<PAGE>
PRUDENTIAL NATURAL RESOURCES FUND, INC.
- -------------------------------------------------------------------------------
PROSPECTUS DATED JULY 30, 1996
- -------------------------------------------------------------------------------
Prudential Natural Resources Fund, Inc., formerly Prudential Global Natural
Resources Fund, Inc. (the Fund), is an open-end, diversified, management
investment company. Its investment objective is long-term growth of capital.
It seeks to achieve this objective by investing primarily in securities of
foreign and domestic companies that own, explore, mine, process or otherwise
develop, or provide goods and services with respect to, natural resources and
in securities, the terms of which are related to the market value of a natural
resource (asset-based securities). The Fund will, under normal circumstances,
invest at least 65% of its total assets in common stocks and equivalents (such
as convertible debt securities and warrants) of natural resource companies and
in asset-based securities. The Fund may also invest in equity securities of
companies in other industries, fixed-income securities (including money market
instruments), and derivatives, including options on equity securities, stock
indices, foreign currencies and futures contracts on foreign currencies, and
may buy and sell futures contracts on foreign currencies and on stock indices
so as to hedge its portfolio. There can be no assurance that the Fund's
investment objective will be achieved. See "How the Fund Invests--Investment
Objective and Policies." The Fund's address is One Seaport Plaza, New York,
New York 10292, and its telephone number is (800) 225-1852.
The Fund's purchase and sale of put and call options may be considered
speculative and may result in higher risks and costs to the Fund. The Fund may
also buy and sell options on stock indices pursuant to limits described
herein. See "How the Fund Invests--Investment Objective and Policies."
The Fund is not intended to constitute a complete investment program. Because
of its objective and policies, including its foreign investments and its
concentration in securities of natural resource companies, the Fund may be
considered of a speculative nature and subject to greater investment risks
than are assumed by certain other investment companies that invest solely in
securities of U.S. issuers or that do not concentrate their investments in
particular industries. See "How the Fund Invests--Investment Objective and
Policies--Special Considerations and Risks."
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. Additional information
about the Fund has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated July 30, 1996, which information is
incorporated herein by reference (is legally considered a part of this
Prospectus) and is available without charge upon request to the Fund at the
address or telephone number noted above.
- -------------------------------------------------------------------------------
Investors are advised to read this Prospectus and retain it for future
reference.
- -------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL NATURAL RESOURCES FUND, INC.?
Prudential Natural Resources Fund, Inc. is a mutual fund. A mutual fund pools
the resources of investors by selling its shares to the public and investing
the proceeds of such sale in a portfolio of securities designed to achieve its
investment objective. Technically, the Fund is an open-end, diversified,
management investment company.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is long-term growth of capital. It seeks to
achieve this objective by investing primarily in securities of foreign and
domestic companies that own, explore, mine, process or otherwise develop, or
provide goods and services with respect to, natural resources and in
securities, the terms of which are related to the market value of a natural
resource. There can be no assurance that the Fund's objective will be achieved.
See "How the Fund Invests--Investment Objective and Policies" at page 8.
RISK FACTORS AND SPECIAL CHARACTERISTICS
The values of natural resources are affected by numerous factors including
events occurring in nature, inflationary pressures and international politics.
Moreover, there are no geographic limitations on natural resource companies in
which the Fund may invest; therefore, depending on market conditions, the Fund
may be invested primarily in foreign securities. See "How the Fund Invests--
Investment Objective and Policies" at page 8. In addition, the Fund may engage
in various hedging and return enhancement strategies, including utilizing
derivatives. These actions may be considered speculative and may result in
higher risks and costs to the Fund. See "How the Fund Invests--Hedging and
Return Enhancement Strategies--Risks of Hedging and Return Enhancement
Strategies" at page 13.
WHO MANAGES THE FUND?
Prudential Mutual Fund Management, Inc. (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 the Fund's average daily net assets. As of June 30, 1996, PMF served as
manager or administrator to 60 investment companies, including 38 mutual funds,
with aggregate assets of approximately $52 billion. The Prudential Investment
Corporation (PIC or the Subadviser) furnishes investment advisory services in
connection with the management of the Fund under a Subadvisory Agreement with
PMF. See "How the Fund is Managed--Manager" at page 15. The management fee is
higher than that paid by most other investment companies.
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 and Class C shares. PSI is paid a
distribution and service fee which is currently being charged at the annual
rate of .25 of 1% of the average daily net assets of the Class A shares and is
paid a distribution and service fee with respect to Class B and Class C shares
at the annual rate of 1% of the average daily net assets of each of the Class B
and Class C shares. See "How the Fund is Managed--Distributor" at page 15.
2
<PAGE>
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. The minimum subsequent investment is $100
for all classes. There is no minimum investment requirement for certain
retirement and employee savings plans or custodial accounts for the benefit of
minors. For purchases made through the Automatic Savings Accumulation Plan, the
minimum initial and subsequent investment is $50. See "Shareholder Guide--How
to Buy Shares of the Fund" at page 22 and "Shareholder Guide--Shareholder
Services" at page 30.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund, through its transfer
agent, Prudential Mutual Fund Services, Inc. (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). See "How the Fund
Values its Shares" at page 18 and "Shareholder Guide--How to Buy Shares of the
Fund" at page 22.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers three classes of shares through this Prospectus:
. Class A Shares: Sold with an initial sales charge of up to 5% of the
offering price.
. Class B Shares: Sold without an initial sales charge but are subject to a
contingent deferred sales charge or CDSC (declining from 5%
to zero of the lower of the amount invested or the
redemption proceeds) which will be imposed on certain
redemptions made within six years of purchase. Although
Class B shares are subject to higher ongoing distribution-
related expenses than Class A shares, Class B shares will
automatically convert to Class A shares (which are subject
to lower ongoing distribution-related expenses)
approximately seven years after purchase.
. Class C Shares: Sold without an initial sales charge and, for one year after
purchase, are subject to a 1% CDSC on redemptions. Like
Class B shares, Class C shares are subject to higher ongoing
distribution-related expenses than Class A shares but do not
convert to another class.
See "Shareholder Guide--Alternative Purchase Plan" at page 23.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order. However,
the proceeds 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 25.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Fund expects to pay dividends of net investment income, if any, and make
distributions of any net capital gains at least annually. Dividends and
distributions will be automatically reinvested in additional shares of the Fund
at NAV without a sales charge unless you request that they be paid to you in
cash. See "Taxes, Dividends and Distributions" at page 19.
3
<PAGE>
FUND EXPENSES
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- ------------------- -------------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price).................. 5% None None
Maximum Sales Load or Deferred
Sales Load Imposed on Reinvested
Dividends........................ None None None
Deferred Sales Load (as a
percentage of original purchase
price or redemption proceeds, None 5% during the first 1% on redemptions
whichever is lower).............. year, decreasing by made within one
1% annually to 1% year of purchase
in the fifth and
sixth years and 0%
the seventh year*
Redemption Fees.................. None None None
Exchange Fee..................... None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net
assets) CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- ------------------- -------------------
Management Fees.................. .75% .75% .75%
12b-1 Fees (After Reduction)..... .25++ 1.00 1.00
Other Expenses................... .57 .57 .57
---- ---- ----
Total Fund Operating Expenses
(After Reduction)................ 1.57% 2.32% 2.32%
==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
EXAMPLE ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 in-
vestment, assuming
(1) 5% annual return and (2) redemption at the end of
each time period:
Class A.............................................. $65 $ 97 $131 $227
Class B.............................................. $74 $102 $134 $238
Class C.............................................. $34 $ 72 $124 $266
You would pay the following expenses on the same in-
vestment, assuming no
redemption:
Class A.............................................. $65 $ 97 $131 $227
Class B.............................................. $24 $ 72 $124 $238
Class C.............................................. $24 $ 72 $124 $266
</TABLE>
The above example is based on data for the Fund's fiscal year ended May 31,
1996. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist investors in understanding the various
costs and expenses that an investor in the Fund will bear, whether directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "How the Fund is Managed." "Other Expenses" includes operating expenses of
the Fund, such as Directors' and professional fees, registration fees, reports
to shareholders, transfer agency and custodian (domestic and foreign) fees and
miscellaneous fees, but excludes foreign withholding 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 Fund may not exceed 6.25% of total gross
sales, subject to certain exclusions. This 6.25% limitation is imposed on
each class of the Fund rather than on a per shareholder basis. Therefore,
long-term shareholders of the Fund may pay more in total sales charges than
the economic equivalent of 6.25% of such shareholders' investment in such
shares. See "How the Fund is Managed--Distributor."
++ Although the Class A Distribution and Service Plan provides that the Fund
may pay a distribution fee of up to .30 of 1% per annum of the average daily
net assets of the Class A shares, the Distributor has agreed to limit its
distribution fees with respect to the Class A shares of the Fund to no more
than .25 of 1% of the average daily net assets of the Class A shares for the
fiscal year ending May 31, 1997. Total Fund Operating Expenses without such
limitation would be 1.62%. See "How the Fund is Managed--Distributor."
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS A SHARES)
The following financial highlights, with respect to each of the five years in
the period ended May 31,1996, have been audited by Price Waterhouse LLP,
independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class A share of common stock
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. The information is based on data contained in
the financial statements. Further performance information is contained in the
annual report, which may be obtained without charge. See "Shareholder Guide--
Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------
JANUARY 22,
1990(a)
YEAR ENDED MAY 31, THROUGH
------------------------------------------------------ MAY 31,
1996(e) 1995(c) 1994(c) 1993(c) 1992(c) 1991(c) 1990(c)
------- ------- ------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period.... $ 13.73 $ 12.55 $11.84 $10.02 $ 9.73 $10.17 $10.58
------- ------- ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(loss)................. (.01) (.03) .01 .02 .01 .13 .04
Net realized and
unrealized gain (loss)
on investment and
foreign currency
transactions........... 4.42 1.21 .70 1.80 .38 (.39) (.45)
------- ------- ------ ------ ------ ------ ------
Total from investment
operations............. 4.41 1.18 .71 1.82 .39 (.26) (.41)
------- ------- ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends from net
investment income...... -- -- -- -- (.09) (.18) --
Distributions from net
realized gains on
investment and foreign
currency transactions.. (.80) -- -- -- (.01) -- --
------- ------- ------ ------ ------ ------ ------
Total distributions..... (.80) -- -- -- (.10) (.18) --
------- ------- ------ ------ ------ ------ ------
Net asset value, end of
period................. $ 17.34 $ 13.73 $12.55 $11.84 $10.02 $ 9.73 $10.17
======= ======= ====== ====== ====== ====== ======
TOTAL RETURN(d):........ 33.51% 9.40% 6.00% 18.16% 4.04% (2.59)% (3.88)%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000)........... $32,608 $19,682 $6,505 $1,898 $590 $770 $427
Average net assets
(000).................. $23,106 $10,791 $4,106 $758 $647 $664 $279
Ratios to average net
assets:
Expenses, including
distribution fees.... 1.57% 1.73% 1.89% 2.38% 2.59% 2.22% 2.72%(b)
Expenses, excluding
distribution fees.... 1.32% 1.48% 1.65% 2.18% 2.39% 2.02% 2.52%(b)
Net investment income
(loss)............... (0.09)% (0.25)% 0.11% 0.13% 0.44% 1.47% 1.86%(b)
Portfolio turnover...... 41% 36% 19% 50% 36% 40% 34%
Average commission rate
per share.............. $ .0290 N/A N/A N/A N/A N/A N/A
</TABLE>
--------
(a) Commencement of offering of Class A shares.
(b) Annualized.
(c) Calculated based upon average shares outstanding during the fiscal
period, by class.
(d) 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.
(e) Calculated prior to Statement of Position 93-2 adjustments.
5
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS B SHARES)
The following financial highlights, with respect to each of the five years in
the period ended May 31,1996, have been audited by Price Waterhouse LLP,
independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class B share of common stock
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. The information is based on data contained in
the financial statements. Further performance information is contained in the
annual report, which may be obtained without charge. See "Shareholder Guide--
Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS B
-----------------------------------------------------------------------------------------------
SEPTEMBER 28,
1987(a)
YEAR ENDED MAY 31, THROUGH
----------------------------------------------------------------------------- MAY 31,
1996(g) 1995(c) 1994(c) 1993(c) 1992(c) 1991(c) 1990(c) 1989(c) 1988(c)(e)
-------- ------- ------- ------- ------- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $ 13.35 $ 12.29 $ 11.69 $ 9.97 $ 9.72 $ 10.14 $ 9.86 $ 9.36 $ 10.00
-------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(loss).................. (.10) (.13) (.08) (.07) (.08) .06 .02 .07 .04
Net realized and
unrealized gain (loss)
on investment and
foreign currency
transactions............ 4.25 1.19 .68 1.79 .39 (.39) .92 .45 (.66)
-------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations.............. 4.15 1.06 .60 1.72 .31 (.33) .94 .52 (.62)
-------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends from net
investment income....... -- -- -- -- (.05) (.09) (.06) (.02) (.02)
Distributions from net
realized gains on
investment and foreign
currency transactions... (.80) -- -- -- (.01) -- (.60) -- --
-------- ------- ------- ------- ------- ------- ------- ------- -------
Total distributions...... (.80) -- -- -- (.06) (.09) (.66) -- --
-------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of
period.................. $ 16.70 $ 13.35 $ 12.29 $ 11.69 $ 9.97 $ 9.72 $ 10.14 $ 9.86 $ 9.36
======== ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN(f):......... 32.49% 8.62% 5.13% 17.25% 3.26% (3.31)% 9.63% 5.57% (6.23)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)................... $113,090 $80,774 $64,235 $36,150 $23,228 $33,653 $47,579 $44,497 $50,577
Average net assets (000). $ 84,396 $74,681 $48,772 $23,464 $26,877 $40,090 $48,251 $47,592 $42,945
Ratios to average net
assets:
Expenses, including
distribution fees...... 2.32% 2.48% 2.65% 3.18% 3.39% 3.02% 3.07% 2.63%(d) 1.69%(b)(d)
Expenses, excluding
distribution fees...... 1.32% 1.48% 1.65% 2.18% 2.39% 2.02% 2.07% 1.63%(d) 2.69%(b)(d)
Net investment income
(loss)................. (0.84)% (1.05)% (0.67)% (0.67)% (0.36)% 0.58% 0.16% 0.69%(d) 0.76%(b)(d)
Portfolio turnover....... 41% 36% 19% 50% 36% 40% 34% 52% 24%
Average commission rate
per share............... $ .0290 N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
--------
(a) Commencement of offering of Class B shares.
(b) Annualized.
(c) Calculated based upon average shares outstanding during the fiscal
period, by class.
(d) Net of expense reimbursement.
(e) On March 1, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as Manager of the Fund.
(f) 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.
(g) Calculated prior to Statement of Position 93-2 adjustments.
6
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS C SHARES)
The following financial highlights have been audited by Price Waterhouse LLP,
independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class C share of common stock
outstanding, total return, ratios to average net assets and other supplemental
data for the 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 C
--------------------
AUGUST 1,
1994(a)
YEAR ENDED THROUGH
MAY 31, MAY 31,
1996(e) 1995(c)
---------- ---------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................. $13.35 $12.47
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss)......................... (.10) (.13)
Net realized and unrealized gain (loss) on investment
and foreign currency transactions................... 4.25 1.01
------ ------
Total from investment operations..................... 4.15 .88
------ ------
LESS DISTRIBUTIONS
Dividends from net investment income................. -- --
Distributions from net realized gains on investment
and foreign currency transactions................... (.80) --
------ ------
Total distributions.................................. (.80) --
------ ------
Net asset value, end of period....................... $16.70 $13.35
====== ======
TOTAL RETURN(D):..................................... 32.49% 7.06%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)...................... $1,551 $ 606
Average net assets (000)............................. $ 734 $ 294
Ratios to average net assets:
Expenses, including distribution fees.............. 2.32 % 2.56 %(b)
Expenses, excluding distribution fees.............. 1.32 % 1.56 %(b)
Net investment income (loss)....................... (0.84)% (1.08)%(b)
Portfolio turnover................................... 41% 36%
Average commission rate per share.................... $.0290 N/A
</TABLE>
--------
(a) Commencement of offering of Class C shares.
(b) Annualized.
(c) Calculated based upon average shares outstanding during the fiscal
period, by class.
(d) 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.
(e) Calculated prior to Statement of Position 93-2 adjustments.
7
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
THE INVESTMENT OBJECTIVE OF THE FUND IS LONG-TERM GROWTH OF CAPITAL. THE
FUND WILL SEEK TO ACHIEVE ITS OBJECTIVE BY INVESTING PRIMARILY IN SECURITIES
OF FOREIGN AND DOMESTIC "NATURAL RESOURCE COMPANIES" (HEREINAFTER DESCRIBED)
AND IN SECURITIES (TYPICALLY DEBT SECURITIES OR PREFERRED STOCKS) THE TERMS OF
WHICH ARE RELATED TO THE MARKET VALUE OF SOME NATURAL RESOURCE (ASSET-BASED
SECURITIES). THE FUND WILL, UNDER NORMAL CIRCUMSTANCES, INVEST AT LEAST 65% OF
ITS TOTAL ASSETS IN COMMON STOCKS AND EQUIVALENTS (SUCH AS CONVERTIBLE DEBT
SECURITIES AND WARRANTS) OF NATURAL RESOURCE COMPANIES AND IN ASSET-BASED
SECURITIES. THERE CAN BE NO ASSURANCE THAT SUCH OBJECTIVE WILL BE ACHIEVED.
THE FUND'S INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE FUND'S
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF
1940, AS AMENDED (THE INVESTMENT COMPANY ACT). FUND POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE BOARD OF DIRECTORS.
Companies that primarily own, explore, mine, process or otherwise develop
natural resources, or supply goods and services primarily to such companies,
will be considered "natural resource companies." Natural resources generally
include precious metals (e.g., gold, silver and platinum), ferrous and
nonferrous metals (e.g., iron, aluminum and copper), strategic metals (e.g.,
uranium and titanium), hydrocarbons (e.g., coal, oil and natural gases),
timber land, undeveloped real property and agricultural commodities.
THE VALUE OF EQUITY SECURITIES OF NATURAL RESOURCE COMPANIES (INCLUDING
THOSE COMPANIES THAT ARE PRIMARILY INVOLVED IN PROVIDING GOODS AND SERVICES TO
NATURAL RESOURCE COMPANIES) WILL FLUCTUATE PURSUANT TO MARKET CONDITIONS
GENERALLY, AS WELL AS THE MARKET FOR THE PARTICULAR NATURAL RESOURCE IN WHICH
THE ISSUER IS INVOLVED. IN ADDITION, THE VALUES OF NATURAL RESOURCES ARE
AFFECTED BY NUMEROUS FACTORS INCLUDING EVENTS OCCURRING IN NATURE,
INFLATIONARY PRESSURES AND INTERNATIONAL POLITICS. For instance, events in
nature (such as earthquakes or fires in prime natural resource areas) and
political events (such as coups or military confrontations) can affect the
overall supply of a natural resource and thereby the value of companies
involved in such natural resources. In addition, rising interest rates (i.e.,
inflationary pressures) may affect the demand for natural resources such as
timber. The Fund will seek securities that are attractively priced relative to
the intrinsic value of the relevant natural resource or that are of companies
which are positioned to benefit under existing or anticipated economic
conditions. Accordingly, the Fund may shift its emphasis from one natural
resource industry to another depending upon prevailing trends or developments,
provided that the Fund will not invest 25% or more of its total assets in the
securities of companies in any one natural resource industry. See "Investment
Restrictions" in the Statement of Additional Information for information
concerning the industry classifications. The Fund is not required to maintain
any particular mix of investments among the natural resource industries.
THERE ARE ALSO NO GEOGRAPHIC LIMITATIONS ON NATURAL RESOURCE COMPANIES IN
WHICH THE FUND MAY INVEST. DEPENDING UPON MARKET CONDITIONS, THE FUND MAY BE
INVESTED PRIMARILY IN FOREIGN SECURITIES. In light of the geographic
concentration of many natural resources, the Fund anticipates that many of the
companies in which it invests will be located in Canada, Australia, New
Zealand, Malaysia, Western Europe, the United Kingdom and the United States.
Investments may also be made in companies located in Indonesia, Japan, other
countries in Southeast Asia and other countries as the Fund's investment
adviser may from time to time determine. In connection with the Fund's
investments in foreign securities, the Fund's investment adviser will consider
factors such as the expected levels of inflation and interest rates;
government policies influencing business conditions; the range of investment
opportunities available to international
8
<PAGE>
investors and other pertinent financial, tax, social, political and national
factors--all in relation to the prevailing prices of the securities of foreign
issuers. The Fund may seek to hedge its position in foreign currencies as more
fully described herein.
THE FUND IS NOT REQUIRED TO MAINTAIN ANY PARTICULAR GEOGRAPHIC OR CURRENCY
MIX OF ITS INVESTMENTS; HOWEVER, THE FUND INTENDS TO MAINTAIN INVESTMENTS IN
AT LEAST THREE COUNTRIES (INCLUDING THE UNITED STATES). HOWEVER, WHEN MARKET
CONDITIONS WARRANT, THE FUND MAY BE PRIMARILY INVESTED IN SECURITIES OF U.S.
ISSUERS.
THE FUND MAY INVEST IN COMMON STOCK EQUIVALENTS, SUCH AS CONVERTIBLE
SECURITIES, AS WELL AS IN COMMON STOCKS. A convertible security is a fixed-
income security (a bond or preferred stock) which may be converted at a stated
price within a specified period of time into a certain quantity of the common
stock of the same or a different issuer. Convertible securities are senior to
common stocks in a corporation's capital structure, but are usually
subordinated to similar nonconvertible securities. While providing a fixed
income stream (generally higher in yield than the income derivable from a
common stock but lower than that afforded by a similar nonconvertible
security), a convertible security also affords an investor the opportunity,
through its conversion feature, to participate in the capital appreciation
attendant upon a market price advance in the convertible security's underlying
common stock.
The price of a convertible security tends to increase as the market value of
the underlying stock rises, whereas it tends to decrease as the market value
of the underlying stock declines. While no securities investment is without
some risk, investments in convertible securities generally entail less risk
than investments in the common stock of the same issuer.
IN ADDITION TO COMMON STOCKS AND COMMON STOCK EQUIVALENTS, THE FUND MAY
INVEST IN SECURITIES, THE PRINCIPAL AMOUNT, REDEMPTION TERMS OR CONVERSION
TERMS OF WHICH ARE RELATED TO THE MARKET PRICE OF A NATURAL RESOURCE ASSET,
REFERRED TO HEREIN AS "ASSET-BASED SECURITIES." The Fund will only purchase
asset-based securities which are rated, or are issued by issuers that have
outstanding obligations rated, at least BBB or Baa by Standard & Poor's
Ratings Group (S&P) or Moody's Investors Service (Moody's), respectively, or
commercial paper rated at least A-2 or P-2 by S&P or Moody's, respectively, or
in unrated securities of issuers that the investment adviser has determined to
be of comparable quality. Subsequent to its purchase by the Fund, a security
may be assigned a lower rating or cease to be rated. Such an event would not
require the elimination of the issue from the portfolio, but the investment
adviser will consider such an event in determining whether the Fund should
continue to hold the security in its portfolio. Securities rated Baa by
Moody's, although considered to be investment grade, lack outstanding
investment characteristics and, in fact, have speculative characteristics. See
"Description of Security Ratings" in the Statement of Additional Information.
If the asset-based security is backed by a letter of credit or other similar
instrument, the Fund's investment adviser may take such backing into account
in determining the quality of the security.
Although it is expected that the market prices of the asset-based securities
will fluctuate on the basis of the natural resources on which such securities
are based, there may not be a perfect correlation between the price movements
of the asset-based securities and the underlying natural resources. Asset-
based securities are not always secured with a security interest in the
underlying natural resource asset. Further, asset-based securities typically
bear interest or pay dividends at below market rates (and in certain cases at
nominal rates). Although the value of asset-based securities that bear
interest may fluctuate inversely with market interest rates, such fluctuations
are anticipated generally to be minimal since the value of such securities is
typically based on the natural resources on which the securities are based.
Certain asset-based securities may be payable at maturity in cash, or, at
the option of the holder, directly in a stated amount of the asset to which
the securities are related. The Fund does not intend to invest directly in
natural resources and, therefore, would elect to be paid in cash or would sell
the asset-based security prior to maturity to realize the appreciation in the
underlying asset. An example of an asset-based security would be a debt
security that will be repaid at a price based on, for instance, gold or crude
oil prices over a specified period of time. Assume, for example, that gold is
selling at a market price of $300 per ounce and an issuer sells a $1,000 face
amount gold-related note with a four year maturity, payable at maturity at the
greater of either $1,000 in cash or the then market price of three ounces of
gold. If at maturity the market price of gold is $400 per ounce, the amount
payable on the note would be $1,200.
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AS INDICATED ABOVE, THE FUND INTENDS TO INVEST PRIMARILY IN COMMON STOCKS
AND EQUIVALENTS OF NATURAL RESOURCE COMPANIES AND ASSET-BASED SECURITIES;
HOWEVER, UNDER NORMAL CIRCUMSTANCES, THE FUND MAY INVEST UP TO 35% OF ITS
TOTAL ASSETS IN COMMON STOCKS (AND EQUIVALENTS) OF COMPANIES OTHER THAN
NATURAL RESOURCE COMPANIES AND IN DEBT SECURITIES OF NATURAL RESOURCE
COMPANIES, AS WELL AS OTHER COMPANIES. The Fund will only invest in debt
securities (including money market instruments) of such companies which are
rated, or are issued by companies that have outstanding debt securities rated,
at least BBB or Baa by S&P or Moody's, respectively, or commercial paper rated
at least A-2 or P-2 by S&P or Moody's, respectively, or in unrated securities
of issuers that the investment adviser has determined to be of comparable
quality. Money market instruments include obligations issued or guaranteed by
the U.S. Government or its agencies or instrumentalities, commercial paper,
certificates of deposit, bankers' acceptances and other obligations of
domestic and foreign banks (and branches thereof). See "Description of
Security Ratings" in the Statement of Additional Information. Unlike equity
securities, there may not be a direct correlation between the price of debt
securities of a natural resource company and the demand for the natural
resource assets of the company. In addition, the prices of debt securities
generally increase when interest rates decline and decrease when interest
rates rise.
THE FUND MAY ALSO (i) ENTER INTO FORWARD FOREIGN CURRENCY EXCHANGE
CONTRACTS, (ii) PURCHASE AND WRITE (i.e., SELL) PUT AND CALL OPTIONS ON
STOCKS, STOCK INDICES AND FOREIGN CURRENCIES, (iii) PURCHASE AND SELL FUTURES
CONTRACTS ON FOREIGN CURRENCIES AND STOCK INDICES, (iv) PURCHASE SECURITIES ON
A WHEN-ISSUED OR DELAYED DELIVERY BASIS, (v) MAKE SHORT SALES AGAINST-THE-BOX
AND (vi) ENTER INTO REPURCHASE AGREEMENTS.
WHEN CONDITIONS DICTATE A TEMPORARY DEFENSIVE STRATEGY OR DURING PERIODS OF
PORTFOLIO STRUCTURING AND RESTRUCTURING, THE FUND MAY INVEST IN MONEY MARKET
INSTRUMENTS WITHOUT LIMIT.
IN MANAGING THE FUND'S PORTFOLIO, THE PORTFOLIO MANAGER SEEKS TO IDENTIFY
BROAD TRENDS IN THE NATURAL RESOURCES INDUSTRY THAT, IN HIS OPINION, MAY
PROVIDE ATTRACTIVE INVESTMENT OPPORTUNITIES, EMPHASIZING COMPANIES THAT ARE
LOWER-COST PRODUCERS IN THEIR INDUSTRIES. THE CURRENT PORTFOLIO MANAGER
FOLLOWS A "CONTRARIAN" INVESTMENT APPROACH AND MAY PURCHASE SECURITIES THAT
ARE OUT OF FAVOR WITH MANY INVESTORS OR SELL SECURITIES THAT ARE CURRENTLY IN
FAVOR WITH MANY INVESTORS. SEE "HOW THE FUND IS MANAGED--MANAGER."
SPECIAL CONSIDERATIONS AND RISKS
FOREIGN SECURITIES INVOLVE CERTAIN RISKS WHICH SHOULD BE CONSIDERED
CAREFULLY BY AN INVESTOR IN THE FUND. THESE RISKS INCLUDE POLITICAL OR
ECONOMIC INSTABILITY IN THE COUNTRY OF THE ISSUER, THE DIFFICULTY OF
PREDICTING INTERNATIONAL TRADE PATTERNS, THE POSSIBILITY OF IMPOSITION OF
EXCHANGE CONTROLS AND THE RISK OF CURRENCY FLUCTUATIONS. Such securities may
be subject to greater fluctuations in price than securities issued by U.S.
corporations or issued or guaranteed by the U.S. Government, its
instrumentalities or agencies. In addition, there may be less publicly
available information about a foreign company than about a domestic company.
Foreign companies generally are not subject to uniform accounting, auditing
and financial reporting standards comparable to those applicable to domestic
companies. There is generally less government regulation of securities
exchanges, brokers and listed companies abroad than in the United States, and,
with respect to certain foreign countries, there is a possibility of
expropriation, confiscatory taxation or diplomatic developments which could
affect investments in those countries. Finally, in the event of a default on
any such foreign debt obligations, it may be more difficult for the Fund to
obtain or to enforce a judgment against the issuers of such securities.
In many instances, foreign debt securities may provide higher yields than
securities of domestic issuers which have similar maturities and are of
similar quality. Under certain market conditions these investments may be less
liquid than the securities of U.S. corporations and are certainly less liquid
than securities issued or guaranteed by the U.S. Government, its
instrumentalities or agencies.
IF A SECURITY IS DENOMINATED IN A FOREIGN CURRENCY, IT WILL BE AFFECTED BY
CHANGES IN CURRENCY EXCHANGE RATES AND IN EXCHANGE CONTROL REGULATIONS, AND
COSTS WILL BE INCURRED IN CONNECTION WITH CONVERSIONS BETWEEN CURRENCIES. A
change in the value of any such currency against the U.S. dollar will result
in a corresponding change in the U.S. dollar value of the Fund's securities
denominated in that currency. Such changes also will affect the Fund's income
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and distributions to shareholders. In addition, although the Fund will receive
income in such currencies, the Fund will be required to compute and distribute
its income in U.S. dollars. Therefore, if the exchange rate for any such
currency declines after the Fund's income has been accrued and translated into
U.S. dollars, the Fund could be required to liquidate portfolio securities to
make such distributions, particularly in instances in which the amount of
income the Fund is required to distribute is not immediately reduced by the
decline in such currency. Similarly, if an exchange rate declines between the
time the Fund incurs expenses in U.S. dollars and the time such expenses are
paid, the amount of such currency required to be converted into U.S. dollars
in order to pay such expenses in U.S. dollars will be greater than the
equivalent amount in any such currency of such expenses at the time they were
incurred. The Fund may enter into forward foreign currency exchange contracts
for the purchase or sale of foreign currency, may purchase and sell futures
contracts on foreign currencies and may purchase and write put and call
options on foreign currencies and on futures contracts on foreign currencies.
HEDGING AND RETURN ENHANCEMENT STRATEGIES
THE FUND MAY ENGAGE IN VARIOUS PORTFOLIO STRATEGIES, INCLUDING PURCHASING
AND SELLING DERIVATIVES, TO REDUCE CERTAIN RISKS OF ITS INVESTMENTS AND TO
ATTEMPT TO ENHANCE RETURN, BUT NOT FOR SPECULATION. THESE STRATEGIES CURRENTLY
INCLUDE THE USE OF OPTIONS, FORWARD CURRENCY EXCHANGE CONTRACTS AND FUTURES
CONTRACTS AND OPTIONS THEREON. The Fund's ability to use these strategies may
be limited by market conditions, regulatory limits and tax considerations and
there can be no assurance that any of these strategies will succeed. See
"Investment Objective and Policies" and "Taxes" in the Statement of Additional
Information. New financial products and risk management techniques continue to
be developed and the Fund may use these new investments and techniques to the
extent consistent with its investment objective and policies.
OPTIONS TRANSACTIONS
THE FUND MAY PURCHASE AND WRITE (I.E., SELL) PUT AND CALL OPTIONS ON
SECURITIES AND CURRENCIES THAT ARE TRADED ON NATIONAL OR FOREIGN SECURITIES
EXCHANGES OR IN THE OVER-THE-COUNTER MARKET TO ATTEMPT TO ENHANCE RETURN OR TO
HEDGE THE FUND'S PORTFOLIO. These options will be on equity securities,
financial indices (e.g., S&P 500) and foreign currencies. The Fund may write
covered put and call options to generate additional income through the receipt
of premiums, purchase put options in an effort to protect the value of a
security that it owns against a decline in market value and purchase call
options in an effort to protect against an increase in the price of securities
(or currencies) it intends to purchase. The Fund may also purchase put and
call options to offset previously written put and call options of the same
series. See "Investment Objective and Policies--Options Transactions" in the
Statement of Additional Information.
A CALL OPTION GIVES THE PURCHASER, IN EXCHANGE FOR A PREMIUM PAID, THE
RIGHT, FOR A SPECIFIED PERIOD OF TIME, TO PURCHASE THE SECURITIES OR CURRENCY
SUBJECT TO THE OPTION AT A SPECIFIED PRICE (THE EXERCISE PRICE OR STRIKE
PRICE). The writer of a call option, in return for the premium, has the
obligation, upon exercise of the option, to deliver, depending upon the terms
of the option contract, the underlying securities or currency or a specified
amount of cash to the purchaser upon receipt of the exercise price. When the
Fund writes a call option, the Fund gives up the potential for gain on the
underlying securities or currency in excess of the exercise price of the
option during the period that the option is open.
A PUT OPTION GIVES THE PURCHASER, IN RETURN FOR A PREMIUM, THE RIGHT, FOR A
SPECIFIED PERIOD OF TIME, TO SELL THE SECURITIES OR CURRENCY SUBJECT TO THE
OPTION TO THE WRITER OF THE PUT AT THE SPECIFIED EXERCISE PRICE. The writer of
the put option, in return for the premium, has the obligation, upon exercise
of the option, to acquire the securities or currency underlying the option or
deliver cash at the exercise price. The Fund might, therefore, be obligated to
purchase the underlying securities or currency for more than their current
market price.
THE FUND WILL WRITE ONLY "COVERED" OPTIONS. An option is covered if, so long
as the Fund is obligated under the option, it owns an offsetting position in
the underlying security or currency or maintains liquid, unencumbered assets,
marked to market daily, with a value sufficient to cover its obligations. See
"Investment Objective and Policies--Options Transactions" in the Statement of
Additional Information.
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THERE IS NO LIMITATION ON THE AMOUNT OF CALL OPTIONS THE FUND MAY WRITE. The
Fund has undertaken with certain state securities commissions that, so long as
shares of the Fund are registered in those states, it will not (a) write puts
having aggregate exercise prices greater than 25% of total net assets; or (b)
purchase (i) put options on stocks not held in the Fund's portfolio, (ii) put
options on stock indices or foreign currencies or (iii) call options on
stocks, stock indices or foreign currencies if, after any such purchase, the
aggregate premiums paid for such options would exceed 10% of the Fund's total
net assets; provided, however, that the Fund may purchase put options on
stocks held by the Fund if after such purchase the aggregate premiums paid for
such options do not exceed 20% of the Fund's total assets. The aggregate value
of the obligations underlying put options will not exceed 50% of the Fund's
assets.
FORWARD CURRENCY EXCHANGE CONTRACTS
THE FUND MAY ENTER INTO FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS TO
PROTECT THE VALUE OF ITS PORTFOLIO AGAINST FUTURE CHANGES IN THE LEVEL OF
CURRENCY EXCHANGE RATES. The Fund may enter into such contracts on a spot,
i.e., cash, basis at the rate then prevailing in the currency exchange market
or on a forward basis, by entering into a forward contract to purchase or sell
currency. A forward contract on foreign currency is an obligation to purchase
or sell a specific currency at a future date, which may be any fixed number of
days agreed upon by the parties from the date of the contract at a price set
on the date of the contract.
THE FUND'S DEALINGS IN FORWARD CONTRACTS WILL BE LIMITED TO HEDGING
INVOLVING EITHER SPECIFIC TRANSACTIONS OR PORTFOLIO POSITIONS. Transaction
hedging is the purchase or sale of a forward contract with respect to specific
receivables or payables of the Fund generally arising in connection with the
purchase or sale of its portfolio securities and accruals of interest or
dividends receivable and Fund expenses. Position hedging is the sale of a
foreign currency with respect to portfolio security positions denominated or
quoted in that currency or in a currency bearing a substantial correlation to
the value of that currency (cross hedge). Although there are no limits on the
number of forward contracts which the Fund may enter into, the Fund may not
position hedge with respect to a particular currency for an amount greater
than the aggregate market value (determined at the time of making any sale of
foreign currency) of the securities held in its portfolio denominated or
quoted in, or currently convertible into, such currency. See "Investment
Objective and Policies--Risks Related to Forward Currency Exchange Contracts"
in the Statement of Additional Information.
FUTURES CONTRACTS AND OPTIONS THEREON
THE FUND MAY PURCHASE AND SELL FINANCIAL FUTURES CONTRACTS AND OPTIONS
THEREON WHICH ARE TRADED ON A COMMODITIES EXCHANGE OR BOARD OF TRADE FOR
CERTAIN HEDGING AND RISK MANAGEMENT PURPOSES AND TO ATTEMPT TO ENHANCE RETURN
IN ACCORDANCE WITH REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION.
These futures contracts and options thereon will be on financial indices and
foreign currencies or groups of foreign currencies such as the European
Currency Unit. (A European Currency Unit is a basket of specified amounts of
the currencies of certain member states of the European Economic Community, a
Western European economic cooperative organization including such countries as
France, Germany, The Netherlands and the United Kingdom.) A financial futures
contract is an agreement to purchase or sell an agreed amount of securities or
currencies at a set price for delivery in the future.
UNDER REGULATIONS OF THE COMMODITY EXCHANGE ACT, INVESTMENT COMPANIES
REGISTERED UNDER THE INVESTMENT COMPANY ACT ARE EXEMPT FROM THE DEFINITION OF
"COMMODITY POOL OPERATOR," SUBJECT TO COMPLIANCE WITH CERTAIN CONDITIONS. THE
EXEMPTION IS CONDITIONED UPON THE FUND'S PURCHASING AND SELLING FUTURES
CONTRACTS AND OPTIONS THEREON FOR BONA FIDE HEDGING TRANSACTIONS, EXCEPT THAT
THE FUND MAY PURCHASE AND SELL FUTURES CONTRACTS AND OPTIONS THEREON FOR ANY
OTHER PURPOSE TO THE EXTENT THAT THE AGGREGATE INITIAL MARGIN AND OPTION
PREMIUMS DO NOT EXCEED 5% OF THE LIQUIDATION VALUE OF THE FUND'S TOTAL ASSETS.
ALTHOUGH THERE ARE NO OTHER LIMITS APPLICABLE TO FUTURES CONTRACTS, THE VALUE
OF ALL FUTURES CONTRACTS SOLD WILL NOT EXCEED THE TOTAL MARKET VALUE OF THE
FUND'S PORTFOLIO.
THE FUND'S SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON DEPENDS
UPON THE INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET
AND OF INTEREST RATES AND REQUIRES SKILLS AND TECHNIQUES DIFFERENT FROM
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THOSE USED IN SELECTING PORTFOLIO SECURITIES. The correlation between
movements in the price of a futures contract and movements in the index or
price of the currencies being hedged is imperfect and there is a risk that the
value of the index or currencies being hedged may increase or decrease at a
greater rate than the related futures contracts resulting in losses to the
Fund. Certain futures exchanges or boards of trade have established daily
limits on the amount that the price of futures contracts or options thereon
may vary, either up or down, from the previous day's settlement price. These
daily limits may restrict the Fund's ability to purchase or sell certain
futures contracts or options thereon on any particular day.
THE FUND'S ABILITY TO ENTER INTO FUTURES CONTRACTS AND OPTIONS THEREON IS
LIMITED BY THE REQUIREMENTS OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED
(THE INTERNAL REVENUE CODE), FOR QUALIFICATION AS A REGULATED INVESTMENT
COMPANY. See "Taxes" in the Statement of Additional Information.
RISKS OF HEDGING AND RETURN ENHANCEMENT STRATEGIES
PARTICIPATION IN THE OPTIONS OR FUTURES MARKETS AND IN CURRENCY EXCHANGE
TRANSACTIONS INVOLVES INVESTMENT RISKS AND TRANSACTION COSTS TO WHICH THE FUND
WOULD NOT BE SUBJECT ABSENT THE USE OF THESE STRATEGIES. If the investment
adviser's predictions of movements in the direction of the securities, foreign
currency and interest rate markets are inaccurate, the adverse consequences to
the Fund may leave the Fund in a worse position than if such strategies were
not used. Risks inherent in the use of options, foreign currency and futures
contracts and options thereon include (1) dependence on the investment
adviser's ability to predict correctly movements in the direction of interest
rates, securities prices and currency markets; (2) imperfect correlation
between the price of options and futures contracts and options thereon and
movements in the prices of the securities or currencies being hedged; (3) the
fact that skills needed to use these strategies are different from those
needed to select portfolio securities; (4) the possible absence of a liquid
secondary market for any particular instrument at any time; (5) the possible
need to defer closing out certain hedged positions to avoid adverse tax
consequences; and (6) the possible inability of the Fund to purchase or sell a
portfolio security at a time that otherwise would be favorable for it to do
so, or the possible need for the Fund to sell a portfolio security at a
disadvantageous time, due to the need for the Fund to maintain "cover" or to
segregate securities in connection with hedging transactions. See "Investment
Objective and Policies" and "Taxes" in the Statement of Additional
Information.
OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Fund may on occasion enter into repurchase agreements whereby the seller
of a security agrees to repurchase that security from the Fund at a mutually
agreed upon time and price. The repurchase date is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Fund's money
is invested in the repurchase agreement. The Fund's repurchase agreements will
at all times be fully collateralized in an amount at least equal to the resale
price. The instruments held as collateral are valued daily, and if the value
of the instruments declines, the Fund will require additional collateral. If
the seller defaults and the value of the collateral securing the repurchase
agreement declines, the Fund may incur a loss. The Fund participates in a
joint repurchase account with other investment companies managed by Prudential
Mutual Fund Management, Inc. pursuant to an order of the Securities and
Exchange Commission (SEC).
ILLIQUID SECURITIES
The Fund may hold up to 10% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven
days, securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable in securities
markets either within or outside of the United States. Restricted securities
eligible for resale pursuant to Rule 144A under the Securities Act of 1933, as
amended (the Securities Act), and
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privately placed commercial paper that have a readily available market are not
considered illiquid for purposes of this limitation. The investment adviser
will monitor the liquidity of such restricted securities under the supervision
of the Board of Directors. The Fund's investment in Rule 144A securities could
have the effect of increasing illiquidity to the extent that qualified
institutional buyers become, for a limited time, uninterested in purchasing
Rule 144A securities. The Fund intends to comply with any applicable state
blue sky laws restricting the Fund's investments in illiquid securities. See
"Investment Restrictions" in the Statement of Additional Information.
Repurchase agreements subject to demand are deemed to have a maturity equal to
the applicable notice period.
The staff of the SEC has taken the position that purchased over-the-counter
options and the assets used as "cover" for written over-the-counter options
are illiquid securities unless the Fund and the counterparty have provided for
the Fund, at the Fund's election, to unwind the over-the-counter option. The
exercise of such an option ordinarily would involve the payment by the Fund of
an amount designed to reflect the counterparty's economic loss from an early
termination, but does allow the Fund to treat the assets used as "cover" as
"liquid."
BORROWING
The Fund may borrow an amount equal to no more than 20% of the value of its
total assets (computed at the time the loan is made) for temporary,
extraordinary or emergency purposes or for the clearance of transactions. The
Fund may pledge up to 20% of its total assets to secure these borrowings.
SHORT SALES AGAINST-THE-BOX
The Fund may make short sales of securities or maintain a short position,
provided that at all times when a short position is open the Fund owns an
equal amount of such securities or securities convertible into or
exchangeable, without payment of any further consideration, for an equal
amount of the securities of the same issuer as the securities sold short (a
short sale against-the-box), and that not more than 25% of the Fund's net
assets (determined at the time of the short sale) may be subject to such
sales. Short sales will be made primarily to defer realization of gain or loss
for federal tax purposes. The Fund does not intend to have more than 5% of its
net assets (determined at the time of the short sale) subject to short sales
against-the-box during the coming year.
SECURITIES LENDING
The Fund is permitted to lend its portfolio securities. See "Investment
Objective and Policies--Lending of Portfolio Securities" in the Statement of
Additional Information.
Subject to shareholder approval, the Board of Directors has approved a
change in the Fund's investment restrictions and policies which would permit
the Fund to make loans of portfolio securities in an amount of up to 30% of
the Fund's total assets. This change will be submitted to shareholders for
their approval at a special meeting scheduled to be held in or about October
1996.
PORTFOLIO TURNOVER
As a result of the Fund's investment policies, its portfolio turnover rate
may exceed 100%, although the rate is not expected to exceed 200%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the Fund's
portfolio securities, excluding securities having a maturity at the date of
purchase of one year or less. High portfolio turnover may involve
correspondingly greater brokerage commissions and other transaction costs,
which will be borne directly by the Fund. See "Portfolio Transactions and
Brokerage" in the Statement of Additional Information. In addition, high
portfolio turnover may result in increased short-term capital gains which,
when distributed to shareholders, are treated as ordinary income. See "Taxes,
Dividends and Distributions."
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INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities, as defined in the Investment Company
Act. See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS A BOARD OF DIRECTORS WHICH, IN ADDITION TO OVERSEEING THE
ACTIONS OF THE FUND'S MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW,
DECIDES UPON MATTERS OF GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND
SUPERVISES THE DAILY BUSINESS OPERATIONS OF THE FUND. THE FUND'S SUBADVISER
FURNISHES DAILY INVESTMENT ADVISORY SERVICES.
For the fiscal year ended May 31, 1996, the Fund's total expenses as a
percentage of average net assets for the Fund's Class A, Class B and Class C
shares were 1.57%, 2.32% and 2.32%, respectively. See "Financial Highlights."
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (PMF OR THE MANAGER), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .75 OF 1% OF THE FUND'S AVERAGE DAILY
NET ASSETS. It was incorporated in May 1987 under the laws of the State of
Delaware. For the fiscal year ended May 31, 1996, the Fund paid management
fees to PMF of .75 of 1% of the Fund's average net assets. See "'Manager" in
the Statement of Additional Information.
As of June 30, 1996, PMF served as the manager to 37 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies with aggregate assets of
approximately $52 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF THE FUND AND ALSO ADMINISTERS THE FUND'S CORPORATE AFFAIRS. See
"Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC OR THE 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.
The current portfolio manager of the Fund is Leigh Goehring, a Manager of
Prudential Mutual Fund Investment Management, a unit of PIC. Mr. Goehring has
responsibility for the day-to-day management of the Fund's portfolio. Mr.
Goehring has been employed by PIC as a manager since 1986. Mr. Goehring also
serves as the portfolio manager of the National Resources Portfolio within
Prudential's variable life and annuity products.
PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance
Company of America (Prudential), a major diversified insurance and financial
services company.
DISTRIBUTOR
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), ONE
SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE
LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE SHARES OF
THE FUND. IT IS AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL.
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UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12b-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), PRUDENTIAL SECURITIES (THE DISTRIBUTOR) INCURS THE
EXPENSES OF DISTRIBUTING THE FUND'S CLASS A, CLASS B AND CLASS C SHARES. 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.
The State of Texas requires that shares of the Fund may be sold in that state
only by dealers or other financial institutions which are registered there as
broker-dealers.
Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
UNDER THE CLASS A PLAN, THE FUND MAY PAY PRUDENTIAL SECURITIES FOR ITS
DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL
RATE OF UP TO .30 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES.
The Class A Plan provides that (i) up to .25 of 1% of the average daily net
assets of the Class A shares may be used to pay for personal service and/or
the maintenance of shareholder accounts (service fee) and (ii) total
distribution fees (including the service fee of .25 of 1%) may not exceed .30
of 1% of the average daily net assets of the Class A shares. Prudential
Securities has agreed to limit its distribution-related fees payable under the
Class A Plan to .25 of 1% of the average daily net assets of the Class A
shares for the fiscal year ending May 31, 1997.
UNDER THE CLASS B AND CLASS C PLANS, THE FUND PAYS PRUDENTIAL SECURITIES FOR
ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C SHARES
AT AN ANNUAL RATE OF UP TO 1% OF THE AVERAGE DAILY NET ASSETS OF EACH OF THE
CLASS B AND CLASS C SHARES. The Class B and Class C Plans provide for the
payment to Prudential Securities of (i) an asset-based sales charge of .75 of
1% of the average daily net assets of each of the Class B and Class C shares
and (ii) a service fee of .25 of 1% of the average daily net assets of each of
the Class B and Class C shares. The service fee is used to pay for personal
service and/or the maintenance of shareholder accounts. Prudential Securities
also receives contingent deferred sales charges from certain redeeming
shareholders. See "Shareholder Guide--How to Sell Your Shares--Contingent
Deferred Sales Charges."
For the fiscal year ended May 31, 1996, the Fund paid distribution expenses
of .25 of 1%, 1.00% and 1.00% of the average daily net assets of the Class A,
Class B and Class C shares, respectively. The Fund records all payments made
under the Plans as expenses in the calculation of net investment income. See
"Distributor" in the Statement of Additional Information.
Distribution expenses attributable to the sale of shares of the Fund will be
allocated to each class based upon the ratio of sales of each class to the
sales of all shares of the Fund other than expenses allocable to a particular
class. The distribution fee and sales charge of one class will not be used to
subsidize the sale of another class.
Each Plan provides that it shall continue in effect from year to year
provided that a majority of the Board of Directors of the Fund, including a
majority of the Directors who are not "interested persons" of the Fund (as
defined in the Investment Company Act) and who have no direct or indirect
financial interest in the operation of the Plan or any agreement related to
the Plan (the Rule 12b-1 Directors), vote annually to continue the Plan. Each
Plan may be terminated at any time by vote of a majority of the Rule 12b-1
Directors or of a majority of the outstanding shares of the applicable class
of the Fund. The Fund will not be obligated to pay distribution and service
fees incurred under any Plan if it is terminated or not continued.
16
<PAGE>
In addition to distribution and service fees paid by the Fund under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers (including Prudential
Securities) and other persons who distribute shares of the Fund. Such payments
may be calculated by reference to the net asset value of shares sold by such
persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (NASD), governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the
allegations asserted against it, PSI consented to the entry of an SEC
Administrative Order which stated that PSI's conduct violated the federal
securities law, directed PSI to cease and desist from violating the federal
securities laws, pay civil penalties, and adopt certain remedial measures to
address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of
a $10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI has agreed to provide
additional funds, if necessary, for the 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
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may also act as a broker or futures commission
merchant for the Fund, provided that the commissions, fees or other
remuneration it receives are fair and reasonable. See "Portfolio Transactions
and Brokerage" in the Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts, 02171, serves as Custodian for the Fund's portfolio securities
and cash and, in that capacity, maintains certain financial and accounting
books and records pursuant to an agreement with the Fund. Its mailing address
is P.O. Box 1713, Boston, Massachusetts 02105.
17
<PAGE>
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE FUND'S NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. For
valuation purposes, quotations of foreign securities in a foreign currency are
converted to U.S. dollar equivalents. THE BOARD OF DIRECTORS HAS FIXED THE
SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE FUND'S NET ASSET VALUE TO BE
AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not
readily available, at fair value as determined in good faith under procedures
established by the Fund's Board of Directors. See "Net Asset Value" in the
Statement of Additional Information.
The Fund will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase,
sell or redeem shares have been received by the Fund or days on which changes
in the value of the Fund's portfolio securities do not materially affect the
NAV. The New York Stock Exchange is closed on the following holidays: New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
NAVs and dividends. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A shares as a result of the larger distribution-
related fee to which Class B and Class C shares are subject. It is expected,
however, that the NAV of the three classes will tend to converge immediately
after the recording of dividends, if any, which will differ by approximately
the amount of the distribution-related expense accrual differential among the
classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE ITS TOTAL RETURN (INCLUDING
"AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE" TOTAL RETURN) AND YIELD IN
ADVERTISEMENTS OR SALES LITERATURE. TOTAL RETURN AND YIELD ARE CALCULATED
SEPARATELY FOR CLASS A, CLASS B AND CLASS C SHARES. These figures are based on
historical earnings and are not intended to indicate future performance. The
"total return" shows how much an investment in the Fund would have increased
(decreased) over a specified period of time (i.e., one, five or ten years or
since inception of the Fund) assuming that all distributions and dividends by
the Fund were reinvested on the reinvestment dates during the period and less
all recurring fees. The "aggregate" total return reflects actual performance
over a stated period of time. "Average annual" total return is a hypothetical
rate of return that, if achieved annually, would have produced the same
aggregate total return if performance had been constant over the entire
period. "Average annual" total return smooths out variations in performance
and takes into account any applicable initial or contingent deferred sales
charges. Neither "average annual" total return nor "aggregate" total return
takes into account any federal or state income taxes which may be payable upon
redemption. The "yield" refers to the income generated by an investment in the
Fund over a one-month or 30-day period. This income is then "annualized;" that
is, the amount of income generated by the investment during that 30-day period
is assumed to be generated each 30-day period for twelve periods and is shown
as a percentage of the investment. The income earned on the investment is also
assumed to be reinvested at the end of the sixth 30-day period. The Fund also
may include
18
<PAGE>
comparative performance information in advertising or marketing the Fund's
shares. Such performance information may include data from Lipper Analytical
Services, Inc., Morningstar Publications, Inc., other industry publications,
business periodicals and market indices. See "Performance Information" in the
Statement of Additional Information. Further performance information is
contained in the Fund's annual and semi-annual reports to shareholders, which
may be obtained without charge. See "Shareholder Guide--Shareholder Services--
Reports to Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE FUND HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
FUND WILL NOT BE SUBJECT TO FEDERAL INCOME 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.
Under the Internal Revenue Code, special rules apply to the treatment of
certain options and futures contracts (Section 1256 contracts). At the end of
each year, such investments held by the Fund will be required to be "marked to
market" for federal income tax purposes; that is, treated as having been sold
at market value. Sixty percent of any 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.
The Fund may incur foreign income taxes in connection with some of its
foreign investments. Certain of these taxes may be credited to shareholders.
See "Taxes" in the Statement of Additional Information. The Fund may, from
time to time, invest in Passive Foreign Investment Companies (PFICs). PFICs
are foreign corporations which derive a majority of their income from passive
sources. For tax purposes, the Fund's investments in PFICs may subject the
Fund to federal income tax on certain income and gains realized by the Fund.
Certain gains or losses from fluctuations in foreign currency exchange rates
(Section 988 gains or losses) will affect the amount of ordinary income the
Fund will be able to pay as dividends. See "Taxes" in the Statement of
Additional Information.
TAXATION OF SHAREHOLDERS
Any dividends out of net investment income, together with distributions of
net short-term gains (i.e., the excess of net short-term capital gains over
net long-term capital losses) distributed to shareholders, will be taxable as
ordinary income to the shareholder whether or not reinvested. Any net capital
gains ( i.e., the excess of net long-term capital gains over net short-term
capital losses) distributed to shareholders will be taxable as long-term
capital gains to 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 the same as the maximum tax
rate for ordinary income.
Dividends received by corporate shareholders are eligible for a dividends
received deduction of 70% to the extent the Fund's income is derived from
qualified dividends received by the Fund from domestic corporations. Dividends
attributable to interest income, capital and currency gains, gain or loss from
Section 1256 contracts, dividend income from foreign corporations and income
from some other sources will not be eligible for the corporate dividends
received deduction. See "Taxes" in the Statement of Additional Information.
Corporate shareholders should consult their tax advisers regarding other
requirements applicable to the dividends received deduction.
19
<PAGE>
Any gain or loss realized upon a sale or redemption of shares of the Fund by
a shareholder who is not a dealer in securities will generally be treated as
long-term capital gain or loss if the shares have been held more than one year
and otherwise as short-term capital gain or loss. Any such loss with respect
to shares that are held for six months or less, however, will be treated as
long-term capital loss to the extent of any capital gain distributions
received by the shareholder.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of
Class B or Class C shares for Class A shares constitutes a taxable event for
federal income tax purposes. However, such opinions are not binding on the
Internal Revenue Service.
Shareholders are advised to consult their own tax advisers regarding
specific questions as to federal, state or local taxes. See "Taxes" in the
Statement of Additional Information.
WITHHOLDING TAXES
Under the Internal Revenue Code, the Fund is required to withhold and remit
to the U.S. Treasury 31% of 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. Withholding at this
rate is also required from dividends and capital gains distributions (but not
redemption proceeds) payable to shareholders who are otherwise subject to
backup withholding. Dividends of net investment income and short-term capital
gains paid to a foreign shareholder will generally be subject to U.S.
withholding tax at the rate of 30% (or lower treaty rate).
DIVIDENDS AND DISTRIBUTIONS
THE FUND EXPECTS TO PAY DIVIDENDS OF NET INVESTMENT INCOME, IF ANY, AND MAKE
DISTRIBUTIONS AT LEAST ANNUALLY OF ANY CAPITAL GAINS IN EXCESS OF NET LONG-
TERM CAPITAL LOSSES. Dividends paid by the Fund with respect to each class of
shares, to the extent any dividends are paid, will be calculated in the same
manner, at the same time, on the same day and will be in the same amount
except that each class will bear its own distribution charges, generally
resulting in lower dividends for Class B and Class C shares. Distributions of
net capital gains, if any, will be paid in the same amount for each class of
shares. See "How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES BASED ON
THE NAV OF EACH CLASS ON THE RECORD DATE OR SUCH OTHER DATE AS THE BOARD OF
DIRECTORS MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT LESS
THAN FIVE BUSINESS DAYS PRIOR TO THE RECORD DATE TO RECEIVE SUCH DIVIDENDS AND
DISTRIBUTIONS IN CASH. Such election should be submitted to Prudential Mutual
Fund Services, Inc., Attention: Account Maintenance, P.O. Box 15015, New
Brunswick, New Jersey 08906-5015. If you hold shares through Prudential
Securities, you should contact your financial adviser to elect to receive
dividends and distributions in cash. 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.
WHEN THE FUND GOES "EX-DIVIDEND," THE NAV OF EACH CLASS IS REDUCED BY THE
AMOUNT OF THE DIVIDEND OR DISTRIBUTION ALLOCABLE TO EACH CLASS. IF YOU BUY
SHARES JUST PRIOR TO THE EX-DIVIDEND DATE (WHICH GENERALLY OCCURS FOUR
BUSINESS DAYS PRIOR TO THE RECORD DATE), THE PRICE YOU PAY WILL INCLUDE THE
DIVIDEND OR DISTRIBUTION AND A PORTION OF YOUR INVESTMENT WILL BE RETURNED TO
YOU AS A TAXABLE DIVIDEND OR DISTRIBUTION. YOU SHOULD, THEREFORE, CONSIDER THE
TIMING OF DIVIDENDS AND DISTRIBUTIONS WHEN MAKING YOUR PURCHASES.
20
<PAGE>
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
THE FUND WAS INCORPORATED IN MARYLAND ON JUNE 15, 1987. THE FUND IS
AUTHORIZED TO ISSUE 500 MILLION SHARES OF COMMON STOCK, $.01 PAR VALUE PER
SHARE, DIVIDED INTO FOUR CLASSES, DESIGNATED CLASS A, CLASS B, CLASS C AND
CLASS Z COMMON STOCK, EACH OF WHICH CONSISTS OF 125 MILLION AUTHORIZED SHARES.
Each class of common stock represents an interest in the same assets of the
Fund and is identical in all respects except that (i) each class is subject to
different sales charges and distribution and/or service fees, which may affect
performance, (ii) each class has exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and has
separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of any other class, (iii)
each class has a different exchange privilege and (iv) only Class B shares
have a conversion feature. Since Class B and Class C shares generally bear
higher distribution expenses than Class A shares, the liquidation proceeds to
shareholders of those classes are likely to be lower than to Class A
shareholders. In accordance with the Fund's Articles of Incorporation, the
Board of Directors may authorize the creation of additional series of common
stock and classes within such series, with such preferences, privileges,
limitations and voting and dividend rights as the Board of Directors may
determine. Currently, the Fund is offering three classes, designated Class A,
Class B and Class C shares.
The Board of Directors may increase or decrease the number of authorized
shares without approval by the shareholders. Shares of the Fund, when issued,
are fully paid, nonassessable, fully transferable and redeemable at the option
of the holder. Shares are also redeemable at the option of the Fund under
certain circumstances as described under "Shareholder Guide--How to Sell Your
Shares." Each share of each class of common stock is equal as to earnings,
assets and voting privileges, except as noted above, and each class bears the
expenses related to the distribution of its shares. Except for the conversion
feature applicable to the Class B shares, there are no conversion, preemptive
or other subscription rights. In the event of liquidation, each share of
common stock of the Fund is entitled to its portion of all of the Fund's
assets after all debt and expenses of the Fund have been paid. The Fund's
shares do not have cumulative voting rights for the election of Directors.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF DIRECTORS IS REQUIRED TO BE
ACTED ON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF
THE FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE
OR MORE DIRECTORS OR TO TRANSACT ANY OTHER BUSINESS.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information
set forth in the Registration Statement filed by the Fund with the SEC under
the Securities Act of 1933. 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.
21
<PAGE>
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES, INC. (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The purchase price 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). See "Alternative Purchase Plan"
below. See also "How the Fund Values its Shares."
The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares. The minimum subsequent investment is $100
for all classes. All minimum investment requirements are waived for certain
retirement and employee savings plans or custodial accounts for the benefit of
minors. For purchases made through the Automatic Savings Accumulation Plan,
the minimum initial and subsequent investment is $50. See "Shareholder
Services" below.
Application forms can be obtained from PMFS, Prudential Securities or
Prusec. If a stock certificate is desired, it must be requested in writing for
each transaction. Certificates are issued only for full shares. Shareholders
who hold their shares through Prudential Securities will not receive stock
certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the investment.
Transactions in Fund shares may be subject to postage and handling charges
imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, you
must first telephone PMFS at (800) 225-1852 (toll-free) to receive an account
number. The following information will be requested: your name, address, tax
identification number, class election, dividend distribution election, amount
being wired and wiring bank. Instructions should then be given by you to your
bank to transfer funds by wire to State Street Bank and Trust Company (State
Street), Boston, Massachusetts, Custody and Shareholder Services Division,
Attention: Prudential Natural Resources Fund, Inc., specifying on the wire the
account number assigned by PMFS and your name and identifying the sales charge
alternative (Class A, Class B or Class C shares).
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Fund as of that day. See "Net Asset Value" in the
Statement of Additional Information.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Natural
Resources Fund, Inc., Class A, Class B or Class C 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.
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<PAGE>
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS THROUGH THIS PROSPECTUS THREE CLASSES OF SHARES (CLASS A,
CLASS B AND CLASS C SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL
SALES CHARGE STRUCTURE FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF
THE PURCHASE, THE LENGTH OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER
RELEVANT CIRCUMSTANCES (ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
------------------------------ ------------------------ ------------------------
<C> <C> <C> <S>
CLASS A Maximum initial sales charge .30 of 1% Initial sales charge
of 5% of the public offering (Currently being waived or reduced for
price charged at a rate certain purchases
of .25 of 1%)
CLASS B Maximum contingent deferred 1% Shares convert to Class
sales charge or CDSC of 5% of A shares approximately
the lesser of the amount seven years after
invested or the redemption purchase
proceeds; declines to zero
after six years
CLASS C Maximum CDSC of 1% of the 1% Shares do not convert to
lesser of the amount invested another class
or the redemption proceeds on
redemptions made within one
year of purchase
</TABLE>
The three classes of shares represent an interest in the same portfolio of
investments of the Fund and have the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its Plan (except
as noted under the heading "General Information--Description of Common
Stock"), and (iii) only Class B shares have a conversion feature. The three
classes also have separate exchange privileges. See "How to Exchange Your
Shares" below. The income attributable to each class and the dividends payable
on the shares of each class will be reduced by the amount of the distribution
fee 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 shares.
Financial advisers and other sales agents who sell shares of the Fund will
receive different compensation for selling Class A, Class B and Class C shares
and will generally receive more compensation initially for selling Class A and
Class B shares than for selling Class C shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER
THINGS, (1) the length of time you expect to hold your investment, (2) the
amount of any applicable sales charge (whether imposed at the time of purchase
or redemption) and distribution-related fees, as noted above, (3) whether you
qualify for any reduction or waiver of any applicable sales charge, (4) the
various exchange privileges among the different classes of shares (see "How to
Exchange Your Shares" below) and (5) the fact that Class B shares
automatically convert to Class A shares approximately seven years after
purchase (see "Conversion Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund:
If you intend to hold your investment in the Fund for less than 7 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 5% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B
shares.
If you intend to hold your investment for 7 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
23
<PAGE>
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 shares 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 fees on
Class A shares. This does not take into account the time value of money, which
further reduces the impact of the higher Class B or Class C distribution-
related fee on the investment, fluctuations in 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. See "Reduction and Waiver of Initial Sales Charges" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial
sales charge alternative is the next determined NAV plus a sales charge
(expressed as a percentage of the offering price and of the amount invested)
as shown in the following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
------------------ --------------- --------------- -----------------
<S> <C> <C> <C>
Less than $25,000 5.00% 5.26% 4.75%
$25,000 to $49,999 4.50 4.71 4.25
$50,000 to $99,999 4.00 4.17 3.75
$100,000 to $249,999 3.25 3.36 3.00
$250,000 to $499,999 2.50 2.56 2.40
$500,000 to $999,999 2.00 2.04 1.90
$1,000,000 and above None None None
</TABLE>
Selling dealers may be deemed to be underwriters, as that term is defined in
the Securities Act.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be
aggregated to determine the applicable reduction. See "Purchase and Redemption
of Fund Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares"
in the Statement of Additional Information.
Benefit Plans. Class A shares may be purchased at NAV, without payment of an
initial sales charge, by pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the
Internal Revenue Code (Benefit Plans), provided that the 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.
24
<PAGE>
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 Prudential's
PruArray or SmartPath Programs (benefit plan recordkeeping services)
(hereafter referred to as a PruArray or SmartPath Plan); provided that the
plan has at least $1 million in existing assets or 250 eligible employees or
participants. The term "existing assets" for this purpose includes stock
issued by a PruArray or SmartPath Plan sponsor and 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.
Special Rules Applicable to Retirement Plans. After a Benefit Plan or
PruArray or SmartPath Plan qualifies to purchase Class A shares at NAV, all
subsequent purchases will be made at NAV.
Other Waivers. In addition, Class A shares may be purchased at NAV, through
Prudential Securities or the Transfer Agent, by the following persons: (a)
officers and current and former Directors/Trustees of the Prudential Mutual
Funds (including the Fund), (b) employees of Prudential Securities and PMF and
their subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer Agent, (c)
employees 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, (d) 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 (e)
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 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 purchase.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation
of your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions. See "Purchase
and Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--
Class A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one
of the deferred sales charge alternatives is the NAV 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."
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES AT ANY TIME FOR CASH AT THE NAV NEXT DETERMINED
AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE TRANSFER AGENT
OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES." In certain
cases, however, redemption proceeds will be reduced by the amount of any
applicable contingent deferred sales charge, as described below. See
"Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM YOUR SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION
25
<PAGE>
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 Preferred
Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN
SEVEN DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR
WRITTEN REQUEST, EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH
PRUDENTIAL SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE
CREDITED TO YOUR PRUDENTIAL SECURITIES ACCOUNT UNLESS YOU INDICATE OTHERWISE.
Such payment may be postponed or the right of redemption suspended at times
(a) when the New York Stock Exchange is closed for other than customary
weekends and holidays, (b) when trading on such Exchange is restricted, (c)
when an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund fairly to determine the value of its net assets, or
(d) during any other period when the SEC, by order, so permits; provided that
applicable rules and regulations of the SEC shall govern as to whether the
conditions prescribed in (b), (c) or (d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL
THE FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS
BEEN HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE
CHECK BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY
WIRE OR BY CERTIFIED OR OFFICIAL BANK CHECK.
REDEMPTION IN KIND. If the Board of Directors determines that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price
in whole or in part by a distribution in kind of securities from the
investment portfolio of the Fund, in lieu of cash, in conformity with
applicable rules of the SEC. Securities will be readily marketable and will be
valued in the same manner as a regular redemption. See "How the Fund Values
its Shares." If your shares are redeemed in kind, you will incur transaction
costs in converting the assets into cash. The Fund, however, has elected to be
governed by Rule 18f-1 under the Investment Company Act, under which the Fund
is obligated to redeem shares solely in cash up to the lesser of $250,000 or
1% of the net asset value of the Fund during any 90-day period for any one
shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Board
of Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose
account has a net asset value of less than $500 due to a redemption. The Fund
will give such shareholders 60 days' prior written notice in which to purchase
sufficient additional shares to avoid such redemption. No contingent deferred
sales charge will be imposed on any such involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of the Fund at the NAV next
determined after the order is received, which must be within 90 days after the
date of the redemption. Any CDSC paid in connection with such redemption will
be credited (in shares) to your account. (If less than a full repurchase is
made, the credit will be
26
<PAGE>
on a pro rata basis.) You must notify the Fund's Transfer Agent, either
directly or through Prudential Securities, at the time the repurchase
privilege is exercised to adjust your account for the CDSC you previously
paid. Thereafter, any redemptions will be subject to the CDSC applicable at
the time of the redemption. See "Contingent Deferred Sales Charges" below.
Exercise of the repurchase privilege will generally not affect the federal tax
treatment of any gain realized upon redemption. However, if the redemption was
made within a 30 day period of the repurchase and if the redemption resulted
in a loss, some or all of the loss, depending on the amount reinvested, may
not be allowed for federal income tax purposes.
CONTINGENT DEFERRED SALES 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" and "Waiver of the Contingent Deferred Sales Charges--
Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchase of shares, all payments
during a month will be aggregated and deemed to have been made on the last day
of the month. The CDSC will be calculated from the first day of the month
after the initial purchase, excluding the time shares were held in a money
market fund. See "How to Exchange Your Shares."
The following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
YEAR SINCE PURCHASE AS A PERCENTAGE OF DOLLARS INVESTED
PAYMENT MADE OR REDEMPTION PROCEEDS
------------------- -----------------------------------
<S> <C>
First............................... 5.0%
Second.............................. 4.0%
Third............................... 3.0%
Fourth.............................. 2.0%
Fifth............................... 1.0%
Sixth............................... 1.0%
Seventh............................. None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Fund shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC
period; and finally, of amounts representing the cost of shares held for the
longest period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided
to redeem $500 of your investment. Assuming at the time of the redemption the
NAV had appreciated to $12 per share, the value of your Class B shares would
be $1,260 (105 shares at $12 per share). The CDSC would not be applied to the
27
<PAGE>
value of the reinvested dividend shares and the amount which represents
appreciation ($260). Therefore, $240 of the $500 redemption proceeds ($500
minus $260) would be charged at a rate of 4% (the applicable rate in the
second year after purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC
will be waived in the case of a redemption following the death or disability
of a shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint
tenancy (with rights of survivorship), at the time of death or initial
determination of disability, provided that the shares were purchased prior to
death or disability.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include: (i) in the case of a tax-
deferred retirement plan, a lump-sum or other distribution after retirement;
(ii) in the case of an IRA or Section 403(b) custodial account, a lump-sum or
other distribution after attaining age 59 1/2; and (iii) a tax-free return of
an excess contribution plan or plan distributions following the death or
disability of the shareholder, provided that the shares were purchased prior
to death or disability. The waiver does not apply in the case of a tax-free
rollover or transfer of assets, other than one following a separation from
service (i.e., following voluntary or involuntary termination of employment or
following retirement). Under no circumstances will the CDSC be waived on
redemptions resulting from the termination of a tax-deferred retirement plan,
unless such redemptions otherwise qualify for a waiver as described above. In
the case of Direct Account and PSI or Subsidiary Prototype Benefit Plans, the
CDSC will be waived on redemptions which represent borrowings from such plans.
Shares purchased with amounts used to repay a loan from such plans on which a
CDSC was not previously deducted will thereafter be subject to a CDSC without
regard to the time such amounts were previously invested. In the case of a
401(k) plan, the CDSC will also be waived upon the redemption of shares
purchased with amounts used to repay loans made from the account to the
participant and from which a CDSC was previously deducted.
In addition, the CDSC will be waived on redemptions of shares held by a
Director of the Fund.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to waiver of the CDSC and provide the Transfer Agent with such
supporting documentation as it may deem appropriate. The waiver will be
granted subject to confirmation of your entitlement. See "Purchase and
Redemption of Fund Shares--Waiver of the Contingent Deferred Sales Charge--
Class B Shares" in the Statement of Additional Information.
A quantity discount may apply to redemption of Class B shares purchased
prior to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement
of Additional Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected
at relative net asset value without the imposition of any additional sales
charge. The first conversion of Class B shares occurred in February 1995, when
the conversion feature was first implemented.
Since the Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will
be determined on each conversion date in accordance with the following
formula: (i) the ratio of (a) the amounts paid for Class B shares purchased at
least seven
28
<PAGE>
years prior to the conversion date to (b) the total amount paid for all Class
B shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time
any Eligible Shares in your account convert to Class A shares, all shares or
amounts representing Class B shares then in your account that were acquired
through the automatic reinvestment of dividends and other distributions will
convert to Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible
Shares calculated as described above will generally be either more or less
than the number of shares actually purchased approximately seven years before
such conversion date. For example, if 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 conversions are suspended,
Class B shares of the Fund will continue to be subject, possibly indefinitely,
to their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE FUND, YOU HAVE AN EXCHANGE PRIVILEGE WITH CERTAIN
OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE PRIVILEGE), INCLUDING ONE OR MORE
SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENTS
OF SUCH FUNDS. CLASS A, CLASS B AND CLASS C SHARES MAY BE EXCHANGED FOR CLASS
A, CLASS B AND CLASS C 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 the 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. For purposes of calculating the holding
period applicable to the Class B conversion feature, the time period during
which Class B shares were held in a money market fund will be excluded. See
"Conversion Feature--Class B Shares" above. An exchange will be treated as a
redemption and purchase for tax purposes. See "Shareholder Investment
Account--Exchange Privilege" in the Statement of Additional Information.
29
<PAGE>
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM AND HOLD SHARES IN NON-CERTIFICATE
FORM. Thereafter, you may call the Fund at (800) 225-1852 to execute a
telephone exchange of shares, on weekdays, except holidays, between the hours
of 8:00 A.M. and 6:00 P.M., New York time. For your protection and to prevent
fraudulent exchanges, your telephone call will be recorded and you will be
asked to provide your personal identification number. A written confirmation
of the exchange transaction will be sent to you. NEITHER THE FUND NOR ITS
AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH RESULTS FROM
ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER THE FOREGOING
PROCEDURES. (THE FUND 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 two funds next determined after the request is
received in good order. The Exchange Privilege is available only in states
where the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON
THE FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, 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. 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 on a quarterly
basis, unless the shareholder elects otherwise. 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.
The Exchange Privilege may be modified or terminated at any time on 60 days'
notice to shareholders.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder of the Fund, you can
take advantage of the following services and privileges:
. AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund at NAV
without a sales charge. You may direct the Transfer Agent in writing not less
than 5 full business days prior to the record date to have subsequent
dividends and/or distributions sent in cash rather than reinvested. If you
hold shares through Prudential Securities, you should contact your financial
adviser.
. AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make
regular purchases of the Fund's shares in amounts as little as $50 via an
automatic debit to a bank account or Prudential Securities account (including
a Command
30
<PAGE>
Account). For additional information about this service, you may contact your
Prudential Securities financial adviser, Prusec representative or the Transfer
Agent directly.
. TAX-DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code
are available through the Distributor. These plans are for use by both self-
employed individuals and corporate employers. These plans permit either self-
direction of accounts by participants, or a pooled account arrangement.
Information regarding the establishment of these plans, the administration,
custodial fees and other details is available from Prudential Securities or
the Transfer Agent. If you are considering adopting such a plan, you should
consult with your own legal or tax adviser with respect to the establishment
and maintenance of such a plan.
. SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges."
. REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at One Seaport
Plaza, New York, New York 10292. In addition, monthly unaudited financial data
is available upon request from the Fund.
. SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at One
Seaport Plaza, New York, New York 10292, or by telephone, at (800) 225-1852
(toll-free) or, from outside the U.S.A., at (908) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
31
<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 (800) 225-1852 for a free prospectus. Read the prospectus
carefully before you invest or send money.
<TABLE>
<CAPTION>
TAXABLE BOND FUNDS EQUITY FUNDS
<S> <C>
Prudential Diversified Bond Fund, Inc. Prudential Allocation Fund
Prudential Government Income Fund, Inc. Balanced Portfolio
Prudential Government Securities Trust Strategy Portfolio
Short-Intermediate Term Series Prudential Distressed Securities Fund, Inc.
Prudential High Yield Fund, Inc. Prudential Equity Fund, Inc.
Prudential Mortgage Income Fund, Inc. Prudential Equity Income Fund
Prudential Structured Maturity Fund, Inc. Prudential Jennison Fund, Inc.
Income Portfolio Prudential Multi-Sector Fund, Inc.
The BlackRock Government Income Trust Prudential Natural Resources Fund, Inc.
Prudential Small Companies Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund MONEY MARKET FUNDS
High Yield Series
Insured Series . Taxable Money Market Funds
Intermediate Series Prudential Government Securities Trust
Prudential Municipal Series Fund Money Market Series
Florida Series U.S. Treasury Money Market Series
Hawaii Income Series Prudential Special Money Market Fund, Inc.
Maryland Series Money Market Series
Massachusetts Series Prudential MoneyMart Assets, Inc.
Michigan Series
New Jersey Series . Tax-Free Money Market Funds
New York Series Prudential Tax-Free Money Fund, Inc.
North Carolina Series Prudential California Municipal Fund
Ohio Series California Money Market Series
Pennsylvania Series Prudential Municipal Series Fund
Prudential National Municipals Fund, Connecticut Money Market Series
Inc. Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
GLOBAL FUNDS
. Command Funds
Prudential Europe Growth Fund, Inc. Command Money Fund
Prudential Global Genesis Fund, Inc. Command Government Fund
Prudential Global Limited Maturity Fund, Command Tax-Free Fund
Inc. Limited Maturity Portfolio
Prudential Intermediate Global Income Fund,
Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series . Institutional Money Market Funds
The Global Government Plus Fund, Inc. Prudential Institutional Liquidity Portfolio, Inc.
The Global Total Return Fund, Inc. Institutional Money Market Series
Global Utility Fund, Inc.
</TABLE>
A-1
<PAGE>
PROSPECTUS
July 30, 1996
- --------------------------------------------------------------------------------
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 solicita-
tion of any offer to buy any of the securities offered hereby in any jurisdic-
tion to any person to whom it is unlawful to make such offer in such jurisdic-
tion.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND HIGHLIGHTS............................................................ 2
Risk Factors and Special Characteristics.................................. 2
FUND EXPENSES.............................................................. 4
FINANCIAL HIGHLIGHTS....................................................... 5
HOW THE FUND INVESTS....................................................... 8
Investment Objective and Policies......................................... 8
Hedging and Return Enhancement Strategies................................. 11
Other Investments and Policies............................................ 13
Investment Restrictions................................................... 15
HOW THE FUND IS MANAGED.................................................... 15
Manager................................................................... 15
Distributor............................................................... 15
Portfolio Transactions.................................................... 17
Custodian and Transfer and Dividend Disbursing Agent...................... 17
HOW THE FUND VALUES ITS SHARES............................................. 18
HOW THE FUND CALCULATES
PERFORMANCE............................................................... 18
TAXES, DIVIDENDS AND DISTRIBUTIONS......................................... 19
GENERAL INFORMATION........................................................ 21
Description of Common Stock............................................... 21
Additional Information.................................................... 21
SHAREHOLDER GUIDE.......................................................... 22
How to Buy Shares of the Fund............................................. 22
Alternative Purchase Plan................................................. 23
How to Sell Your Shares................................................... 25
Conversion Feature--Class B Shares........................................ 28
How to Exchange Your Shares............................................... 29
Shareholder Services...................................................... 30
THE PRUDENTIAL MUTUAL FUND FAMILY.......................................... A-1
</TABLE>
- --------------------------------------------------------------------------------
MF 135A 4441438
Class A: 743970105
CUSIP Nos.: Class B: 743970204
Class C: 743970303
PRUDENTIAL NATURAL
RESOURCES FUND, INC.
------------
(FORMERLY PRUDENTIAL GLOBAL NATURAL RESOURCES FUND, INC.)
Prudential Mutual Funds [LOGO]
Building Your Future
On Our Strength/SM/
<PAGE>
PRUDENTIAL NATURAL RESOURCES FUND, INC.
Statement of Additional Information
dated July 30, 1996
Prudential Natural Resources Fund, Inc., formerly Prudential Global Natural
Resources Fund, Inc. (the Fund), is an open-end, diversified, management
investment company. Its investment objective is long-term growth of capital.
It seeks to achieve this objective by investing primarily in securities of
foreign and domestic companies that own, explore, mine, process or otherwise
develop, or provide goods and services with respect to, natural resources and
in securities, the terms of which are related to the market value of a natural
resource (asset-based securities). The Fund will, under normal circumstances,
invest at least 65% of its total assets in common stocks and equivalents (such
as convertible debt securities and warrants) of natural resource companies and
in asset-based securities. The Fund may also invest in equity securities of
companies in other industries, fixed-income securities (including money market
instruments), and derivatives, including options on equity securities, stock
indices, foreign currencies and futures contracts on foreign currencies, and
may buy and sell futures contracts on foreign currencies and on stock indices
so as to hedge its portfolio. There can be no assurance that the Fund's
investment objective will be achieved. See "Investment Objective and
Policies."
The Fund's address is One Seaport Plaza, New York, New York 10292, and its
telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Fund's Prospectus dated July 30, 1996, a copy of
which may be obtained from the Fund upon request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CROSS-REFERENCE
TO PAGE IN
PAGE PROSPECTUS
----- ---------------
<S> <C> <C>
General Information...................................... B-2 21
Investment Objective and Policies........................ B-2 8
Investment Restrictions.................................. B-11 15
Directors and Officers................................... B-13 15
Manager.................................................. B-15 15
Distributor.............................................. B-17 15
Portfolio Transactions and Brokerage..................... B-19 17
Purchase and Redemption of Fund Shares................... B-21 22
Shareholder Investment Account........................... B-24 30
Net Asset Value.......................................... B-27 18
Taxes.................................................... B-28 19
Performance Information.................................. B-30 18
Custodian, Transfer and Dividend Disbursing Agent and In-
dependent Accountants................................... B-32 17
Financial Statements..................................... B-33 --
Report of Independent Accountants........................ B-46 --
Description of Security Ratings.......................... A-1 --
Appendix I--Historical Performance Data.................. I-1 --
Appendix II--General Investment Information.............. II-1 --
Appendix III--Information Relating to The Prudential..... III-1 --
</TABLE>
- -------------------------------------------------------------------------------
MF135B 444-1454
<PAGE>
GENERAL INFORMATION
At a special meeting held on July 19, 1994, shareholders approved an
amendment to the Fund's Articles of Incorporation to change the Fund's name
from Prudential-Bache Global Natural Resources Fund, Inc. to Prudential Global
Natural Resources Fund, Inc. Effective July 30, 1996, the Fund's name changed
to Prudential Natural Resources Fund, Inc.
INVESTMENT OBJECTIVE AND POLICIES
The Fund seeks to achieve its investment objective of long-term growth of
capital by investing primarily in securities of foreign and domestic companies
that own, explore, mine, process or otherwise develop, or provide goods and
services with respect to, natural resources and in asset-based securities.
There can be no assurance that the Fund's investment objective will be
achieved. See "How the Fund Invests--Investment Objective and Policies" in the
Prospectus.
OPTIONS TRANSACTIONS
OPTIONS ON EQUITY SECURITIES. The Fund intends to purchase and write (i.e.,
sell) put and call options that are traded on U.S. or foreign securities
exchanges or that are listed on NASDAQ or that are traded over-the-counter. A
call option is a short-term contract (having a duration of nine months or
less) pursuant to which the purchaser, in return for a premium paid, has the
right to buy the security underlying the option at a specified exercise price
at any time during the term of the option. The writer of the call option, who
receives the premium, has the obligation, upon exercise of the option, to
deliver the underlying security against payment of the exercise price. A put
option is a similar contract which gives the purchaser, in return for a
premium, the right to sell the underlying security at a specified price during
the term of the option. The writer of the put, who receives the premium, has
the obligation to buy the underlying security upon exercise at the exercise
price. The Fund will write put options only when the investment adviser
desires to invest in the underlying security.
A call option written by the Fund is "covered" if the Fund owns the security
underlying the option or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration held in a segregated account by its Custodian) upon conversion
or exchange of other securities held in its portfolio. A call option is also
covered if the Fund holds on a share-for-share basis a call on the same
security as the call written where the exercise price of the call held is
equal to or less than the exercise price of the call written or greater than
the exercise price of the call written if the difference is maintained by the
Fund in cash, U.S. Government obligations or other liquid, unencumbered
assets, marked to market daily, in a segregated account with its Custodian. A
put option written by the Fund is "covered" if the Fund maintains cash, U.S.
Government obligations or other liquid, unencumbered assets, marked to market
daily, with a value equal to the exercise price in a segregated account with
its Custodian, or else holds on a share-for-share basis a put of the same
security as the put written where the exercise price of the put held is equal
to or greater than the exercise price of the put written. The premium paid by
the purchaser of an option will reflect, among other things, the relationship
of the exercise price to the market price and volatility of the underlying
security, the remaining term of the option, supply and demand and interest
rates.
If the writer of an option wishes to terminate the obligation, he or she may
effect a "closing purchase transaction." This is accomplished by buying an
option of the same series as the option previously written. The effect of the
purchase is that the writer's position will be cancelled by the clearing
corporation. However, a writer may not effect a closing purchase transaction
after he or she has been notified of the exercise of an option. Similarly, an
investor who is the holder of an option may liquidate his or her position by
effecting a "closing sale transaction." This is accomplished by selling an
option of the same series as the option previously purchased. There is no
guarantee that either a closing purchase or a closing sale transaction can be
effected. To secure the obligation to deliver the underlying security in the
case of a call option, the writer of the option is generally required to
pledge for the benefit of the broker the underlying security or other assets
in accordance with the rules of the relevant exchange or clearinghouse, such
as The Options Clearing Corporation (OCC), an institution created to interpose
itself between buyers and sellers of options in the United States.
Technically, the clearinghouse assumes the other side of every purchase and
sale transaction on an exchange and, by doing so, guarantees the transaction.
The Fund will realize a profit from a closing transaction if the price of
the transaction is less than the premium received from writing the option or
is more than the premium paid to purchase the option; the Fund will realize a
loss from a closing transaction if the price of the transaction is more than
the premium received from writing the option or is less than the premium paid
to purchase the option. Because increases in the market price of a call option
will generally reflect increases in the market price of the underlying
security, any loss resulting from the repurchase of a call option is likely to
be offset in whole or in part by appreciation of the underlying security owned
by the Fund.
B-2
<PAGE>
The Fund may also purchase a "protective put," i.e., a put option acquired
for the purpose of protecting a portfolio security from a decline in market
value. In exchange for the premium paid for the put option, the Fund acquires
the right to sell the underlying security at the exercise price of the put
regardless of the extent to which the underlying security declines in value.
The loss to the Fund is limited to the premium paid for, and transaction costs
in connection with, the put plus the initial excess, if any, of the market
price of the underlying security over the exercise price. However, if the
market price of the security underlying the put rises, the profit the Fund
realizes on the sale of the security will be reduced by the premium paid for
the put option less any amount (net of transaction costs) for which the put
may be sold. Similar principles apply to the purchase of puts on stock
indices, as described below.
OPTIONS ON STOCK INDICES. In addition to options on equity securities, the
Fund may also purchase and sell put and call options on stock indices traded
on U.S. and foreign securities exchanges or listed on NASDAQ. Options on stock
indices are similar to options on stock except that, rather than the right to
take or make delivery of stock at a specified price, an option on a stock
index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the stock index upon which the option
is based is greater than, in the case of a call, or less than, in the case of
a put, the exercise price of the option. This amount of cash is equal to such
difference between the closing price of the index and the exercise price of
the option, expressed in dollars, times a specified multiple (the multiplier).
The writer of the option is obligated, in return for the premium received, to
make delivery of this amount. Unlike stock options, all settlements are in
cash, and gain or loss depends on price movements in the stock market
generally (or in a particular industry or segment of the market) rather than
price movements in individual stocks.
The multiplier for an index option performs a function similar to the unit
of trading for a stock option. It determines the total dollar value per
contract of each point in the difference between the exercise price of an
option and the current level of the underlying index. A multiplier of 100
means that a one-point difference will yield $100. Options on different
indices may have different multipliers.
Because exercises of index options are settled in cash, a call writer 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. In addition, unless the Fund has other liquid assets which are
sufficient to satisfy the exercise of a call, the Fund would be required to
liquidate portfolio securities or borrow in order to satisfy the exercise.
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 the Fund will
realize a gain or loss on the purchase or sale of an option on an index
depends upon movements in the level of 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 the Fund of
options on indices would be subject to the investment adviser'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. The investment adviser
currently uses such techniques in conjunction with the management of other
mutual funds.
STOCK INDEX FUTURES AND OPTIONS THEREON
The Fund may attempt to reduce the risk of the investment in equity
securities by hedging a portion of its portfolio through the use of stock
index futures and options on stock index futures traded on a commodities
exchange or board of trade. A stock index futures contract is an agreement in
which the writer (or seller) of the contract agrees to deliver to the buyer an
amount of cash equal to a specific dollar amount times the difference between
the value of 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. When the futures
contract is entered into, each party deposits with a broker or in a segregated
custodial account approximately 5% of the contract amount, called the "initial
margin." Subsequent payments to and from the broker, called "variation
margin," will be made on a daily basis as the price of the underlying stock
index fluctuates making the long and short positions in the futures contracts
more or less valuable, a process known as "marked to the market." In the case
of options on stock index futures, the holder of the option pays a premium and
receives the right, upon exercise of the option at a specified price during
the option period, to assume a position in a stock index futures contract (a
long position if the option is a call and a short position if the option is a
put). If the option is exercised by the holder before the last trading day
during the option period, the option writer delivers the futures position, as
well as any balance in the writer's futures margin account. If it is exercised
on the last trading day, the option writer delivers to the option holder cash
in an amount equal to the difference between the option exercise price and the
closing level of the relevant index on the date the option expires.
B-3
<PAGE>
The Fund intends to engage in stock index futures and options on stock index
futures transactions as a hedge against changes, resulting from market
conditions, in the value of securities which are held in the Fund's portfolio
or which the Fund intends to purchase, in accordance with the rules and
regulations of the Commodity Futures Trading Commission (the CFTC). The Fund
also intends to engage in such transactions when they are economically
appropriate for the reduction of risks inherent in the ongoing management of
the Fund and may write options on futures contracts to realize through the
receipt of premium income a greater return than would be realized in the
Fund's portfolio securities alone.
The Fund's successful use of stock index futures contracts, options on such
contracts and options on indices depends upon the investment adviser's ability
to predict the direction of the market and is subject to various additional
risks. The correlation between movements in the price of the stock index
future and the price of the securities being hedged is imperfect and the risk
from imperfect correlation increases as the composition of the Fund's
portfolio diverges from the composition of the relevant index. In addition, if
the Fund purchases futures to hedge against market advances before it can
invest in common stock in an advantageous manner and the market declines, the
Fund might create a loss on the futures contract. Particularly in the case of
options on stock index futures and on stock indices, the Fund's ability to
establish and maintain positions will depend on market liquidity. In addition,
the ability of the Fund to close out a futures position or an option depends
on a liquid secondary market. There is no assurance that liquid secondary
markets will exist for any particular futures contract or option at any
particular time. See "Limitations on Purchase and Sale of Stock Options and
Options on Stock Indices and Foreign Currencies," "Risks of Options on Foreign
Currencies" and "Risks of Options on Indices" below. During the coming year,
the Fund will not enter into futures contracts on stock indices or options
thereon if the aggregate margin and premiums on such options exceed 5% of the
Fund's total assets.
RISKS OF TRANSACTIONS IN OPTIONS
An option position may be closed out only on an exchange, board of trade or
other trading facility which provides a secondary market for an option of the
same series. Although the Fund will generally purchase or write only those
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market on an exchange will exist for any
particular option, or at any particular time, and for some options no
secondary market on an exchange or otherwise may exist. In such event it might
not be possible to effect closing transactions in particular options, with the
result that the Fund would have to exercise its options in order to realize
any profit and would incur brokerage commissions upon the exercise of call
options and upon the subsequent disposition of underlying securities acquired
through the exercise of call options or upon the purchase of underlying
securities for the exercise of put options. If the Fund as a covered call
option writer is unable to effect a closing purchase transaction in a
secondary market, it will not be able to sell the underlying security until
the option expires or it delivers the underlying security upon exercise.
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 or underlying securities; (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 Fund intends to purchase
and sell only those options which are cleared by clearinghouses whose
facilities are considered to be adequate to handle the volume of options
transactions.
RISKS OF OPTIONS ON INDICES
The Fund's purchase and sale of options on indices will be subject to risks
described above under "Risks of Transactions in Options." In addition, the
distinctive characteristics of options on indices create certain risks that
are not present with stock options.
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, the Fund would not be able
to close out options which it had purchased or written and, if restrictions on
exercise
B-4
<PAGE>
were imposed, may be unable to exercise an option it holds, which could result
in substantial losses to the Fund. It is the Fund's policy to purchase or
write options only on indices which include a number of stocks sufficient to
minimize the likelihood of a trading halt in the index.
The ability to establish and close out positions on such options will be
subject to the development and maintenance of a liquid secondary market. It is
not certain that this market will develop in all index option contracts. The
Fund will not purchase or sell any index option contract unless and until, in
the investment adviser's opinion, the market for such options has developed
sufficiently that the risk in connection with such transactions is no greater
than the risk in connection with options on stocks.
SPECIAL RISKS OF WRITING CALLS ON INDICES. Because exercises of index
options are settled in cash, a call writer such as the Fund cannot determine
the amount of its settlement obligations in advance and, unlike call writing
on specific stocks, cannot provide in advance for, or cover, its potential
settlement obligations by acquiring and holding the underlying securities.
However, the Fund will write call options on indices only under the
circumstances described below under "Limitations on Purchase and Sale of Stock
Options and Options on Stock Indices and Foreign Currencies."
Price movements in the Fund's portfolio probably will not correlate
precisely with movements in the level of the index and, therefore, the Fund
bears the risk that the price of the securities held by the Fund may not
increase as much as the index. In such event, the Fund would bear a loss on
the call which is not completely offset by movements in the price of the
Fund's portfolio. It is also possible that the index may rise when the Fund's
portfolio of stocks does not rise. If this occurred, the Fund would experience
a loss on the call which would not be offset by an increase in the value of
its portfolio and might also experience a loss in its portfolio. However,
because the value of a diversified portfolio will, over time, tend to move in
the same direction as the market, movements in the value of the Fund in the
opposite direction as the market would be likely to occur for only a short
period or to a small degree.
Unless the Fund has other liquid assets which are sufficient to satisfy the
exercise of a call, the Fund would be required to liquidate portfolio
securities in order to satisfy the exercise. Because an exercise must be
settled within hours after receiving the notice of exercise, if the Fund fails
to anticipate an exercise, it may have to borrow from a bank (in amounts not
exceeding 20% of the Fund's total assets) pending settlement of the sale of
securities in its portfolio and would incur interest charges thereon.
When the Fund has written a call, there is also a risk that the market may
decline between the time the Fund has a call exercised against it, at a price
which is fixed as of the closing level of the index on the date of exercise,
and the time the Fund is able to sell stocks in its portfolio. As with stock
options, the Fund will not learn that an index option has been exercised until
the day following the exercise date but, unlike a call on stock where the Fund
would be able to deliver the underlying securities in settlement, the Fund may
have to sell part of its investment portfolio in order to make settlement in
cash, and the price of such investments 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 the Fund has written is "covered" by an
index call held by the Fund with the same strike price, the Fund will bear the
risk that the level of the index may decline between the close of trading on
the date the exercise notice is filed with the clearing corporation and the
close of trading on the date the Fund exercises the call it holds or the time
the Fund sells the call, which, in either case, would occur no earlier than
the day following the day the exercise notice was filed.
SPECIAL RISKS OF PURCHASING PUTS AND CALLS. If the Fund holds an index
option and exercises it before final determination of the closing index value
for that day, it runs the risk that the level of the underlying index may
change before closing. If such a change causes the exercised option to fall
out-of-the-money, the Fund will be required to pay the difference between the
closing index value and the exercise price of the option (times the applicable
multiplier) to the assigned writer. Although the Fund may be able to minimize
this risk by withholding exercise instructions until just before the daily
cutoff time or by selling rather than exercising an option when the index
level is close to the exercise price, it may not be possible to eliminate this
risk entirely because the cutoff times for index options may be earlier than
those fixed for other types of options and may occur before definitive closing
index values are announced.
RISKS OF OPTIONS ON FOREIGN CURRENCIES
Because there are two currencies involved, 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--
Investment Objective and Policies--Special Considerations and Risks,"
including government actions affecting currency valuation and the movements of
currencies
B-5
<PAGE>
from one country to another. The quantities of currency underlying option
contracts represent odd lots in a market dominated by transactions between
banks; this can mean extra transaction costs upon exercise. Option markets may
be closed while round-the-clock interbank currency markets are open, and this
can create price and rate discrepancies.
RISKS RELATED TO FORWARD CURRENCY EXCHANGE CONTRACTS
The Fund may enter into forward foreign currency exchange contracts in
several circumstances. When the Fund enters into a contract for the purchase
or sale of a security denominated in a foreign currency, or when the Fund
anticipates the receipt in a foreign currency of dividends or interest
payments on a security which it holds, the Fund may desire to "lock-in" the
U.S. dollar price of the security or the U.S. dollar equivalent of such
dividend or interest payment, as the case may be. By entering into a forward
contract for a fixed amount of dollars, for the purchase or sale of the amount
of foreign currency involved in the underlying transactions, the Fund will be
able to protect itself against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and the subject foreign
currency during the period between the date on which the security is purchased
or sold, or on which the dividend or interest payment is declared, and the
date on which such payments are made or received.
Additionally, when the investment adviser believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, the Fund may enter into a forward contract for a fixed amount of
dollars, to sell the amount of foreign currency approximating the value of
some or all of the Fund's portfolio securities denominated in such foreign
currency. The precise matching of the forward contract amounts and the value
of the securities involved will not generally be possible since the future
value of securities in foreign currencies will change as a consequence of
market movements in the value of those securities between the date on which
the forward contract is entered into and the date it matures. The projection
of short-term currency market movement is extremely difficult, and the
successful execution of a short-term hedging strategy is highly uncertain. The
Fund does not intend to enter into such forward contracts to protect the value
of its portfolio securities on a regular or continuous basis. The Fund will
also not enter into such forward contracts or maintain a net exposure to such
contracts where the consummation of the contracts would obligate the Fund to
deliver an amount of foreign currency in excess of the value of the Fund's
portfolio securities or other assets denominated in that currency. Under
normal circumstances, consideration of the prospect for currency parities will
be incorporated into the long-term investment decisions made with regard to
overall diversification strategies. However, the Fund believes that it is
important to have the flexibility to enter into such forward contracts when it
determines that the best interests of the Fund will thereby be served. If the
Fund enters into a position hedging transaction, the transaction will be
"covered" by the position being hedged or the Fund's Custodian or subcustodian
will place cash or U.S. Government obligations or other liquid, unencumbered
assets in a segregated account of the Fund (less the value of the "covering"
positions, if any) in an amount equal to the value of the Fund's total assets
committed to the consummation of the given forward contract. The assets placed
in the segregated account will be marked to market daily, and if the value
declines, additional cash or securities will be placed in the account so that
the value of the account will, at all times, equal the amount of the Fund's
net commitment with respect to the forward contract.
The Fund generally will not enter into a forward contract with a term of
greater than one year. At the maturity of a forward contract, the Fund may
either sell the portfolio security and make delivery of the foreign currency,
or it may retain the security and terminate its contractual obligation to
deliver the foreign currency by purchasing an "offsetting" contract with the
same currency trader obligating it to purchase, on the same maturity date, the
same amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the contract. Accordingly,
it may be necessary for the Fund to purchase additional foreign currency on
the spot market (and bear the expense of such purchase) if the market value of
the security is less than the amount of foreign currency that the Fund is
obligated to deliver and if a decision is made to sell the security and make
delivery of the foreign currency.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. Should forward contract prices
decline during the period between the Fund's entering into a forward contract
for the sale of a foreign currency and the date it enters into an offsetting
contract for the purchase of the foreign currency, the Fund will realize a
gain to the extent that the price of the currency it has agreed to sell
exceeds the price of the currency it has agreed to purchase. Should forward
contract prices increase, the Fund will suffer a loss to the extent that the
price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
The Fund's dealings in forward foreign currency exchange contracts will be
limited to the transactions described above. Of course, the Fund is not
required to enter into such transactions with regard to its foreign currency-
denominated securities. It also should be realized that this method of
protecting the value of the Fund's portfolio securities against a decline in
the value of a currency does not eliminate fluctuations in the underlying
prices of the securities which are unrelated to exchange rates.
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<PAGE>
Additionally, although such contracts tend to minimize the risk of loss due to
a decline in the value of the hedged currency, at the same time they tend to
limit any potential gain which might result should the value of such currency
increase.
Although the Fund values its assets daily in terms of U.S. dollars, it does
not intend physically to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. It will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the spread) between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign
currency to the Fund at one rate, while offering a lesser rate of exchange
should the Fund desire to resell that currency to the dealer.
RISKS OF 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. In the case of futures contracts on stock indices, the correlation
between the price of the futures contract and the movements in the index may
not be perfect. Therefore, a correct forecast of currency rates, market trends
or international political trends by the investment adviser may still not
result in a successful hedging transaction.
Although the Fund will purchase or sell futures contracts only on exchanges
where there appears to be an adequate secondary market, there is no assurance
that a liquid secondary market on an exchange will exist for any particular
contract or at any particular time. Accordingly, there can be no assurance
that it will be possible, at any particular time, to close a futures position.
In the event the Fund could not close a futures position and the value of such
position declined, the Fund would be required to continue to make daily cash
payments of variation margin. There is no guarantee that the price movements
of the portfolio securities denominated in foreign currencies will, in fact,
correlate with the price movements in the futures contract 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, German Mark and Eurodollar, among others. Futures contracts
are also available on the S&P 500 Stock Index, the NYSE Composite Index and
the Major Market Index and other global exchanges.
Under regulations of the Commodity Exchange Act, investment companies
registered under the Investment Company Act of 1940, as amended (the
Investment Company Act), are exempt from the definition of "commodity pool
operator," subject to compliance with certain conditions. The exemption is
conditioned upon the Fund's purchasing and selling futures contracts and
options thereon for bona fide hedging transactions, except that the Fund may
purchase and sell futures contracts and options thereon for any other purpose
to the extent that the aggregate initial margin and option premiums do not
exceed 5% of the liquidation value of the Fund's total assets. The Fund will
use currency futures and options on such futures in a manner consistent with
these requirements.
Successful use of futures contracts by the Fund is also subject to the
ability of the Fund's investment adviser to predict correctly movements in the
direction of markets and other factors affecting currencies or the stock
market generally. For example, if the Fund has hedged against the possibility
of an increase in currency rates which would adversely affect the price of
securities in its portfolio and the price of such securities increases
instead, the Fund will lose part or all of the benefit of the increased value
of its securities because it will have offsetting losses in its futures
positions. In addition, in such situations, if the Fund has insufficient cash
to meet daily variation margin requirements, it may need to sell securities to
meet such requirements. Such sales of securities may be, but will not
necessarily be, at increased prices which reflect the rising market. The Fund
may have to sell securities at a time when it is disadvantageous to do so.
The hours of trading of futures contracts may not conform to the hours
during which the Fund may trade the underlying securities. To the extent that
the futures markets close before the securities markets, significant price and
rate movements can take place in the securities markets that cannot be
reflected in the futures markets.
OPTIONS ON FUTURES CONTRACTS
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
B-7
<PAGE>
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, German Mark and Eurodollar, among others. With
respect to stock indices, options are traded on futures contracts for the S&P
500 Stock Index and the NYSE Composite Index and other global indices.
The holder or writer of an option may terminate its position by selling or
purchasing an option of the same series. There is no guarantee that such
closing transactions can be effected.
LIMITATIONS ON PURCHASE AND SALE OF STOCK OPTIONS AND OPTIONS ON STOCK INDICES
AND FOREIGN CURRENCIES
The Fund may write put and call options on stocks only if they are covered,
and such options must remain covered so long as the Fund is obligated as a
writer. The Fund will write put options on stock indices and foreign
currencies only if they are covered by segregating with the Fund's Custodian
an amount of cash or short-term investments equal to the aggregate exercise
price of the puts. The Fund has undertaken with certain state securities
commissions that, so long as shares of the Fund are registered in those
states, it will not (a) write puts having aggregate exercise prices greater
than 25% of total net assets; or (b) purchase (i) put options on stocks not
held in the Fund's portfolio, (ii) put options on stock indices or foreign
currencies or (iii) call options on stocks, stock indices or foreign
currencies if, after any such purchase, the aggregate premiums paid for such
options would exceed 10% of the Fund's total net assets; provided, however,
that the Fund may purchase put options on stocks held by the Fund if after
such purchase the aggregate premiums paid for such options do not exceed 20%
of the Fund's total assets. In addition, the Fund does not intend during the
coming year to invest in options on equity securities or stock indices if more
than 5% of its net assets would be necessary to cover such options.
Except as described below, the Fund will write call options on indices only
if on such date it holds a portfolio of stocks at least equal to the value of
the index times the multiplier times the number of contracts. When the Fund
writes a call option on a broadly-based stock market index, the Fund will
segregate or put into escrow with its Custodian, or pledge to a broker as
collateral for the option, cash, U.S. Government securities, liquid high grade
debt securities or at least one "qualified security" with a market value at
the time the option is written of not less than 100% of the current index
value times the multiplier times the number of contracts.
If the Fund has written an option on an industry or market segment index, it
will so 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
stocks of issuers in such industry or market segment, with a market value at
the time the option is written of not less than 100% of the current index
value times the multiplier times the number of contracts. Such stocks 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 Fund's holdings
in that industry or market segment. No individual security will represent more
than 15% of the amount so segregated, pledged or escrowed in the case of
broadly-based stock market index options or 25% of such amount in the case of
industry or market segment index options. If at the close of business on any
day the market value of such qualified securities so segregated, escrowed or
pledged falls below 100% of the current index value times the multiplier times
the number of contracts, the Fund will so segregate, escrow or pledge an
amount in cash, Treasury bills or other high grade short-term obligations
equal in value to the difference. In addition, when the Fund writes a call on
an index which is in-the-money at the time the call is written, the Fund will
segregate with its Custodian or pledge to the broker as collateral cash, U.S.
Government securities 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 Fund's obligation to segregate additional
amounts in the event that the market value of the qualified securities falls
below 100% of the current index value times the multiplier times the number of
contracts. A "qualified security" is an equity security which is listed on a
national securities exchange or listed on the National Association of
Securities Dealers Automated Quotation System against which the Fund has not
written a stock call option and which has not been hedged by the Fund by the
sale of stock index futures. However, if the Fund holds a call on the same
index as the call written where the exercise price of the call held is equal
to or less than the exercise price of the call written or greater than the
exercise price of the call written if the difference is maintained by the Fund
in cash, 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.
POSITION LIMITS. Transactions by the Fund in futures contracts and options
will be subject to limitations, if any, established by each of the exchanges,
boards of trade or other trading facilities (including NASDAQ) governing the
maximum number of options in each class which may be written or purchased by a
single investor or group of investors acting in concert, regardless of whether
the options are written on the same or different exchanges, boards of trade or
other trading facilities or are held or written in one or more accounts or
through one or more brokers. Thus, the number of futures contracts and options
which the Fund may write or
B-8
<PAGE>
purchase may be affected by the futures contracts and options written or
purchased by other investment advisory clients of the investment adviser. An
exchange, board of trade or other trading facility may order the liquidation
of positions found to be in excess of these limits, and it may impose certain
other sanctions.
DEFENSIVE STRATEGY AND SHORT-TERM INVESTMENTS
When conditions dictate a temporary defensive strategy or during periods of
portfolio structuring or restructuring, the Fund may invest more than 35% of
its total assets in money market instruments, including commercial paper of
domestic corporations, certificates of deposit, bankers' acceptances and other
obligations of domestic and foreign banks, and obligations issued or
guaranteed by the U.S. Government, its agencies or its instrumentalities. Such
investments may be subject to certain risks, including future political and
economic developments, the possible imposition of withholding taxes on
interest income, the seizure or nationalization of foreign deposits and
foreign exchange controls or other restrictions.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
From time to time, in the ordinary course of business, the Fund may purchase
securities on a when-issued or delayed delivery basis; that is, delivery and
payment can take place a month or more after the date of the transaction. The
Fund will make commitments for such when-issued or delayed delivery
transactions only with the intention of actually acquiring the securities. The
Fund's Custodian will maintain, in a separate account of the Fund, cash, U.S.
Government securities or other high-grade debt obligations having a value
equal to or greater than such commitments. If the Fund chooses to dispose of
the right to acquire a when-issued or delayed delivery security prior to its
acquisition, it could, as with the disposition of any other portfolio
security, incur a gain or loss due to market fluctuations. The Fund does not
intend to have more than 5% of its net assets (determined at the time of
entering into the transaction) involved in transactions on a when-issued or
delayed delivery basis during the coming year.
SHORT SALES AGAINST-THE-BOX
The Fund may make short sales of securities or maintain a short position,
provided that at all times when a short position is open the Fund owns an
equal amount of such securities or securities convertible into or
exchangeable, without payment of any further consideration, for an equal
amount of the securities of the same issuer as the securities sold short (a
short sale against-the-box), and that not more than 25% of the Fund's net
assets (determined at the time of the short sale) may be subject to such
sales. Short sales will be made primarily to defer realization of gain or loss
for federal tax purposes. The Fund does not intend to have more than 5% of its
net assets (determined at the time of the short sale) subject to short sales
against-the-box during the coming year.
REPURCHASE AGREEMENTS
The Fund's repurchase agreements will be collateralized by U.S. Government
obligations. The Fund will enter into repurchase transactions only with
parties meeting creditworthiness standards approved by the Fund's Board of
Directors. The Fund's investment adviser will monitor the creditworthiness of
such parties, under the general supervision of the Board of Directors. In the
event of a default or bankruptcy by a seller, the Fund will promptly seek to
liquidate the collateral. To the extent that the proceeds from any sale of
such collateral upon a default in the obligation to repurchase are less than
the repurchase price, the Fund will suffer a loss.
The Fund participates in a joint repurchase account with other investment
companies managed by Prudential Mutual Fund Management, Inc. (PMF) pursuant to
an order of the Securities and Exchange Commission (SEC). On a daily basis,
any uninvested cash balances of the Fund may be aggregated with those of such
investment companies and invested in one or more repurchase agreements. Each
fund participates in the income earned or accrued in the joint account based
on the percentage of its investment.
LENDING OF PORTFOLIO SECURITIES
The Fund may lend its portfolio securities to brokers, dealers and financial
institutions, provided that outstanding loans do not exceed in the aggregate
10% of the value of the Fund's total assets and provided that such loans are
callable at any time by the Fund and are at all times secured by cash or
equivalent collateral that is equal to at least the market value, determined
daily, of the loaned securities. The advantage of such loans is that the Fund
continues to receive payments in lieu of the interest and dividends of the
loaned securities, while at the same time earning interest either directly
from the borrower or on the collateral which will be invested in short-term
obligations.
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<PAGE>
A loan may be terminated by the borrower on one business day's notice or by
the Fund at any time. If the borrower fails to maintain the requisite amount
of collateral, the loan automatically terminates and the Fund can use the
collateral to replace the securities while holding the borrower liable for any
excess of replacement cost over collateral. As with any extensions of credit,
there are risks of delay in recovery and in some cases loss of rights in the
collateral should the borrower of the securities fail financially. However,
these loans of portfolio securities will only be made to firms determined to
be creditworthy pursuant to procedures approved by the Board of Directors of
the Fund. On termination of the loan, the borrower is required to return the
securities to the Fund, and any gain or loss in the market price during the
loan would inure to the Fund.
Since voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loan, in whole or in
part as may be appropriate, to permit the exercise of such rights if the
matters involved would have a material effect on the Fund's investment in the
securities which are the subject of the loan. The Fund will pay reasonable
finders', administrative and custodial fees in connection with a loan of its
securities or may share the interest earned on collateral with the borrower.
WARRANTS
The Fund will not invest more than 5% of its net assets in warrants, nor
will it invest more than 2% of its net assets in warrants which are not listed
on the New York or American Stock Exchange. In the application of such
limitation, warrants will be valued at the lower of cost or market value,
except that warrants acquired by the Fund in units or attached to other
securities will be deemed to be without value.
SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest up to 5% of its total assets in securities of other
registered investment companies. Generally, the Fund does not intend to invest
in such securities. If the Fund does invest in securities of other registered
investment companies, shareholders of the Fund may be subject to duplicate
management and advisory fees.
ILLIQUID SECURITIES
The Fund may not hold more than 10% of its net assets in repurchase
agreements which have a maturity of longer than seven days or in other
illiquid securities, including securities that are illiquid by virtue of the
absence of a readily available market (either within or outside of the United
States) or legal or contractual restrictions on resale. Historically, illiquid
securities have included securities subject to contractual or legal
restrictions on resale because they have not been registered under the
Securities Act of 1933, as amended (Securities Act), securities which are
otherwise not readily marketable and repurchase agreements having a maturity
of longer than seven days. Securities which have not been registered under the
Securities Act are referred to as private placements or restricted securities
and are purchased directly from the issuer or in the secondary market. Mutual
funds do not typically hold a significant amount of these restricted or other
illiquid securities because of the potential for delays on resale and
uncertainty in valuation. Limitations on resale may have an adverse effect on
the marketability of portfolio securities and a mutual fund might be unable to
dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemptions within
seven days. A mutual fund might also have to register such restricted
securities in order to dispose of them resulting in additional expense and
delay. Adverse market conditions could impede such a public offering of
securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes.
Institutional investors depend on an efficient institutional market in which
the unregistered security can be readily resold or on an issuer's ability to
honor a demand for repayment. The fact that there are contractual or legal
restrictions on resale to the general public or to certain institutions may
not be indicative of the liquidity of such investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to
the general public. Rule 144A establishes a "safe harbor" from the
registration requirements of the Securities Act for resales of certain
securities to qualified institutional buyers. The investment adviser
anticipates that the market for certain restricted securities such as
institutional commercial paper and foreign securities will expand further as a
result of this regulation and the development of automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National
Association of Securities Dealers, Inc.
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and commercial paper for which there is a readily available
market will not be deemed to be illiquid. The investment adviser will monitor
the liquidity of such restricted securities subject to the supervision of the
Board of Directors. In reaching liquidity decisions, the investment adviser
will consider,
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inter alia, the following factors: (1) the frequency of trades and quotes for
the security; (2) the number of dealers wishing to purchase or sell the
security and the number of other potential purchasers; (3) dealer undertakings
to make a market in the security; and (4) the nature of the security and the
nature of the marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers and the mechanics of the transfer).
In addition, in order for commercial paper that is issued in reliance on
Section 4(2) of the Securities Act to be considered liquid, (i) it must be
rated in one of the two highest rating categories by at least two nationally
recognized statistical rating organizations (NRSRO), or if only one NRSRO
rates the securities, by that NRSRO, or, if unrated, be of comparable quality
in the view of the investment adviser, and (ii) it must not be "traded flat"
(i.e., without accrued interest) or in default as to principal or interest.
Repurchase agreements subject to demand are deemed to have a maturity equal to
the notice period.
PORTFOLIO TURNOVER
As a result of the investment policies described above, the Fund may engage
in a substantial number of portfolio transactions, but the Fund's portfolio
turnover rate is not expected to exceed 200%. The portfolio turnover rate is
generally the percentage computed by dividing the lesser of portfolio
purchases or sales (excluding all securities, including options, whose
maturities or expiration dates at acquisition were one year or less) by the
monthly average value of the portfolio. High portfolio turnover involves
correspondingly greater brokerage commissions and other transaction costs,
which are borne directly by the Fund. In addition, high portfolio turnover may
also mean that a proportionately greater amount of distributions to
shareholders will be taxed as ordinary income rather than long-term capital
gains compared to investment companies with lower portfolio turnover. See
"Portfolio Transactions and Brokerage" and "Taxes."
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities. A "majority of the
Fund's outstanding voting securities," when used in this Statement of
Additional Information, means the lesser of (i) 67% of the voting shares
represented at a meeting at which more than 50% of the outstanding voting
shares are present in person or represented by proxy or (ii) more than 50% of
the outstanding voting shares.
The Fund may not:
1. Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of transactions); provided that
the deposit or payment by the Fund of initial or maintenance margin in
connection with futures or options is not considered the purchase of a
security on margin.
2. Make short sales of securities or maintain a short position, except short
sales against-the-box.
3. Issue senior securities, borrow money or pledge its assets, except that
the Fund may borrow up to 20% of the value of its total assets (calculated
when the loan is made) for temporary, extraordinary or emergency purposes or
for the clearance of transactions. The Fund may pledge up to 20% of the value
of its total assets to secure such borrowings. For purposes of this
restriction, the purchase or sale of securities on a when-issued or delayed
delivery basis, forward foreign currency exchange contracts and collateral and
collateral arrangements relating thereto, and collateral arrangements with
respect to futures contracts and options thereon and with respect to the
writing of options and obligations of the Fund to Directors pursuant to
deferred compensation arrangements are not deemed to be a pledge of assets or
the issuance of a senior security.
4. Purchase any security (other than obligations of the U.S. Government, its
agencies or instrumentalities) if as a result: (i) with respect to 75% of the
Fund's total assets, more than 5% of the Fund's total assets (determined at
the time of investment) would then be invested in securities of a single
issuer, or (ii) 25% or more of the Fund's total assets (determined at the time
of investment) would be invested in a single industry.
5. Purchase any security if as a result the Fund would then hold more than
10% of the outstanding voting securities of an issuer.
6. Buy or sell real estate or interests in real estate, except that the Fund
may purchase and sell securities which are secured by real estate, securities
of companies which invest or deal in real estate and publicly traded
securities of real estate investment trusts. The Fund may not purchase
interests in real estate limited partnerships which are not readily
marketable.
7. Buy or sell commodities or commodity contracts. (For purposes of this
restriction, futures contracts on currencies and on stock indices and forward
foreign currency exchange contracts are not deemed to be commodities or
commodity contracts.)
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8. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter
under certain federal securities laws.
9. Make investments for the purpose of exercising control or management.
10. Invest in securities of other registered investment companies, except by
purchases in the open market involving only customary brokerage commissions
and as a result of which not more than 5% of its total assets (determined at
the time of investment) would be invested in such securities, or except as
part of a merger, consolidation or other acquisition.
11. Invest in interests in oil, gas or other mineral exploration or
development programs, except that the Fund may invest in the securities of
companies which invest in or sponsor such programs.
12. Make loans, except through (i) repurchase agreements and (ii) loans of
portfolio securities (limited to 10% of the Fund's total assets).
13. Purchase any security if as a result the Fund would then have more than
5% of its total assets (determined at the time of the investment) invested in
securities of companies (including predecessors) less than three years old,
except that the Fund may invest in the securities of any U.S. Government
agency or instrumentality, and in any security guaranteed by such agency or
instrumentality and except that the Fund may invest in securities rated in the
top three grades by a nationally recognized rating agency.
In order to comply with certain state "Blue Sky" restrictions, the Fund will
not as a matter of operating policy:
(1) make investments which are not readily marketable if at the time of
investment more than 15% of its total assets would be committed to such
investments, including illiquid securities and foreign securities which are
not listed on an exchange;
(2) invest in oil, gas and mineral leases;
(3) engage in short sales against-the-box, lending of portfolio securities
and investing in illiquid securities, as described in this Statement of
Additional Information, until disclosure of these investment techniques and
strategies is described in the Prospectus;
(4) purchase the securities of any issuer if, to the knowledge of the Fund,
any officer or Director of the Fund or the Fund's Manager or Subadviser owns
more than 1/2 of 1% of the outstanding securities of such issuer, and such
officers and Directors who own more than 1/2 of 1% own in the aggregate more
than 5% of the outstanding securities of such issuer;
(5) invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, or securities
of issuers which are restricted as to disposition, if more than 15% of its
total assets would be invested in such securities. This restriction shall not
apply to mortgage-backed securities, asset-backed securities or obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; and
(6) invest more than 5% of its total assets in securities of unseasoned
issuers, including their predecessors, which have been in operation for less
than three years, and in equity securities of issuers which are not readily
marketable.
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of the Fund's assets, it is intended that if the
percentage limitation is met at the time the investment is made, a later
change in percentage resulting from changing total or net asset values will
not be considered a violation of such policy. However, in the event that the
Fund's asset coverage for borrowings falls below 300%, the Fund will take
prompt action to reduce its borrowings, as required by applicable law.
NATURAL RESOURCE COMPANIES
The Fund will generally invest a substantial majority of its total assets in
securities of natural resource companies. With respect to Investment
Restriction No. 4, the following categories will be considered separate and
distinct industries: integrated oil/domestic, integrated oil/international,
crude oil production, natural gas production, gas pipeline, oil service,
Canadian oil and gas, Australian oil and gas, coal, forest products, paper,
foods (including corn and wheat), aluminum, copper, all other basic metals
(e.g., nickel, steel, lead), gold, silver, platinum, mining finance,
plantations (e.g., edible oils), mineral sands, and diversified resources. A
company will be deemed to be in a particular industry if the majority of its
revenues is derived from one of the categories described in the preceding
sentence.
The Board of Directors will review these industry classifications from time
to time to determine whether they are reasonable under the circumstances and
may change such classifications, without shareholder approval, to the extent
necessary.
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DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE WITH FUND DURING PAST FIVE YEARS
- --------------------- --------- ----------------------
<S> <C> <C>
Edward D. Beach (71) Director President and Director of BMC Fund, Inc., a closed-end
c/o Prudential Mutual investment company; formerly Vice Chairman of
Fund Management, Inc. Broyhill Furniture Industries, Inc.; Certified Public
One Seaport Plaza Accountant; Secretary and Treasurer of Broyhill Fam-
New York, NY ily Foundation, Inc.; Member of the Board of Trustees
of Mars Hill College; President, Treasurer and Direc-
tor of First Financial Fund, Inc. and The High Yield
Plus Fund, Inc.; President and Director of Global
Utility Fund, Inc.
Donald D. Lennox (77) Director Chairman (since February 1990) and Director (since
c/o Prudential Mutual April 1989) of International Imaging Materials, Inc.;
Fund Management, Inc. Retired Chairman, Chief Executive Officer and Direc-
One Seaport Plaza tor of Schlegel Corporation (March 1987-February
New York, NY 1989); Director of Gleason Corporation, Personal
Sound Technologies, Inc. and The High Yield Income
Fund, Inc.
Douglas H. McCorkindale (57) Director Vice Chairman, Gannett Co. Inc. (publishing and media)
c/o Prudential Mutual (since March 1984); Director of Continental Airlines,
Fund Management, Inc. Inc., Gannett Co. Inc. and Frontier Corporation
One Seaport Plaza
New York, NY
Thomas T. Mooney (54) Director President of the Greater Rochester Metro Chamber of
c/o Prudential Mutual Commerce; formerly Rochester City Manager; Trustee of
Fund Management, Inc. Center for Governmental Research, Inc.; Director of
One Seaport Plaza Blue Cross of Rochester, The Business Council of New
New York, NY York State, Monroe County Water Authority, Rochester
Jobs, Inc., Executive Service Corps of Rochester,
Monroe County Industrial Development Corporation,
Northeast-Midwest Institute, First Financial Fund,
Inc. and The High Yield Plus Fund, Inc.
*Richard A. Redeker (52) President and President, Chief Executive Officer and Director (since
One Seaport Plaza Director October 1993), PMF; Executive Vice President, Direc-
New York, NY tor and Member of Operating
Committee (since October 1993), Prudential Securities
Incorporated (Prudential Securities); Director (since
October 1993) of Prudential Securities Group, Inc.
(PSG); Executive Vice President (since January 1994),
The Prudential Investment Corporation; Director
(since January 1994), Prudential Mutual Fund Distrib-
utors, Inc. (PMFD) and Prudential Mutual Fund Servic-
es, Inc. (PMFS); formerly Senior Executive Vice Pres-
ident and Director of Kemper Financial Services, Inc.
(September 1978-September 1993); President and Direc-
tor of The High Yield Income Fund, Inc.
Louis A. Weil, III (55) Director Publisher and Chief Executive Officer (since January
c/o Prudential Mutual 1996) and Director (since September 1991) of Central
Fund Management, Inc. Newspapers, Inc.; Chairman of the Board (since Janu-
One Seaport Plaza ary 1996), Publisher and Chief Executive Officer (Au-
New York, NY gust 1991-December 1995), Phoenix Newspapers, Inc.;
prior thereto, Publisher of Time Magazine (May 1989-
March 1991); formerly, President, Publisher and Chief
Executive Officer of The Detroit News (February 1986-
August 1989); formerly member of the Advisory Board,
Chase Manhattan Bank-Westchester.
</TABLE>
- -----------------
* "Interested" Director, as defined in the Investment Company Act, by reason of
his affiliation with Prudential Securities and PMF.
B-13
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE WITH FUND DURING PAST FIVE YEARS
- --------------------- --------- ----------------------
<S> <C> <C>
Robert F. Gunia (49) Vice President Chief Administrative Officer (since July 1990), Direc-
One Seaport Plaza tor (since January 1989), Executive Vice President,
New York, NY Treasurer and Chief Financial Officer (since June
1987) of PMF; Senior Vice President (since March
1987) of Prudential Securities; Executive Vice Presi-
dent, Treasurer, Comptroller and Director (since
March 1991), PMFD; Director (since June 1987), PMFS;
Vice President and Director (since May 1989) of The
Asia Pacific Fund, Inc.
S. Jane Rose (50) Secretary Senior Vice President (since January 1991) and Senior
One Seaport Plaza Counsel (since June 1987) of PMF; Senior Vice Presi-
New York, NY dent and Senior Counsel (since July 1992) of Pruden-
tial Securities; formerly Vice President and Associ-
ate General Counsel of Prudential Securities.
Susan C. Cote (41) Treasurer and Managing Director, Prudential Investment Advisors, and
751 Broad Street Principal Financial Vice President, The Prudential Investment Corporation
Newark, NJ and Accounting (since February 1995); Senior Vice President (January
Officer 1989-January 1995) of PMF; Senior Vice President
(January 1992-January 1995) and Vice President (Janu-
ary 1986-December 1991) of Prudential Securities.
Stephen M. Ungerman (43) Assistant First Vice President of PMF (since February 1993);
One Seaport Plaza Treasurer prior thereto, Senior Tax Manager of Price Waterhouse
New York, NY LLP (1981-January 1993).
Marguerite E.H. Assistant Vice President and Associate General Counsel (since
Morrison (40) Secretary June 1991) of PMF; Vice President and Associate Gen-
One Seaport Plaza eral Counsel of Prudential Securities.
New York, NY
</TABLE>
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 Board of Directors has 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.
Lennox and Beach are scheduled to retire on December 31, 1997 and 1999,
respectively.
The Board of Directors has nominated a new slate of Directors of the Fund
which will be submitted to shareholders at a special meeting scheduled to be
held in or about October 1996.
The Fund pays each of its Directors who is not an affiliated person of PMF
annual compensation of $7,500, in addition to certain out-of-pocket expenses.
Directors may receive their Directors' fees pursuant to a deferred fee
agreement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of such 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. 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.
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-14
<PAGE>
The following table sets forth the aggregate compensation paid by the Fund
to the Directors who are not affiliated with the Manager for the fiscal year
ended May 31, 1996 and the aggregate compensation paid to such Directors for
service on the Fund's Board and the Boards of any other investment companies
managed by Prudential Mutual Fund Management, Inc. (Fund Complex) for the
calendar year ended December 31, 1995.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT ESTIMATED FROM FUND
AGGREGATE BENEFITS ACCRUED 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............... $7,500 None N/A $183,500(22/43)*
Donald D. Lennox--
Director............... 7,500 None N/A 86,250(10/22)*
Douglas H.
McCorkindale--Director. 7,500 None N/A 63,750(7/10)*
Thomas T. Mooney--
Director............... 7,500 None N/A 125,625(14/19)*
Louis A. Weil, III--
Director............... 7,500 None N/A 93,750(11/16)*
</TABLE>
- ---------
* Indicates number of funds/portfolios in Fund Complex (including the Fund) to
which aggregate compensation relates.
As of July 12, 1996, the Directors and officers of the Fund, as a group,
owned beneficially less than 1% of the outstanding common stock of the Fund.
As of July 12, 1996, Prudential Securities was record holder for other
beneficial owners of 1,372,318 Class A shares (or 67.5% of the outstanding
Class A shares), 5,097,113 Class B shares (or 83.2% of the outstanding Class B
shares) and 83,353 Class C shares (or 82.5% of the outstanding Class C shares)
of the Fund. In the event of any meetings of shareholders, Prudential
Securities will forward, or cause the forwarding of, proxy material to the
beneficial owners for which it is the record holder.
As of July 12, 1996, Prudential Securities, C/F Michele Ferrero IRA Rollover
DTD 3/23/90, c/o Industrial Development Co., 4100 N. Powerline Rd, Ste B-2,
Pompano, FL 33073-3037, was the beneficial owner of 5.9% of the Fund's Class C
shares.
MANAGER
The manager of the Fund is Prudential Mutual Fund Management, Inc. (PMF or
the Manager), One Seaport Plaza, New York, New York 10292. PMF serves as
manager to all of the other investment companies that, together with the Fund,
comprise the Prudential Mutual Funds. See "How the Fund is Managed--Manager"
in the Prospectus. As of June 30, 1996, PMF managed and/or administered open-
end and closed-end management investment companies with assets of
approximately $52 billion. According to the Investment Company Institute, as
of December 31, 1995, the Prudential Mutual Funds were the 13th largest family
of mutual funds in the United States.
PMF is a subsidiary of Prudential Securities 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. 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 Agreement with the Fund (the Management
Agreement), PMF, subject to the supervision of the Fund's Board of Directors
and in conformity with the stated policies of the Fund, manages both the
investment operations of the Fund and the composition of the Fund's portfolio,
including the purchase, retention, disposition and loan of securities. In
connection therewith, PMF is obligated to keep certain books and records of
the Fund. PMF also administers the Fund's corporate affairs and, in connection
therewith, furnishes the Fund with office facilities, together with those
ordinary clerical and bookkeeping services which are not being furnished by
State Street Bank and Trust Company, the Fund's custodian, and PMFS, the
Fund's transfer and dividend disbursing agent. The management services of PMF
for the Fund are not exclusive under the terms of the Management Agreement and
PMF is free to, and does, render management services to others.
B-15
<PAGE>
For its services, PMF receives, pursuant to the Management Agreement, a fee
at an annual rate of .75 of 1% of the Fund's average daily net assets. The fee
is computed daily and payable monthly. The Management Agreement also provides
that, in the event the expenses of the Fund (including the fees of PMF, but
excluding interest, taxes, brokerage commissions, distribution fees and
litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Fund's business) for any fiscal year
exceed the lowest applicable annual expense limitation established and
enforced pursuant to the statutes or regulations of any jurisdiction in which
the Fund's shares are qualified for offer and sale, the compensation due 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. No such
reductions were required during the fiscal year ended May 31, 1996. Currently,
the Fund believes that the most restrictive expense limitation of state
securities commissions is 2 1/2% of the Fund's average daily net assets up to
$30 million, 2% of the next $70 million of such assets and 1 1/2% of such
assets in excess of $100 million. Because the expenses incurred by the Fund
are anticipated to be higher than those of funds that invest only in U.S.
securities, the Fund has received waivers from applicable state expense
limitations to exclude certain foreign transactional expenses from expenses
subject to the limitation.
In connection with its management of the corporate affairs of the Fund, PMF
bears the following expenses:
(a) the salaries and expenses of all of its and the Fund's personnel except
the fees and expenses of Directors who are not affiliated persons of PMF or
the Fund's investment adviser;
(b) all expenses incurred by PMF or by the Fund in connection with managing
the ordinary course of the Fund's business, other than those assumed by the
Fund as described below; and
(c) the costs and expenses payable to The Prudential Investment Corporation
(PIC) pursuant to the subadvisory agreement between PMF and PIC (the
Subadvisory Agreement).
Under the terms of the Management Agreement, the Fund is responsible for the
payment of the following expenses: (a) the fees payable to the Manager, (b)
the fees and expenses of Directors who are not affiliated persons of the
Manager or the Fund's investment adviser, (c) the fees and certain expenses of
the Custodian and Transfer and Dividend Disbursing Agent, including the cost
of providing records to the Manager in connection with its obligation of
maintaining required records of the Fund and of pricing the Fund's shares, (d)
the charges and expenses of legal counsel and independent accountants for the
Fund, (e) brokerage commissions and any issue or transfer taxes chargeable to
the Fund in connection with its securities transactions, (f) all taxes and
corporate fees payable by the Fund to governmental agencies, (g) the fees of
any trade associations of which the Fund may be a member, (h) the cost of
stock certificates representing shares of the Fund, (i) the cost of fidelity
and liability insurance, (j) the fees and expenses involved in registering and
maintaining registration of the Fund and of its shares with the SEC,
registering the Fund and qualifying its shares under state securities laws,
including the preparation and printing of the Fund's registration statements
and prospectuses for such purposes, (k) allocable communications expenses with
respect to investor services and all expenses of shareholders' and Directors'
meetings and of preparing, printing and mailing reports, proxy statements and
prospectuses to shareholders in the amount necessary for distribution to the
shareholders, (l) litigation and indemnification expenses and other
extraordinary expenses not incurred in the ordinary course of the Fund's
business and (m) distribution fees.
The Management Agreement provides that PMF will not be liable for any error
of judgment or for any loss suffered by the Fund in connection with the
matters to which the Management Agreement relates, except a loss resulting
from willful misfeasance, bad faith, gross negligence or reckless disregard of
duty. The Management Agreement provides that it will terminate automatically
if assigned, and that it may be terminated without penalty by either party
upon not more than 60 days' nor less than 30 days' written notice. The
Management Agreement will continue in effect for a period of more than two
years from the date of execution only so long as such continuance is
specifically approved at least annually in conformity with the Investment
Company Act. The Management Agreement was last approved by the Board of
Directors of the Fund, including a majority of the Directors who are not
parties to the contract or interested persons of any such party, as defined in
the Investment Company Act, on May 8, 1996 and by shareholders of the Fund on
February 19, 1988.
For the fiscal years ended May 31, 1996, 1995 and 1994, the Fund paid
management fees to PMF of $811,776, $642,865 and $396,582, respectively.
PMF has entered into the Subadvisory Agreement with PIC (the Subadviser), a
wholly-owned subsidiary of Prudential. The Subadvisory Agreement provides that
PIC will furnish investment advisory services in connection with the
management of the Fund. In connection therewith, PIC is obligated to keep
certain books and records of the Fund. PMF continues to have responsibility
for all investment advisory services pursuant to the Management Agreement and
supervises PIC's performance of such services. PIC
B-16
<PAGE>
is reimbursed by PMF for the reasonable costs and expenses incurred by PIC in
furnishing those services. Investment advisory services are provided to the
Fund by a unit of the Subadviser known as Prudential Mutual Fund Investment
Management.
The Subadvisory Agreement was last approved by the Board of Directors,
including a majority of the Directors who are not parties to the contract or
interested persons of any such party as defined in the Investment Company Act,
on May 8, 1996, and by shareholders of the Fund on February 19, 1988.
The Subadvisory Agreement provides that it will terminate in the event of
its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. The Subadvisory Agreement may be
terminated by the Fund, PMF or PIC upon not more than 60 days', nor less than
30 days', written notice. The Subadvisory Agreement provides that it will
continue in effect for a period of more than two years from its execution only
so long as such continuance is specifically approved at least annually in
accordance with the requirements of the Investment Company Act.
DISTRIBUTOR
Prudential Securities Incorporated (Prudential Securities or PSI), One
Seaport Plaza, New York, New York 10292, acts as the distributor of the shares
of the Fund. Prior to January 2, 1996, Prudential Mutual Fund Distributors,
Inc. (PMFD), One Seaport Plaza, New York, New York 10292, served as the
distributor of the Class A shares of the Fund.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the
Fund under Rule 12b-1 under the Investment Company Act and a distribution
agreement (the Distribution Agreement), Prudential Securities (the
Distributor) incurs the expenses of distributing the Fund's Class A, Class B
and Class C shares. See "How the Fund is Managed--Distributor" in the
Prospectus.
Prior to January 22, 1990, the Fund offered only one class of shares (the
then existing Class B shares). On October 11, 1989, the Board of Directors,
including a majority of the Directors who are not interested persons of the
Fund and who have no direct or indirect financial interest in the operation of
the Class A or Class B Plan or in any agreement related to either Plan (the
Rule 12b-1 Directors), at a meeting called for the purpose of voting on each
Plan, adopted a new plan of distribution for the Class A shares of the Fund
(the Class A Plan) and approved an amended and restated plan of distribution
with respect to the Class B shares of the Fund (the Class B Plan). On May 4,
1993, the Board of Directors, including a majority of the Rule 12b-1
Directors, at a meeting called for the purpose of voting on each Plan,
approved the continuance of the Plans and Distribution Agreements and approved
modifications of the Fund's Class A and Class B Plans and Distribution
Agreements to conform them with recent amendments to the National Association
of Securities Dealers, Inc. (NASD) maximum sales charge rule described below.
As so modified, the Class A Plan provides that (i) up to .25 of 1% of the
average daily net assets of the Class A shares may be used to pay for personal
service and the maintenance of shareholder accounts (service fee) and (ii)
total distribution fees (including the service fee of .25 of 1%) may not
exceed .30 of 1%. As so modified, the Class B Plan provides that (i) up to .25
of 1% of the average daily net assets of the Class B shares may be paid as a
service fee and (ii) up to .75 of 1% (not including the service fee) of the
average daily net assets of the Class B shares (asset-based sales charge) may
be used as reimbursement for distribution-related expenses with respect to the
Class B shares. On May 4, 1993, the Board of Directors, including a majority
of the Rule 12b-1 Directors, at a meeting called for the purpose of voting on
each Plan, adopted a plan of distribution for the Class C shares of the Fund
and approved further amendments to the plans of distribution for the Fund's
Class A and Class B shares changing them from reimbursement type plans to
compensation type plans. The Plans were last approved by the Board of
Directors, including a majority of the Rule 12b-1 Directors, on May 8, 1996.
The Class A Plan, as amended, was approved by Class A and Class B
shareholders, and the Class B Plan, as amended, was approved by Class B
shareholders on July 19, 1994. The Class C Plan was approved by the sole
shareholder of Class C shares on August 1, 1994.
CLASS A PLAN. For the fiscal year ended May 31, 1996, PMFD and PSI received
payments of $57,800 under the Class A Plan. This amount was primarily expended
for payment of account servicing fees to financial advisers and other persons
who sell Class A shares. For the fiscal year ended May 31, 1996, PMFD and PSI
also received approximately $86,400 in initial sales charges.
CLASS B PLAN. For the fiscal year ended May 31, 1996, the Distributor
received $844,000 from the Fund under the Class B Plan and spent approximately
$758,700 in distributing the Fund's Class B shares. It is estimated that of
the latter amount, approximately 2.5% ($19,200) was spent on printing and
mailing of prospectuses to other than current shareholders; 9.6% ($72,900) was
spent on compensation to Pruco Securities Corporation, an affiliated broker-
dealer (Prusec), for commissions to its representatives and other expenses,
including an allocation on account of overhead and other branch office
distribution-related expenses, incurred by it for distribution of Fund shares;
and 87.9% ($666,600) on the aggregate of (i) payments of commissions
B-17
<PAGE>
and account servicing fees to financial advisers (40.3% or $305,400) and (ii)
an allocation on account of overhead and other branch office distribution-
related expenses (47.6% or $361,200). The term "overhead and other branch
office distribution-related expenses" represents (a) the expenses of operating
Prudential Securities' branch offices in connection with the sale of Fund
shares, including lease costs, the salaries and employee benefits of
operations and sales support personnel, utility costs, communications costs
and the costs of stationery and supplies, (b) the costs of client sales
seminars, (c) expenses of mutual fund sales coordinators to promote the sale
of Fund shares and (d) other incidental expenses relating to branch promotion
of Fund sales.
Prudential Securities also receives the proceeds of contingent deferred
sales charges paid by investors upon certain redemptions of Class B shares.
See "Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales
Charges" in the Prospectus. For the fiscal year ended May 31, 1996, the
Distributor received approximately $300,000 in contingent deferred sales
charges attributable to Class B shares.
CLASS C PLAN. For the fiscal year ended May 31, 1996, Prudential Securities
received $7,300 under the Class C Plan and spent approximately $12,900 in
distributing Class C shares. It is estimated that of the latter amount, 7.8%
or $1,000 was spent on printing and mailing to other than current shareholders
and 92.2% or $11,900 was spent on the aggregate of (i) payments or commissions
and account servicing fees to financial advisers (45.7% or $5,900) and (ii) an
allocation of overhead and other branch office distribution-related expenses
for payments of related expenses (46.5% or $6,000). Prudential Securities also
receives the proceeds of contingent deferred sales charges paid by investors
upon certain redemptions of Class C shares. See "Shareholder Guide--How to
Sell Your Shares--Contingent Deferred Sales Charges" in the Prospectus. For
the fiscal year ended May 31, 1996, Prudential Securities received
approximately $2,000 in contingent deferred sales charges attributable to
Class C shares.
The Class A, Class B and Class C Plans continue in effect from year to year,
provided that each such continuance is approved at least annually by a vote of
the Board of Directors, including a majority vote of the Rule 12b-1 Directors,
cast in person at a meeting called for the purpose of voting on such
continuance. The Plans may each be terminated at any time, without penalty, by
the vote of a majority of the Rule 12b-1 Directors or by the vote of the
holders of a majority of the outstanding shares of the applicable class on not
more than 30 days' written notice to any other party to the Plans. The Plans
may not be amended to increase materially the amounts to be spent for the
services described therein without approval by the shareholders of the
applicable class (by both Class A and Class B shareholders, voting separately,
in the case of material amendments to the Class A Plan), and all material
amendments are required to be approved by the Board of Directors in the manner
described above. Each Plan will automatically terminate in the event of its
assignment. The Fund will not be contractually obligated to pay expenses
incurred under any Plan if it is terminated or not continued.
Pursuant to each Plan, the Board of Directors will review at least quarterly
a written report of the distribution expenses incurred on behalf of each class
of shares of the Fund by the Distributor. The report includes an itemization
of the distribution expenses and the purposes of such expenditures. In
addition, as long as the Plans remain in effect, the selection and nomination
of the Rule 12b-1 Directors shall be committed to the Rule 12b-1 Directors.
Pursuant to the Distribution Agreement, the Fund has agreed to indemnify
Prudential Securities to the extent permitted by applicable law against
certain liabilities under the Securities Act of 1933, as amended. The restated
Distribution Agreement was approved by the Board of Directors, including a
majority of the Rule 12b-1 Directors, on May 8, 1996. On November 3, 1995, the
Board of Directors approved the transfer of the Distribution Agreement for
Class A shares with PMFD to Prudential Securities.
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.
B-18
<PAGE>
On January 18, 1994, PSI agreed to the entry of a Final Consent Order and a
Parallel Consent Order by the Texas Securities Commissioner. The firm also
entered into a related agreement with the Texas Securities Commissioner. The
allegations were that the firm had engaged in improper sales practices and
other improper conduct resulting in pecuniary losses and other harm to
investors residing in Texas with respect to purchases and sales of limited
partnership interests during the period of January 1, 1980 through December
31, 1990. Without admitting or denying the allegations, PSI consented to a
reprimand, agreed to cease and desist from future violations, and to provide
voluntary donations to the State of Texas in the aggregate amount of
$1,500,000. The firm agreed to suspend the creation of new customer accounts,
the general solicitation of new accounts, and the offer for sale of securities
in or from PSI's North Dallas office to new customers during a period of
twenty consecutive business days, and agreed that its other Texas offices
would be subject to the same restrictions for a period of five consecutive
business days. PSI also agreed to institute training programs for its
securities salesmen in Texas.
On October 27, 1994, Prudential Securities Group, Inc. (PSG) and PSI entered
into agreements with the United States Attorney deferring prosecution
(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 will also serve as an
independent "ombudsman" whom PSI employees can call anonymously with
complaints about ethics and compliance. Prudential Securities shall report any
allegations or instances of criminal conduct and material improprieties to the
new director. The new director will submit compliance reports which shall
identify all such allegations or instances of criminal conduct and material
improprieties every three months for a three-year period.
NASD MAXIMUM SALES CHARGE RULE. Pursuant to rules of the NASD, the
Distributor is required to limit aggregate initial sales charges, deferred
sales charges and asset-based sales charges to 6.25% of total gross sales of
each class of shares. Interest charges on unreimbursed distribution expenses
equal to the prime rate plus one percent per annum may be added to the 6.25%
limitation. Sales from the reinvestment of dividends and distributions are not
included in the calculation of the 6.25% limitation. The annual asset-based
sales charge on shares of the Fund may not exceed .75 of 1% per class. The
6.25% limitation applies to each class of the Fund rather than on a per
shareholder basis. If aggregate sales charges were to exceed 6.25% of total
gross sales of any class, all sales charges on shares of that class would be
suspended.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for decisions to buy and sell securities and
options on securities and futures for the Fund, the selection of brokers,
dealers and futures commission merchants to effect the transactions and the
negotiation of brokerage commissions, if any. For purposes of this section,
the term "Manager" includes the Subadviser. Broker-dealers may receive
brokerage commissions on Fund portfolio transactions, including options and
the purchase and sale of underlying securities upon the exercise of options.
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. Brokerage commissions on United States
securities, options and futures exchanges or boards of trade are subject to
negotiation between the Manager and the broker or futures commission merchant.
Equity securities traded in the over-the-counter market and bonds, including
convertible bonds, are generally traded on a "net" basis with dealers acting
as principal for their own accounts without a stated commission, although the
price of the security usually includes a profit to the dealer. In underwritten
offerings, securities are purchased at a fixed price which includes an amount
of compensation to the underwriter, generally referred to as the underwriter's
concession or discount. On occasion, certain money market instruments and U.S.
Government agency securities may be purchased directly from the issuer, in
which case no commissions or discounts are paid. The Fund will not deal with
Prudential Securities in any transaction in which Prudential Securities acts
as principal. Thus, it will not deal with Prudential Securities acting, as
market maker, and it will not execute a negotiated trade with Prudential
Securities if execution involves Prudential Securities acting as principal
with respect to any part of the Fund's order.
In placing orders for portfolio securities of the Fund, the Manager is
required to give primary consideration to obtaining the most favorable price
and efficient execution. Within the framework of this policy, the Manager will
consider the research and investment services provided by brokers, dealers or
futures commission merchants who effect or are parties to portfolio
transactions of the Fund, the Manager or the Manager's other clients. Such
research and investment services are those which brokerage houses customarily
provide to institutional investors and include statistical and economic data
and research reports on particular companies
B-19
<PAGE>
and industries. Such services are used by the Manager in connection with all
of its investment activities, and some of such services obtained in connection
with the execution of transactions for the Fund may be used in managing other
investment accounts. Conversely, brokers, dealers or futures commission
merchants furnishing such services may be selected for the execution of
transactions of such other accounts, whose aggregate assets may be far larger
than the Fund's, and the services furnished by such brokers, dealers or
futures commission merchants may be used by the Manager in providing
investment management for the Fund. 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 policy of the Manager is to pay higher commissions to brokers,
other than Prudential Securities, for particular transactions than might be
charged if a different broker had been selected, on occasions when, in the
Manager's opinion, this policy furthers the objective of obtaining best price
and execution. In addition, the Manager is authorized to pay higher
commissions on brokerage transactions for the Fund to brokers other than
Prudential Securities in order to secure research and investment services
described above, subject to review by the Fund's Board of Directors from time
to time as to the extent and continuation of this practice. The allocation of
orders among brokers and the commission rates paid are reviewed periodically
by the Fund's Board of Directors.
Portfolio securities may not be purchased from any underwriting or selling
syndicate of which Prudential Securities (or any affiliate), during the
existence of the syndicate, is a principal underwriter (as defined in the
Investment Company Act), except in accordance with rules of the SEC. This
limitation, in the opinion of the Fund, will not significantly affect the
Fund's ability to pursue its present investment objective. However, in the
future in other circumstances, the Fund may be at a disadvantage because of
this limitation in comparison to other funds with similar objectives but not
subject to such limitations.
Subject to the above considerations, Prudential Securities may act as a
securities broker or futures commission merchant for the Fund. In order for
Prudential Securities (or any affiliate) to effect any portfolio transactions
for the Fund, the commissions, fees or other remuneration received by
Prudential Securities (or any affiliate) must be reasonable 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 contracts being purchased or sold on
an 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 or futures commission merchant in a commensurate arm's-
length transaction. Furthermore, the Board of Directors of the Fund, including
a majority of the non-interested Directors, has adopted procedures which are
reasonably designed to provide that any commissions, fees or other
remuneration paid to Prudential Securities (or any affiliate) are consistent
with the foregoing standard. In accordance with Section 11(a) of the
Securities Exchange Act of 1934, Prudential Securities may not retain
compensation for effecting transactions on a national securities exchange for
the Fund unless the Fund has expressly authorized the retention of such
compensation. Prudential Securities must furnish to the Fund at least annually
a statement setting forth the total amount of all compensation retained by
Prudential Securities from transactions effected for the Fund during the
applicable period. Brokerage and futures transactions with Prudential
Securities (or any affiliate) are also subject to such fiduciary standards as
may be imposed upon Prudential Securities (or such affiliate) by applicable
law.
Transactions in options by the Fund will be subject to limitations
established by each of the exchanges governing the maximum number of options
which may be written or held by a single investor or group of investors acting
in concert, regardless of whether the options are written or held on the same
or different exchanges or are written or held in one or more accounts or
through one or more brokers. Thus, the number of options which the Fund may
write or hold may be affected by options written or held by the Manager and
other investment advisory clients of the Manager. An exchange may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
The table below sets forth information concerning the payment of commissions
by the Fund, including the amount of such commissions paid to Prudential
Securities for the three years ended May 31, 1996:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
YEAR ENDED YEAR ENDED YEAR ENDED
MAY 31, 1996 MAY 31, 1995 MAY 31, 1994
------------ ------------ ------------
<S> <C> <C> <C>
Total brokerage commissions paid by the
Fund.................................. $302,200 $216,458 $156,492
Total brokerage commissions paid to
Prudential Securities and its foreign
affiliates............................ $ 2,200 $ 1,285 $ 6,800
Percentage of total brokerage commis-
sions paid to Prudential Securities
and its foreign affiliates............ 0.73% 0.59% 4.3%
</TABLE>
The Fund effected approximately 1.21% of the total dollar amount of its
transactions involving the payment of commissions through Prudential
Securities during the year ended May 31, 1996. Of the total brokerage
commissions paid during that period,
B-20
<PAGE>
$260,399 (or 86.4%) were paid to firms which provide research, statistical or
other services to PIC. PMF has not separately identified a portion of such
brokerage commissions as applicable to the provision of such research,
statistical or other services.
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share plus a sales charge which, at the election of the
investor, may be imposed either (i) at the time of purchase (Class A shares)
or (ii) on a deferred basis (Class B or Class C shares). See "Shareholder
Guide--How to Buy Shares of the Fund" in the Prospectus.
Each class of shares represents an interest in the same assets of the Fund
and is identical in all respects, except that (i) each class is subject to
different sales charges and distribution and/or service fees, which may affect
performance, (ii) each class has exclusive voting rights with respect to any
matter submitted to shareholders that relates solely to its arrangement and
has separate voting rights on any matter submitted to shareholders in which
the interests of one class differ from the interest of any other class, (iii)
each class has a different exchange privilege and (iv) only Class B shares
have a conversion feature. See "Distributor" and "Shareholder Investment
Account--Exchange Privilege."
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares of the Fund are sold at a maximum sales charge of
5% and Class B* and Class C* shares are sold at net asset value. Using the
Fund's net asset value at May 31, 1996, the maximum offering price of the
Fund's shares is as follows:
<TABLE>
<CAPTION>
CLASS A
<S> <C>
Net asset value and redemption price per Class A share............ $17.34
Maximum sales charge (5% of offering price)....................... .91
------
Maximum offering price to public.................................. $18.25
======
<CAPTION>
CLASS B
<S> <C>
Net asset value, offering price and redemption price per Class B
share*........................................................... $16.70
======
<CAPTION>
CLASS C
<S> <C>
Net asset value, offering price and redemption price per Class C
share*........................................................... $16.70
======
</TABLE>
---------
* Class B and Class C shares are subject to a contingent deferred
sales charge on certain redemptions. See "Shareholder Guide--How to
Sell Your Shares--Contingent Deferred Sales Charges" in the
Prospectus.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES--CLASS A SHARES
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other Prudential Mutual Funds, the
purchases may be combined to take advantage of the reduced sales charges
applicable to larger purchases. See the table of breakpoints under
"Shareholder Guide--Alternative Purchase Plan" in the Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's and spouse's Individual Retirement Account (IRA);
(d) any company controlled by the individual (a person, entity or group that
holds 25% or more of the outstanding voting securities of a 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 benefits plans of a company controlled by an
individual.
B-21
<PAGE>
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more retirement or group
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that
employer).
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charges will be
granted subject to confirmation of the investor's holdings. The Combined
Purchase and Cumulative Purchase Privilege does not apply to individual
participants in any retirement or group plans.
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of
related investors, as described above under "Combined Purchase and Cumulative
Purchase Privilege," may aggregate the value of their existing holdings of
shares of the Fund and shares of other Prudential Mutual Funds (excluding
money market funds other than those acquired pursuant to the exchange
privilege) to determine the reduced sales charge. However, the value of shares
held directly with the Transfer Agent and through Prudential Securities will
not be aggregated to determine the reduced sales charge. All shares must be
held either directly with the Transfer Agent or through Prudential Securities.
The value of existing holdings for purposes of determining the reduced sales
charge is calculated using the maximum offering price (net asset value plus
maximum sales charge) as of the previous business day. See "How the Fund
Values its Shares" in the Prospectus.
The Distributor must be notified at the time of purchase that the
shareholder is entitled to a reduced sales charge. The reduced sales charges
will be granted subject to confirmation of the investors' holdings. Rights of
Accumulation are not available to individual participants in any retirement or
group plans.
LETTER OF INTENT. Reduced sales charges are also available to investors (or
an eligible group of related investors), including retirement and group plans,
who enter into a written Letter of Intent providing for the purchase, within a
thirteen-month period, of shares of the Fund and shares of other Prudential
Mutual Funds (Investment Letter of Intent). Retirement and group plans may
also qualify to purchase Class A shares at net asset value by entering into a
Letter of Intent whereby they agree to enroll, within a thirteen-month period,
a specified number of eligible employees or participants (Participant Letter
of Intent).
For purposes of the Investment Letter of Intent, all shares of the Fund and
shares of other Prudential Mutual Funds (excluding money market funds other
than those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent
and through Prudential Securities will not be aggregated to determine the
reduced sales charge. All shares must be held either directly with the
Transfer Agent or through Prudential Securities.
A Letter of Intent permits a purchaser, in the case of an Investment Letter
of Intent, to establish a total investment goal to be achieved by any number
of investments over a thirteen-month period and, in the case of a Participant
Letter of Intent, to establish minimum eligible employee or participant goal
over a thirteen-month period. Each investment made during the period, in the
case of an Investment Letter of Intent, will receive the reduced sales charge
applicable to the amount represented by the goal, as if it were a single
investment. In the case of a Participant Letter of Intent, each investment
made during the period will be made at net asset value. Escrowed Class A
shares totaling 5% of the dollar amount of the Letter of Intent will be held
by the Transfer Agent in the name of the purchaser, except in the case of
retirement and group plans where the employer or plan sponsor will be
responsible for paying any applicable sales charge. The effective date of an
Investment Letter of Intent (except in the case of retirement and group plans)
may be back-dated up to 90 days, in order that any investments made during
this 90-day period, valued at the purchaser's cost, can be applied to the
fulfillment of the Letter of Intent goal.
The Investment Letter of Intent does not obligate the investor to purchase,
nor the Fund to sell, the indicated amount. Similarly, the Participant Letter
of Intent does not obligate the retirement or group plan to enroll the
indicated number of eligible employees or participants. In the event the
Letter of Intent goal is not achieved within the thirteen-month period, the
purchaser (or the employer or plan sponsor in the case of any retirement or
group plan) is required to pay the difference between the sales charge
otherwise applicable to the purchases made during this period and sales
charges actually paid. Such payment may be made directly to the Distributor
or, if not paid, the Distributor will liquidate sufficient escrowed shares to
obtain such difference. Investors electing to purchase Class A shares of the
Fund pursuant to a Letter of Intent should carefully read such Letter of
Intent.
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will, in the
case of an Investment Letter of Intent, be granted subject to confirmation of
the investor's holdings or in
B-22
<PAGE>
the case of a Participant Letter of Intent, subject to confirmation of the
number of eligible employees or participants in the retirement or group plan.
Letters of Intent are not available to individual participants in any
retirement or group plans.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
The contingent deferred sales charge is waived under circumstances described
in the Prospectus. See "Shareholder Guide-- How to Sell Your Shares--Waiver of
the Contingent Deferred Sales Charges--Class B Shares" in the Prospectus. In
connection with these waivers, the Transfer Agent will require you to submit
the supporting documentation set forth below.
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
Death A copy of the shareholder's death
certificate or, in the case of a trust,
a copy of the grantor's death
certificate, plus a copy of the trust
agreement identifying the grantor.
Disability - An individual A copy of the Social Security
will be considered disabled if Administration award letter or a letter
he or she is unable to engage from a physician on the physician's
in any substantial letterhead stating that the shareholder
gainful activity by reason of (or, in the case of a trust, the
any medically determinable grantor) is permanently disabled. The
physical or mental impairment letter must also indicate the date of
which can be expected to disability.
result in death or to be of
long-continued and indefinite
duration.
Distribution from an IRA or A copy of the distribution form from
403(b) Custodial Account the custodial firm indicating (i) the
date of birth of the shareholder and
(ii) that the shareholder is over 59
1/2 and is taking a normal
distribution--signed by the
shareholder.
Distribution from Retirement A letter signed by the plan
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 the Fund purchased
prior to August 1, 1994 if immediately after a purchase of such shares, the
aggregate cost of all Class B shares of the Fund owned by you in a single
account exceeded $500,000. For example, if you purchased $100,000 of Class B
shares of the Fund and the following year purchased an additional $450,000 of
Class B shares with the result that the aggregate cost of your Class B shares
of the Fund following the second purchase was $550,000, the quantity discount
would be available for the second purchase of $450,000 but not for the first
purchase of $100,000. The quantity discount will be imposed at the following
rates depending on whether the aggregate value exceeded $500,000 or $1
million:
<TABLE>
<CAPTION>
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
- ------------------- ---------------------- ---------------
<S> <C> <C>
First.................................... 3.0% 2.0%
Second................................... 2.0% 1.0%
Third.................................... 1.0% 0%
Fourth and thereafter.................... 0% 0%
</TABLE>
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to the reduced CDSC. The reduced CDSC will be granted subject to
confirmation of your holdings.
B-23
<PAGE>
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which the shares are held for the
investor by the Transfer Agent. If a stock certificate is desired, it must be
requested in writing for each transaction. Certificates are issued only for
full shares and may be redeposited in the Account at any time. There is no
charge to the investor for issuance of a certificate. The Fund makes available
to its shareholders the following privileges and plans.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund. An
investor may direct the Transfer Agent in writing not less than 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 contingent deferred sales charge
paid in connection with the amount of proceeds being reinvested.
EXCHANGE PRIVILEGE
The Fund makes available to its shareholders the privilege of exchanging
their shares of the Fund for shares of certain other Prudential Mutual Funds,
including one or more specified money market funds, subject in each case to
the minimum investment requirements of such funds. Shares of such other
Prudential Mutual Funds may also be exchanged for shares of the Fund. All
exchanges are made on the basis of relative net asset value next determined
after receipt of an order in proper form. An exchange will be treated as a
redemption and purchase for tax purposes. Shares may be exchanged for shares
of another fund only if shares of such fund may legally be sold under
applicable state laws. For retirement and group plans having a limited menu of
Prudential Mutual Funds, the Exchange Privilege is available for those funds
eligible for investment in the particular program.
It is contemplated that the Exchange Privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
CLASS A. Shareholders of the Fund may exchange their Class A shares for
Class A shares of certain other Prudential Mutual Funds, shares of Prudential
Government Securities Trust (Short-Intermediate Term Series) and shares of the
money market funds specified below. No fee or sales load will be imposed upon
the exchange. Shareholders of money market funds who acquired such shares upon
exchange of Class A shares may use the Exchange Privilege only to acquire
Class A shares of the Prudential Mutual Funds participating in the Exchange
Privilege.
The following money market funds participate in the Class A Exchange
Privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets, Inc.
Prudential Tax-Free Money Fund, Inc.
CLASS B AND CLASS C. Shareholders of the Fund may exchange their Class B and
Class C shares for Class B and Class C shares, respectively, of certain other
Prudential Mutual Funds and shares of Prudential Special Money Market Fund,
Inc., a money market fund. No CDSC will be payable upon such exchange, but a
CDSC may be payable upon the redemption of the Class B and Class C shares
acquired as a result of an exchange. The applicable sales charge will be that
imposed by the fund in which shares were initially purchased and the purchase
date will be deemed to be the first day of the month after the initial
purchase, rather than the date of the exchange.
B-24
<PAGE>
Class B and Class C shares of the Fund may also be exchanged for shares of
Prudential Special Money Market Fund, Inc. without imposition of any CDSC at
the time of exchange. Upon subsequent redemption from such money market fund
or after re-exchange into the Fund, such shares will be subject to the CDSC
calculated without regard to the time such shares were held in the money
market fund. In order to minimize the period of time in which shares are
subject to a CDSC, shares exchanged out of the money market fund will be
exchanged on the basis of their remaining holding periods, with the longest
remaining holding periods being transferred first. In measuring the time
period shares are held in a money market fund and "tolled" for purposes of
calculating the CDSC holding period, exchanges are deemed to have been made on
the last day of the month. Thus, if shares are exchanged into the Fund from a
money market fund during the month (and are held in the Fund at the end of
month), the entire month will be included in the CDSC holding period.
Conversely, if shares are exchanged into a money market fund prior to the last
day of the month (and are held in the money market fund on the last day of the
month), the entire month will be excluded from the CDSC holding period. For
purposes of calculating the seven year holding period applicable to the Class
B conversion feature, the time period during which Class B shares were held in
a money market fund will be excluded.
At any time after acquiring shares of other funds participating in the Class
B or Class C Exchange Privilege, a shareholder may again exchange those shares
(and any reinvested dividends and distributions) for Class B or Class C shares
of the Fund, respectively, without subjecting such shares to any CDSC. Shares
of any fund participating in the Class B or Class C exchange privilege that
were acquired through reinvestment of dividends or distributions may be
exchanged for Class B or Class C shares, respectively, of other funds without
being subject to any CDSC.
Additional details about the Exchange Privilege and prospectuses for each of
the Prudential Mutual Funds are available from the Fund's Transfer Agent,
Prudential Securities or Prusec. The Exchange Privilege may be modified,
terminated or suspended on sixty days' notice, and any fund, including the
Fund, or the Distributor, has the right to reject any exchange application
relating to such fund's shares.
DOLLAR COST AVERAGING
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more
shares when the price is low and fewer shares when the price is high. The
average cost per share is lower than it would be if a constant number of
shares were bought at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class beginning in 2011, the cost of four years at
a private college could reach $210,000 and over $90,000 at a public
university./1/
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals./2/
<TABLE>
<CAPTION>
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
-------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
25 Years............................... $ 110 $ 165 $ 220 $ 275
20 Years............................... 176 264 352 440
15 Years............................... 296 444 592 740
10 Years............................... 555 833 1,110 1,388
5 Years................................ 1,371 2,057 2,742 3,428
</TABLE>
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 Fund.
The investment return and principal value of an investment will fluctuate so
that an investor's shares when redeemed may be worth more or less than their
original cost.
B-25
<PAGE>
AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP)
Under ASAP, an investor may arrange to have a fixed amount automatically
invested in shares of the Fund monthly by authorizing his or her bank account
or Prudential Securities account (including a Command Account) to be debited
to invest specified dollar amounts in shares of the Fund. The investor's bank
must be a member of the Automatic Clearing House System. Stock certificates
are not issued to ASAP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, Prudential Securities or Prusec.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders through Prudential
Securities or the Transfer Agent. Such withdrawal plan provides for monthly or
quarterly checks in any amount, except as provided below, up to the value of
the shares in the shareholder's account. Withdrawals of Class B or Class C
shares may be subject to a CDSC. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus.
In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account value applies, (ii) withdrawals may not be for less than $100 and
(iii) the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at net asset
value on shares held under this plan. See "Shareholder Investment Account--
Automatic Reinvestment of Dividends and/or Distributions."
Prudential Securities and the Transfer Agent act as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may
be terminated at any time, and the Distributor reserves the right to initiate
a fee of up to $5 per withdrawal, upon 30 days' written notice to the
shareholder.
Withdrawal payments should not generally be considered as dividends, yield
or income. If periodic withdrawals continuously exceed reinvested dividends
and distributions, the shareholder's original investment will be
correspondingly reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must generally be recognized for federal income tax
purposes. In addition, withdrawals made concurrently with the purchases of
additional shares are inadvisable because of the sales charge applicable to
(i) the purchase of Class A shares and (ii) the withdrawal of Class B and
Class C shares. Each shareholder should consult his or her own tax adviser
with regard to the tax consequences of the systematic withdrawal plan,
particularly if used in connection with a retirement plan.
TAX-DEFERRED RETIREMENT PLANS
Various tax-deferred retirement plans, including a 401(k) plan, self-
directed individual retirement accounts and "tax-deferred accounts" under
Section 403(b)(7) of the Internal Revenue Code are available through the
Distributor. These plans are for use by both self-employed individuals and
corporate employers. These plans permit either self-direction of accounts by
participants, or a pooled account arrangement. Information regarding the
establishment of these plans, and 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
B-26
<PAGE>
bracket and shows how much more retirement income can accumulate within an IRA
as opposed to a taxable individual savings account.
TAX-DEFERRED COMPOUNDING/1/
<TABLE>
<CAPTION>
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
------------- -------- --------
<S> <C> <C>
10 years............................................ $ 26,165 $ 31,291
15 years............................................ 44,675 58,649
20 years............................................ 68,109 98,846
25 years............................................ 97,780 157,909
30 years............................................ 135,346 244,692
</TABLE>
- ---------
/1/ The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated. Earnings
in the IRA account will be subject to tax when withdrawn from the account.
MUTUAL FUND PROGRAMS
From time to time, the Fund may be included in a mutual fund program with
other Prudential Mutual Funds. Under such a program, a group of portfolios
will be selected and thereafter marketed collectively. Typically, these
programs are created with an investment theme, e.g., to seek greater
diversification, protection from interest rate movements or access to
different management styles. In the event such a program is instituted, there
may be a minimum investment requirement for the program as a whole. The Fund
may waive or reduce the minimum initial investment requirements in connection
with such a program.
The mutual funds in the program may be purchased individually or as a part
of a program. Since the allocation of portfolios included in the program may
not be appropriate for all investors, individuals should consult their
Prudential Securities Financial Advisor or Prudential/Pruco Securities
Representative concerning the appropriate blend of portfolios for them. If
investors elect to purchase the individual mutual funds that constitute the
program in an investment ratio different from that offered by the program, the
standard minimum investment requirements for the individual mutual funds will
apply.
NET ASSET VALUE
Under the Investment Company Act, the Board of Directors is responsible for
determining in good faith the fair value of securities of the Fund. In
accordance with procedures adopted by the Board of Directors, the value of
investments listed on a securities exchange and NASDAQ National Market System
securities (other than options on stock and stock indices) are valued at the
last sale price on the day of valuation or, if there was no sale on such day,
the mean between the last bid and asked prices on such day, as provided by a
pricing service or principal market maker. Corporate bonds (other than
convertible debt securities) and U.S. Government securities that are actively
traded in the over-the-counter market, including listed securities for which
the primary market is believed to be over-the-counter, are valued on the basis
of valuations provided by a pricing service which uses information with
respect to transactions in bonds, quotations from bond dealers, agency
ratings, market transactions in comparable securities and various
relationships between securities in determining value. Convertible debt
securities that are actively traded in the over-the-counter market, including
listed securities for which the primary market is believed to be over-the-
counter, are valued at the mean between the last reported bid and asked prices
provided by principal market makers. Options on stock and stock indices traded
on an exchange are valued at the mean between the most recently quoted bid and
asked prices on the respective exchange and futures contracts and options
thereon are valued at their last sale prices as of the close of the
commodities exchange or board of trade. Quotations of foreign securities in a
foreign currency are converted to U.S. dollar equivalents at the current rate
obtained from a recognized bank or dealer and forward currency exchange
contracts are valued at the current cost of covering or offsetting such
contracts. Should an extraordinary event, which is likely to affect the value
of the security, occur after the close of an exchange on which a portfolio
security is traded, such security will be valued at fair value considering
factors determined in good faith by the investment adviser under procedures
established by and under the general supervision of the Fund's Board of
Directors.
Securities or other assets for which market quotations are not readily
available are valued at their fair value as determined in good faith by the
Board of Directors. Short-term debt securities are valued at cost, with
interest accrued or discount amortized to
B-27
<PAGE>
the date of maturity, if their original maturity was 60 days or less, unless
this is determined by the Board of Directors not to represent fair value.
Short-term securities with remaining maturities of more than 60 days, for
which market quotations are readily available, are valued at their current
market quotations as supplied by an independent pricing agent or principal
market maker. The Fund will compute its net asset value at 4:15 P.M., New York
time, on each day the New York Stock Exchange is open for trading except on
days on which no orders to purchase, sell or redeem Fund shares have been
received or days on which changes in the value of the Fund's portfolio
securities do not affect net asset value. In the event the New York Stock
Exchange closes early on any business day, the net asset value of the Fund's
shares shall be determined at the time between such closing and 4:15 P.M., New
York time.
Net asset value is calculated separately for each class. The net asset value
of Class B and Class C shares will generally be lower than the net asset value
of Class A shares as a result of the larger distribution-related fee to which
Class B and Class C shares are subject. 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-related expense accrual differential among the classes.
TAXES
The Fund has elected to qualify and intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code.
This relieves the Fund (but not its shareholders) from paying federal income
tax on income which is distributed to shareholders, and permits net capital
gains of the Fund (i.e., the excess of net long-term capital gains over net
short-term capital losses) to be treated as long-term capital gains of the
shareholders, regardless of how long shares in the Fund are held.
Qualification as a regulated investment company requires, among other
things, that (a) at least 90% of the Fund's annual gross income (without
reduction for losses from the sale or other disposition of securities) be
derived from interest, dividends, payments with respect to securities loans,
and gains from the sale or other disposition of securities or foreign
currencies, or other income (including but not limited to, gains from options,
futures or forward contracts) derived with respect to its business of
investing in such securities or currencies; (b) the Fund derives less than 30%
of its gross income from gains (without reduction for losses) from the sale or
other disposition of securities, options thereon, futures contracts, options
thereon, forward contracts and foreign currencies held for less than three
months (except for foreign currencies directly related to the Fund's business
of investing in securities); (c) the Fund diversifies its holdings so that, at
the end of each quarter of the taxable year, (i) at least 50% of the value of
the Fund's assets is represented by cash, U.S. Government securities and other
securities limited in respect of any one issuer to an amount not greater than
5% of the value of the assets of the Fund and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities of any one issuer (other than U.S.
Government securities); and (d) the Fund distribute to its shareholders at
least 90% of its net investment income and net short-term gains (i.e., the
excess of net short-term capital gains over net long-term capital losses) in
each year.
The Fund is required under the Internal Revenue Code to distribute 98% of
its ordinary income in the same calendar year in which it is earned. The Fund
is also required to distribute during the calendar year 98% of the capital
gain net income it earned during the twelve months ending on October 31 of
such calendar year. In addition, the Fund must distribute during the calendar
year any undistributed ordinary income and undistributed capital gain net
income from the prior year or the twelve-month period ending on October 31 of
such prior calendar year, respectively. To the extent it does not meet these
distribution requirements, the Fund will be subject to a non-deductible 4%
excise tax on the undistributed amount. For purposes of this excise tax,
income on which the Fund pays income tax is treated as distributed.
Gains or losses on sales of securities by the Fund will be treated as long-
term capital gains or losses if the securities have been held by it for more
than one year, except in certain cases where the Fund acquires a put or writes
a call thereon or otherwise holds an offsetting position with respect to the
securities. Other gains or losses on the sale of securities will be short-term
capital gains or losses. Gains and losses on the sale, lapse or other
termination of options on securities will generally be treated as gains and
losses from the sale of securities. If an option written by the Fund on
securities lapses or is terminated through a closing transaction, such as a
repurchase by the Fund of the option from its holder, the Fund will generally
realize capital gain or loss. If securities are sold by the Fund pursuant to
the exercise of a call option written by it, the Fund will include the premium
received in the sale proceeds of the securities delivered in determining the
amount of gain or loss on the sale. Certain of the Fund's transactions may be
subject to wash sale, short sale and straddle provisions of the Internal
Revenue Code. In addition, debt securities acquired by the Fund may be subject
to original issue discount and market discount rules.
B-28
<PAGE>
Special rules apply to most options on stock indices, futures contracts and
options thereon and forward foreign currency exchange contracts in which the
Fund may invest. See "Investment Objective and Policies." These investments
will generally constitute Section 1256 contracts and will be required to be
"marked to market" for federal income tax purposes at the end of the Fund's
taxable year; that is, treated as having been sold at market value. Except
with respect to certain forward foreign currency exchange contracts, sixty
percent of any gain or loss recognized on such deemed sales and on actual
dispositions will be treated as long-term capital gain or loss, and the
remainder will be treated as short-term capital gain or loss.
Gain or loss on the sale, lapse or other termination of options on stock and
narrowly-based stock indices will be capital gain or loss and will be long-
term or short-term depending on the holding period of the option. In addition,
positions which are part of a straddle will be subject to certain wash sale
and short sale provisions of the Internal Revenue Code. In the case of a
straddle, the Fund may be required to defer the recognition of losses on
positions it holds to the extent of any unrecognized gain on offsetting
positions held by the Fund.
The Fund's ability to hold foreign currencies or engage in hedging
activities may be limited by the requirement that it must derive less than 30%
of its gross income from gains from the sale of securities held for less than
three months.
Gains or losses attributable to fluctuations in exchange rates which occur
between the time the Fund accrues interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time
the Fund actually collects such receivables or pays such liabilities are
treated as ordinary income or ordinary loss. Similarly, gains or losses on
forward foreign currency exchange contracts or dispositions of debt securities
denominated in a foreign currency attributable to fluctuations in the value of
the foreign currency between the date of acquisition of the security and the
date of disposition also are treated as ordinary gain or loss. These gains,
referred to under the Internal Revenue Code as "Section 988" gains or losses,
increase or decrease the amount of the Fund's investment company taxable
income available to be distributed to its shareholders as ordinary income,
rather than increasing or decreasing the amount of the Fund's net capital
gain. If Section 988 losses exceed other investment company taxable income
during a taxable year, the Fund would not be able to make any ordinary
dividend distributions, or distributions made before the losses were realized
would be recharacterized as a return of capital to shareholders, rather than
as an ordinary dividend, reducing each shareholder's basis in his or her Fund
shares.
Shareholders electing to receive dividends and distributions in the form of
additional shares will have a cost basis for federal income tax purposes in
each share so received equal to the net asset value of a share of the Fund on
the reinvestment date.
Any dividends paid shortly after a purchase by an investor may have the
effect of reducing the per share net asset value of the investor's shares by
the per share amount of the dividends. Furthermore, such dividends, although
in effect a return of capital, are subject to federal income taxes. Therefore,
prior to purchasing shares of the Fund, the investor should carefully consider
the impact of dividends, including capital gains distributions, which are
expected to be or have been announced.
Any loss realized on a sale, redemption or exchange of shares of the Fund by
a shareholder will be disallowed to the extent the shares are replaced within
a 61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
If a shareholder who acquires shares of the Fund sells or otherwise disposes
of such shares within 90 days of acquisition, certain sales charges incurred
in acquiring such shares may not be included in the basis of such shares for
purposes of calculating gain or loss realized upon such sale or disposition.
The per share dividends on Class B and Class C shares will be lower than the
per share dividends on Class A 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 in the same amount for
Class A, Class B and Class C shares. See "Net Asset Value."
Dividends of net investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a
nominee or fiduciary) who is a nonresident alien individual, a foreign
corporation or a foreign partnership (foreign shareholder) are subject to a
30% (or lower treaty rate) withholding tax upon the gross amount of the
dividends unless the dividends are effectively connected with a U.S. trade or
business conducted by the foreign shareholder. Capital gain dividends paid to
a foreign shareholder generally are not subject to withholding tax. A foreign
shareholder will, however, be required to pay U.S. income tax on any dividends
and capital gain distributions which are effectively connected with a U.S.
trade or business of the foreign shareholder.
B-29
<PAGE>
Since the Fund is likely to have a substantial portion of its assets
invested in securities of foreign issuers, the amount of the Fund's dividends
eligible for the corporate dividends received deduction will be minimal.
Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Income tax
treaties between certain countries and the United States may reduce or
eliminate such taxes. It is impossible to determine in advance the effective
rate of foreign tax to which the Fund will be subject, since the amount of the
Fund's assets to be invested in various countries is not known.
If the Fund is liable for foreign income taxes, the Fund may 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
Fund will be able to do so. For the fiscal year ended May 31, 1996, the Fund
did not elect under the Internal Revenue Code to "pass through" to its
shareholders foreign income taxes paid by the Fund, since at the close of its
taxable year less than 50% of the value of the Fund's total assets consisted
of securities of foreign corporations. If the Fund is able to elect to "pass
through" the foreign taxes paid, 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 Fund; and (ii) treat their
pro rata share of foreign income taxes as paid by them. Shareholders will then
be permitted either to deduct their pro rata share of foreign income taxes in
computing their taxable income or to claim a foreign tax credit against U.S.
income taxes. No deduction for foreign taxes may be claimed by a shareholder
who does not itemize deductions. Foreign shareholders may not deduct or claim
a credit for foreign tax unless the dividends paid to them by the Fund are
effectively connected with a U.S. trade or business.
The amount of foreign taxes for which a shareholder may claim a credit in
any year will generally be subject to a separate limitation for "passive
income," which includes, among other things, dividends, interest and certain
foreign currency gains. Gain or loss from the sale of a security or from a
Section 988 transaction which is treated as ordinary income or loss (or would
have been so treated absent an election by the Fund) will be treated as
derived from sources within the United States, potentially reducing the amount
allowable as a credit under the limitation.
Each shareholder will be notified within 60 days after the close of the
Fund's taxable year whether the foreign taxes paid by the Fund will "pass
through" for that year and, if so, such notification will designate (a) the
shareholder's portion of the foreign taxes paid by the Fund and (b) the
portion of the dividend which represents income derived from foreign sources.
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
Fund.
Pennsylvania Personal Property Tax. The Fund has obtained a written letter
of determination from the Pennsylvania Department of Revenue that the Fund is
subject to the Pennsylvania foreign franchise and corporate net income tax.
Accordingly, it is expected that Fund shares will be exempt from Pennsylvania
personal property taxes. The Fund 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.
PERFORMANCE INFORMATION
AVERAGE ANNUAL TOTAL RETURN. The Fund may from time to time advertise its
average annual total return. Average annual total return is determined
separately for Class A, Class B and Class C shares. See "How the Fund
Calculates Performance" in the Prospectus.
Average annual total return is computed according to the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value at the end of the 1, 5 or 10 year periods
(or fractional portion thereof) of a hypothetical $1,000 payment made
at the beginning of the 1, 5 or 10 year periods.
Average annual total return takes into account any applicable initial or
contingent deferred sales charges but does not take into account any federal
or state income taxes that may be payable upon redemption.
B-30
<PAGE>
The average annual total returns for Class A shares for the one year, five
year and since inception (January 21, 1990) periods ended May 31, 1996 were
26.8%, 12.6% and 8.6%, respectively. The average annual total returns for
Class B shares for the one year, five year and since inception (September 28,
1987) periods ended May 31, 1996 were 27.5%, 12.7% and 7.8%, respectively.
Without the expense subsidy the average annual total return with respect to
the Class B shares of the Fund for the since inception period would have been
7.2%. The average annual total returns for Class C shares for one year and
since inception (August 1, 1994) periods ended May 31, 1996 were 31.5% and
21.0%, respectively.
AGGREGATE TOTAL RETURN. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B
and Class C shares. See "How the Fund Calculates Performance" in the
Prospectus.
Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed according to the following formula:
ERV--P
--------
P
Where:
P = a hypothetical initial payment of $1,000.
ERV = Ending Redeemable Value at the end of the 1,5 or 10 year periods (or
fractional portion thereof) of a hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10 year periods.
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.
The aggregate total returns for Class A shares for the one year, five year
and since inception (January 21, 1990) periods ended May 31, 1996 were 33.5%,
90.3% and 78.2%, respectively. The aggregate total returns for Class B shares
for the one year, five year and since inception (September 28, 1987) periods
ended May 31, 1996 were 32.5%, 83.2% and 92.2%, respectively. Without the fee
waiver the aggregate total return for the Class B shares for the since
inception period would have been 84.3%. The aggregate total return for Class C
shares for the one year and since inception (August 1, 1994) periods ended May
31, 1996 were 32.5% and 41.9%, respectively.
YIELD. The Fund may from time to time advertise its yield as calculated over
a 30-day period. Yield is calculated separately for Class A, Class B and Class
C shares. This yield will be computed by dividing the Fund's net investment
income per share earned during this 30-day period by the maximum offering
price per share on the last day of this period. Yield is calculated according
to the following formula:
a--b
YIELD = 2[(------ +1)/6/ -1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
Yield fluctuates and an annualized yield quotation is not a representation
by the Fund as to what an investment in the Fund will actually yield for any
given period.
B-31
<PAGE>
From time to time, the performance of the Fund may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long-term and the rate of
inflation./1/
(CHART)
- ---------
/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 & 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.
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 the Fund's portfolio securities
and cash, and in that capacity maintains cash and certain financial and
accounting books and records pursuant to an agreement with the Fund.
Subcustodians provide custodial services for the Fund's foreign assets held
outside the United States. See "How the Fund is Managed--Custodian and
Transfer and Dividend Disbursing Agent" in the Prospectus.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of the
Fund. It is a wholly-owned subsidiary of PMF. PMFS provides customary transfer
agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, the payment of dividends and distributions and
related functions. For these services, PMFS receives an annual fee per
shareholder account, 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 May 31, 1996, the Fund
incurred fees of approximately $158,000 for such services.
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York 10036,
serves as the Fund's independent accountants and in that capacity audits the
Fund's annual financial statements.
B-32
<PAGE>
Portfolio of Investments PRUDENTIAL GLOBAL NATURAL
as of May 31, 1996 RESOURCES FUND, INC.
- ---------------------------------------------------------------
- ---------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
- ---------------------------------------------------------------
LONG-TERM INVESTMENTS--96.8%
COMMON STOCKS--91.8%
- ---------------------------------------------------------------
<C> <S> <C>
Australia--5.8%
433,200 Acacia Resources(a) (Oil & Natural
Gas Production & Refining) $ 1,165,018
478,265 Capral Aluminium Ltd. (Metals-Non
Ferrous) 1,328,196
186,500 Comalco Ltd. (Metals-Non Ferrous) 1,093,907
77,400 CRA Ltd. (Metals-Non Ferrous) 1,254,484
216,600 Delta Gold NL(a) (Precious Metals) 587,694
164,800 Plutonic Resources Ltd. (Precious
Metals) 979,778
500,000 QNI Ltd. (Metals-Non Ferrous) 1,216,982
122,564 Western Mining Corp. Hldgs. Ltd.
(Metals-Non Ferrous) 928,204
------------
8,554,263
- ---------------------------------------------------------------
Canada--32.8%
147,500 Agnico-Eagle Mines Ltd. (Precious
Metals) 2,950,000
110,000 Alberta Energy Co. Ltd. (Oil &
Natural Gas Production &
Refining) 2,103,650
168,800 Anderson Exploration Ltd.(a) (Oil &
Natural Gas Production &
Refining) 1,749,606
109,400 Archer Resources Ltd.(a) (Oil &
Natural Gas Production &
Refining) 371,321
45,700 Barrick Gold (Precious Metals) 1,444,387
391,900 Barrington Petroleum Ltd.(a)
(Exploration & Production) 1,244,354
663,600 Beau Canada Exploration Ltd.(a) (Oil
& Natural Gas Production &
Refining) 978,447
124,300 Blue Range Resource Corp.(a) (Oil &
Natural Gas Production &
Refining) 970,810
71,000 Cabre Exploration Ltd.(a) (Oil &
Natural Gas Production &
Refining) 919,891
225,800 Cambior Inc. (Precious Metals) 3,650,708
68,200 Cameco Corp. (Misc. Materials &
Commodities) 3,469,737
59,800 Canadian Natural Resources Ltd.(a)
(Oil & Natural Gas Production &
Refining) $ 1,032,314
64,700 Crestar Energy Inc.(a) (Oil &
Natural Gas Production &
Refining) 1,123,985
83,100 Discovery West Corp.(a) (Oil &
Natural Gas Production &
Refining) 291,153
85,800 Dorset Exploration Ltd.(a) (Oil &
Natural Gas Production &
Refining) 328,796
121,200 ELAN Energy Inc.(a) (Oil & Natural
Gas Production & Refining) 1,132,380
43,300 Ensign Resource Service Group Inc.
(Oil Services) 316,058
79,900 Grad & Walker Energy Corp.(a) (Oil &
Natural Gas Production &
Refining) 486,982
302,336 HCO Energy Ltd.(a) (Oil & Natural
Gas Production & Refining) 289,095
78,000 Jordan Petroleum Ltd.(a) (Oil &
Natural Gas Production &
Refining) 478,248
300,000 Kap Resources Ltd.(a) (Chemicals) 667,883
122,200 Morrison Petroleum Ltd. (Oil &
Natural Gas Production &
Refining) 664,518
104,000 Northrock Resources Ltd.(a) (Oil &
Natural Gas Production &
Refining) 664,234
160,700 Northstar Energy Corp.(a)
(Exploration & Production) 1,571,810
200,000 Pacific Forest Products Ltd.(a)
(Forest Products & Paper) 2,532,847
26,000 Paramount Resources Ltd. (Oil &
Natural Gas Production &
Refining) 288,467
35,600 Pinnacle Resources Ltd.(a) (Oil &
Natural Gas Production &
Refining) 415,766
62,100 Placer Dome Inc. (Precious Metals) 1,829,004
65,000 Prime Resources Group, Inc.(a)
(Precious Metals) 626,277
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-33
<PAGE>
Portfolio of Investments PRUDENTIAL GLOBAL NATURAL
as of May 31, 1996 RESOURCES FUND, INC.
- ---------------------------------------------------------------
- ---------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
- ---------------------------------------------------------------
<C> <S> <C>
Canada (cont'd.)
132,700 Repadre Capital Corp.(a) (Precious
Metals) $ 673,186
79,300 Rigel Energy Corp.(a) (Oil & Natural
Gas Production & Refining) 752,482
357,800 Rio Alto Exploration Ltd.(a)
(Exploration & Production) 1,828,175
50,800 Talisman Energy, Inc.(a) (Oil &
Natural Gas Production &
Refining) 1,216,234
102,300 Timberwest Forest Ltd. (Forest
Products & Paper) 1,112,606
350,000 Tiomin Resources Inc.(a) (Metals-Non
Ferrous) 996,350
100,000 Triton Mining Corp.(a) (Precious
Metals) 638,686
232,600 TVX Gold, Inc.(a) (Precious Metals) 2,122,263
196,000 Veritas Energy Services Inc.(a)
(Energy Equipment & Services) 2,489,343
145,000 Viridian Inc.(a) (Chemicals) 1,936,861
------------
48,358,914
- ---------------------------------------------------------------
France--1.1%
22,316 Total France Petroleum Ltd.
(Integrated Producers) 1,618,847
- ---------------------------------------------------------------
Japan--1.3%
58,000 Ace Koeki Co. Ltd. (Financial
Services) 989,018
46,000 Okato Shoji Co. Ltd.(a) (Financial
Services) 920,810
------------
1,909,828
- ---------------------------------------------------------------
New Zealand--2.1%
185,174 Fernz Corp. (Chemicals) 544,370
1,209,500 Fletcher Challenge Ltd. (Forest
Products & Paper) 1,552,010
1,080,960 Tasman Agriculture (Miscellaneous
Industrial) 939,391
------------
3,035,771
- ---------------------------------------------------------------
South Africa--1.6%
11,500 Vaal Reefs Exploration & Mining Co.
Ltd.
(Metals-Non Ferrous) $ 1,181,724
26,200 Western Deep Levels Ltd. (Metals-Non
Ferrous) 1,204,598
------------
2,386,322
- ---------------------------------------------------------------
United States--47.1%
168,500 Abacan Resources Corp.(a)
(Exploration & Production) 858,297
47,500 Aluminum Company of America
(Metals-Non Ferrous) 2,927,187
25,300 Anadarko Petroleum Corp. (Energy
Sources) 1,359,875
52,600 Arcadian Corp. (Chemicals) 1,052,000
113,600 Asia Pacific Resource
International(a) (Forest Products
& Paper) 781,000
70,000 Baker Hughes Inc. (Energy Equipment
& Services) 2,196,250
147,900 Brush Wellman Inc. (Metals-Non
Ferrous) 2,773,125
37,300 Camco Inc. (Energy Equipment &
Services) 1,226,237
83,137 Coflexip ADR (Energy Equipment &
Services) 1,558,819
74,800 Core Laboratories N.V.(a) (Oil
Services) 1,140,700
51,300 Cross Timbers Oil Co. (Energy
Sources) 1,147,838
25,900 Dawson Production Services Inc.(a)
(Oil Services) 314,038
40,568 Diamond Offshore Drilling Inc.(a)
(Exploration & Production) 1,942,193
47,700 Ensco International Inc.(a) (Energy
Equipment & Services) 1,448,887
51,100 Falcon Drilling Inc.(a) (Oil
Services) 1,239,175
54,100 First Mississippi Corp. (Chemicals) 1,338,975
62,911 FirstMiss Gold Inc.(a) (Gold) 2,461,393
28,800 Freeport-McMoran Copper & Gold Inc.
(Metals-Non Ferrous) 936,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-34
<PAGE>
Portfolio of Investments PRUDENTIAL GLOBAL NATURAL
as of May 31, 1996 RESOURCES FUND, INC.
- ---------------------------------------------------------------
- ---------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
- ---------------------------------------------------------------
<C> <S> <C>
United States (cont'd.)
68,500 ICO, Inc. (Energy Equipment &
Services) $ 445,250
67,500 J. Ray McDermott, S.A.(a) (Energy
Equipment & Services) 1,687,500
88,900 Kloof Gold Mining Co. Ltd.
ADR (Metals-Non Ferrous) 1,133,475
80,200 Louisiana-Pacific Corp. (Forest
Products & Paper) 1,974,925
377,400 Marine Drilling Co., Inc.(a)
(Energy Equipment & Services) 3,821,175
44,800 Newfield Exploration Co.(a) (Energy
Sources) 1,668,800
40,558 Newmont Mining Corp. (Metals-Non
Ferrous) 2,443,619
201,022 NGC Corp. (Energy Sources) 3,115,841
119,000 Noble Affiliates, Inc. (Energy
Sources) 4,031,125
38,250 Noble Drilling Corp.(a) (Energy
Equipment & Services) 511,594
200,000 Nord Resources Corp.(a) (Metals-Non
Ferrous) 1,200,000
43,900 Pegasus Gold Inc.(a) (Precious
Metals) 658,500
61,400 Pride Petroleum Services, Inc.(a)
(Energy Equipment & Services) 1,059,150
46,900 Rayonier Inc. (Multi-Industry) 1,758,750
82,800 Reading & Bates Corp.(a) (Energy
Equipment & Services) 1,821,600
154,800 Santa Fe Pacific Gold Corp.
(Precious Metals) 2,360,700
30,100 SEACOR Holdings Inc.(a) (Energy
Equipment & Services) 1,444,800
31,800 Sonat Offshore Drilling Inc.
(Energy Equipment & Services) 1,685,400
118,500 Stillwater Mining Co.(a) (Metals-Non
Ferrous) 3,466,125
65,100 Stolt Comex Seaway(a) (Energy
Equipment & Services) 943,950
27,883 Tidewater Inc. (Energy Equipment &
Services) $ 1,150,174
45,700 TJ International Inc. (Forest
Products) 856,875
32,607 Weatherford Enterra Inc.(a)
(Energy Equipment & Services) 1,027,121
159,600 Western Gas Resources, Inc.
(Oil & Natural Gas Production &
Refining) 2,374,050
------------
69,342,488
------------
Total common stocks
(cost US$101,179,117) 135,206,433
------------
PREFERRED STOCKS--3.0%
- ---------------------------------------------------------------
United States--3.0%
17,600 AMAX Gold Inc., Ser. B, 7.5%,
Convertible (Precious Metals) 928,400
20,900 Freeport-McMoran Copper & Gold Inc.,
$0.025 (Gold) 483,313
17,600 Hecla Mining Co., 7.00%,
Convertible, Ser. B, (Precious
Metals) 787,600
42,800 Noble Drilling Corp., $1.50,
Convertible (Oil Services) 1,455,200
11,100 Reading & Bates Corp., $1.625,
Convertible (Energy Equipment &
Services) 745,087
------------
Total preferred stocks
(cost US$3,491,038) 4,399,600
------------
WARRANTS(a)--0.1%
- ---------------------------------------------------------------
Canada--0.1%
150,000 Kap Resources Ltd.,
Expiring 8/3/00 @CAD$2 (Chemicals)
(cost US$101,374) 153,284
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-35
<PAGE>
PRUDENTIAL GLOBAL NATURAL
RESOURCES FUND, INC.
Portfolio of Investments as of May 31, 1996
- ---------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
- ---------------------------------------------------------------
CONVERTIBLE BONDS--1.9%
- ---------------------------------------------------------------
Canada--0.5%
Golden Shamrock Mines Ltd.,
Sr. Sub. Deb.,
CAD 600 7.50%, 5/9/00
(Metals-Non Ferrous) $ 738,000
- ---------------------------------------------------------------
New Zealand--0.6%
Natural Gas Corp. Hldgs. Ltd.,
NZ$ 760 10.50%, 10/14/97
(Gas Pipelines) 980,379
- ---------------------------------------------------------------
United States--0.8%
Coeur D Alene Mines Corp.,
Sr. Sub. Deb., (Precious Metals)
US$ 1,131 6.375%, 1/31/04 1,142,310
------------
Total convertible bonds
(cost $2,487,013) 2,860,689
------------
Total long-term investments
(cost US$107,258,542) 142,620,006
------------
SHORT-TERM INVESTMENTS--3.2%
- ---------------------------------------------------------------
Repurchase Agreement--3.2%
United States--3.2%
4,651 Joint Repurchase Agreement Account,
5.32%, 6/3/96,
(cost US$4,651,000; Note 5) 4,651,000
------------
- ---------------------------------------------------------------
Total Investments--100%
(cost US$111,909,542; Note 4) 147,271,006
Liabilities in excess of
other assets (22,653)
------------
Net Assets--100% $147,248,353
------------
------------
</TABLE>
- ---------------
(a) Non-income producing security.
ADR--American Depositary Receipt.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-36
<PAGE>
PRUDENTIAL GLOBAL NATURAL
Statement of Assets and Liabilities RESOURCES FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets May 31, 1996
------------
Investments, at value (cost $111,909,542).................................................................... $147,271,006
Receivable for Fund shares sold.............................................................................. 1,132,549
Dividends and interest receivable............................................................................ 122,255
Other assets................................................................................................. 4,919
------------
Total assets.............................................................................................. 148,530,729
------------
Liabilities
Bank overdraft............................................................................................... 70,921
Payable for investments purchased............................................................................ 754,133
Accrued expenses and other liabilities....................................................................... 162,965
Payable for Fund shares reacquired........................................................................... 101,094
Due to Distributors.......................................................................................... 100,022
Due to Manager............................................................................................... 90,239
Withholding taxes payable.................................................................................... 3,002
------------
Total liabilities......................................................................................... 1,282,376
------------
Net Assets................................................................................................... $147,248,353
------------
------------
Net assets were comprised of:
Common stock, at par...................................................................................... $ 87,436
Paid-in capital in excess of par.......................................................................... 106,003,733
------------
106,091,169
Accumulated net investment loss........................................................................... (106,296)
Accumulated net realized gains on investments and foreign currency transactions........................... 5,905,998
Net unrealized appreciation on investments and foreign currencies......................................... 35,357,482
------------
Net assets, May 31, 1996..................................................................................... $147,248,353
------------
------------
Class A:
Net asset value and redemption price per share
($32,607,724 / 1,880,150 shares of common stock issued and outstanding)................................ $17.34
Maximum sales charge (5% of offering price)............................................................... .91
------
Maximum offering price to public.......................................................................... $18.25
------
------
Class B:
Net asset value, offering price and redemption price per share
($113,089,545 / 6,770,615 shares of common stock issued and outstanding)............................... $16.70
------
------
Class C:
Net asset value, offering price and redemption price per share
($1,551,084 / 92,861 shares of common stock issued and outstanding).................................... $16.70
------
------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-37
<PAGE>
PRUDENTIAL GLOBAL NATURAL
RESOURCES FUND, INC.
Statement of Operations
- --------------------------------------------------------------
- --------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income (Loss) May 31, 1996
<S> <C>
Income
Dividends (net of foreign withholding taxes
of $64,739).............................. $ 1,331,527
Interest (net of foreign withholding taxes
of $7,711)............................... 277,793
------------
Total income............................. 1,609,320
------------
Expenses
Distribution fee--Class A................... 57,765
Distribution fee--Class B................... 843,964
Distribution fee--Class C................... 7,345
Management fee.............................. 811,776
Transfer agent's fees and expenses.......... 195,000
Custodian's fees and expenses............... 152,000
Reports to shareholders..................... 92,000
Registration fees........................... 64,000
Audit fee and expenses...................... 53,000
Directors' fees and expenses................ 38,500
Legal fees and expenses..................... 12,000
Miscellaneous............................... 9,508
------------
Total expenses........................... 2,336,858
------------
Net investment loss............................ (727,538)
------------
Realized and Unrealized Gain (Loss)
on Investments and Foreign
Currency Transactions
Net realized gain on:
Investment transactions..................... 9,364,567
Written option transactions................. 137,287
Foreign currency transactions............... 2,210
------------
9,504,064
------------
Net change in unrealized appreciation/
depreciation on:
Investment transactions..................... 22,746,404
Foreign currency............................ (2,567)
------------
22,743,837
------------
Net gain on investments and foreign
currencies.................................. 32,247,901
------------
Net Increase in Net Assets
Resulting from Operations...................... $ 31,520,363
------------
------------
</TABLE>
PRUDENTIAL GLOBAL NATURAL
RESOURCES FUND, INC.
Statement of Changes in Net Assets
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase in Year Ended May 31,
---------------------------
Net Assets 1996 1995
----------- ------------
<S> <C> <C>
Operations
Net investment income (loss)... $ (727,538) $ (816,984)
Net realized gain on investment
and foreign currency
transactions................ 9,504,064 4,777,347
Net change in unrealized
appreciation/depreciation on
investments and foreign
currencies.................. 22,743,837 4,160,890
------------ ------------
Net increase in net assets
resulting from operations... 31,520,363 8,121,253
------------ ------------
Net equalization credits.......... 90,374 66,525
------------ ------------
Distributions from net realized
gains on investment and written
option transactions (Note 1)
Class A........................ (1,303,488) --
Class B........................ (4,284,054) --
Class C........................ (33,008) --
------------ ------------
(5,620,550) --
------------ ------------
Fund share transactions (net of
share conversions) (Note 6)
Proceeds from shares sold...... 122,535,276 67,667,069
Net asset value of shares
issued in reinvestment of
distributions............... 5,017,619 --
Cost of shares reacquired...... (107,356,234) (45,533,815)
------------ ------------
Net increase in net assets from
Fund share transactions..... 20,196,661 22,133,254
------------ ------------
Total increase.................... 46,186,848 30,321,032
Net Assets
Beginning of year................. 101,061,505 70,740,473
------------ ------------
End of year....................... $147,248,353 $101,061,505
------------ ------------
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-38
<PAGE>
PRUDENTIAL GLOBAL NATURAL
Notes to Financial Statements RESOURCES FUND, INC.
- --------------------------------------------------------------------------------
Prudential Global Natural Resources Fund, Inc., (the "Fund"), is registered
under the Investment Company Act of 1940 as a diversified, open-end management
investment company. The Fund's investment objective is long-term growth of
capital which it seeks to achieve by investing primarily in equity securities of
foreign and domestic natural resource companies.
- --------------------------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Security Valuation: Securities traded on an exchange 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. Securities for which market
quotations are not available, other than private placements, shall each be
valued at a price supplied by an independent pricing agent, which is, in the
opinion of such pricing agent, representative of the market value of such
securities as of the time of determination of net asset value. Securities for
which market quotations are not readily available, and for which the pricing
agent or principal market maker does not provide a valuation, including
restricted securities, will be valued at fair value as determined in good faith
according to a pricing procedure developed by the Investment Adviser under
procedures established by and under the general supervision of the Fund's Board
of Directors. Options listed on exchanges are valued at their closing price on
the applicable exchange.
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 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
daily 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 Fund are presented using 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 the 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 $2,210 represents net
foreign exchange gains or losses from disposition 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 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 the regulation of foreign securities
markets.
Options: The Fund may either purchase or write options in order to hedge against
adverse market movements or fluctuations in value caused by changes in
prevailing interest rates or foreign currency exchange rates with respect to
securities or currencies which the Fund currently owns or intends to purchase.
When the Fund purchases an option, it pays a premium and an amount equal to that
premium is recorded as an investment. When the Fund writes an option, it
receives a premium and an amount equal to that premium is recorded as a
liability. The investment
- --------------------------------------------------------------------------------
B-39
<PAGE>
PRUDENTIAL GLOBAL NATURAL
Notes to Financial Statements RESOURCES FUND, INC.
- --------------------------------------------------------------------------------
or liability is adjusted daily to reflect the current market value of the
option. If an option expires unexercised, the Fund realizes a gain or loss to
the extent of the premium received or paid. If an option is exercised, the
premium received or paid is an adjustment to the proceeds from the sale or the
cost basis of the purchase in determining whether the Fund has realized a gain
or loss. The difference between the premium and the amount received or paid on
effecting a closing purchase or sale transaction is also treated as a realized
gain or loss. Gain or loss on purchased options is included in net realized gain
(loss) on investment transactions. Gain or loss on written options is presented
separately as net realized gain (loss) on written option transactions.
The Fund, as writer of an option, has no control over whether the underlying
securities or currencies may be sold (called) or purchased (put). As a result,
the Fund bears the market risk of an unfavorable change in the price of the
security or currency underlying the written option. The Fund, as purchaser of an
option, bears the risk of the potential inability of the counterparties to meet
the terms of their contracts.
Securities Transactions and 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. 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: The Fund follows the accounting practice known as equalization by
which a portion of the proceeds from sales and costs of reacquisitions of Fund
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. As a result, undistributed net investment
income (loss) per share is unaffected by sales or reacquisitions of the Fund's
shares.
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 interest, dividends and (realized and unrealized)
capital gains have been provided for in accordance with the Fund's understanding
of the applicable country's tax rules and rates. In addition, certain countries
impose taxes on capital gains realized on the sale of portfolio securities, and
as such, taxes have been accrued where applicable on the unrealized gains of
such securities.
Dividends and Distributions: The Fund expects to pay dividends out of net
investment income and make distributions of any net capital gains, at least
annually, if any. 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 of wash
sales, foreign currencies and passive investment companies' transactions.
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. During the fiscal year
ended May 31, 1996, the Fund reclassified $23,135 of foreign currency gains
which were recognized in the current year and reclassified tax-basis net
operating losses of $560,092. The net effect of these reclassifications was to
decrease accumulated net realized gains on investments and foreign currency
transactions and decrease accumulated net investment loss by $583,227 for the
fiscal year ended May 31, 1996. Net realized gains and net assets were not
affected by this change.
- --------------------------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual Fund Management, Inc.
("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 services of PIC, 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.
- --------------------------------------------------------------------------------
B-40
<PAGE>
PRUDENTIAL GLOBAL NATURAL
Notes to Financial Statements RESOURCES FUND, INC.
- --------------------------------------------------------------------------------
The management fee paid PMF is computed daily and payable monthly, at an annual
rate of .75 of 1% of the Fund's average daily net assets.
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. Prudential Securities Incorporated ("PSI")
became the distributor of the Class A shares of the Fund effective January 2,
1996 and is serving the Fund under the same terms and conditions as under the
arrangement with PMFD and continues as the distributor of the Class B and Class
C shares of the Fund. The Fund compensates 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, B and C Plans, the Fund compensates PSI and PMFD for
the period June 1, 1995 through January 1, 1996 with respect to Class A shares,
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 Class C shares,
respectively. Such expenses under the Plans were .25 of 1%, 1% and 1% of the
average daily net assets of the Class A, B and C shares, respectively, for the
year ended May 31, 1996.
PMFD and PSI have advised the Fund that they have received approximately $86,400
in front-end sales charges resulting from sales of Class A shares during the
year ended May 31, 1996. From these fees, PMFD and PSI paid such sales charges
to Pruco Securities Corporation, affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI has advised the Fund that for the year ended May 31, 1996, it received
approximately $300,400 and $2,300 in contingent deferred sales charges imposed
upon certain redemptions by Class B and Class C shareholders, respectively.
PMFD is a wholly-owned subsidiary of PMF; PSI, PIC 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 Fund's transfer agent and during the year ended May 31, 1996,
the Fund incurred fees of approximately $158,000 for the services of PMFS. As of
May 31, 1996, approximately $19,000 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations include certain-out-of
pocket expenses paid to non-affiliates.
For the year ended May 31, 1996, PSI and/or its foreign affiliates earned
approximately $2,200 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 May 31, 1996 aggregated $54,127,772 and $43,972,323,
respectively.
The Fund will elect to treat net currency losses of approximately $21,000
incurred in the seven month period ended May 31, 1996 as having been incurred in
the following year.
The federal income tax basis of the Fund's investments at May 31, 1996 was
$112,099,438 and accordingly, net unrealized appreciation for federal income tax
purposes was $35,167,586 (gross unrealized appreciation--$38,799,683 gross
unrealized depreciation--$3,632,097).
Transactions in options written during the year ended May 31, 1996 were as
follows:
<TABLE>
<CAPTION>
Number of
Contracts Premiums
--------- --------
<S> <C> <C>
Options outstanding at May 31, 1995.... -- $ --
Options written........................ 530 160,905
Options terminated in closing purchase
transactions.......................... (530) (160,905)
--- --------
Options outstanding at May 31, 1996.... -- $ --
--- --------
--- --------
</TABLE>
- --------------------------------------------------------------------------------
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. At May 31, 1996, the Fund had a
0.4% undivided interest in the repurchase agreements in the joint account. The
undivided interest for the Fund represented $4,651,000 in principal amount. As
of such date, each repurchase agreement in the joint account and the value of
the collateral therefor was as follows:
- --------------------------------------------------------------------------------
B-41
<PAGE>
PRUDENTIAL GLOBAL NATURAL
Notes to Financial Statements RESOURCES FUND, INC.
- --------------------------------------------------------------------------------
Bear, Stearns & Co., 5.32%, in the principal amount of $359,000,000, repurchase
price $359,159,157, due 6/3/96. The value of the collateral including accrued
interest is $367,322,500.
CS First Boston Corp., 5.35%, in the principal amount of $300,000,000,
repurchase price $300,133,750, due 6/3/96. The value of the collateral including
accrued interest is $306,002,116.
Chase Securities, Inc., 5.25%, in the principal amount of $173,690,000,
repurchase price $173,765,989, due 6/3/96. The value of the collateral including
accrued interest is $177,814,913.
Morgan Stanley & Co., 5.27%, in the principal amount of $59,000,000, repurchase
price $59,025,911, due 6/3/96. The value of the collateral including accrued
interest is $60,337,647.
Smith Barney, Inc., 5.33%, in the principal amount of $359,000,000, repurchase
price $359,159,456, due 6/3/96. The value of the collateral including accrued
interest is $366,180,343.
- --------------------------------------------------------------------------------
Note 6. Capital
The Fund offers Class A, Class B and Class C shares. Class A shares are sold
with a front-end sales charge of up to 5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a contingent
deferred sales charge of 1% during the first year. Class B shares will
automatically convert to Class A shares on a quarterly basis approximately seven
years after purchase.
The Fund has authorized 500 million shares of common stock $.01 par value per
share equally divided into three classes, designated Class A, Class B and Class
C common stock.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------- ---------- ------------
<S> <C> <C>
Year ended May 31, 1996:
Shares sold........................ 2,539,693 $ 38,555,696
Shares issued in reinvestment of
distributions.................... 79,485 1,097,686
Shares reacquired.................. (2,375,614) (35,670,241)
---------- ------------
Net increase in shares outstanding
before conversion................ 243,564 3,983,141
Shares issued upon conversion from
Class B.......................... 203,473 3,015,272
---------- ------------
Net increase in shares
outstanding...................... 447,037 $ 6,998,413
---------- ------------
---------- ------------
<CAPTION>
Class A Shares Amount
- ------- ---------- ------------
<S> <C> <C>
Year ended May 31, 1995:
Shares sold........................ 1,088,557 $ 13,699,912
Shares reacquired.................. (1,076,421) (13,660,360)
---------- ------------
Net increase in shares outstanding
before conversion................ 12,136 39,552
Shares issued upon conversion from
Class B.......................... 902,501 10,461,391
---------- ------------
Net increase in shares
outstanding...................... 914,637 $ 10,500,943
---------- ------------
---------- ------------
<CAPTION>
Class B
- -------
<S> <C> <C>
Year ended May 31, 1996:
Shares sold........................ 5,634,740 $ 82,831,397
Shares issued in reinvestment of
distributions.................... 287,532 3,890,312
Shares reacquired.................. (4,990,847) (71,288,757)
---------- ------------
Net increase in shares outstanding
before conversion................ 931,425 15,432,952
Shares reacquired upon conversion
into Class A..................... (210,326) (3,015,272)
---------- ------------
Net increase in shares
outstanding...................... 721,099 $ 12,417,680
---------- ------------
---------- ------------
Year ended May 31, 1995:
Shares sold........................ 4,373,614 $ 53,315,314
Shares reacquired.................. (2,624,605) (31,785,126)
---------- ------------
Net increase in shares outstanding
before conversion................ 1,749,009 21,530,188
Shares reacquired upon conversion
and/or exchange into Class A..... (926,144) (10,461,391)
---------- ------------
Net increase in shares
outstanding...................... 822,865 $ 11,068,797
---------- ------------
---------- ------------
<CAPTION>
Class C
- -------
<S> <C> <C>
Year ended May 31, 1996:
Shares sold........................ 73,169 $ 1,148,183
Shares issued in reinvestment of
distributions.................... 2,191 29,621
Shares reacquired.................. (27,858) (397,236)
---------- ------------
Net increase in shares
outstanding...................... 47,502 $ 780,568
---------- ------------
---------- ------------
August 1, 1994* through
May 31, 1995:
Shares sold........................ 52,700 $ 651,843
Shares reacquired.................. (7,341) (88,329)
---------- ------------
Net increase in shares
outstanding...................... 45,359 $ 563,514
---------- ------------
---------- ------------
</TABLE>
- ---------------
* Commencement of offering of Class C shares.
- --------------------------------------------------------------------------------
B-42
<PAGE>
PRUDENTIAL GLOBAL NATURAL
Notes to Financial Statements RESOURCES FUND, INC.
- --------------------------------------------------------------------------------
Note 7. Name Change
On May 8, 1996, the Board of Directors approved a name change for the Prudential
Global Natural Resources Fund, Inc. Effective July 30, 1996 the Fund will change
its name to the Prudential Natural Resources Fund, Inc.
- --------------------------------------------------------------------------------
B-43
<PAGE>
PRUDENTIAL GLOBAL NATURAL
Financial Highlights RESOURCES FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
-------------------------------------------------------------
Year Ended May 31,
-------------------------------------------------------------
1996(c) 1995(a) 1994(a) 1993(a) 1992(a)
------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 13.73 $ 12.55 $ 11.84 $ 10.02 $ 9.73
------- ------- --------- --------- ---------
Income from investment operations
Net investment income (loss).................. (.01) (.03) .01 .02 .01
Net realized and unrealized gain on investment
and foreign currency transactions.......... 4.42 1.21 .70 1.80 .38
------- ------- --------- --------- ---------
Total from investment operations........... 4.41 1.18 .71 1.82 .39
------- ------- --------- --------- ---------
Less distributions
Dividends from net investment income.......... -- -- -- -- (.09)
Distributions from net realized gains on
investment and foreign currency
transactions............................... (.80) -- -- -- (.01)
------- ------- --------- --------- ---------
Total distributions........................ (.80) -- -- -- (.10)
------- ------- --------- --------- ---------
Net asset value, end of year.................. $ 17.34 $ 13.73 $ 12.55 $ 11.84 $ 10.02
------- ------- --------- --------- ---------
------- ------- --------- --------- ---------
TOTAL RETURN(b):.............................. 33.51% 9.40% 6.00% 18.16% 4.04%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $32,608 $19,682 $6,505 $1,898 $590
Average net assets (000)...................... $23,106 $10,791 $4,106 $758 $647
Ratios to average net assets:
Expenses, including distribution fees...... 1.57% 1.73% 1.89% 2.38% 2.59%
Expenses, excluding distribution fees...... 1.32% 1.48% 1.65% 2.18% 2.39%
Net investment income (loss).................. (.09)% (.25)% .11% .13% .44%
For Class A, B and C shares:
Portfolio turnover............................ 41% 36% 19% 50% 36%
Average commission rate per share............. $ .0290 N/A N/A N/A N/A
</TABLE>
- ---------------
(a) Calculated based upon 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) Calculated prior to Statement of Position 93-2 adjustments (See Note 1).
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-44
<PAGE>
PRUDENTIAL GLOBAL NATURAL
Financial Highlights RESOURCES FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
--------------------------------------------------------------- -------------------
August 1,
Year 1994(d)
Year Ended May 31, Ended through
---------------------------------------------------------------- May 31, May 31,
1996(e) 1995(a) 1994(a) 1993(a) 1992(a) 1996(e) 1995(a)
-------- ---------- ---------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....$ 13.35 $ 12.29 $ 11.69 $ 9.97 $ 9.72 $13.35 $ 12.47
-------- ---------- ---------- ---------- ---------- -------- ---------
Income from investment operations
Net investment loss..................... (.10) (.13) (.08) (.07) (.08) (.10) (.13)
Net realized and unrealized gain on
investment and foreign currency
transactions......................... 4.25 1.19 .68 1.79 .39 4.25 1.01
-------- ---------- ---------- ---------- ---------- -------- ---------
Total from investment operations..... 4.15 1.06 .60 1.72 .31 4.15 .88
-------- ---------- ---------- ---------- ---------- -------- ---------
Less distributions
Dividends from net investment income.... -- -- -- -- (.05) -- --
Distributions from net realized gains
on investment and foreign currency
transactions......................... (.80) -- -- -- (.01) (.80) --
-------- ---------- ---------- ---------- ---------- -------- ---------
Total distributions.................. (.80) -- -- -- (.06) (.80) --
-------- ---------- ---------- ---------- ---------- -------- ---------
Net asset value, end of period..........$ 16.70 $ 13.35 $ 12.29 $ 11.69 $ 9.97 $16.70 $ 13.35
-------- ---------- ---------- ---------- ---------- -------- ---------
-------- ---------- ---------- ---------- ---------- -------- ---------
TOTAL RETURN(b):........................ 32.49% 8.62% 5.13% 17.25% 3.26% 32.49% 7.06%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).........$113,090 $80,774 $64,235 $36,150 $23,228 $1,551 $606
Average net assets (000)................ $84,396 $74,681 $48,772 $23,464 $26,877 $734 $294
Ratios to average net assets:
Expenses, including distribution
fees............................... 2.32% 2.48% 2.65% 3.18% 3.39% 2.32%
Expenses, excluding distribution 2.56%(c)
fees............................... 1.32% 1.48% 1.65% 2.18% 2.39% 1.32% 1.56%(c)
Net investment loss..................... (.84)% (1.05)% (.67)% (.67)% (.36)% (.84)% (1.08)%(c)
</TABLE>
- ---------------
(a) Calculated based upon average shares 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 class C shares.
(c) Calculated prior to Statement of Position 93-2 adjustments (See Note 1).
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-45
<PAGE>
PRUDENTIAL GLOBAL NATURAL
Report of Independent Accountants RESOURCES FUND, INC.
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of
Prudential Global Natural Resources Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Global Natural Resources
Fund, Inc. (the "Fund") at May 31, 1996, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the five years in the
period then ended, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at May 31,
1996 by correspondence with the custodian and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
July 22, 1996
B-46
<PAGE>
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than Aaa 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 risk appear somewhat larger than the Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
(i.e., they are neither highly protected nor poorly secured.) Interest
payments and principal security appear adequate for the present, but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa to B. The modifier 1 indicates that the company ranks
in the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
SHORT-TERM DEBT RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted.
P-1: Issues rated "Prime-1" or "P-1" (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
P-2: Issues rated "Prime-2" or "P-2" (or supporting institutions) have a
strong ability for repayment of senior short-term debt obligations.
STANDARD & POOR'S RATINGS GROUP
DEBT RATINGS
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits 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
debt in this category than in higher-rated categories.
COMMERCIAL PAPER RATINGS
S&P's commercial paper ratings are current assessments of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-1: The A-1 designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with the designation A-2 is
satisfactory. However, the relative degree of safety is not as high for issues
designated A-1.
A-1
<PAGE>
APPENDIX I--HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
The following chart shows the long-term performance of various asset classes
and the rate of inflation.
[CHART]
Source: Prudential Investment Corporation based on data from Ibbotson
Associates' ENCORR Software, Chicago, Illinois. 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.
I-1
<PAGE>
CHART 2
Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart below shows the historical
total returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate
bonds, U.S. high yield bonds and world government bonds on an annual basis
from 1987 through 1995. The total returns of the indices include accrued
interest, plus the price changes (gains or losses) of the underlying
securities during the period mentioned. The data is provided to illustrate the
varying historical total returns and investors should not consider this
performance data as an indication of the future performance of the Fund or of
any sector in which the Fund invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information
has not been verified. The figures do not reflect the operating expenses and
fees of a mutual fund. See "Fund Expenses" in the prospectus. The net effect
of the deduction of the operating expenses of a mutual fund on these
historical total returns, including the compounded effect over time, could be
substantial.
Historical Total Returns of Different Bond Market Sectors
[CHART]
/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.
I-2
<PAGE>
This chart illustrates the This chart shows the growth of a
performance of major world stock hypothetical $10,000 investment made
markets for the period from 1986 in the stocks representing the S&P
through 1995. It does not 500 stock index with and without
represent the performance of any reinvested dividends.
Prudential Mutual Fund.
[CHART] [CHART]
Hong Kong 23.8%
Belgium 20.7%
Sweden 19.4%
Netherland 19.3%
Spain 17.9%
Switzerland 17.1%
France 15.3%
UK 15.0%
US 14.8%
Japan 12.8%
Austrailia 10.9%
Germany 10.7%
Source: Morgan Stanley Capital Source: Stocks, Bonds, Bills, and
International (MSCI). Used with Inflation 1996 Yearbook, Ibbotson
permission. Morgan Stanley Country Associates, Chicago (annually
indices are unmanaged indices updates work by Roger G. Ibbotson
which include those stocks making and Rex A. Sinquefield). Used with
up the largest two-thirds of each permission. All rights reserved.
country's total stock market This chart is used for illustrative
capitalization. Returns reflect purposes only and is not intended to
the reinvestment of all represent the past, present or
distributions. This chart is for future performance of any Prudential
illustrative purposes only and is Mutual Fund. Common stock total
not indicative of the past, return is based on the Standard &
present or future performance of Poor's 500 Stock Index, a market-
any specific investment. Investors value-weighted index made up of 500
cannot invest directly in stock of the largest stocks in the U.S.
indices. based upon their stock market value.
Investors cannot invest directly in
indices.
---------------------------------------
WORLD STOCK MARKET CAPITALIZATION BY
REGION
World Total: $9.2 Trillion
[CHART]
Europe 28.3
Canada 2.2
US 40.8
Pacific Basin 28.7
Source: Morgan Stanley Capital
International, December 1995. Used
with permission. This chart
represents the capitalization of
major world stock markets as
measured by the Morgan Stanley
Capital International (MSCI) World
Index. The total market
capitalization is based on the value
of 1579 companies in 22 countries
(representing approximately 60% of
the aggregate market value of the
stock exchanges). This chart is for
illustrative purposes only and does
not represent the allocation of any
Prudential Mutual Fund.
I-3
<PAGE>
The 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 (1926-1995)
[CHART]
- ---------------------------------------
Source: Stocks, Bonds, Bills and Inflation 1996 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. 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.
[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.
I-4
<PAGE>
APPENDIX II--GENERAL INVESTMENT INFORMATION
ASSET ALLOCATION
Asset allocation is a technique for reducing risk, providing balance. Asset
allocation among different types of securities within an overall investment
portfolio helps to reduce risk and to potentially provide stable returns,
while enabling investors to work toward their financial goal(s). Asset
allocation is also a strategy to gain exposure to better performing asset
classes while maintaining investment in other asset classes.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable
returns. Owning a portfolio of securities mitigates the individual risks (and
returns) of any one security. Additionally, diversification among types of
securities reduces the risks (and general returns) of any one type of
security.
DURATION
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to
changes in interest rates. When interest rates fall, bond prices generally
rise. Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, i.e., principal and interest
rate payments. Duration is expressed as a measure of time in years--the longer
the duration of a bond (or a bond portfolio), the greater the impact of
interest rate changes on the bond's (or the bond portfolio's) price. Duration
differs from effective maturity in that duration takes into account call
provisions, coupon rates and other factors. Duration measures interest rate
risk only and not other risks, such as credit risk and, in the case of non-
U.S. dollar denominated securities, currency risk. Effective maturity measures
the final maturity dates of a bond (or a bond portfolio).
MARKET TIMING
Market timing--buying securities when prices are low and selling them when
prices are relatively higher--may not work for many investors because it is
impossible to predict with certainty how the price of a security will
fluctuate. However, owning a security for a long period of time may help
investors offset short-term price volatility and realize positive returns.
POWER OF COMPOUNDING
Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth
of assets. The long-term investment results of compounding may be greater than
that of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.
II-1
<PAGE>
APPENDIX III--INFORMATION RELATING TO THE PRUDENTIAL
Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating
to the Prudential Mutual Funds. See "Management of the Fund--Manager" in the
Prospectus. The data will be used in sales materials relating to the
Prudential Mutual Funds. Unless otherwise indicated, the information is as of
December 31, 1995 and is subject to change thereafter. All information relies
on data provided by The Prudential Investment Corporation (PIC) or from other
sources believed by the Manager to be reliable. Such information has not been
verified by the Fund.
INFORMATION ABOUT PRUDENTIAL
The Manager and 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's Money Management Group (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 sixteenth 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.
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.
- ---------
/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 Fund, Inc. 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.
III-1
<PAGE>
Equity Funds. Forbes magazine listed Prudential Equity Fund among twenty
mutual funds on its Honor Roll in its mutual fund issue of August 28, 1995.
Honorees are chosen annually among mutual funds (excluding sector funds) which
are open to new investors and have had the same management for at least five
years. Forbes considers, among other criteria, the total return of a mutual
fund in both bull and bear markets as well as a fund's risk profile.
Prudential Equity Fund is managed with a "value" investment style by PIC. In
1995, Prudential Securities introduced Prudential Jennison Fund, a growth-
style equity fund managed by Jennison Associates Capital Corp., a premier
institutional equity manager and a subsidiary of Prudential.
High Yield Funds. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor the 167
issues held in the Prudential High Yield Fund (currently the largest fund of
its kind in the country) along with 100 or so other high yield bonds, which
may be considered for purchase./3/ Non-investment grade bonds, also known as
junk bonds or high yield bonds, are subject to a greater risk of loss of
principal and interest including default risk than higher-rated bonds.
Prudential high yield portfolio managers and analysts meet face-to-face with
almost every bond issuer in the High Yield Fund's portfolio annually, and have
additional telephone contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets--from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from Pulp and Paper Forecaster to Women's
Wear Daily--to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential
mutual fund.
Prudential Mutual Funds trade approximately $31 billion in U.S. and foreign
government securities a year. PIC seeks information from government policy
makers. In 1995, Prudential's portfolio managers met with several senior U.S.
and foreign government officials, on issues ranging from economic conditions
in foreign countries to the viability of index-linked securities in the United
States.
Prudential Mutual Funds' portfolio managers and analysts met with over 1,200
companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.
Prudential Mutual Fund global equity managers conducted many of their visits
overseas, often holding private meetings with a company in a foreign language
(our global equity managers speak 7 different languages, including Mandarin
Chinese).
Trading Data./4/ On an average day, Prudential Mutual Funds' U.S. and
foreign equity trading desks traded $77 million in securities representing
over 3.8 million shares with nearly 200 different firms. Prudential Mutual
Funds' bond trading desks traded $157 million in government and corporate
bonds on an average day. That represents more in daily trading than most bond
funds tracked by Lipper even have in assets./5/ Prudential Mutual Funds' money
market desk traded $3.2 billion in money market securities on an average day,
or over $800 billion a year. They made a trade every 3 minutes of every
trading day. In 1994, the Prudential Mutual Funds effected more than 40,000
trades in money market securities and held on average $20 billion of money
market securities./6/
Based on complex-wide data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Services, 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.
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/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.
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<PAGE>
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 8+).
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
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
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/7/ As of December 31, 1994.
/8/ On an annual basis, Institutional Investor magazine surveys more than 700
institutional money managers, chief investment officers and research
directors, asking them to evaluate analysts in 76 industry sectors. Scores
are produced by taking the number of votes awarded to an individual analyst
and weighting them based on the size of the voting institution. In total,
the magazine sends its survey to approximately 2,000 institutions and a
group of European and Asian institutions.
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