Z shares. Class Z
shares are not subject to any sales or redemption charge and are offered
exclusively for sale to a limited group of investors. There are 500 million
authorized shares of common stock, $.01 par value per share, divided equally
into four classes, designated Class A, Class B, Class C and Class Z common
stock.
Transactions in shares of common stock were as follows:
Class A Shares Amount
- ---------------------------------- ----------- -------------
Year ended October 31, 1996:
Shares sold....................... 26,335,607 $ 415,012,668
Shares issued in reinvestment of
distributions................... 680,446 10,109,525
Shares reacquired................. (28,068,715) (443,294,595)
----------- -------------
Net increase in shares outstanding
before conversion............... (1,052,662) (18,172,402)
Shares issued upon conversion from
Class B......................... 872,989 13,829,667
----------- -------------
Net decrease in shares
outstanding..................... (179,673) $ (4,342,735)
----------- -------------
----------- -------------
Year ended October 31, 1995:
Shares sold....................... 14,310,794 $ 203,989,259
Shares issued in reinvestment of
distributions................... 73,418 983,611
Shares reacquired................. (15,121,426) (217,547,014)
----------- -------------
Net decrease in shares outstanding
before conversion............... (737,214) (12,574,144)
Shares issued upon conversion from
Class B......................... 10,085,947 130,068,677
----------- -------------
Net increase in shares
outstanding..................... 9,348,733 $ 117,494,533
----------- -------------
----------- -------------
Class B Shares Amount
- ---------------------------------- ----------- -------------
Year ended October 31, 1996:
Shares sold....................... 10,835,882 $ 164,171,609
Shares issued in reinvestment of
distributions................... 846,398 12,154,296
Shares reacquired................. (8,151,951) (123,589,487)
----------- -------------
Net increase in shares outstanding
before conversion............... 3,530,329 52,736,418
Shares reacquired upon conversion
into Class A.................... (906,072) (13,829,667)
----------- -------------
Net increase in shares
outstanding..................... 2,624,257 $ 38,906,751
----------- -------------
----------- -------------
Year ended October 31, 1995:
Shares sold....................... 8,422,470 $ 116,118,701
Shares issued in reinvestment of
distributions................... 390,179 5,070,014
Shares reacquired................. (8,836,648) (120,783,109)
----------- -------------
Net decrease in shares outstanding
before conversion............... (23,999) 405,606
Shares reacquired upon conversion
into Class A.................... (10,370,444) (130,068,677)
----------- -------------
Net decrease in shares
outstanding..................... (10,394,443) $(129,663,071)
----------- -------------
----------- -------------
Class C
- ----------------------------------
Year ended October 31, 1996:
Shares sold....................... 343,501 $ 5,317,184
Shares issued in reinvestment of
distributions................... 12,592 180,902
Shares reacquired................. (122,368) (1,957,739)
----------- -------------
Net increase in shares
outstanding..................... 233,725 $ 3,540,347
----------- -------------
----------- -------------
Year ended October 31, 1995:
Shares sold....................... 210,290 $ 2,946,948
Shares issued in reinvestment of
distributions................... 1,419 18,497
Shares reacquired................. (46,329) (622,882)
----------- -------------
Net increase in shares
outstanding..................... 165,380 $ 2,342,563
----------- -------------
----------- -------------
- -------------------------------------------------------------------------------
B-45
<PAGE>
PRUDENTIAL WORLD FUND, INC.
Notes to Financial Statements GLOBAL SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class Z Shares Amount
- ---------------------------------- ----------- -------------
<S> <C> <C>
March 1, 1996(a) through
October 31, 1996:
Shares sold....................... 3,507,519 $ 54,685,539
Shares issued in reinvestment of
distributions................... 1,895 30,533
Shares reacquired................. (1,081,529) (17,321,224)
----------- -------------
Net increase in shares
outstanding..................... 2,427,885 $ 37,394,848
----------- -------------
----------- -------------
</TABLE>
- ---------------
(a) Commencement of offering of Class Z shares.
- ------------------------------------------------------------
Note 7. Distributions
On December 10, 1996, the Board of Directors of the Fund declared a currency
gain dividend of $0.04 per share, short-term capital gain distribution of $0.20
per share and a long-term capital gain distribution of $1.05 per share for Class
A, B, C and Z shares respectively, payable on December 19, 1996 to shareholders
of record on December 16, 1996.
B-46
<PAGE>
PRUDENTIAL WORLD FUND, INC.
Financial Highlights GLOBAL SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
---------------------------------------------------------
Year Ended October 31,
---------------------------------------------------------
1996 1995(a) 1994(a) 1993(a) 1992(a)
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 15.52 $ 14.89 $ 13.17 $ 9.58 $ 10.08
-------- -------- ------- ------- -------
Income from investment operations
Net investment income (loss).................. -- .01 (.04) .02 .03
Net realized and unrealized gain (loss) on
investment and foreign currency
transactions............................... 1.83 .81 1.76 3.57 (.53)
-------- -------- ------- ------- -------
Total from investment operations........... 1.83 .82 1.72 3.59 (.50)
-------- -------- ------- ------- -------
Less distributions
Distributions paid to shareholders from net
realized gains on investment and foreign
currency transactions...................... (.73) (.19) -- -- --
-------- -------- ------- ------- -------
Total distributions........................ (.73) (.19) -- -- --
-------- -------- ------- ------- -------
Net asset value, end of year.................. $ 16.62 $ 15.52 $ 14.89 $ 13.17 $ 9.58
-------- -------- ------- ------- -------
-------- -------- ------- ------- -------
TOTAL RETURN(b):.............................. 12.33% 5.74% 13.06% 37.47% (4.96)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $234,700 $222,002 $73,815 $42,021 $13,973
Average net assets (000)...................... $222,948 $174,316 $58,455 $21,409 $14,758
Ratios to average net assets:
Expenses, including distribution fees...... 1.45% 1.51% 1.55% 1.56% 1.71%
Expenses, excluding distribution fees...... 1.20% 1.26% 1.30% 1.36% 1.51%
Net investment income (loss)............... (0.04)% .10% (0.29)% 0.20% 0.22%
For Class A, B, C and Z shares:
Portfolio turnover rate(c).................... 52% 50% 49% 69% 58%
Average commission rate paid per share........ $ 0.0366 N/A N/A N/A N/A
</TABLE>
- ---------------
(a) Based on average shares outstanding, by class.
(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.
(c) Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-47
<PAGE>
PRUDENTIAL WORLD FUND, INC.
Financial Highlights GLOBAL SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
------------------------------------------------------------ --------
Year
Year Ended October 31, Ended
------------------------------------------------------------ October 31,
1996 1995(a) 1994(a) 1993(a) 1992(a) 1996
-------- -------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 15.03 $ 14.53 $ 12.94 $ 9.47 $ 10.05 $ 15.03
-------- -------- -------- -------- -------- -------
Income from investment operations
Net investment income (loss).................. (.08) (.11) (.13) (.04) (.05) (.05)
Net realized and unrealized gain (loss) on
investment and foreign currency
transactions............................... 1.74 .80 1.72 3.51 (.53) 1.71
-------- -------- -------- -------- -------- --------
Total from investment operations........... 1.66 .69 1.59 3.47 (.58) 1.66
-------- -------- -------- -------- -------- --------
Less distributions
Distributions paid to shareholders from net
realized gains on investment and foreign
currency transactions...................... (.73) (.19) -- -- -- (.73)
-------- -------- -------- -------- -------- --------
Total distributions........................ (.73) (.19) -- -- -- (.73)
-------- -------- -------- -------- -------- --------
Net asset value, end of period................ $ 15.96 $ 15.03 $ 14.53 $ 12.94 $ 9.47 $ 15.96
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
TOTAL RETURN(b):.............................. 11.57% 4.98% 12.29% 36.64% (5.77)% 11.57%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $326,978 $268,498 $410,520 $251,133 $178,438 $ 7,693
Average net assets (000)...................... $294,230 $287,656 $345,771 $183,741 $210,464 $ 5,516
Ratios to average net assets:
Expenses, including distribution fees...... 2.12% 2.19% 2.24% 2.24% 2.40% 2.20%
Expenses, excluding distribution fees...... 1.20% 1.27% 1.30% 1.36% 1.51% 1.20%
Net investment income (loss)............... (.67)% (.84)% (0.97)% (0.39)% (0.47)% (.72)%
<CAPTION>
Class Z
-----------
August 1, March 1,
Year 1994(d) 1996 (e)
Ended Through Through
October 31, October 31, October 31,
1995(a) 1994(a) 1996
----------- ----------- -----------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 14.53 $ 14.03 $ 15.42
----- ----- -----------
Income from investment operations
Net investment income (loss).................. (.11) (.03) .06
Net realized and unrealized gain (loss) on
investment and foreign currency
transactions............................... .80 .53 1.18
----- ----- -----------
Total from investment operations........... .69 .50 1.24
----- ----- -----------
Less distributions
Distributions paid to shareholders from net
realized gains on investment and foreign
currency transactions...................... (.19) -- (.01)
----- ----- -----------
Total distributions........................ (.19) -- (.01)
----- ----- -----------
Net asset value, end of year.................. $ 15.03 $ 14.53 $ 16.65
----- ----- -----------
----- ----- -----------
TOTAL RETURN(b):.............................. 4.98% 3.56% 12.30%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $ 3,733 $ 1,205 $40,416
Average net assets (000)...................... $ 2,284 $ 630 $26,452
Ratios to average net assets:
Expenses, including distribution fees...... 2.25% 2.63%(c) 1.20%(c)
Expenses, excluding distribution fees...... 1.25% 1.63%(c) 1.20%(c)
Net investment income (loss)............... (.76)% (1.21)%(c) .55%(c)
</TABLE>
- ---------------
(a) Based on average shares outstanding, by class.
(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 offering of Class C shares.
(e) Commencement of offering of Class Z shares.
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-48
<PAGE>
PRUDENTIAL WORLD FUND, INC.
Independent Auditors' Report GLOBAL SERIES
- --------------------------------------------------------------------------------
The Shareholders and Board of Directors
Prudential World Fund, Inc.--Global Series
We have audited the accompanying statement of assets and liabilities including
the portfolio of investments, of Prudential World Fund, Inc.--Global Series, as
of October 31, 1996, the related statements of operations for the year then
ended and of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the period
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
October 31, 1996 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential World
Fund, Inc.--Global Series as of October 31, 1996, the results of its operations,
the changes in its net assets, and its financial highlights for the respective
stated periods, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
December 13, 1996
B-49
<PAGE>
PRUDENTIAL WORLD FUND
Portfolios of Investments INTERNATIONAL STOCK SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value (Note 1)
10/31/96 9/30/96 Description 10/31/96 9/30/96
<C> <C> <S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS 93.3% 93.3%
COMMON STOCKS
- ------------------------------------------------------------------------------------------------------------------------------
Argentina
3.1% 3.0%
60,000 50,000 Telecom Argentina (ADR) (Utilities) $ 2,265,000 $ 2,018,750
160,000 160,000 YPF Sociedad Anonima (ADR) (Oil & Gas) 3,640,000 3,660,000
------------ ------------
5,905,000 5,678,750
- ------------------------------------------------------------------------------------------------------------------------------
Australia 8.1% 8.0%
1,050,000 1,050,000 CSR, Ltd. (Multi-Industry) 3,526,616 3,680,566
600,000 600,000 Mayne Nickless Ltd. (Multi-Industry) 3,973,384 4,059,187
385,000 385,000 National Australia Bank Ltd. (Commercial Banking) 4,223,899 4,051,669
1,400,000 1,200,000 Pioneer International Ltd. (Building Materials & Components) 3,726,236 3,275,835
------------ ------------
15,450,135 15,067,257
- ------------------------------------------------------------------------------------------------------------------------------
Canada 4.7% 4.3%
154,000 154,000 Bank of Nova Scotia (Commercial Banking) 4,855,235 4,363,503
284,000 284,000 Canadian Tire Corp., Ltd., Class A (Automotive Parts) 4,132,527 3,762,901
------------ ------------
8,987,762 8,126,404
- ------------------------------------------------------------------------------------------------------------------------------
Finland 0.7%
67,000 Outokumpu O.V. (Metals-Non Ferrous) 1,233,048
- ------------------------------------------------------------------------------------------------------------------------------
France 5.8% 6.7%
3,132 Chargeurs Reunis S.A. (Multi-Industry) 115,856
34,075 30,075 Christian Dior S.A. (Textiles & Apparel) 4,523,819 3,518,089
9,800 Pathe S.A. (Media) 2,503,428
24,000 24,000 Peugeot S.A. (Automobile Manufacturing) 2,497,462 2,644,769
49,000 49,000 Societe Nationale Elf Aquitaine (Energy) 3,910,816 3,832,959
------------ ------------
10,932,097 12,615,101
- ------------------------------------------------------------------------------------------------------------------------------
Italy 5.5% 5.4%
1,200,000 1,200,000 Banca Fideuram S.P.A. (Financial Services) 2,541,762 2,850,394
330,000 300,000 Benetton Group S.P.A. (ADR) (Textiles & Apparel) 3,900,398 3,375,984
2,790,000 2,790,000 Parmalat Finanziaria S.P.A. (Agriculture) 3,986,909 4,009,252
------------ ------------
10,429,069 10,235,630
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-50
<PAGE>
PRUDENTIAL WORLD FUND
Portfolios of Investments INTERNATIONAL STOCK SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value (Note 1)
10/31/96 9/30/96 Description 10/31/96 9/30/96
<C> <C> <S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Japan 5.2% 5.6%
380,000 380,000 Hitachi, Ltd. (Electrical Equipment) $ 3,367,701 $ 3,684,849
205,000 205,000 Matsushita Electric Industrial Co., Ltd. (Electrical
Equipment) 3,273,812 3,441,975
54,000 54,000 Sony Corp. (Electronics) 3,236,257 3,408,485
------------ ------------
9,877,770 10,535,309
- ------------------------------------------------------------------------------------------------------------------------------
Netherlands 11.4% 11.4%
32,000 32,000 AKZO N.V. (Chemicals) 4,025,419 3,880,489
30,000 30,000 Gamma Holding N.V. (Textiles & Apparel) 1,456,225 1,478,688
130,000 130,000 ING Groep N.V. (Financial Services) 4,046,246 4,058,937
98,000 98,000 KLM Royal Dutch Airlines (Airlines/Military Technology) 2,329,489 2,624,335
80,000 80,000 Knp Bt (kon) Nv (Forestry & Paper) 1,760,414 1,880,372
138,000 138,000 Pakhoed Holdings N.V. (Energy Equipment & Services) 4,287,126 3,953,692
120,000 120,000 Stork N.V. (Machinery & Engineering) 3,749,117 3,690,580
------------ ------------
21,654,036 21,567,093
- ------------------------------------------------------------------------------------------------------------------------------
New Zealand 5.3% 5.1%
1,700,000 1,575,000 Carter Holt Harvey Ltd. (Forestry & Paper) 3,821,845 3,468,678
700,000 700,000 Fisher & Paykel Industries Ltd. (Consumer Durable Goods) 2,558,501 2,398,098
1,470,000 1,470,000 Lion Nathan Ltd. (Beverages & Tobacco) 3,720,467 3,658,813
------------ ------------
10,100,813 9,525,589
- ------------------------------------------------------------------------------------------------------------------------------
Norway 2.6% 3.5%
114,000 Nycomed A.S.A., Series B (Drugs & Medical Supplies) 1,332,943
78,000 78,000 Orkla A.S. (Food & Household Products) 4,550,204 3,900,060
41,000 103,700 Unitor A.S. (Business & Public Services) 448,858 1,372,052
------------ ------------
4,999,062 6,605,055
- ------------------------------------------------------------------------------------------------------------------------------
South Korea 3.8% 4.7%
98,000 98,000 Korea Zinc (Metals-Non Ferrous) 2,111,225 2,135,593
30,575 30,575 L.G. Construction Ltd. (Construction & Housing) 606,874 662,582
17,600 17,600 Pohang Iron & Steel Co., Ltd. (Metal-Steel) 862,693 969,491
23,189 23,189 Samsung Electronics Co., Ltd. (Manufacturing) 1,630,597 1,819,185
4,879 4,879 Samsung Electronics Co., Ltd. (new shares) (Manufacturing) 333,632 367,402
10,001 42,361 Sam Yang Co. (Misc. Materials & Commodities) 346,177 1,584,691
60,020 60,020 Tong Yang Cement Co. (Construction & Housing) 1,329,339 1,366,073
------------ ------------
7,220,537 8,905,017
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-51
<PAGE>
PRUDENTIAL WORLD FUND
Portfolios of Investments INTERNATIONAL STOCK SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Value (Note 1)
10/31/96 9/30/96 Description 10/31/96 9/30/96
<C> <C> <S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Spain 6.7% 6.3%
87,000 87,000 Banco Bilbao Vizcaya, S.A. (Commercial Banking) $ 4,219,007 $ 4,013,716
26,000 24,000 Banco de Andalucia S.A. (Commercial Banking) 3,701,212 3,299,252
460,000 460,000 Iberdrola, S.A. (Utilities) 4,875,244 4,463,061
------------ ------------
12,795,463 11,776,029
- ------------------------------------------------------------------------------------------------------------------------------
Sweden 7.1% 7.3%
70,000 70,000 Electrolux AB (Appliances) 3,891,666 3,935,552
155,000 145,000 SKF International AB (Consumer Goods) 3,425,714 3,490,680
175,000 175,000 Svedala Industri AB (Engineering & Construction) 2,737,989 3,037,507
170,000 157,000 Volvo AB (Automobile Manufacturing) 3,524,828 3,376,726
------------ ------------
13,580,195 13,840,465
- ------------------------------------------------------------------------------------------------------------------------------
Switzerland 7.8% 8.1%
4,100 4,100 Ciba-Geigy Ltd. (Chemicals) 5,033,272 5,243,084
15,000 15,000 Valora Holding AG (Merchandising) (a) 2,530,947 2,607,032
6,000 5,500 SMH-Swiss Corp. for Microelectronics and Watchmaking
Industries Ltd. (Electronics) 3,666,325 3,700,869
6,300 6,300 Sulzer Brothers Ltd. (Machinery & Engineering) 3,571,474 3,701,746
------------ ------------
14,802,018 15,252,731
- ------------------------------------------------------------------------------------------------------------------------------
United Kingdom 16.2% 13.2%
400,076 400,076 Allied-Lyons PLC (Beverages & Tobacco) 3,086,022 2,811,176
1,325,000 633,000 British Steel PLC (Steel) 3,681,753 1,961,408
731,000 731,000 British Telecom PLC (Telecommunications) 4,234,923 4,078,271
1,250,000 1,250,000 Coats Viyella PLC (Textiles & Apparel) 3,112,286 2,875,587
55,000 55,000 E D + F Manitoba Group (Financial Services) (a) 152,156 146,753
445,000 445,000 Lloyds Abbey Life PLC (Insurance) 4,544,142 4,366,432
400,000 Rank Group PLC (Media) 2,659,073
350,000 350,000 National Westminster Bank PLC (Commercial Banking) 3,995,525 3,719,092
473,000 473,000 Takare PLC (Health Services) 1,100,716 1,065,915
800,000 800,000 Tesco PLC (Food & Household Products) 4,335,232 3,799,687
------------ ------------
30,901,828 24,824,321
------------ ------------
Total long-term investments
(cost $152,381,088 and $151,027,154, respectively) 177,635,785 175,787,799
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-52
<PAGE>
PRUDENTIAL WORLD FUND
Portfolios of Investments INTERNATIONAL STOCK SERIES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Amount
(000) Value (Note 1)
10/31/96 9/30/96 Description 10/31/96 9/30/96
<C> <C> <S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS 7.4% 6.5%
- ------------------------------------------------------------------------------------------------------------------------------
Repurchase Agreement
$ 12,277 Joint Repurchase Agreement Account, 5.72%, 10/1/96
(cost $12,277,000; Note 5) $ 12,277,000
------------
$ 14,166 Joint Repurchase Agreement Account, 5.55%, 11/1/96
(cost $14,166,000; Note 5) $ 14,166,000
------------
Total Investments--100.7% and 99.8%, respectively
(cost $166,547,088 and $163,304,154, respectively; Note 4) 191,801,785 188,064,799
Other assets (liabilities) in excess of liabilities (other
assets)--(0.7%) and 0.2%, respectively (1,366,540) 322,196
------------ ------------
Net Assets--100% $190,435,245 $188,386,995
------------ ------------
------------ ------------
</TABLE>
- ---------------
ADR--American Depository Receipt.
(a) Non-income producing security.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-53
<PAGE>
PRUDENTIAL WORLD FUND
Statements of Assets and Liabilities INTERNATIONAL STOCK SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets October 31, 1996 September 30, 1996
<S> <C> <C>
Investments, at value (cost $166,547,088 and $163,304,154, respectively)................ $191,801,785 $188,064,799
Cash.................................................................................... -- 1,596
Foreign currency, at value (cost $228,722 and $137,293, respectively)................... 231,404 136,025
Interest and dividends receivable....................................................... 269,193 458,963
Receivable for Series shares sold....................................................... 742,693 306,010
Receivable for investments sold......................................................... 951,838 199,543
Deferred expenses and other assets...................................................... 17,849 19,379
---------------- ------------------
Total assets......................................................................... 194,014,762 189,186,315
---------------- ------------------
Liabilities
Bank overdraft.......................................................................... 637,755 --
Payable for investments purchased....................................................... 1,624,017 355,479
Accrued expenses........................................................................ 220,527 168,560
Management fee payable.................................................................. 162,415 132,985
Payable for Series shares reacquired.................................................... 934,803 127,536
Administration fee payable.............................................................. -- 14,760
---------------- ------------------
Total liabilities.................................................................... 3,579,517 799,320
---------------- ------------------
Net Assets.............................................................................. $190,435,245 $188,386,995
---------------- ------------------
---------------- ------------------
Net assets were comprised of:
Common Stock, at par................................................................. $114,819 $ 114,300
Paid-in capital in excess of par..................................................... 160,461,557 159,598,648
---------------- ------------------
160,576,376 159,712,948
Undistributed net investment income.................................................. 1,905,396 2,217,711
Accumulated net realized gain on investments......................................... 2,696,743 1,696,470
Net unrealized appreciation on investments and foreign currencies.................... 25,256,730 24,759,866
---------------- ------------------
Net assets........................................................................... $190,435,245 $188,386,995
---------------- ------------------
---------------- ------------------
Class A:
Net assets........................................................................... $ 5,169 $199.30
---------------- ------------------
---------------- ------------------
Shares of common stock issued and outstanding........................................ 311.6 12.092
---------------- ------------------
---------------- ------------------
Net asset value and redemption price per share....................................... $ 16.59 $ 16.48
Maximum sales charge (5.0% of offering price)........................................ 0.87 0.87
---------------- ------------------
Maximum offering price to public..................................................... $ 17.46 $ 17.35
---------------- ------------------
---------------- ------------------
Class B:
Net assets........................................................................... $ 1,922 $199.20
---------------- ------------------
---------------- ------------------
Shares of common stock issued and outstanding........................................ 115.98 12.092
---------------- ------------------
---------------- ------------------
Net asset value, offering price and redemption price per share....................... $ 16.57 $ 16.47
---------------- ------------------
---------------- ------------------
Class C:
Net assets........................................................................... $200.36 $199.20
---------------- ------------------
---------------- ------------------
Shares of common stock issued and outstanding........................................ 12.092 12.092
---------------- ------------------
---------------- ------------------
Net asset value, offering price and redemption price per share....................... $ 16.57 $ 16.47
---------------- ------------------
---------------- ------------------
Class Z:
Net assets........................................................................... $190,427,954 $ 188,386,397
---------------- ------------------
---------------- ------------------
Shares of common stock issued and outstanding........................................ 11,481,500 11,429,941
---------------- ------------------
---------------- ------------------
Net asset value, offering price and redemption price per share....................... $ 16.59 $ 16.48
---------------- ------------------
---------------- ------------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-54
<PAGE>
PRUDENTIAL WORLD FUND
Statements of Operations INTERNATIONAL STOCK SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
October 1, 1996
Through Year Ended
Net Investment Income (Loss) October 31, 1996 September 30, 1996
<S> <C> <C>
Income
Interest......................................................................... $ 54,004 $ 650,936
Dividends (net of foreign withholding taxes of $13,305 and $676,041,
respectively).................................................................. 111,180 4,497,460
---------------- ------------------
Total income.................................................................. 165,184 5,148,396
---------------- ------------------
Expenses
Management fee................................................................... 162,415 1,849,447
Administration fee............................................................... -- 244,264
Custodian's fees and expenses.................................................... 32,000 350,000
Transfer agent fees.............................................................. 26,000 8,000
Audit fee........................................................................ 20,000 15,500
Legal fees....................................................................... 20,000 15,000
Reports to shareholders.......................................................... 10,000 50,000
Registration fees................................................................ 5,000 25,000
Amortization of organization expenses............................................ 1,137 13,421
Directors' fees.................................................................. 3,500 12,000
Miscellaneous.................................................................... 12,162 8,566
---------------- ------------------
Total expenses................................................................ 292,214 2,591,198
Expense recovery (Note 2)........................................................... -- 4,420
---------------- ------------------
Total expenses and expense recovery................................................. 292,214 2,595,618
---------------- ------------------
Net investment income (loss)........................................................ (127,030) 2,552,778
---------------- ------------------
Realized and Unrealized Gain (Loss)
on Investment and Foreign Currency Transactions
Net realized gain (loss) on:
Investment transactions.......................................................... 837,173 4,925,561
Foreign currency transactions.................................................... (22,185) (171,664)
---------------- ------------------
814,988 4,753,897
---------------- ------------------
Net change in unrealized appreciation on:
Investments...................................................................... 494,052 7,445,086
Foreign currencies............................................................... 2,812 (6,428)
---------------- ------------------
496,864 7,438,658
---------------- ------------------
Net gain on investments and foreign currencies...................................... 1,311,852 12,192,555
---------------- ------------------
Net Increase in Net Assets
Resulting from Operations........................................................... $ 1,184,822 $ 14,745,333
---------------- ------------------
---------------- ------------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-55
<PAGE>
PRUDENTIAL WORLD FUND
Statements of Changes in Net Assets INTERNATIONAL STOCK SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
October 1, 1996
Through October
Increase (Decrease) 31, Year Ended September 30,
In Net Assets 1996 1996 1995
<S> <C> <C> <C>
Operations
Net investment income (loss).......................................... $ (127,030) $2,552,778 $ 1,884,332
Net realized gain (loss) on investment and foreign currency
transactions....................................................... 814,988 4,753,897 (3,084,946)
Net change in unrealized appreciation of investments and foreign
currencies......................................................... 496,864 7,438,658 9,333,213
--------------- ------------ ------------
Net increase in net assets resulting from operations.................. 1,184,822 14,745,333 8,132,599
--------------- ------------ ------------
Dividends and distributions
Dividends to shareholders from net investment income..................
Class Z............................................................ -- (1,739,771) (750,797)
--------------- ------------ ------------
Distributions to shareholders from net realized gains
Class Z............................................................ -- -- (2,440,090)
--------------- ------------ ------------
Series share transactions
Net proceeds from shares sold......................................... 9,340,491 115,942,217 93,624,206
Net asset value of shares issued in in reinvestment of dividends and
distributions...................................................... -- 1,739,771 3,190,887
Cost of shares redeemed............................................... (8,477,063) (78,985,777) 67,895,915
--------------- ------------ ------------
Net increase in net assets from Series share transactions............. 863,428 38,696,211 28,919,178
--------------- ------------ ------------
Total increase........................................................... 2,048,250 51,701,773 33,860,890
Net Assets
Beginning of period...................................................... 188,386,995 136,685,222 102,824,332
--------------- ------------ ------------
End of period............................................................ $ 190,435,245 18$8,386,995 $136,685,222
--------------- ------------ ------------
--------------- ------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-56
<PAGE>
PRUDENTIAL WORLD FUND
Notes to Financial Statements INTERNATIONAL STOCK SERIES
- --------------------------------------------------------------------------------
Prudential World Fund, Inc. (the ``Fund'') is registered under the Investment
Company Act of 1940, as an open-end, diversified management investment company
and consists of two series as a result of the reorganization described in Note
7. The International Stock Series (the ``Series''), formerly a series of The
Prudential Institutional Fund (the ``Company''), commenced investment operations
in November, 1992. Subsequent to September 30, 1996 (the Series' prior fiscal
year end) the Series' changed its fiscal year end to October 31 in conjunction
with the reorganization.
The investment objective of the Series is to achieve long-term growth of capital
through investment in equity securities of foreign issuers. Income is a
secondary objective. The Series seeks to achieve its objective primarily through
investment in a diversified portfolio of securities which consist of equity
securities of foreign issuers.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Series in the preparation of its financial statements.
Securities Valuation: Securities traded on an exchange (whether domestic or
foreign) are valued at the last reported sales price on the primary exchange on
which they are traded. Securities traded in the over-the-counter market
(including securities listed on exchanges for which a last sales price is not
available) are valued at the average of the last reported bid and asked prices.
Any security for which a reliable market quotation is unavailable is 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
Series' Board of Directors.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
In connection with transactions in repurchase agreements with U.S. financial
institutions, it is the Series' policy that its custodian or designated
subcustodians, as the case may be under triparty repurchase agreements, take
possession of the underlying 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 Series may be delayed or limited.
All securities are valued as of 4:15 p.m., New York time.
Foreign Currency Translation: The books and records of the Series are maintained
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on
the following basis:
(i) market value of investment securities, other assets and liabilities - at the
closing rates of exchange.
(ii) purchases and sales of investment securities, income and expenses - at the
rate of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Series are presented at the foreign exchange
rates and market values at the close of the fiscal period, the Series 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 Series
does not isolate the effect of changes in foreign exchange rates from the
fluctuations arising from changes in the market prices of long-term portfolio
securities sold during the period. Accordingly, these realized foreign currency
gains (losses) are included in the reported net realized gains (losses) on
investment transactions.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains or losses from holdings of foreign currencies, currency
gains or losses realized between the trade and settlement dates on security
transactions, and the difference between the amounts of dividends, interest and
foreign taxes recorded on the Series' books and the U.S. dollar equivalent
amounts actually received or paid. Net unrealized currency gains or losses from
valuing foreign currency denominated assets and liabilities (other than
investments) at fiscal period end exchange rates are reflected as a component of
net unrealized appreciation on investments and 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 Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date; interest income is recorded on the accrual basis. Expenses are
recorded on the accrual basis which may require the use of certain estimates by
management.
Net investment income (other than distribution fees) and unrealized and realized
gains or losses are allocated daily to each class of shares based
- --------------------------------------------------------------------------------
B-57
<PAGE>
PRUDENTIAL WORLD FUND
Notes to Financial Statements INTERNATIONAL STOCK SERIES
- --------------------------------------------------------------------------------
upon the relative proportion of net assets of each class at the beginning of
the day.
Taxes: For federal income tax purposes, each series in the Fund is treated as a
separate taxpaying entity. It is the intent of the Series to continue to meet
the requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its net income to shareholders. Therefore, no
federal income tax provision is required.
Withholding taxes on foreign dividends, interest and capital gains have been
provided for in accordance with the Series' understanding of the applicable
country's tax rules and regulations.
Dividends and Distributions: The Series expects to pay dividends of net
investment income and distributions of net realized capital and currency gains,
if any, 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.
Reclassification of Capital Accounts: The Series accounts for and reports
distributions to shareholders in accordance with the American Institute of
Certified Accountants' Statement of Position 93-2: Determination, Disclosure,
and Financial Statement Presentation of Income, Capital Gains, and Return of
Capital Distributions by Investment Companies. The effect of applying this
statement was to decrease undistributed net investment income and increase
accumulated net realized gain on investments by $177,909 and $185,285 for the
year ended September 30, 1996 and for the period October 1, 1996 through October
31, 1996, respectively, due to realized and recognized currency losses during
the periods. Net investment income, net realized gains and net assets were not
affected by this change.
Deferred Organization Expenses: Approximately $64,000 of costs were incurred in
connection with the organization and initial registration of the Series and are
being amortized ratably over the period of benefit not to exceed 60 months from
the date of the Series' commencement of investment operations.
- ------------------------------------------------------------
Note 2. Agreements
The Series had a management agreement with Prudential Institutional Fund
Management, Inc. (``PIFM'') until September 22, 1996. Effective September 23,
1996, the Series has a management agreement with Prudential Mutual Fund
Management LLC (``PMF'') (collectively the ``Managers''). Pursuant to these
agreements, the Managers have responsibility for all investment advisory
services and supervises the subadviser's performance of such services. The
Managers have a subadvisory agreement with Mercator Asset Management, L.P.
(``Mercator''); Mercator furnishes investment advisory services in connection
with the management of the Series. The Managers pay for the subadviser's
services, compensation of officers of the Series, occupancy and certain clerical
and bookkeeping costs of the Series. The Series bears all other costs and
expenses.
The management fee paid PIFM was computed daily and payable monthly at an annual
rate of 1.15% of the average daily net assets of the Series through September
22, 1996. Effective September 23, 1996, the management fee paid PMF is computed
daily and payable monthly at an annual rate of 1% of the average daily net
assets of the Series. PMF pays Mercator at an annual rate of .75 of 1% of the
Series average daily net assets up to and including $50 million, .60 of 1% of
the Series' average daily net assets in excess of $50 million up to and
including $300 million and .45 of 1% of the Series' average daily net assets in
excess of $300 million.
Prior to September 23, 1996, PIFM had voluntarily agreed to subsidize a portion
of the operating expenses of the Series such that the expense ratio did not
exceed 1.60% of the Series' average daily net assets. Such expenses may be
recovered by PIFM so long as the total expense ratio did not exceed 1.60% of the
Series' average daily net assets. PIFM recovered $4,420 of the Series operating
expenses during the period October 1, 1995 through September 22, 1996.
The Series had an administration agreement with PMF until September 22, 1996.
The administration fee paid PMF was computed daily and payable monthly at an
annual rate of .17% of the Company's daily average net assets up to $250 million
and .15% of the Company's average daily net assets in excess of $250 million.
Effective September 23, 1996, the Series has a distribution agreement with
Prudential Securities Incorporated (``PSI'') which acts as the distributor of
the Class A, Class B, Class C and Class Z shares of the Series. 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, B and C
plans'') regardless of expenses actually incurred by them. The distribution fees
are accrued daily and payable monthly. PSI also incurs the expenses of
distributing the Series' Class Z shares under the distribution agreement, none
of which is reimbursed or paid for by the Series.
Pursuant to the Class A, B and C Plans, the Series compensates PSI for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%
of the average daily net assets of the Class A, B, and C shares, respectively.
Such expenses under the Plans were .25 of 1%, 1% and 1%
- --------------------------------------------------------------------------------
B-58
<PAGE>
PRUDENTIAL WORLD FUND
Notes to Financial Statements INTERNATIONAL STOCK SERIES
- --------------------------------------------------------------------------------
of the average daily net assets of the Class A, B and C shares for the periods
September 23, 1996 through September 30, 1996 and October 1, 1996 through
October 31, 1996.
PSI, PIFM and PMF are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Series' transfer agent. During the periods September 23, 1996
through September 30, 1996 and October 1, 1996 through October 31, 1996, the
Series incurred fees of approximately $7,400 and $26,000, respectively, for the
services of PMFS. As of September 30, 1996 and October 31, 1996 these 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. Prior to
September 23, 1996 PMFS was paid .03 of 1% of the Company's average daily net
assets up to $250 million and .02 of 1% of the Company's average daily net
assets in excess of $250 million from the administration fee paid to PMF.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities of the Series, excluding short-term
investments for the year ended September 30, 1996 were $56,408,661 and
$22,148,491, respectively, and for the period October 1, 1996 through October
31, 1996 were $8,083,093 and $7,566,333, respectively.
The federal income tax basis and unrealized appreciation/depreciation of the
Series' investments as of September 30, 1996 and October 31, 1996 was as
follows:
<TABLE>
<CAPTION>
Net Unrealized
Appreciation/ Gross Unrealized
Date Basis (Depreciation) Appreciation Depreciation
- ------------------- ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C>
September 30, 1996 $163,304,154 $ 24,760,645 $ 31,703,166 $6,942,521
October 31, 1996 $166,547,088 $ 25,254,697 $ 33,309,225 $8,054,528
</TABLE>
- ------------------------------------------------------------
Note 5. Joint Repurchase Agreement Account
The Series, 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 September
30, 1996 and October 31, 1996, the Series had a 1.23% and 1.66% undivided
interest in the joint account, respectively. The undivided interest for the
Series represents $12,277,000 and $14,166,000, respectively, in the principal
amount. As of such dates, each repurchase agreement in the joint account and the
collateral therefor were as follows:
September 30, 1996
Bear, Stearns & Co., Inc., 5.72%, in the principal amount of $333,000,000,
repurchase price $333,052,910, due 10/1/96. The value of the collateral
including accrued interest was $339,757,925.
J.P. Morgan Securities, Inc., 5.70%, in the principal amount of $109,000,000,
repurchase price $109,017,258, due 10/1/96. The value of the collateral
including accrued interest was $111,181,257.
Goldman, Sachs & Co., Inc., 5.70%, in the principal amount of $333,000,000,
repurchase price $333,052,725, due 10/1/96. The value of the collateral
including accrued interest was $339,860,615.
Smith Barney, Inc., 5.75%, in the principal amount of $224,000,000, repurchase
price $224,035,778, due 10/1/96. The value of the collateral including accrued
interest was $228,481,010.
October 31, 1996
Bear, Stearns & Co., Inc., 5.53%, in the principal amount of $277,000,000,
repurchase price $277,042,550, due 11/1/96. The value of the collateral
including accrued interest was $282,667,606.
CS First Boston Corp., 5.56%, in the principal amount of $100,000,000,
repurchase price $100,015,444, due 11/1/96. The value of the collateral
including accrued interest was $102,000,453.
Deutsche Bank Securities Corp., 5.55%, in the principal amount of $175,000,000,
repurchase price $175,026,979, due 11/1/96. The value of the collateral
including accrued interest was $178,500,400.
Morgan Stanley & Co., Inc., 5.65%, in the principal amount of $26,585,000,
repurchase price $26,589,172, due 11/1/96. The value of the collateral including
accrued interest was $27,128,601.
Smith Barney, Inc., 5.55%, in the principal amount of $277,000,000, repurchase
price $277,042,704, due 11/1/96. The value of the collateral including accrued
interest was $282,541,278.
- ------------------------------------------------------------
Note 6. Capital
Effective September 23, 1996, the Series offers Class A, Class B, Class C and
Class Z 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
- --------------------------------------------------------------------------------
B-59
<PAGE>
PRUDENTIAL WORLD FUND
Notes to Financial Statements INTERNATIONAL STOCK SERIES
- --------------------------------------------------------------------------------
charge of 1% during the first year. Class B shares automatically convert to
Class A shares on a quarterly basis approximately seven years after purchase.
Class Z shares are not subject to any sales or redemption charge and are offered
exclusively for sale to a limited group of investors.
A special exchange privilege is also available for shareholders who qualified to
purchase Class A shares at net asset value.
There are 500 million authorized shares of $.01 par value common stock, divided
into four classes, designated Class A, Class B, Class C and Class Z common
stock, each of which consists of 125 million authorized shares.
Transactions in shares of common stock for the period October 1, 1996 through
October 31, 1996 and for the years ended September 30, 1996 and 1995 were as
follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
October 1, 1996 through
October 31, 1996:
Shares sold......................... 300 $ 5,035
---------- ------------
---------- ------------
September 23, 1996(a) through
September 30, 1996:
Shares sold......................... 12 $ 200
---------- ------------
---------- ------------
Class B
- ------------------------------------
October 1, 1996 through
October 31, 1996:
Shares sold......................... 104 $ 1,737
---------- ------------
---------- ------------
September 23, 1996(a) through
September 30, 1996:
Shares sold......................... 12 $ 200
---------- ------------
---------- ------------
Class C
- ------------------------------------
September 23, 1996(a) through
September 30, 1996:
Shares sold......................... 12 $ 200
---------- ------------
---------- ------------
</TABLE>
- ---------------
(a) Commencement of offering of Class A, Class B and Class C shares.
<TABLE>
<CAPTION>
Class Z Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
October 1, 1996 through
October 31, 1996:
Shares sold......................... 558,189 $ 9,333,719
Shares reacquired................... (506,630) (8,477,063)
---------- ------------
Net increase in shares
outstanding....................... 51,559 $ 856,656
---------- ------------
---------- ------------
Year ended September 30, 1996:
Shares sold......................... 7,376,874 $115,941,617
Shares issued in reinvestment of
dividends......................... 116,607 1,739,771
Shares reacquired................... (5,027,997) (78,985,777)
---------- ------------
Net increase in shares
outstanding....................... 2,465,484 $ 38,695,611
---------- ------------
---------- ------------
Year ended September 30, 1995:
Shares sold......................... 6,497,880 $ 93,624,206
Shares issued in reinvestment of
dividends and distributions....... 228,737 3,190,887
Shares reacquired................... (4,691,305) (67,895,915)
---------- ------------
Net increase in shares
outstanding....................... 2,035,312 $ 28,919,178
---------- ------------
---------- ------------
</TABLE>
Of the shares outstanding at September 30, 1996 and October 31, 1996 PIFM and
affiliates owned 5,881,584 and 5,892,471 shares of the Series, respectively.
- ------------------------------------------------------------
Note 7. Reorganization
On May 17, 1996, the Trustees of the Company approved an Agreement and a Plan of
Reorganization (the ``Plan of Reorganization'') for the Company. The Plan of
Reorganization was approved by shareholders on September 6, 1996. Under the Plan
of Reorganization, The Prudential Institutional Fund, International Stock Fund
joined the Prudential Global Fund, Inc. to become two separate series of a newly
named Prudential World Fund, Inc. Existing shareholders of The Prudential
Institutional Fund, International Stock Fund became Class Z shareholders in the
Series and the Series also began offering Class A, B and C shares.
- --------------------------------------------------------------------------------
B-60
<PAGE>
PRUDENTIAL WORLD FUND
Financial Highlights INTERNATIONAL STOCK SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B
----------------------------- -----------------------------
October 1, September 23, October 1, September 23,
1996 1996(a) 1996 1996(a)
Through Through Through Through
October 31, September 30, October 31, September 30,
1996 1996 1996 1996
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 16.48 $ 16.54 $ 16.47 $ 16.54
----- ----- ----- -----
Income from investment operations:
Net investment loss..................... (.01) -- (.02) --
Net realized and unrealized gain (loss)
on investment and foreign currency
transactions......................... .12 (.06) .12 (.07)
----- ----- ----- -----
Total from investment operations..... .11 (.06) .10 (.07)
----- ----- ----- -----
Net asset value, end of period.......... $ 16.59 $ 16.48 $ 16.57 $ 16.47
----- ----- ----- -----
----- ----- ----- -----
TOTAL RETURN(c)......................... .67% (.36)% .61% (.42)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period............... $ 5,169 $ 199 $ 1,922 $ 199
Average net assets...................... $ 2,793 $ 199 $ 313 $ 199
Ratios to average net assets:(b)
Expenses, including distribution
fees.............................. 2.05% 2.46% 2.80% 3.21%
Expenses, excluding distribution
fees.............................. 1.80% 2.21% 1.80% 2.21%
Net investment income................ (1.03)% .75% (1.78)% 0%
Portfolio turnover rate................. 4% 15% 4% 15%
Average commission rate paid per
share................................ $ .0256 $ .0222 $ .0256 $ .0222
</TABLE>
- ---------------
(a) Commencement of offering of Class A and Class B shares.
(b) Annualized.
(c) Total return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total return for periods of
less than a full year are not annualized. Total return includes the effect
of expense subsidies/recoveries, as applicable.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-61
<PAGE>
PRUDENTIAL WORLD FUND
Financial Highlights INTERNATIONAL STOCK SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class Z
----------------------------- --------------------------------------------------
October 1, September 23, October 1,
1996 1996(b) 1996
Through Through Through Year Ended September 30,
October 31, September 30, October 31, ----------------------------------
1996 1996 1996 1996 1995 1994
----------- ------------- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 16.47 $ 16.54 $ 16.48 $ 15.25 $ 14.84 $ 12.35
------- ------- --------- -------- -------- --------
Income from investment operations:
Net investment income (loss)............ (.02) -- (.01) .22 .18(c) .13(c)
Net realized and unrealized gain
(loss) on investment and foreign
currency transactions............. .12 (.07) .12 1.20 .66 2.54
------- ------- --------- -------- -------- --------
Total from investment operations..... .10 (.07) .11 1.42 .84 2.67
------- ------- --------- -------- -------- --------
Less distributions:
Dividends from net investment income.... -- -- -- (.19) (.10) (.03)
Distributions from net realized gains... -- -- -- -- (.33) (.15)
------- ------- --------- -------- -------- --------
Total distributions.................. -- -- -- (.19) (.43) (.18)
------- ------- --------- -------- -------- --------
Net asset value, end of period.......... $ 16.57 $ 16.47 $ 16.59 $ 16.48 $ 15.25 $ 14.84
------- ------- --------- -------- -------- --------
------- ------- --------- -------- -------- --------
TOTAL RETURN(e)......................... .61% (.42)% .67% 9.44% 5.95% 21.71%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $ 200(f) $ 199(f) $ 190,428 $188,386 $136,685 $102,824
Average net assets (000)................ $ 202(f) $ 199(f) $ 191,228 $161,356 $118,927 $ 68,476
Ratios to average net assets:
Expenses, including distribution
fees.............................. 2.80%(d) 3.21%(d) 1.80%(d) 1.61%(c) 1.60%(c) 1.60%(c)
Expenses, excluding distribution
fees.............................. 1.80%(d) 2.21%(d) 1.80%(d) 1.61%(c) 1.60%(c) 1.60%(c)
Net investment income................ (1.78)%(d) 0%(d) (.78)%(d) 1.58%(c) 1.58%(c) 1.08%(c)
Portfolio turnover rate................. 4% 15% 4% 15% 20% 21%
Average commission rate paid per
share................................ $ .0256 $ .0222 $ .0256 $ .0222 N/A N/A
<CAPTION>
November 5,
1992(a)
Through
September 30,
1993
-------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 10.00
------
Income from investment operations:
Net investment income (loss)............ .16(c)
Net realized and unrealized gain
(loss) on investment and foreign
currency transactions............. 2.21
------
Total from investment operations..... 2.37
------
Less distributions:
Dividends from net investment income.... (.02)
Distributions from net realized gains... --
------
Total distributions.................. (.02)
------
Net asset value, end of period.......... $ 12.35
------
------
TOTAL RETURN(e)......................... 23.74%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $31,708
Average net assets (000)................ $14,491
Ratios to average net assets:
Expenses, including distribution
fees.............................. 1.60%(c)(d)
Expenses, excluding distribution
fees.............................. 1.60%(c)(d)
Net investment income................ 1.44%(c)(d)
Portfolio turnover rate................. 15%
Average commission rate paid per
share................................ N/A
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Commencement of offering of Class C shares.
(c) Net of expense subsidy/recovery.
(d) Annualized.
(e) Total return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total return for periods of
less than a full year are not annualized. Total return includes the effect
of expense subsidies/recoveries, as applicable.
(f) Figures are actual and are not rounded to the nearest thousand.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-62
<PAGE>
PRUDENTIAL WORLD FUND
Independent Auditors' Report INTERNATIONAL STOCK SERIES
- --------------------------------------------------------------------------------
The Shareholders and Board of Directors
Prudential World Fund, Inc., International Stock Series
We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments, of Prudential World Fund, Inc., International
Stock Series, as of October 31, 1996 and September 30, 1996, the related
statements of operations for the period October 1, 1996 through October 31, 1996
and the year ended September 30, 1996 and of changes in net assets and the
financial highlights for each of the periods presented. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
September 30, 1996 and October 31, 1996 by correspondence with the custodian and
brokers; where replies were not received from brokers we performed other
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential World
Fund, Inc., International Stock Series, as of September 30, 1996 and October 31,
1996, the results of its operations, the changes in its net assets, and its
financial highlights for the respective stated periods in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
November 27, 1996
B-63
<PAGE>
APPENDIX--GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
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.
App-1
<PAGE>
APPENDIX--HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
This chart shows the long-term performance of various asset classes and the
rate of inflation.
- --------------------------------------------------------------------------------
CAMERA READY GRAPH
- --------------------------------------------------------------------------------
Source: Prudential Investment Corporation based on data from Ibbotson
Associates' EnCORR Software, Chicago, Il. As of 12/31/95. 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 attributable to capital appreciation and the
reinvestment of distributions. Bond returns are attributable mainly to the
reinvestment of distributions. Also, stock prices are usually more volatile than
bond prices over the long-term.
Small stock returns for 1926-1989 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 represented by a portfolio that contains
only one bond with a maturity of roughly 20 years. At the beginning of each year
a new bond with a then-current coupon replaces the old bond. 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).
Impact of Inflation. The "real" rate of investment return is that which exceeds
the rate of inflation, the percentage change in the value of consumer goods and
the general cost of living. A common goal of long-term investors is to outpace
the erosive impact of inflation on investment returns.
App-2
<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 to
December 1995. The total returns of the indices include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of either Series or of any sector in which
a Series invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees of
a mutual fund. See "Fund Expenses" in the prospectus. The net effect of the
deduction of the operating expenses of a mutual fund on these historical total
returns, including the compounded effect over time, could be substantial.
Historical Total Returns of Different Bond Market Sector
[Chart A Attached]
(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.
App-3
<PAGE>
This chart illustrates the performance of major world stock markets for the
period from 1985 through 1995. It does not represent the performance of any
Prudential Mutual Fund.
[Insert Chart B]
Source: Morgan Stanley Capital International as of 12/31/95. Morgan Stanley
country indices area unmanaged indices which include those stocks making up the
largest two-thirds of each country's total stock market capitalization. This
chart is for illustrative purposes only and is not indicative of the past,
present or future performance of any specific investment. Investors cannot
invest directly in stock indices.
This chart shows the growth of a hypothetical $10,000 investment made in the
stock representing the S&P 500 stock index with and without reinvested
dividends. As of 12/31/95.
[Insert Chart C]
Source: Lipper Analytical New Applications (LANA). This chart is for
illustrative purposes only and is not representative of the past, present or
future performance of any Prudential Mutual Fund. Common Stock total returns are
based on the S&P 500 Index, a market-value weighted index made up of 500 of the
largest stocks in the U.S. based upon their stock market value. Investors cannot
buy or invest in market indices.
App-4
<PAGE>
This chart below shows the historical volatility of general interest rates
as measured by the long U.S. Treasury Bond.
Long U.S. Treasury Bond Yield in Percent (1926-1994)
(PASTE-UP CHART)
- ----------
Source: Stocks, Bonds, Bills, and Inflation 1995 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 1926-1994. 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.
The following chart, although not relevant to share ownership in the Fund,
may provide useful information about the effects of a hypothetical investment
diversified over different asset portfolios. The chart shows the range of annual
total returns for major stock and bond indices for the period from December 31,
1975 through December 31, 1995. The horizontal "Best Returns Zone" band shows
that a hypothetical blended portfolio constructed of one-third U.S. stocks (S&P
500), one-third foreign stocks (EAFE Index), and one-third U.S. bonds (Lehman
Index) would have eliminated the "highest highs" and "lowest lows" of any single
asset class.
(PASTE-UP 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.
App-5
<PAGE>
APPENDIX--INFORMATION RELATING TO THE PRUDENTIAL
Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating to
the Prudential Mutual Funds. See "How the Fund is Managed--Manager" in the
Prospectus. Thedata will be used in sales materials relating to the Prudential
Mutual Funds. Unless otherwise indicated, the information is as of December 31,
1995 and is subject to change thereafter. All information relies on data
provided by The Prudential Investment Corporation (PIC) or from other sources
believed by the Manager to be reliable. Such information has not been verified
bythe 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,
1995. Its primary business is to offer a full range of products and services in
three areas: insurance, investments and home ownership for individuals and
families; health-care management and other benefit programs for employees of
companies and members of groups; and asset management for institutional clients
and their associates. Prudential (together with its subsidiaries) employs more
than 92,000 persons worldwide, and maintains a sales force of approximately
13,000 agents and 5,600 financial advisors. Prudential is a major issuer of
annuities, including variable annuities. Prudential seeks to develop innovative
products and services to meet consumer needs in each of its business areas.
Prudential uses the rock of Gibraltar as its symbol. The Prudential rock is a
recognized brand name throughout the world.
Insurance. Prudential has been engaged in the insurance business since
1875. It insures or provides financial services to more than 50 million people
worldwide--one of every five people in the United States. Long one of the
largest issuers of individual life insurance, the Prudential has 19 million life
insurance policies in force today with a face value of $1 trillion. Prudential
has the largest capital base ($11.4 billion) of any life insurance company in
the United States. The Prudential provides auto insurance for more than 1.7
million cars and insures more than 1.4 million homes.
Money Management. The Prudential is one of the largest pension fund
managers in the country, providing pension services to 1 in 3 Fortune 500 firms.
It manages $36 billion of individual retirement plan assets, such as 401(k)
plans. In July 1995, Institutional Investor ranked Prudential the third largest
institutional money manager of the 300 largest money management organizations in
the United States as of December 31, 1994. As of December 31, 1995, Prudential
had more than $314 billion in assets under management. Prudential Investments, a
business group of Prudential (of which Prudential Mutual Funds is a key part)
manages over $190 billion in assets of institutions and individuals.
Real Estate. The Prudential Real Estate Affiliates, the fourth largest real
estate brokerage network in the United States, has more than 34,000 brokers and
agents and more than 1,100 offices in the United States.(2)
Healthcare. Over two decades ago, the Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, almost 5 million
Americans receive healthcare from a Prudential managed care membership.
Financial Services. The Prudential Bank, a wholly-owned subsidiary of the
Prudential, has nearly $3 billion in assets and serves nearly 1.5 million
customers across 50 states.
Information about the Prudential Mutual Funds
Prudential Mutual Fund Management is one of the seventeen largest mutual
fund companies in the country, with over 2.5 million shareholders invested in
more than 50 mutual fund portfolios and variable annuities with more than 3.7
million shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers who manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment
portfolios.
- ----------
(1) Prudential Mutual Fund Investment Management, a unit of PIC, serves as the
Subadviser to substantially all of the Prudential Mutual Funds. Wellington
Management Company serves as the subadviser to Global Utility Fund, Inc.
Nicholas-Applegate Capital Management as subadviser to Nicholas-Applegate
Fund, Inc., Jennison Associates Capital Corp. as the subadviser to
Prudential Jennison Series Fund, Inc. and Prudential Dryden Fund, and
BlackRock Financial Management, Inc. as subadviser to The BlackRock
Government Income Trust. There are multiple subadvisers for The Target
Portfolio Trust.
(2) As of December 31, 1994.
App-6
<PAGE>
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser in
national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
The Wall Street Journal, The New York Times, Barron's and USA Today.
Equity Funds. Forbes magazines 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 Growth Fund, a growth-style
equity fund managed by Jennison Associates Capital Corp., a premier
institutional equity manager and a subsidiary of Prudential.
High Yield Funds. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor the 167
issues held in the Prudential High Yield Fund (currently the largest fund of its
kind in the country) along with 100 or so other high yield bonds, which may be
considered for purchase.(3) Non-investment grade bonds, also known as junk bonds
or high yield bonds, are subject to a greater risk of loss of principal and
interest including default risk than higher-rated bonds. Prudential high yield
portfolio managers and analysts meet face-to-face with almost every bond issuer
in the High Yield Fund's portfolio annually, and have additional telephone
contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets--from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from Pulp and Paper Forecaster to Women's
Wear Daily--to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential mutual
fund.
Prudential Mutual Funds trade approximately $31 billion in U.S. and foreign
government securities a year. PIC seeks information from government policy
makers. In 1995, Prudential's portfolio managers met with several senior U.S.
and foreign government officials, on issues ranging from economic conditions in
foreign countries to the viability of index-linked securities in the United
States.
Prudential Mutual Funds' portfolio managers and analysts met with over
1,200 companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.
Prudential Mutual Funds' 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)
- ----------
(3) As of December 31, 1995. The number of bonds and the size of the Fund are
subject to change.
(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 Mutual Fund Investment Management, a division 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.
App-7
<PAGE>
Based on complex-wide data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Services, Inc., the Transfer Agent of the
Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free number. On an
annual basis, that represents approximately 1.8 million telephone calls
answered.
Information about Prudential Securities
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 5,600 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1995, assets held by Prudential Securities for its
clients approximated $168 billion. During 1994, over 28,000 new customer
accounts were opened each month at PSI.(7)
Prudential Securities has a two-year Financial Advisor training program
plus advanced education programs, including Prudential Securities "university,"
which provides advanced education in a wide array of investment areas.
Prudential Securities is the only Wall Street firm to have its own in-house
Certified Financial Planner (CFP) program. In the December 1995 issue of
Registered Rep, an industry publication, Prudential Securities' Financial
Advisor training programs received a grade of A- (compared to an industry
average of B+).
In 1995, Prudential Securities' equity research team ranked 8th in
Institutional Investor magazine's 1995 "All America Research Team" survey. Five
Prudential Securities' analysts were ranked as first-team finishers.(8)
In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial Architect[SM], a state-of-the-art asset allocation software program
which helps Financial Advisors to evaluate a client's objectives and overall
financial plan, and a comprehensive mutual fund information and analysis system
that compares different mutual funds.
For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
advisor or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
- ----------
(7) As of December 31, 1994.
(8) In 1995, Institutional Investor magazine surveyed more than 700
institutional money managers, chief investment officers and research
directors, asking them to evaluate analysts in approximately 80 industry
sectors. Scores were 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 sent its survey to more than 2,000
institutions, including a group of European and Asian institutions. This
survey is conducted annually.
App-8
<PAGE>
DESCRIPTION OF S&P, MOODY'S AND DUFF & PHELPS RATINGS
Description of S&P Corporate Bond Ratings:
AAA - Bonds rated AAA have the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA - Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A - Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
BB, B, CCC, CC, C - Bonds rated BB, B, CCC, CC, or C are regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
represents the lowest degree of speculation and C the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
Description of Moody's Corporate Bond Ratings:
Aaa - Bonds rated Aaa are judged to be the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
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 these issues.
Aa - Bonds 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 in Aaa securities.
A - Bonds 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 sometime in the future.
Baa - Bonds 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 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 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.
Caa - Bonds 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 rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds, and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Moody's applies the numerical modifiers 1, 2 and 3 in the Aa and A rating
categories. The modifier 1 indicates that the security 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 issue ranks in the lower end of its
generic rating category.
App-9
<PAGE>
Description of Duff & Phelps Bond Ratings:
AAA - Bonds rated AAA by Duff & Phelps are considered to be of the highest
credit quality. The risk factors are negligible, being only slightly more than
for risk-free U.S. Treasury debt.
AA+, AA, AA- - Bonds rated AA+, AA or AA- are considered to be of high
credit quality. Protection factors are strong. Risk is modest but may vary
slightly from time to time because of economic conditions.
A+, A, A- - Bonds rated A+, A or A- have protection factors which are
average but adequate; however, risk factors are more variable and greater in
periods of economic stress.
BBB+, BBB, BBB- - Bonds rated BBB+, BBB or BBB- have below average
protection factors but are still considered sufficient for prudent investment.
These bonds demonstrate considerable variability in risk during economic cycles.
BB+, BB, BB- - Bonds rated BB+, BB, or BB- are below investment grade but
are still 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+, B, B- - Bonds rated B+, B, or B- are below investment grade and possess
the 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.
CCC - Bonds rated CCC are 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.
DD - Bonds rated DD are defaulted debt obligations. The issuer failed to
meet scheduled principal and/or interest payments.
Description of S&P Commercial Paper Ratings:
Commercial paper rated A-1 by S&P indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted A-1+.
Capacity for timely payment on commercial paper rated A-2 is strong, but the
relative degree of safety is not as high as for issues designated A-1.
Description of Moody's Commercial Paper Ratings:
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated Prime-1 (or related supporting institutions) are
considered to have a superior capacity for repayment of short-term promissory
obligations. Issuers rated Prime-2 (or related supporting institutions) are
considered to have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics of
issuers rated Prime-1 but to a lesser degree. Earnings trends and coverage
ratios, while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternative liquidity is maintained.
Description of Duff & Phelps Commercial Paper Rating:
Duff & Phelps commercial paper ratings are divided into three categories,
ranging from "1" for the highest quality obligations to "3" for the lowest. No
ratings are issued for companies whose paper is not deemed investment grade.
Issues assigned the Duff 1 rating are considered top grade. This category is
further divided into three gradations as follows: Duff 1 plus -- highest
certainty of timely payment, short-term liquidity, including internal operating
factors and/or ready access to alternative sources of funds, is clearly
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 strong fundamental protection factors, risk
factors are minor; Duff 1 minus-high certainty of timely payment, liquidity
factors are strong and supported by good fundamental protection factors, risk
factors are very small. Issues rated Duff 2 represent a good certainty of timely
payment; liquidity factors and company fundamentals are sound; although ongoing
internal funds needs may enlarge total financing requirements, access to capital
markets is good; risk factors are small. Duff 3 represents a satisfactory grade;
satisfactory liquidity and other protection factors qualify issue as to
investment grade; risk factors are larger and subject to more variation;
nevertheless timely payment is expected.
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