<PAGE>
As filed with the Securities and Exchange Commission on July 25, 1997
Securities Act Registration No. 33-15166
Investment Company Act Registration No. 811-5206
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [_]
PRE-EFFECTIVE AMENDMENT NO. [_]
POST-EFFECTIVE AMENDMENT NO.17 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [_]
AMENDMENT NO.18 [X]
(Check appropriate box or boxes)
-----------
PRUDENTIAL NATURAL RESOURCES FUND, INC.
(Exact name of registrant as specified in charter)
GATEWAY CENTER THREE
100 MULBERRY STREET NEWARK,
NEW JERSEY 07102-4077
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (201) 367-7530
S. JANE ROSE, ESQ.
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NJ 07102-4077
(NAME AND ADDRESS OF AGENT FOR SERVICE)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE
DATE OF THE REGISTRATION STATEMENT.
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX):
[_] immediately upon filing pursuant to paragraph (b)
[X] on (July 30, 1997) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a) (1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[_] this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
PURSUANT TO RULE 24f-2 UNDER THE INVESTMENT COMPANY ACT OF 1940, REGISTRANT
HAS PREVIOUSLY REGISTERED AN INDEFINITE NUMBER OF SHARES OF COMMON STOCK, PAR
VALUE $.01 PER SHARE. THE REGISTRANT FILED A NOTICE UNDER SUCH RULE FOR ITS
FISCAL YEAR ENDED MAY 31, 1997 ON OR ABOUT JULY 24, 1997.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
------------- --------
<C> <S> <C>
PART A
Item 1. Cover Page........................... Cover Page
Item 2. Synopsis............................. Fund Expenses; Fund Highlights
Item 3. Condensed Financial Information...... Fund Expenses; Financial
Highlights; How the Fund
Calculates Performance
Item 4. General Description of Registrant.... Cover Page; Fund Highlights;
How the Fund Invests; General
Information
Item 5. Management of the Fund............... Financial Highlights; How the
Fund is Managed; General
Information; Shareholder Guide
Item 5A. Management's Discussion of Fund
Performance.......................... Financial Highlights
Item 6. Capital Stock and Other Securities... Taxes, Dividends and
Distributions; General
Information; Shareholder Guide
Item 7. Purchase of Securities Being Offered. Shareholder Guide; How the
Fund Values Its Shares; How
the Fund is Managed
Item 8. Redemption or Repurchase............. Shareholder Guide; How the
Fund Values its Shares;
General Information
Item 9. Pending Legal Proceedings............ Not Applicable
PART B
Item 10. Cover Page........................... Cover Page
Item 11. Table of Contents.................... Table of Contents
Item 12. General Information and History...... General Information
Item 13. Investment Objectives and Policies... Investment Objective and
Policies; Investment
Restrictions
Item 14. Management of the Fund............... Directors and Officers;
Manager; Distributor
Item 15. Control Persons and Principal Holders
of Securities........................ Directors and Officers
Item 16. Investment Advisory and Other Manager; Distributor;
Services............................. Custodian, Transfer and
Dividend Disbursing Agent and
Independent Accountants
Item 17. Brokerage Allocation and Other Portfolio Transactions and
Practices............................ Brokerage
Item 18. Capital Stock and Other Securities... Not Applicable
Item 19. Purchase, Redemption and Pricing of Purchase and Redemption of
Securities Being Offered............. Fund Shares; Shareholder
Investment Account
Item 20. Tax Status........................... Taxes, Dividends and
Distributions
Item 21. Underwriters......................... Distributor
Item 22. Calculation of Performance Data...... Performance Information
Item 23. Financial Statements................. Financial Statements
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Post-Effective Amendment
to the Registration Statement.
</TABLE>
<PAGE>
PRUDENTIAL NATURAL RESOURCES FUND, INC.
- -------------------------------------------------------------------------------
PROSPECTUS DATED JULY 30, 1997
- -------------------------------------------------------------------------------
Prudential 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 Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077,
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, 1997, which information is
incorporated herein by reference (is legally considered a part of this
Prospectus) and is available without charge upon request to the Fund at the
address or telephone number noted above.
- -------------------------------------------------------------------------------
Investors are advised to read this Prospectus and retain it for future
reference.
- -------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADE-
QUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OF-
FENSE.
<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 9.
WHAT ARE THE FUND'S 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 9. In addition, the Fund may engage
in various hedging and return enhancement strategies and use 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 12. As
with an investment in any mutual fund, an investment in this Fund can decrease
in value and you can lose money.
WHO MANAGES THE FUND?
Prudential Investments Fund Management LLC (PIFM 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, 1997, PIFM
served as manager or administrator to 62 investment companies, including 40
mutual funds, with aggregate assets of approximately $56.7 billion. The
Prudential Investment Corporation, which does business under the name of
Prudential Investments (PI, the Subadviser or the investment adviser),
furnishes investment advisory services in connection with the management of the
Fund under a Subadvisory Agreement with PIFM. See "How the Fund is Managed--
Manager" at page 16. 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, Class C and Class Z 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. Prudential Securities incurs the expense of
distributing the Fund's Class Z shares under a Distribution Agreement with the
Fund, none of which is reimbursed or paid for by the Fund. See "How the Fund is
Managed--Distributor" at page 17.
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 Class A, Class B and Class C shares. Class Z shares are not subject to any
minimum investment requirements. There is no minimum investment requirement for
certain retirement and employee savings plans or custodial accounts for the
benefit of minors. For purchases made through the Automatic Savings
Accumulation Plan, the minimum initial and subsequent investment is $50. See
"Shareholder Guide--How to Buy Shares of the Fund" at page 23 and "Shareholder
Guide--Shareholder Services" at page 34.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund, through its transfer
agent, Prudential Mutual Fund Services LLC (PMFS or the Transfer Agent), at the
net asset value per share (NAV) next determined after receipt of your purchase
order by the Transfer Agent or Prudential Securities plus a sales charge which
may be imposed either (i) at the time of purchase (Class A shares) or (ii) on a
deferred basis (Class B or Class C shares). Class Z shares are offered to a
limited group of investors at net asset value without any sales charge. See
"How the Fund Values its Shares" at page 19 and "Shareholder Guide--How to Buy
Shares of the Fund" at page 23.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers four classes of shares through this Prospectus:
. Class A Shares:
Sold with an initial sales charge of up to 5% of the offering
price.
.Class B Shares:
Sold without an initial sales charge but are subject to a
contingent deferred sales charge or CDSC (declining from 5% to
zero of the lower of the amount invested or the redemption
proceeds) which will be imposed on certain redemptions made
within six years of purchase. Although Class B shares are
subject to higher ongoing distribution-related expenses than
Class A shares, Class B shares will automatically convert to
Class A shares (which are subject to lower ongoing
distribution-related expenses) approximately seven years after
purchase.
.Class C Shares:
Sold without an initial sales charge and, for one year after
purchase, are subject to a 1% CDSC on redemptions. Like Class
B shares, Class C shares are subject to higher ongoing
distribution-related expenses than Class A shares but do not
convert to another class.
.Class Z Shares:
Sold without either an initial or contingent deferred sales
charge to a limited group of investors. Class Z shares are not
subject to any ongoing service or distribution expenses.
See "Shareholder Guide--Alternative Purchase Plan" at page 24.
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 28.
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 20.
3
<PAGE>
FUND EXPENSES
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES+
Maximum Sales Load
Imposed on Purchases
(as a percentage of
offering price)....... 5% None None None
Maximum Sales Load
Imposed on Reinvested
Dividends............. None None None None
Maximum Deferred Sales
Load (as a percentage None 5% during the 1% on None
of original purchase first year, redemptions
price or redemption decreasing by made within
proceeds, whichever is 1% annually to one year
lower)................ 1% in the fifth of purchase
and sixth years
and 0% the
seventh year*
Redemption Fees....... None None None None
Exchange Fee.......... None None None None
ANNUAL FUND OPERATING
EXPENSES
(as a percentage of av-
erage net assets) CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- -------------- -------------- --------------
Management Fees....... .75% .75% .75% .75%
12b-1 Fees (After
Reduction)............ .25++ 1.00 1.00 None
Other Expenses........ .48 .48 .48 .48
---- ---- ---- ----
Total Fund Operating
Expenses (After
Reduction)............ 1.48% 2.23% 2.23% 1.23%
==== ==== ==== ====
</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.............................................. $64 $ 94 $127 $218
Class B.............................................. $73 $100 $129 $229
Class C.............................................. $33 $ 70 $119 $256
Class Z.............................................. $13 $ 39 $ 68 $149
You would pay the following expenses on the same in-
vestment, assuming no
redemption:
Class A.............................................. $64 $ 94 $127 $218
Class B.............................................. $23 $ 70 $119 $229
Class C.............................................. $23 $ 70 $119 $256
Class Z.............................................. $13 $ 39 $ 68 $149
</TABLE>
The above example is based on data for the Fund's fiscal year ended May 31,
1997. 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, 1998. Total Fund Operating Expenses without such
limitation would be 1.53%. 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, 1997 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,
YEAR ENDED MAY 31, 1990(A)
---------------------------------------------------------------- THROUGH
1997(C) 1996 1995(C) 1994(C) 1993(C) 1992(C) 1991(C) MAY 31, 1990(C)
------- ------- ------- ------- ------- ------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period.... $ 17.34 $ 13.73 $ 12.55 $11.84 $10.02 $ 9.73 $10.17 $10.58
------- ------- ------- ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income
(loss)................. (.07) (.01) (.03) .01 .02 .01 .13 .04
Net realized and
unrealized gain (loss)
on investment and
foreign currency
transactions........... .94 4.42 1.21 .70 1.80 .38 (.39) (.45)
------- ------- ------- ------ ------ ------ ------ ------
Total from investment
operations............. .87 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.. (1.94) (.80) -- -- -- (.01) -- --
------- ------- ------- ------ ------ ------ ------ ------
Total distributions..... (1.94) (.80) -- -- -- (.10) (.18) --
------- ------- ------- ------ ------ ------ ------ ------
Net asset value, end of
period................. $ 16.27 $ 17.34 $ 13.73 $12.55 $11.84 $10.02 $ 9.73 $10.17
======= ======= ======= ====== ====== ====== ====== ======
TOTAL RETURN(D):........ 5.37% 33.51% 9.40% 6.00% 18.16% 4.04% (2.59)% (3.88)%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000)........... $47,054 $32,608 $19,682 $6,505 $1,898 $590 $770 $427
Average net assets
(000).................. $40,093 $23,106 $10,791 $4,106 $758 $647 $664 $279
Ratios to average net
assets:
Expenses, including
distribution fees.... 1.48% 1.57% 1.73% 1.89% 2.38% 2.59% 2.22% 2.72%(b)
Expenses, excluding
distribution fees.... 1.23% 1.32% 1.48% 1.65% 2.18% 2.39% 2.02% 2.52%(b)
Net investment income
(loss)............... (.43)% (0.09)% (0.25)% 0.11% 0.13% 0.44% 1.47% 1.86%(b)
Portfolio turnover...... 53% 41% 36% 19% 50% 36% 40% 34%
Average commission rate
per share.............. $ .0371 $ .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.
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, 1997 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,
YEAR ENDED MAY 31, 1987(A)
--------------------------------------------------------------------------------------- THROUGH MAY 31,
1997(C) 1996 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> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $ 16.70 $ 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).................. (.19) (.10) (.13) (.08) (.07) (.08) .06 .02 .07 .04
Net realized and
unrealized gain (loss)
on investment and
foreign currency
transactions............ .89 4.25 1.19 .68 1.79 .39 (.39) .92 .45 (.66)
-------- -------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations.............. .70 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... (1.94) (.80) -- -- -- (.01) -- (.60) -- --
-------- -------- ------- ------- ------- ------- ------- ------- ------- -------
Total distributions...... (1.94) (.80) -- -- -- (.06) (.09) (.66) -- --
-------- -------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of
period.................. $ 15.46 $ 16.70 $ 13.35 $ 12.29 $ 11.69 $ 9.97 $ 9.72 $ 10.14 $ 9.86 $ 9.36
======== ======== ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN(f):......... 4.51% 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)................... $111,464 $113,090 $80,774 $64,235 $36,150 $23,228 $33,653 $47,579 $44,497 $50,577
Average net assets (000). $107,361 $ 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...... 2.23% 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...... 1.23% 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)................. (1.18)% (0.84)% (1.05)% (0.67)% (0.67)% (0.34)% 0.58% 0.16% 0.69%(d) 0.76%(b)(d)
Portfolio turnover....... 53% 41% 36% 19% 50% 36% 40% 34% 52% 24%
Average commission rate
per share............... $ .0371 $ .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.
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 MAY 31, THROUGH
------------------ MAY 31,
1997(C) 1996 1995(C)
---------- --------- ---------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..... $ 16.70 $ 13.35 $12.47
--------- --------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss)............. (.19) (.10) (.13)
Net realized and unrealized gain (loss)
on investment and foreign currency
transactions............................ .89 4.25 1.01
--------- --------- ------
Total from investment operations......... .70 4.15 .88
--------- --------- ------
LESS DISTRIBUTIONS
Distributions from net realized gains on
investment and foreign currency
transactions............................ (1.94) (.80) --
--------- --------- ------
Net asset value, end of period........... $ 15.46 $ 16.70 $13.35
========= ========= ======
TOTAL RETURN(D):......................... 4.51% 32.49% 7.06%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).......... $ 2,542 $ 1,551 $ 606
Average net assets (000)................. $ 2,041 $ 734 $ 294
Ratios to average net assets:
Expenses, including distribution fees.. 2.23% 2.32 % 2.56 %(b)
Expenses, excluding distribution fees.. 1.23% 1.32 % 1.56 %(b)
Net investment income (loss)........... (1.18)% (0.84)% (1.08)%(b)
Portfolio turnover....................... 53% 41% 36%
Average commission rate per share........ $ 0.371 $ .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.
7
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS Z 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 Z 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 Z
----------------
SEPTEMBER 16,
1996 (A) THROUGH
MAY 31, 1997(C)
----------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $17.08
------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss)................................ (.03)
Net realized and unrealized gain (loss) on investment and
foreign currency transactions.............................. 1.19
------
Total from investment operations............................ 1.16
------
LESS DISTRIBUTIONS
Distributions from net realized gains on investment and
foreign currency transactions.............................. (1.94)
------
Net asset value, end of period.............................. $16.30
======
TOTAL RETURN(D):............................................ 10.38%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............................. $3,140
Average net assets (000).................................... $ 994
Ratios to average net assets:
Expenses.................................................. 1.23% (b)
Net investment income (loss).............................. (.18%)(b)
Portfolio turnover.......................................... 53%
Average commission rate per share........................... $.0371
</TABLE>
--------
(a) Commencement of offering of Class Z 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.
8
<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 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
9
<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, WHEN MARKET CONDITIONS WARRANT, THE FUND MAY
BE PRIMARILY INVESTED IN SECURITIES OF U.S. ISSUERS.
AS WITH AN INVESTMENT IN ANY MUTUAL FUND, AN INVESTMENT IN THIS FUND CAN
DECREASE IN VALUE AND YOU CAN LOSE MONEY.
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 stream 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, 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, Inc. (Moody's), respectively, or
commercial paper rated at least A-2 or P-2 by S&P or Moody's, respectively, or
comparably rated by a nationally recognized statistical rating organization
(NRSRO) or, if unrated, 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
10
<PAGE>
maturity, payable at maturity in cash at the greater of either $1,000 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.
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 Prime-2 by S&P or Moody's, respectively, or comparably rated
by a nationally recognized statistical rating organization (NRSRO) or if
unrated, 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.
11
<PAGE>
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
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, and thus an investor, may lose money
through unsuccessful use of these strategies. The Fund's ability to use these
strategies may be limited by market conditions, regulatory limits and tax
considerations and there can be no assurance that any of these strategies will
succeed. See "Investment Objective and Policies" and "Taxes, Dividends and
Distributions" 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, it 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
12
<PAGE>
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. A written option is "covered"
if, as long as the Fund is obligated under the option, it (i) owns an
offsetting position in the underlying security or currency or (ii) maintains
in a segregated account, cash or other liquid assets in an amount equal to or
greater than its obligation under the option. There is no limitation on the
amount of call options the Fund may write. See "Investment Objective and
Policies--Options Transactions" in the Statement of Additional Information.
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.
The Fund, and thus an investor, may lose money through unsuccessful use of
these strategies. 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
13
<PAGE>
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 OR CLOSE OUT 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, Dividends and Distributions" 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. The Fund, and thus an
investor, may lose money through any unsuccessful 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,
Dividends and Distributions" in the Statement of Additional Information.
OTHER INVESTMENTS AND POLICIES
WHEN-ISSUED OR DELAYED DELIVERY SECURITIES
The Fund may purchase or sell securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions arise when
securities are purchased or sold by the Fund with payment and delivery taking
place in the future in order to secure what is considered to be an
advantageous price and yield to the Fund at the time of entering into the
transaction. The Fund's Custodian will maintain, in a segregated account of
the Fund, cash, U.S. Government securities, equity securities or other liquid,
unencumbered assets, marked-to-market daily, having a value equal to or
greater than the Fund's purchase commitments. The securities so purchased are
subject to market fluctuation and no interest accrues to the purchaser during
the period between purchase and settlement. At the time of delivery of the
securities the value may be more or less than the purchase price and an
increase in the percentage of the Fund's assets committed to the purchase of
securities on a when-issued or delayed delivery basis may increase the
volatility of the Fund's net asset value.
REPURCHASE AGREEMENTS
The Fund may on occasion enter into repurchase agreements whereby the seller
of a security agrees to repurchase that security from the Fund at a mutually
agreed upon time and price. The 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
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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 Investments Fund Management LLC
pursuant to an order of the Securities and Exchange Commission (SEC).
ILLIQUID SECURITIES
The Fund may hold up to 15% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven
days, securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable in securities
markets either within or outside of the United States. Restricted securities
eligible for resale pursuant to Rule 144A under the Securities Act of 1933, as
amended (the Securities Act), and privately placed commercial paper that have
a readily available market are not considered illiquid for purposes of this
limitation. The investment adviser will monitor the liquidity of such
restricted securities under the supervision of the Board of Directors. The
Fund's investment in Rule 144A securities could have the effect of increasing
illiquidity to the extent that qualified institutional buyers become, for a
limited time, uninterested in purchasing Rule 144A securities. See "Investment
Objective and Policies--Illiquid Securities" in the Statement of Additional
Information. Repurchase agreements subject to demand are deemed to have a
maturity equal to the applicable notice period.
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. If
the Fund borrows to invest in securities, any investment gains made on the
securities in excess of interest paid on the borrowing will cause the net
asset value of the shares to rise faster than would otherwise be the case. On
the other hand, if the investment performance of the additional securities
purchased fails to cover their cost (including any interest paid on the money
borrowed) to the Fund, the net asset value of the Fund's shares will decrease
faster than would otherwise be the case. This is the speculative factor known
as "leverage." See "Investment Restrictions" in the Statement of Additional
Information.
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 may lend its portfolio securities to brokers or dealers, banks or
other recognized institutional borrowers of securities, provided that the
borrower at all times maintains cash or other liquid assets or secures an
irrevocable letter of credit in favor of the Fund in an amount equal to at
least 100%, determined daily, of the market value of the securities loaned
which are maintained in a segregated account pursuant to applicable
regulations. During the time portfolio securities
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are on loan, the borrower will pay the Fund an amount equivalent to any
dividend or interest paid on such securities and the Fund may invest the cash
collateral and earn additional income, or it may receive an agreed-upon amount
of interest income from the borrower. As a matter of fundamental policy, the
Fund cannot lend more than 30% of the value of its total assets. The Fund may
pay reasonable administration and custodial fees in connection with a loan.
See "Investment Objective and Policies--Lending of Portfolio Securities" in
the Statement of Additional Information.
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."
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, 1997, and, in the case of the Class Z
Shares, the period ended May 31, 1997, the Fund's total expenses as a
percentage of average net assets for the Fund's Class A, Class B, Class C and
Class Z shares were 1.48%, 2.23%, 2.23% and 1.23%, respectively. See
"Financial Highlights."
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, 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. PIFM is organized in New
York as a limited liability company. It is the successor of Prudential Mutual
Fund Management, Inc., which transferred its assets to PIFM in September 1996.
For the fiscal year ended May 31, 1997, the Fund paid management fees to PIFM
of .75 of 1% of the Fund's average net assets. See "'Manager" in the Statement
of Additional Information.
As of June 30, 1997, PIFM served as the manager to 40 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies with aggregate assets of
approximately $56.7 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PIFM MANAGES THE INVESTMENT
OPERATIONS OF THE FUND AND ALSO ADMINISTERS THE FUND'S CORPORATE AFFAIRS. See
"Manager" in the Statement of Additional Information.
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PURSUANT TO A SUBADVISORY AGREEMENT BETWEEN PIFM AND PRUDENTIAL INVESTMENT
CORPORATION (PIC), PIC, DOING BUSINESS AS PRUDENTIAL INVESTMENTS (PI, THE
SUBADVISER OR THE INVESTMENT ADVISER), PI FURNISHES INVESTMENT ADVISORY
SERVICES IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY
PIFM FOR ITS REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH
SERVICES. Under the Management Agreement, PIFM continues to have
responsibility for all investment advisory services and supervises PI's
performance of such services.
The current portfolio manager of the Fund is Leigh Goehring, a manager of
PI. Mr. Goehring has responsibility for the day-to-day management of the
Fund's portfolio. Mr. Goehring has been employed by PI 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.
PIFM and PIC are wholly-owned subsidiaries of Prudential, a major
diversified insurance and financial services company.
DISTRIBUTOR
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), ONE
SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE
LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE SHARES OF
THE FUND. IT IS AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), PRUDENTIAL SECURITIES (THE DISTRIBUTOR) INCURS THE
EXPENSES OF DISTRIBUTING THE FUND'S CLASS A, CLASS B AND CLASS C SHARES.
Prudential Securities also incurs the expense of distributing the Fund's Class
Z shares under the Distribution Agreement, none of which is reimbursed or paid
for by the Fund. These expenses include commissions and account servicing fees
paid to, or on account of, financial advisers of Prudential Securities and
representatives of Pruco Securities Corporation (Prusec), an affiliated
broker-dealer, commissions and account servicing fees paid to, or on account
of, other broker-dealers or financial institutions (other than national banks)
which have entered into agreements with the Distributor, advertising expenses,
the cost of printing and mailing prospectuses to potential investors and
indirect and overhead costs of Prudential Securities and Prusec associated
with the sale of Fund shares, including lease, utility, communications and
sales promotion expenses.
Under the Plans, 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, 1998.
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
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<PAGE>
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, 1997, 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 Class A, Class B or Class
C shares of the Fund will be allocated to each such class based upon the ratio
of sales of each such class to the sales of Class A, Class B or Class C shares
of the Fund other than expenses allocable to a particular class. The
distribution fee and sales charge of one class will not be used to subsidize
the sale of another class.
Each Plan provides that it shall continue in effect from year to year
provided that a majority of the Board of Directors of the Fund, including a
majority of the Directors who are not "interested persons" of the Fund (as
defined in the Investment Company Act) and who have no direct or indirect
financial interest in the operation of the Plan or any agreement related to
the Plan (the Rule 12b-1 Directors), vote annually to continue the Plan. Each
Plan may be terminated at any time by vote of a majority of the Rule 12b-1
Directors or of a majority of the outstanding shares of the applicable class
of the Fund. The Fund will not be obligated to pay distribution and service
fees incurred under any Plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Fund under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers (including Prudential
Securities) and other persons who distribute shares of the Fund (including
Class Z shares). Such payments may be calculated by reference to the net asset
value of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (NASD), governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the
allegations asserted against it, PSI consented to the entry of an SEC
Administrative Order which stated that PSI's conduct violated the federal
securities laws, directed PSI to cease and desist from violating the federal
securities laws, pay civil penalties, and adopt certain remedial measures to
address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of
a $10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI has agreed to provide
additional funds, if necessary, for the 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
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<PAGE>
agreed, among other things, to pay an additional $330,000,000 into the fund
established by the SEC to pay restitution to investors who purchased certain
PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may
be obtained at no cost by calling (800) 225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may 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.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PIFM. 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.
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
NAVs and dividends. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A shares as a result of the larger distribution-
related fee to which Class B and Class C shares are subject. The NAV of Class
Z shares will generally be higher than the NAV of the other three classes
because Class Z shares are not subject to any distribution and/or service
fees. It is expected, however, that the NAV of the four classes will tend to
converge immediately after the recording of dividends, if any, which will
differ by approximately the amount of the distribution and/or service fee
expense accrual differential among the classes.
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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, CLASS C AND CLASS Z SHARES. These figures are
based on historical earnings and are not intended to indicate future
performance. The "total return" shows how much an investment in the Fund would
have increased (decreased) over a specified period of time (i.e., one, five or
ten years or since inception of the Fund) assuming that all distributions and
dividends by the Fund were reinvested on the reinvestment dates during the
period and less all recurring fees. The "aggregate" total return reflects
actual performance over a stated period of time. "Average annual" total return
is a hypothetical rate of return that, if achieved annually, would have
produced the same aggregate total return if performance had been constant over
the entire period. "Average annual" total return smooths out variations in
performance and takes into account any applicable initial or contingent
deferred sales charges. Neither "average annual" total return nor "aggregate"
total return takes into account any federal or state income taxes which may be
payable upon redemption. The "yield" refers to the income generated by an
investment in the Fund over a one-month or 30-day period. This income is then
"annualized;" that is, the amount of income generated by the investment during
that 30-day period is assumed to be generated each 30-day period for twelve
periods and is shown as a percentage of the investment. The income earned on
the investment is also assumed to be reinvested at the end of the sixth 30-day
period. The Fund also may include comparative performance information in
advertising or marketing the Fund's shares. Such performance information may
include data from Lipper Analytical Services, Inc., Morningstar Publications,
Inc., other industry publications, business periodicals and market indices.
See "Performance Information" in the Statement of Additional Information.
Further performance information is contained in the Fund's annual and semi-
annual reports to shareholders, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
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, Dividends and Distributions" 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, Dividends and Distributions" 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, Dividends and Distributions" 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 own mostly
passive assets or which derive 75% or more of their income from passive
sources. The Fund's investments in PFICs may subject the Fund to federal
income tax on certain income and gains realized by the Fund.
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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, Dividends and Distribution"
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 currently 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. See
"Taxes, Dividends and Distributions" in the Statement of Additional
Information. Corporate shareholders should consult their tax advisers
regarding other requirements applicable to the dividends received deduction.
Any gain or loss realized upon a sale or redemption of 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 any
class of the Fund's shares for any other class of its shares constitutes a
taxable event for federal income tax purposes. However, such opinions are not
binding on the Internal Revenue Service.
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).
SHAREHOLDERS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISERS REGARDING
SPECIFIC QUESTIONS AS TO FEDERAL, STATE OR LOCAL TAXES. SEE "TAXES, DIVIDENDS
AND DISTRIBUTIONS" IN THE STATEMENT OF ADDITIONAL INFORMATION.
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 (other than Class Z) will bear its own distribution
charges, generally resulting in lower dividends for Class B and Class C shares
in relation to Class A and Class Z shares and lower dividends for Class A
shares in relation to Class Z shares. Distributions of net capital gains, if
any, will be paid in the same amount for each class of shares. See "How the
Fund Values its Shares."
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DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES BASED ON
THE NAV OF EACH CLASS ON THE RECORD DATE OR SUCH OTHER DATE AS THE BOARD OF
DIRECTORS MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT LESS
THAN FIVE BUSINESS DAYS PRIOR TO THE RECORD DATE TO RECEIVE SUCH DIVIDENDS AND
DISTRIBUTIONS IN CASH. Such election should be submitted to Prudential Mutual
Fund Services LLC, Attention: Account Maintenance, P.O. Box 15015, New
Brunswick, New Jersey 08906-5015. 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 TWO 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.
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 (except for Class
Z shares, which are not subject to any sales charges or distribution and/or
service fees), which may affect performance, (ii) each class has exclusive
voting rights on any matter submitted to shareholders that relates solely to
its arrangement and has separate voting rights on any matter submitted to
shareholders in which the interests of one class differ from the interests of
any other class, (iii) each class has a different exchange privilege, (iv)
only Class B shares have a conversion feature and (v) Class Z shares are
offered exclusively for sale to a limited group of investors. See "How the
Fund is Managed--Distributor." In accordance with the Fund's Articles of
Incorporation, the Board of Directors may authorize the creation of additional
series 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.
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 (with the
exception of Class Z shares, which are not subject to any distribution or
service fee) 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. Since Class B and Class C shares generally bear higher distribution
expenses than Class A shares, the liquidation proceeds to shareholders of
those classes are likely to be lower than to Class A shareholders and to Class
Z shareholders, whose shares are not subject to any distribution and/or
service fees. The Fund's shares do not have cumulative voting rights for the
election of Directors.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF DIRECTORS IS REQUIRED TO
22
<PAGE>
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.
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 LLC (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. PARTICIPANTS IN PROGRAMS
SPONSORED BY PRUDENTIAL RETIREMENT SERVICES SHOULD CONTACT THEIR CLIENT
REPRESENTATIVE FOR MORE INFORMATION ABOUT CLASS Z SHARES. The purchase price
is the NAV next determined following receipt of an order in proper form by the
Transfer Agent or Prudential Securities plus a sales charge which, at your
option, may be imposed either (i) at the time of purchase (Class A shares) or
(ii) on a deferred basis (Class B or Class C shares). Class Z shares are
offered to a limited group of investors at net asset value without any sales
charge. Payment may be made by wire, check or through your brokerage account.
See "Alternative Purchase Plan" below. See also "How the Fund Values its
Shares."
The minimum initial investment is $1,000 for Class A and Class B shares and
$5,000 for Class C shares, except that the minimum initial investment for
Class C shares may be waived from time to time. There is no minimum investment
requirement for Class Z shares. The minimum subsequent investment is $100 for
all classes, except for Class Z shares, for which there is no such minimum
subsequent investment. 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,
23
<PAGE>
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 class in which you
are eligible to invest (Class A, Class B, Class C or Class Z shares).
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Fund as of that day. See "Net Asset Value" in the
Statement of Additional Information.
In making a subsequent purchase 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, Class C or Class Z shares and your
name and individual account number. It is not necessary to call PMFS to make
subsequent purchase orders utilizing Federal Funds. The minimum amount which
may be invested by wire is $1,000.
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS THROUGH THIS PROSPECTUS FOUR CLASSES OF SHARES (CLASS A,
CLASS B, CLASS C AND CLASS Z SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST
BENEFICIAL SALES CHARGE STRUCTURE FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE
AMOUNT OF THE PURCHASE, THE LENGTH OF TIME YOU EXPECT TO HOLD THE SHARES AND
OTHER RELEVANT CIRCUMSTANCES (ALTERNATIVE PURCHASE PLAN).
<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
CLASS Z None None Sold to a limited group
of investors
</TABLE>
The four classes of shares represent an interest in the same portfolio of
investments of the Fund and have the same rights, except that (i) each class
(with the exception of the Class Z shares, which are not subject to any
distribution or service fees) is subject to different sales charges and
distribution and/or service fees, which may affect performance, (ii) each
class has exclusive voting rights on any matter submitted to shareholders that
relates solely to its arrangement and has separate voting rights on any matter
submitted to shareholders in which the interests of one class differ from the
interest of any other class, and (iii) only Class B shares have a conversion
feature. The four classes also have separate exchange privileges. See "How to
Exchange Your Shares" below. The income attributable to each class and the
dividends payable on the shares of each class will be reduced by the amount of
the distribution fee (if any) of each class. Class B and Class C shares bear
the expenses of a higher distribution fee which will generally cause them to
have higher expense ratios and to pay lower dividends than the Class A and
Class Z shares.
Financial advisers and other sales agents who sell shares of the Fund will
receive different compensation for selling Class A, Class B, Class C and Class
Z shares and will generally receive more compensation initially for selling
Class A and Class B shares than for selling Class C or Class Z shares.
24
<PAGE>
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER
THINGS, (1) the length of time you expect to hold your investment, (2) the
amount of any applicable sales charge (whether imposed at the time of purchase
or redemption) and distribution-related fees, as noted above, (3) whether you
qualify for any reduction or waiver of any applicable sales charge, (4) the
various exchange privileges among the different classes of shares (see "How to
Exchange Your Shares" below) and (5) the fact that Class B shares
automatically convert to Class A shares approximately seven years after
purchase (see "Conversion Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund:
If you intend to hold your investment in the Fund for less than 7 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 5% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B
shares.
If you intend to hold your investment for 7 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money
invested initially because the sales charge on Class A shares is deducted at
the time of purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B 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 UNLESS THE PURCHASER IS ELIGIBLE TO PURCHASE CLASS Z SHARES. See
"Reduction and Waiver of Initial Sales Charges" and "Class Z Shares" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial
sales charge alternative is the next determined NAV plus a sales charge
(expressed as a percentage of the offering price and of the amount invested)
as shown in the following table:
<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>
25
<PAGE>
The Distributor may reallow the entire sales charge to dealers. Selling
dealers may be deemed to be underwriters, as that term is defined in the
Securities Act.
In connection with the sale of Class A shares at NAV (without payment of an
initial sales charge), the Manager, the Distributor or one of their affiliates
will pay dealers, financial advisers and other persons which distribute shares
a finders' fee from its own resources based on a percentage of the net asset
value of shares sold by such persons.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be
aggregated to determine the applicable reduction. See "Purchase and Redemption
of Fund Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares"
in the Statement of Additional Information.
Benefit Plans. Class A shares may be purchased at NAV, without payment of an
initial sales charge, by pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the
Internal Revenue Code (collectively, Benefit Plans), provided that the Benefit
Plan has existing assets of at least $1 million invested in shares of
Prudential Mutual Funds (excluding money market funds other than those
acquired pursuant to the exchange privilege) or 250 eligible employees or
participants. In the case of Benefit Plans whose accounts are held directly
with the Transfer Agent or Prudential Securities and for which the Transfer
Agent or Prudential Securities does individual account recordkeeping (Direct
Account Benefit Plans) and Benefit Plans sponsored by PSI or its subsidiaries
(PSI or Subsidiary Prototype Benefit Plans), Class A shares may be purchased
at NAV by participants who are repaying loans made from such plans to the
participant.
Prudential Retirement Programs. Class A shares may be purchased at NAV by
certain savings, retirement and deferred compensation plans, qualified or non-
qualified under the Internal Revenue Code, for which Prudential serves as the
plan administrator or recordkeeper, provided that (i) the plan has at least $1
million in existing assets or 250 eligible employees and (ii) the Fund is an
available investment option. These plans include pension, profit-sharing,
stock-bonus or other employee benefit plans under Section 401 of the Internal
Revenue Code, deferred compensation and annuity plans under Sections 457 or
403(b)(7) of the Internal Revenue Code and plans that participate in the
Transfer Agent's PruArray and SmartPath Programs (benefit plan recordkeeping
services) (hereafter referred to as a PruArray or SmartPath Plan). All plans
of a company for which Prudential serves as plan administrator or recordkeeper
are aggregated in meeting the $1 million threshold. The term "existing assets"
as used herein includes stock issued by a plan sponsor, shares of Prudential
Mutual Funds and shares of certain unaffiliated mutual funds that participate
in the PruArray or SmartPath Program (Participating Funds). "Existing assets"
also include monies invested in The Guaranteed Interest Account (GIA), a group
annuity insurance product issued by Prudential, and units of The Stable Value
Fund (SVF), an unaffiliated bank collective fund. Class A shares may also be
purchased at NAV by plans that have monies invested in GIA and SVF, provided
(i) the purchase is made with the proceeds of a redemption from either GIA or
SVF and (ii) Class A shares are an investment option of the plan.
PruArray Association Benefit Plans. Class A shares are also offered at net
asset value to Benefit Plans or non-qualified plans sponsored by employers
which are members of a common trade, professional or membership association
(Association) that participate in the PruArray Program provided that the
Association enters into a written agreement with Prudential. Such Benefit
Plans or non-qualified plans may purchase Class A shares at net asset value
without regard to the assets or number of participants in the individual
employer's qualified Plan(s) or non-qualified plans so long as the employers
in the Association (i) have retirement plan assets in the aggregate of at
least $1 million or 250 participants in the aggregate and (ii) maintain their
accounts with the Fund's transfer agent.
26
<PAGE>
PruArray Savings Program. Class A shares are also offered at net asset value
to employees of companies that enter into a written agreement with Prudential
Retirement Services to participate in the PruArray Savings Program. Under this
Program, a limited number of Prudential Mutual Funds are available for
purchase at net asset value by Individual Retirement Accounts and Savings
Accumulation Plans of the company's employees. The Program is available only
to (i) employees who open an IRA or Savings Accumulation Plan account with the
Transfer Agent and (ii) spouses of employees who open an IRA account with the
Transfer Agent. The program is offered to companies that have at least 250
eligible employees.
Special Rules Applicable to Retirement Plans. After a Benefit Plan or
PruArray Plan qualifies to purchase Class A shares at NAV, all subsequent
purchases will be made at NAV.
Other Waivers. In addition, Class A shares may be purchased at NAV, through
Prudential Securities or the Transfer Agent, by the following persons: (a)
officers of the Prudential Mutual Funds (including the Fund), (b) employees of
Prudential Securities and PIFM and their subsidiaries and members of the
families of such persons who maintain an "employee related" account at
Prudential Securities or the Transfer Agent, (c) employees of subadvisers of
the Prudential Mutual Funds provided that such purchases at NAV are permitted
by such person's employer (d) Prudential, employees and special agents of
Prudential and its subsidiaries and all persons who have retired directly from
active service with Prudential or one of its subsidiaries, (e) registered
representatives and employees of dealers who have entered into a selected
dealer agreement with Prudential Securities provided that purchases at NAV are
permitted by such person's employer, (f) investors who have a business
relationship with a financial adviser who joined Prudential Securities from
another investment firm, provided that (i) the purchase is made within 180
days of the commencement of the financial adviser's employment at Prudential
Securities, or within one year in the case of Benefit Plans, (ii) the purchase
is made with proceeds of a redemption of shares of any open-end, non-money
market fund sponsored by the financial adviser's previous employer (other than
a fund which imposes a distribution or service fee of .25 of 1% or less) and
(iii) the financial adviser served as the client's broker on the previous
purchase and (g) investors in Individual Retirement Accounts, provided the
purchase is made with the proceeds of a tax-free rollover of assets from a
Benefit Plan for which Prudential Investments serves as the recordkeeper.
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." The Distributor will pay sales commissions
of up to 4% of the purchase price of Class B shares to dealers, financial
advisers and other persons who sell Class B shares at the time of sale from
its own resources. This facilitates the ability of the Fund to sell the Class
B shares without an initial sales charge being deducted at the time of
purchase. The Distributor anticipates that it will recoup its advancement of
sales commissions from the combination of the CDSC and the distribution fee.
See "How the Fund is Managed--Distributor." In connection with the sale of
Class C shares, the Distributor will pay dealers, financial advisers and other
persons which distribute Class C shares a sales commission of up to 1% of the
purchase price of such shares at the time of the sale.
27
<PAGE>
CLASS Z SHARES
Class Z shares of the Fund are available for purchase by the following
categories of investors:
(i) pension, profit-sharing or other employee benefit plans qualified under
Section 401 of the Internal Revenue Code, deferred compensation and annuity
plans under Sections 457 or 403(b)(7) of the Internal Revenue Code and non-
qualified plans for which the Fund is an available option (collectively,
Benefit Plans), provided such Benefit Plans (in combination with other plans
sponsored by the same employer or group of related employers) have at least
$50 million in defined contribution assets; (ii) participants in any fee-based
program or trust program sponsored by Prudential Securities, The Prudential
Savings Bank, F.S.B. (or any affiliate) which includes mutual funds as
investment options and for which the Fund is an available option; (iii)
certain participants in the MEDLEY Program (group variable annuity contracts)
sponsored by Prudential for whom Class Z shares of the Prudential Mutual Funds
are an available investment option; (iv) Benefit Plans for which Prudential
Retirement Services serves as recordkeeper and as of September 20, 1996, (a)
were Class Z shareholders of the Prudential Mutual Funds, or (b) executed a
letter of intent to purchase Class Z shares of the Prudential Mutual Funds;
(v) current and former Directors/Trustees of the Prudential Mutual Funds
(including the Fund); and (vi) employees of Prudential and/or Prudential
Securities who participate in a Prudential-sponsored employee savings plan.
In connection with the sales of Class Z shares, the Manager, the Distributor
or one of their affiliates may pay dealers, financial advisers and other
persons which distribute shares a finders' fee from its own resources based on
a percentage of the net asset value of shares sold by such persons.
HOW TO SELL 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 THROUGH PRUDENTIAL SECURITIES. PLEASE CONTACT YOUR
PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION
SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD
CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE
CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE
REDEMPTION REQUEST TO BE PROCESSED. IF REDEMPTION IS REQUESTED BY A
CORPORATION, PARTNERSHIP, TRUST OR FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY
ACCEPTABLE TO THE TRANSFER AGENT MUST BE SUBMITTED BEFORE SUCH REQUEST WILL BE
ACCEPTED. All correspondence and documents concerning redemptions should be
sent to the Fund in care of its Transfer Agent, Prudential Mutual Fund
Services LLC, Attention: Redemption Services, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to
a person other than the record owner, (c) are to be sent to an address other
than the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the
redemption request and on the certificates, if any, or stock power must be
guaranteed by an "eligible guarantor institution." An "eligible guarantor
institution" includes any bank, broker, dealer or credit union. The Transfer
Agent reserves the right to request additional information from, and make
reasonable inquiries of, any eligible guarantor institution. For clients of
Prusec, a signature guarantee may be obtained from the agency or office
manager of most Prudential Insurance and Financial Services or Preferred
Services offices. In the case of redemptions from a PruArray or SmartPath
Plan, if the proceeds of the redemption are invested in another investment
option of the plan, in the name of the record holder and at the same address
as reflected in the Transfer Agent's records, a signature guarantee is not
required.
28
<PAGE>
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 CASHIER'S CHECK.
REDEMPTION IN KIND. If the Board of Directors determines that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price
in whole or in part by a distribution in kind of securities from the
investment portfolio of the Fund, in lieu of cash, in conformity with
applicable rules of the 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 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 or loss 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.
See "Taxes, Dividends and Distributions" in the Statement of Additional
Information.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C
shares redeemed within one year of purchase will be subject to a 1% CDSC. The
CDSC will be deducted from the redemption proceeds and reduce the amount paid
to you. The CDSC will be imposed on any redemption by you which reduces the
current value of your Class B or Class C shares 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
29
<PAGE>
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" below.
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
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
30
<PAGE>
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.
SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12%
of the total dollar amount subject to the CDSC may be redeemed without charge.
The Transfer Agent will calculate the total amount available for this waiver
annually on the anniversary date of your purchase or, for shares purchased
prior to March 1, 1997, on March 1 of the current year. The CDSC will be
waived (or reduced) on redemptions until this threshold 12% amount is reached.
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.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS C SHARES.
PruArray or SmartPath Plans. The CDSC will be waived on redemptions from
qualified and non-qualified retirement and deferred compensation plans that
participate in the Transfer Agent's PruArray and SmartPath Programs.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected
at relative net asset value without the imposition of any additional sales
charge. The first conversion of Class B shares occurred in February 1995, when
the conversion feature was first implemented.
Since the Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will
be determined on each conversion date in accordance with the following
formula: (i) the ratio of (a) the amounts paid for Class B shares purchased at
least seven years prior to the conversion date to (b) the total amount paid
for all Class B shares purchased and then held in your account (ii) multiplied
by the total number of Class B shares purchased and then held in your account.
Each time any
31
<PAGE>
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, Class C and Class
Z 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, CLASS C AND CLASS Z SHARES MAY BE EXCHANGED
FOR CLASS A, CLASS B, CLASS C AND CLASS Z SHARES, RESPECTIVELY, OF ANOTHER
FUND ON THE BASIS OF THE RELATIVE NAV. No sales charge will be imposed at the
time of the exchange. Any applicable CDSC payable upon the redemption of
shares exchanged will be calculated from the first day of the month after the
initial purchase excluding the time 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, Inc. 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.
32
<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. All exchanges will be made on the basis of the relative NAV of the
two funds next determined after the request is received in good order. The
Exchange Privilege is available only in states where the exchange may legally
be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON
THE FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND SHAREHOLDERS SHOULD MAKE EXCHANGES BY
MAIL BY WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC AT THE ADDRESS NOTED
ABOVE.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV (see "Alternative
Purchase Plan--Class A Shares--Reduction and Waiver of Initial Sales Charges"
above) and for shareholders who qualify to purchase Class Z shares (see
"Alternative Purchase Plan--Class Z Shares" above). Under this exchange
privilege, amounts representing any Class B and Class C shares (which are not
subject to a CDSC) held in such a shareholder's account will be automatically
exchanged for Class A shares for shareholders who qualify to purchase Class A
shares at NAV on a quarterly basis, unless the shareholder elects otherwise.
Similarly, shareholders who qualify to purchase Class Z shares will have their
Class B and Class C shares which are not subject to a CDSC and their Class A
shares exchanged for Class Z shares on a quarterly basis. Eligibility for this
exchange privilege will be calculated on the business day prior to the date of
the exchange. Amounts representing Class B or Class C shares which are not
subject to a CDSC include the following: (1) amounts representing Class B or
Class C shares acquired pursuant to the automatic reinvestment of dividends
and distributions, (2) amounts representing the increase in the net asset
value above the total amount of payments for the purchase of Class B or Class
C shares and (3) amounts representing Class B or Class C shares held beyond
the applicable CDSC period. Class B and Class C shareholders must notify the
Transfer Agent either directly or through Prudential Securities or Prusec that
they are eligible for this special exchange privilege.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares
when they elect to have those assets become a part of the fee-based program.
Upon leaving the program (whether voluntarily or not), such Class Z shares
(and, to the extent provided for in the program, Class Z shares acquired
through participation in the program) will be exchanged for Class A shares at
net asset value.
The Fund reserves the right to reject any exchange order including exchanges
(and market timing transactions) which are of size and/or frequency engaged in
by one or more accounts acting in concert or otherwise, that have or may have
an adverse effect on the ability of the Subadviser to manage the portfolio.
The determination that such exchanges or activity may have an adverse effect
and the determination to reject any exchange order shall be in the discretion
of the Manager and the Subadviser.
The Exchange Privilege is not a right and may be suspended, modified or
terminated on 60 days' notice to shareholders.
33
<PAGE>
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 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 Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. In addition,
monthly unaudited financial data is available upon request from the Fund.
. SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, 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.
34
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Investments 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.
TAXABLE BOND FUNDS EQUITY FUNDS
Prudential Diversified Bond Fund, Inc.Prudential Balanced Fund
Prudential Distressed Securities
Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series Prudential Dryden Fund
Prudential High Yield Fund, Inc. Prudential Active Balanced Fund
Prudential Mortgage Income Fund, Inc.
Prudential Stock Index Fund
Prudential Emerging Growth Fund,
Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
The BlackRock Government Income Trust Prudential Equity Fund, Inc.
Prudential Equity Income Fund
TAX-EXEMPT BOND
FUNDS Prudential Jennison Series Fund,
Inc.
Prudential Jennison Growth Fund
Prudential California Municipal Fund
California Series Prudential Jennison Growth &
Income Fund
California Income Series Prudential Multi-Sector Fund, Inc.
Prudential Municipal Bond Fund
High Yield Series Prudential Small Company Value Fund,
Inc.
Insured Series Prudential Utility Fund, Inc.
Intermediate Series Nicholas-Applegate Fund, Inc.
Prudential Municipal Series Fund Nicholas-Applegate Growth Equity
Florida Series Fund
Maryland Series
MONEY MARKET FUNDS
Massachusetts Series . Taxable Money Market Funds
Michigan Series Prudential Government Securities
New Jersey Series Trust
New York Series Money Market Series
North Carolina Series U.S. Treasury Money Market Series
Ohio Series Prudential Special Money Market
Pennsylvania Series Fund, Inc.
Money Market Series
Prudential National Municipals Fund, Inc.
Prudential MoneyMart Assets, Inc.
GLOBAL FUNDS
. Tax-Free Money Market Funds
Prudential Tax-Free Money Fund, Inc.
Prudential Europe Growth Fund, Inc. Prudential California Municipal Fund
Prudential Global Genesis Fund, Inc. California Money Market Series
Prudential Municipal Series Fund
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio Connecticut Money Market Series
Massachusetts Money Market Series
Prudential Intermediate Global Income Fund, Inc.
New Jersey Money Market Series
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc. New York Money Market Series
Prudential World Fund, Inc.
Global Series . Command Funds
Command Money Fund
International Stock Series Command Government Fund
The Global Government Plus Fund, Inc.
The Global Total Return Fund, Inc. Command Tax-Free Fund
Global Utility Fund, Inc.
. Institutional Money Market Funds
Prudential Institutional Liquidity
Portfolio, Inc.
Institutional Money Market Series
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given
or made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell, or a 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
What are the Fund's Risk Factors and
Special Characteristics?................................................ 2
FUND EXPENSES.............................................................. 4
FINANCIAL HIGHLIGHTS....................................................... 5
HOW THE FUND INVESTS....................................................... 9
Investment Objective and Policies......................................... 9
Hedging and Return Enhancement Strategies................................. 12
Other Investments and Policies............................................ 14
Investment Restrictions................................................... 16
HOW THE FUND IS MANAGED.................................................... 16
Manager................................................................... 16
Distributor............................................................... 17
Portfolio Transactions.................................................... 19
Custodian and Transfer and Dividend Disbursing Agent...................... 19
HOW THE FUND VALUES ITS SHARES............................................. 19
HOW THE FUND CALCULATES
PERFORMANCE.............................................................. 20
TAXES, DIVIDENDS AND DISTRIBUTIONS......................................... 20
GENERAL INFORMATION........................................................ 22
Description of Common Stock............................................... 22
Additional Information.................................................... 23
SHAREHOLDER GUIDE.......................................................... 23
How to Buy Shares of the Fund............................................. 23
Alternative Purchase Plan................................................. 24
How to Sell Your Shares................................................... 28
Conversion Feature--Class B Shares........................................ 31
How to Exchange Your Shares............................................... 32
Shareholder Services...................................................... 34
THE PRUDENTIAL MUTUAL FUND FAMILY.......................................... A-1
</TABLE>
- --------------------------------------------------------------------------------
MF 135A 4441438
Class A: 743970105
Class B: 743970204
CUSIP Nos.: Class C: 743970303
Class Z: 743970402
PRUDENTIAL
NATURAL
RESOURCES
FUND, INC.
PROSPECTUS
JULY 30, 1997
[LOGO] PRUDENTIAL
INVESTMENTS
<PAGE>
PRUDENTIAL NATURAL RESOURCES FUND, INC.
Statement of Additional Information
dated July 30, 1997
Prudential 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 Gateway Center Three, 100 Mulberry Street, Newark New
Jersey 07102-4077, and its telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Fund's Prospectus dated July 30, 1997, 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 22
Investment Objective and Policies........................ B-2 9
Investment Restrictions.................................. B-11 16
Directors and Officers................................... B-13 16
Manager.................................................. B-16 16
Distributor.............................................. B-17 17
Portfolio Transactions and Brokerage..................... B-20 19
Purchase and Redemption of Fund Shares................... B-21 23
Shareholder Investment Account........................... B-25 34
Net Asset Value.......................................... B-28 33
Taxes, Dividends and Distributions....................... B-29 20
Performance Information.................................. B-31 20
Custodian, Transfer and Dividend Disbursing Agent and In-
dependent Accountants................................... B-33 19
Financial Statements..................................... B-34 --
Report of Independent Accountants........................ B-47 --
Description of Security Ratings.......................... A-1 --
Appendix I--General Investment Information............... I-1 --
Appendix II--Historical Performance Data................. II-1 --
Appendix III--Information Relating to Prudential......... III-1 --
</TABLE>
- -------------------------------------------------------------------------------
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 consideration (or for additional consideration
held in a segregated account by its Custodian) upon conversion or exchange of
other securities held in its portfolio. A call option is also "covered" if the
Fund holds on a share-for-share basis a call on the same security as the call
written where the exercise price of the call held is equal to or less than the
exercise price of the call written or greater than the exercise price of the
call written if the difference is maintained by the Fund in cash or other
liquid assets in a segregated account with its Custodian. 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.
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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 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.
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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 values 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's portfolio or for return enhancement.
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
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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
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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, 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's ability to
enter into forward foreign currency exchange contracts may be limited by
certain requirements for qualification as a regulated investment company under
the Internal Revenue Code. See "Taxes, Dividends and Distributions" herein.
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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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
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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.
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 assets 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 liquid assets equal in value to the
difference. In addition, when the Fund writes a call on an index which is in-
the-money at the time the call is written, the Fund will segregate with its
Custodian or pledge to the broker as collateral cash, U.S. Government
securities or other liquid assets 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
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,
B-8
<PAGE>
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 in the future 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, equity securities or other liquid unencumbered assets
marked-to market daily 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 Investments Fund Management LLC (PIFM)
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
30% of the value of the Fund's total assets and provided that such loans are
callable at any time by the Fund and are at all times secured by cash or
equivalent collateral (which may include a secured letter of credit) 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.
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.
B-9
<PAGE>
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 15% of its net assets in repurchase
agreements which have a maturity of longer than seven days or in other
illiquid securities, including securities that are illiquid by virtue of the
absence of a readily available market (either within or outside of the United
States) or legal or contractual restrictions on resale. 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, 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
B-10
<PAGE>
unrated, be of comparable quality in the view of the investment adviser, and
(ii) it must not be "traded flat" (i.e., without accrued interest) or in
default as to principal or interest. Repurchase agreements subject to demand
are deemed to have a maturity equal to the notice period.
The staff of the 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."
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, Dividends and
Distributions." For the fiscal years ended May 31, 1997 and May 31, 1996, the
Fund's portfolio turnover rates were 53% and 41%, respectively.
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.)
B-11
<PAGE>
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 30% 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.
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.
B-12
<PAGE>
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION PRINCIPAL OCCUPATIONS
(1) WITH FUND DURING PAST FIVE YEARS
- --------------------- --------- ----------------------
<S> <C> <C>
Edward Director President and Director of BMC Fund, Inc., a closed-end
D. Beach investment company; previously, Vice Chairman of
(72) Broyhill Furniture Industries, Inc.; Certified Public
Accountant; Secretary and Treasurer of Broyhill Fam-
ily Foundation, Inc.; Member of the Board of Trustees
of Mars Hill College; Director of The High Yield In-
come Fund, Inc.
Stephen Director Executive Director (since May 1985) of The John A.
C. Eyre Hartford Foundation, Inc. (charitable foundation);
(74) Director of Faircom, Inc.; Trustee Emeritus of Pace
University.
Delayne Director Marketing and Management Consultant; Director of The
Dedrick High Yield
Gold Income Fund, Inc.
(58)
*Robert Director Comptroller (since May 1996) of Prudential Invest-
F. Gunia ments; Executive Vice President and Treasurer (since
(50) December 1996) of Prudential Investments Fund Manage-
ment LLC (PIFM); Senior Vice President (since March
1987) of Prudential Securities Incorporated (Pruden-
tial Securities); formerly Chief Administrative Offi-
cer (July 1990-September 1996), Director (January
1989-September 1996) and Executive Vice President,
Treasurer and Chief Financial Officer (June 1987-Sep-
tember 1996) of Prudential Mutual Fund Management,
Inc. (PMF); Vice President and Director (since May
1989) of The Asia Pacific Fund, Inc.; Director of The
High Yield Income Fund, Inc.
Don G. Director Chairman and Chief Executive Officer (since 1980) of
Hoff Intertec, Inc.
(61) (investments); Chairman and CEO of The Lamaur Corpo-
ration; Director of Innovative Capital Management,
Inc. and The Greater China Fund, Inc.; Chairman and
Director of The Asia Pacific Fund, Inc.
Robert Director President (since 1981) of Robert E. LaBlanc Associ-
E. ates, Inc. (telecommunications); formerly General
LaBlanc Partner at Salomon Brothers and Vice-Chairman of Con-
(62) tinental Telecom; Director of Storage Technology Cor-
poration, Titan Corporation, Salient-3 Communica-
tions, Inc. and Tribune Company; Trustee of Manhattan
College.
*Mendel Director Chief Investment Officer (since October 1996) of Pru-
A. dential Mutual Funds; formerly Chief Financial Offi-
Melzer, cer (November 1995-September 1996) of Prudential In-
CFA (36) vestments, Senior Vice President and Chief
751 Financial Officer (April 1993-November 1995) of Pru-
Broad dential Preferred Financial Services, Managing Direc-
Street tor (April 1991-April 1993) of Prudential Investment
Newark, Advisors and Senior Vice President (July 1989-
NJ 07102 April 1991) of Prudential Capital Corporation; Chair-
man and Director of Prudential Series Fund, Inc.; Di-
rector of The High Yield Income Fund, Inc.
*Richard President and Director Employee of Prudential Investments; formerly Presi-
A. dent, Chief Executive Officer and Director (October
Redeker 1993-September 1996) of PMF; formerly Executive Vice
(53) President, Director and Member of Operating Committee
(October 1993-September 1996) of Prudential Securi-
ties; Director (October 1993-September 1996) of Pru-
dential Securities Group, Inc.; Executive Vice Presi-
dent (July 1994-September 1996) of the Prudential In-
vestment Corporation, Director (January 1994-Septem-
ber 1996) of Prudential Mutual Fund Distributors,
Inc. and Prudential Mutual Fund Services, Inc. and
Senior Executive Vice President and Director of Kem-
per Financial Services, Inc. (September 1978-Septem-
ber 1993); President and Director of The High Yield
Income Fund, Inc.
</TABLE>
B-13
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE WITH FUND DURING PAST FIVE YEARS
--------------------- --------- ----------------------
<C> <C> <S>
Robin B. Smith (57) Director Chairman and Chief Executive Officer
(since August 1996) of Publishers
Clearing House; formerly President
and Chief Executive Officer (January
1988-August 1996) and President and
Chief Operating Officer (September
1981-December 1988) of Publishers
Clearing House; Director of BellSouth
Corporation, Texaco Inc., Springs In-
dustries Inc. and Kmart Corporation.
Stephen Stoneburn (53) Director President and Chief Executive Officer
(since June 1996) of Quadrant Media
Corp. (a publishing Company); for-
merly President (June 1995-June 1996)
of Argus
Integrated Media, Inc., Senior Vice
President and Managing Director (Jan-
uary 1993-1995), Cowles Business Me-
dia, Senior Vice President (January
1991-1992) and Publishing Vice Presi-
dent (May 1989-December 1990) of
Gralla
Publications (a division of United
Newspapers, U.K.) and Senior Vice
President of Fairchild Publications,
Inc.
Nancy H. Teeters (66) Director Economist; formerly Vice President and
Chief Economist (March 1986-June
1990) of International Business Ma-
chines Corporation and member of the
Board of Governors of the Horace
Rackham School of Graduate Studies of
the University of Michigan; Director
of Inland Steel Corporation (since
July 1991).
Susan C. Cote (42) Vice President Vice President of Finance (since Feb-
ruary 1997), Prudential Mutual Funds
&
Annuities (PMF&A); Executive Vice
President (since February 1997) and
Chief Financial Officer (since May
1996) of PIFM; formerly Managing Di-
rector and Vice President (February
1995-May 1996) Prudential Invest-
ments, Senior Vice President (January
1989-January 1995) of Prudential Mu-
tual Fund Management, Inc. and Senior
Vice President (January 1992-January
1995) of Prudential Securities.
Thomas A. Early (42) Vice President Vice President and General Counsel
(since March 1997), PMF&A; Executive
Vice President, Secretary and General
Counsel (since December 1996), PIFM;
formerly Vice President and General
Counsel (March 1994-March 1997), Pru-
dential Retirement Services and Asso-
ciate General Counsel and Chief Fi-
nancial Services Officer (1988-1994),
Frank Russell Company.
S. Jane Rose (51) Secretary Senior Vice President (since December
1996) of PIFM; Senior Vice President
and Senior Counsel (since July 1992)
of Prudential Securities; formerly
Senior Vice President (January 1991-
September 1996) and Senior Counsel
(June 1987-December 1990) of PMF.
Grace C. Torres (38) Treasurer and First Vice President (since December
Principal 1996) of PIFM; First Vice President
Financial and (since March 1994) of Prudential Se-
Accounting curities; formerly First Vice Presi-
Officer dent (March
1994-September 1996) of PMF and Vice
President (July 1989-March 1994) of
Bankers Trust.
Stephen M. Ungerman (43) Assistant Tax Director (since March 1996) of
Treasurer Prudential Investments and the Pri-
vate Asset Group of The Prudential
Insurance Company of America; for-
merly First Vice President (February
1993-September 1996) of Prudential
Mutual Fund Management, Inc. and Se-
nior Tax Manager (1981-January 1993)
Price Waterhouse LLP.
</TABLE>
- ---------
(1) Unless otherwise noted, the address for each of the above persons is c/o
Prudential Investments Fund Management LLC, Gateway Center Three, 100
Mulberry Street, Newark, New Jersey 07102-4077.
* "Interested" Director of the Fund, as defined in the Investment Company Act
of 1940 (the Investment Company Act) by reason of his affiliation with
Prudential, Prudential Securities of PIFM.
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.
B-14
<PAGE>
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. Eyre
and Beach are scheduled to retire on December 31, 1998 and 1999, respectively.
Pursuant to the terms of the Management Agreement with the Fund, the
Manager pays all compensation of officers and employees of the Fund as well as
the fees and expenses of all Directors of the Fund who are affiliated persons
of the Manager. The Fund pays each of its Directors who is not an affiliated
person of PIFM annual compensation of $3,500, in addition to certain out-of-
pocket expenses. The amount of annual compensation paid to each Director may
change as a result of the introduction of additional funds upon the Board of
which the Director will be asked to serve.
Directors may receive their Directors' fees pursuant to a deferred fee
agreement with the Fund. Under the terms of 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.
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, 1997 and the aggregate compensation paid to such Directors for
service on the Fund's Board and that of all other investment companies managed
by PIFM (Fund Complex) for the calendar year ended December 31, 1996. In
October 1996, shareholders elected a new Board of Directors. Below are listed
the Directors who have served the Fund during its most recent fiscal year, as
well as the new Directors who took office at the shareholder meeting in
October.
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(2)
- ----------------- ------------ ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
Edward D. Beach--
Director............... $5,250 None N/A $166,000(21/39)*
Stephen C. Eyre--
Director............... $ 875 None N/A $ 34,250(4/5)*
Delayne D. Gold--
Director............... $ 875 None N/A $175,308(21/42)*
Robert F. Gunia(1)--
Director............... -- None N/A -- *
Don G. Hoff--Director... $ 875 None N/A $ 50,042(5/7)*
Robert F. LaBlanc--
Director............... $ 875 None N/A $ 34,542(4/6)*
Donald D. Lennox--Former
Director............... $4,375 None N/A $ 90,000(10/22)*
Douglas H.
McCorkindale--Former
Director............... $4,375 None N/A $ 67,458(10/13)*
Mendel A. Melzer(1)--
Director............... -- None N/A -- *
Thomas T. Mooney--Former
Director............... $4,375 None N/A $135,375(18/36)*
Richard A. Redeker(1)--
Director............... -- None N/A -- *
Robin B. Smith--
Director............... $ 875 None N/A $ 89,957(11/20)*
Stephen Stoneburn--
Director............... $ 875 None N/A $ 30,375(4/6)*
Nancy H. Teeters--
Director............... $ 875 None N/A $103,583(11/28)*
Louis A. Weil, III--
Former Director........ $4,375 None N/A $ 91,250(13/18)*
</TABLE>
- ---------
@ Effective January 1997, the annual compensation paid to each Director was
reduced to $3,500 in addition to certain out-of-pocket expenses.
* Indicates number of funds/portfolios in Fund Complex (including the Fund)
to which aggregate compensation relates.
(1) Robert F. Gunia, Mendel A. Melzer and Richard A. Redeker, who are
interested Directors, do not receive compensation from the Fund or any
fund in the Fund Complex.
(2) Total compensation from all the funds in the Fund Complex for the calendar
year ended December 31, 1996, including amounts deferred at the election
of Directors under the funds' deferred compensation plans. Including
accrued interest, total deferred compensation amounted to $71,034 and
$139,869 for former Directors Douglas H. McCorkindale and Thomas T. Mooney
and $109,294 for Director Robin B. Smith. Currently, Ms. Smith has agreed
to defer some of her fees at the T-Bill rate and other fees at the Fund
rate.
As of July 11, 1997, the Directors and officers of the Fund, as a group,
owned beneficially less than 1% of the outstanding common stock of the Fund.
B-15
<PAGE>
As of July 11, 1997, the beneficial owners, directly or indirectly, of more
than 5% of the outstanding shares of any class of shares of the Fund were: CS
First Boston Corp., Irvin J. Goldman, Craig Foster, Mark Gorton, Dr. Jarrod
Yuster, 55 East 52nd Street, New York, NY 10055-0002, held 190,171 Class A (or
approximately 6% of the outstanding Class A shares); Prudential Trust Company
FBO PRU-DC Trust Accounts, ATTN. John Surdy, 30 Scranton Office Park, Moosic,
PA 18507-1791 held 40,934 Class Z (or approximately 24% of the outstanding
Class Z shares); and Dr. Cecil H. Hale Ex EST Mrs. Margie N. Hale, 4100
Jackson Ave. Apt. 212, Austin, TX 78731-6003 held 11,947 Class Z shares (or
approximately 7% of the outstanding Class Z shares).
As of July 11, 1997, Prudential Securities was record holder for other
beneficial owners of 1,708,454 Class A shares (or 57% of the outstanding Class
A shares), 5,153,660 Class B shares (or 76% of the outstanding Class B
shares), 119,451 Class C shares (or 77% of the outstanding Class C shares) and
123,424 Class Z shares (or 74% of the outstanding Class Z shares) of the Fund.
In the event of any meetings of shareholders, Prudential Securities will
forward, or cause the forwarding of, proxy material to the beneficial owners
for which it is the record holder.
MANAGER
The manager of the Fund is Prudential Investments Fund Management LLC
(formerly Prudential Mutual Fund Management LLC) (PIFM or the Manager),
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. PIFM
serves as manager to all of the other investment companies that, together with
the Fund, comprise the Prudential Mutual Funds. See "How the Fund is Managed--
Manager" in the Prospectus. As of June 30, 1997, PIFM managed and/or
administered open-end and closed-end management investment companies with
assets of approximately $56.7 billion. According to the Investment Company
Institute, as of December 31, 1996, the Prudential Mutual Funds were the 15th
largest family of mutual funds in the United States.
PIFM is a subsidiary of Prudential Securities and Prudential. Prudential
Mutual Fund Services LLC (PMFS or the Transfer Agent), a wholly-owned
subsidiary of PIFM, serves as the transfer agent for the Prudential Mutual
Funds and, in addition, provides customer service, recordkeeping and
management and administration services to qualified plans.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PIFM, subject to the supervision of the Fund's Board of Directors
and in conformity with the stated policies of the Fund, manages both the
investment operations of the Fund and the composition of the Fund's portfolio,
including the purchase, retention, disposition and loan of securities. In
connection therewith, PIFM is obligated to keep certain books and records of
the Fund. PIFM also administers the Fund's corporate affairs and, in
connection therewith, furnishes the Fund with office facilities, together with
those ordinary clerical and bookkeeping services which are not being furnished
by State Street Bank and Trust Company, the Fund's custodian, and PMFS, the
Fund's transfer and dividend disbursing agent. The management services of PIFM
for the Fund are not exclusive under the terms of the Management Agreement and
PIFM is free to, and does, render management services to others.
For its services, PIFM receives, pursuant to the Management Agreement, a fee
at an annual rate of .75 of 1% of the Fund's average daily net assets. The fee
is computed daily and payable monthly. The Management Agreement also provides
that, in the event the expenses of the Fund (including the fees of PIFM, but
excluding interest, taxes, brokerage commissions, distribution fees and
litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Fund's business) for any fiscal year
exceed the lowest applicable annual expense limitation established and
enforced pursuant to the statutes or regulations of any jurisdiction in which
the Fund's shares are qualified for offer and sale, the compensation due to
PIFM will be reduced by the amount of such excess. Reductions in excess of the
total compensation payable to PIFM will be paid by PIFM to the Fund. No such
reductions were required during the fiscal year ended May 31, 1997. No
jurisdiction currently limits the Fund's expenses.
In connection with its management of the corporate affairs of the Fund, PIFM
bears the following expenses:
(a) the salaries and expenses of all of its and the Fund's personnel except
the fees and expenses of Directors who are not affiliated persons of PIFM or
the Fund's investment adviser;
(b) all expenses incurred by PIFM or by the Fund in connection with managing
the ordinary course of the Fund's business, other than those assumed by the
Fund as described below; and
(c) the costs and expenses payable to The Prudential Investment Corporation,
doing business as Prudential Investments (PI) or the Subadvisor, pursuant to
the subadvisory agreement between PIFM and PI (the Subadvisory Agreement).
Under the terms of the Management Agreement, the Fund is responsible for the
payment of the following expenses: (a) the fees payable to the Manager, (b)
the fees and expenses of Directors who are not affiliated persons of the
Manager or the Fund's investment adviser, (c) the fees and certain expenses of
the Custodian and Transfer and Dividend Disbursing Agent, including the cost
of providing records to the Manager in connection with its obligation of
maintaining required records of the Fund and of pricing the Fund's shares, (d)
the charges and expenses of legal counsel and independent accountants for the
Fund, (e) brokerage
B-16
<PAGE>
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 and the
states, 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 PIFM will not be liable for any error
of judgment or for any loss suffered by the Fund in connection with the
matters to which the Management Agreement relates, except a loss resulting
from willful misfeasance, bad faith, gross negligence or reckless disregard of
duty. The Management Agreement provides that it will terminate automatically
if assigned, and that it may be terminated without penalty by either party
upon not more than 60 days' nor less than 30 days' written notice. The
Management Agreement will continue in effect for a period of more than two
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 29, 1997 and by shareholders of the Fund on
February 19, 1988.
For the fiscal years ended May 31, 1997, 1996 and 1995, the Fund paid
management fees to PIFM of $1,128,718, $811,776 and $642,865, respectively.
PIFM has entered into the Subadvisory Agreement with PI. The Subadvisory
Agreement provides that PI will furnish investment advisory services in
connection with the management of the Fund. In connection therewith, PI is
obligated to keep certain books and records of the Fund. PIFM continues to
have responsibility for all investment advisory services pursuant to the
Management Agreement and supervises PI's performance of such services. PI is
reimbursed by PIFM for the reasonable costs and expenses incurred by PI in
furnishing those services.
The Subadvisory Agreement was last approved by the Board of Directors,
including a majority of the Directors who are not parties to the contract or
interested persons of any such party as defined in the Investment Company Act,
on May 29, 1997, 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, PIFM or PI upon not more than 60 days', nor less than
30 days', written notice. The Subadvisory Agreement provides that it will
continue in effect for a period of more than two years from its execution only
so long as such continuance is specifically approved at least annually in
accordance with the requirements of the Investment Company Act.
DISTRIBUTOR
Prudential Securities Incorporated (Prudential Securities, PSI or the
Distributor), One Seaport Plaza, New York, New York 10292, acts as the
distributor of the shares of the Fund.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the
Fund under Rule 12b-1 under the Investment Company Act and a distribution
agreement (the Distribution Agreement), Prudential Securities (the
Distributor) incurs the expenses of distributing the Fund's Class A, Class B
and Class C shares. Prudential Securities also incurs the expenses of
distributing the Fund's Class Z shares under the Distribution Agreement, none
of which are reimbursed by or paid for by the Fund. See "How the Fund is
Managed--Distributor" in the Prospectus.
Prior to January 22, 1990, the Fund offered only one class of shares (the
then existing Class B shares). On 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
B-17
<PAGE>
modifications of the Fund's Class A and Class B Plans and Distribution
Agreements to conform them with then 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 provided 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 29, 1997.
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 and provides that (i) .25 of
1% of the average daily net assets of the Class C shares shall be paid as
compensation for providing personal service and/or maintaining shareholder
accounts and (ii) .75 of 1% of the average daily net assets of the Class C
shares shall be paid as compensation for distribution services.
CLASS A PLAN. For the fiscal year ended May 31, 1997, PSI received payments
of $100,983 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, 1997, PSI also received
approximately $107,000 in initial sales charges.
CLASS B PLAN. For the fiscal year ended May 31, 1997, the Distributor
received $1,073,611 from the Fund under the Class B Plan and spent
approximately $966,700 in distributing the Fund's Class B shares. It is
estimated that of the latter amount, approximately 2.4% ($23,200) was spent on
printing and mailing of prospectuses to other than current shareholders; 25.2%
($244,000) 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 72.4% ($699,500) on the aggregate of (i) payments of
commissions and account servicing fees to financial advisers (26.3% or
$253,800) and (ii) an allocation on account of overhead and other branch
office distribution-related expenses (46.1% or $445,700). 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, 1997, the
Distributor received approximately $219,400 in contingent deferred sales
charges attributable to Class B shares.
CLASS C PLAN. For the fiscal year ended May 31, 1997, Prudential Securities
received $20,413 under the Class C Plan and spent approximately $19,700 in
distributing Class C shares. It is estimated that of the latter amount, 7.6%
or $1,500 was spent on printing and mailing to other than current
shareholders; 15.7% ($3,100) was spent on compensation to 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 76.7% or $15,100 was spent
on the aggregate of (i) payments or commissions and account servicing fees to
financial advisers (53.8% or $10,600) and (ii) an allocation of overhead and
other branch office distribution-related expenses for payments of related
expenses (22.9% or $4,500). 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, 1997, Prudential Securities received approximately $2,100
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
B-18
<PAGE>
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 federal securities laws. The Distribution
Agreement was last approved by the Board of Directors, including a majority of
the Rule 12b-1 Directors, on May 29, 1997.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators in 51 jurisdictions and the NASD to resolve
allegations that PSI sold interests in more than 700 limited partnerships (and
a limited number of other types of securities) from January 1, 1980 through
December 31, 1990, in violation of securities laws to persons for whom such
securities were not suitable in light of the individuals' financial condition
or investment objectives. It was also alleged that the safety, potential
returns and liquidity of the investments had been misrepresented. The limited
partnerships principally involved real estate, oil and gas producing
properties and aircraft leasing ventures. The SEC Order (i) included findings
that PSI's conduct violated the federal securities laws and that an order
issued by the SEC in 1986 requiring PSI to adopt, implement and maintain
certain supervisory procedures had not been complied with; (ii) directed PSI
to cease and desist from violating the federal securities laws and imposed a
$10 million civil penalty; and (iii) required PSI to adopt certain remedial
measures including the establishment of a Compliance Committee of its Board of
Directors. Pursuant to the terms of the SEC settlement, PSI established a
settlement fund in the amount of $330,000,000 and procedures, overseen by a
court approved Claims Administrator, to resolve legitimate claims for
compensatory damages by purchasers of the partnership interests. PSI has
agreed to provide additional funds, if necessary, for that purpose. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action. In settling the
above referenced matters, PSI neither admitted nor denied the allegations
asserted against it.
On January 18, 1994, PSI agreed to the entry of a Final Consent Order and a
Parallel Consent Order by the Texas Securities Commissioner. The firm also
entered into a related agreement with the Texas Securities Commissioner. The
allegations were that the firm had engaged in improper sales practices and
other improper conduct resulting in pecuniary losses and other harm to
investors residing in Texas with respect to purchases and sales of limited
partnership interests during the period of January 1, 1980 through December
31, 1990. Without admitting or denying the allegations, PSI consented to a
reprimand, agreed to cease and desist from future violations, and to provide
voluntary donations to the State of Texas in the aggregate amount of
$1,500,000. The firm agreed to suspend the creation of new customer accounts,
the general solicitation of new accounts, and the offer for sale of securities
in or from PSI's North Dallas office to new customers during a period of
twenty consecutive business days, and agreed that its other Texas offices
would be subject to the same restrictions for a period of five consecutive
business days. PSI also agreed to institute training programs for its
securities salesmen in Texas.
On October 27, 1994, Prudential Securities Group, Inc. (PSG) and PSI entered
into agreements with the United States Attorney deferring prosecution
(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 serves as an independent
"ombudsman" whom PSI employees can call anonymously with complaints about
ethics and compliance. Prudential Securities reports any allegations or
instances of criminal conduct and material improprieties to the new director.
The new director submits compliance reports which identify all such
allegations or instances of criminal conduct and material improprieties every
three months and will continue to do so for a three-year period.
NASD MAXIMUM SALES CHARGE RULE. Pursuant to rules of the NASD, the
Distributor is required to limit aggregate initial sales charges, deferred
sales charges and asset-based sales charges to 6.25% of total gross sales of
each class of shares. Interest charges on unreimbursed distribution expenses
equal to the prime rate plus one percent per annum may be added to the 6.25%
limitation. Sales from the reinvestment of dividends and distributions are not
included in the calculation of the 6.25% limitation. The annual asset-based
sales charge on shares of the Fund may not exceed .75 of 1% per class. The
6.25% limitation applies to each class of the Fund rather than on a per
shareholder basis. If aggregate sales charges were to exceed 6.25% of total
gross sales of any class, all sales charges on shares of that class would be
suspended.
B-19
<PAGE>
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 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
B-20
<PAGE>
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, 1997:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
YEAR ENDED YEAR ENDED YEAR ENDED
MAY 31, 1997 MAY 31, 1996 MAY 31, 1995
------------ ------------ ------------
<S> <C> <C> <C>
Total brokerage commissions paid by the
Fund.................................. $442,486 $302,200 $216,458
Total brokerage commissions paid to
Prudential Securities and its foreign
affiliates............................ $ 8,100 $ 2,200 $ 1,285
Percentage of total brokerage commis-
sions paid to Prudential Securities
and its foreign affiliates............ 1.83% 0.73% 0.59%
</TABLE>
The Fund effected approximately 0.54% of the total dollar amount of its
transactions involving the payment of commissions through Prudential
Securities during the year ended May 31, 1997. Of the total brokerage
commissions paid during that period, approximately $398,886 (or 90%) were paid
to firms which provide research, statistical or other services to PIFM. PIFM
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). Class Z shares of the
Fund are offered to a limited group of investors at net asset value without
any sales charges. See "Shareholder Guide--How to Buy Shares of the Fund" in
the Prospectus.
Each class of shares represents an interest in the same assets of the Fund
and is identical in all respects, except that (i) each class is subject to
different sales charges and distribution and/or service fees (except for Class
Z shares, which are not subject to any sales charges and distribution and/or
service fees), which may affect performance, (ii) each class has exclusive
voting rights with respect to any matter submitted to shareholders that
relates solely to its arrangement and has separate voting rights on any matter
submitted to shareholders in which the interests of one class differ from the
interest of any other class, (iii) each class has a different exchange
privilege, (iv) only Class B shares have a conversion feature and (v) Class Z
shares are offered exclusively for sale to a limited group of investors. See
"Distributor" and "Shareholder Investment Account--Exchange Privilege."
B-21
<PAGE>
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares of the Fund are sold at a maximum sales charge of
5% and Class B*, Class C* and Class Z shares are sold at net asset value.
Using the Fund's net asset value at May 31, 1997, 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............ $16.27
Maximum sales charge (5% of offering price)....................... .86
------
Maximum offering price to public.................................. $17.13
======
<CAPTION>
CLASS B
<S> <C>
Net asset value, offering price and redemption price per Class B
share*........................................................... $15.46
======
<CAPTION>
CLASS C
<S> <C>
Net asset value, offering price and redemption price per Class C
share*........................................................... $15.46
======
<CAPTION>
CLASS Z
<S> <C>
Net asset value, offering price and redemption price per Class Z
share............................................................ $16.30
======
</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.
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.
B-22
<PAGE>
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 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.
B-23
<PAGE>
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 will be A copy of the Social Security
considered disabled if he or she is Administration award letter or a letter
unable to engage in any substantial from a physician on the physician's
gainful activity by reason of any letterhead stating that the shareholder
medically determinable physical or (or, in the case of a trust, the
mental impairment which can be grantor) is permanently disabled. The
expected to result in death or to be letter must also indicate the date of
of long-continued and indefinite disability.
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-24
<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. (Class A shares)
Prudential Tax-Free Money Fund, Inc.
CLASS B AND CLASS C. Shareholders of the Fund may exchange their Class B and
Class C shares for Class B and Class C shares, respectively, of certain other
Prudential Mutual Funds and shares of Prudential Special Money Market Fund,
Inc. No CDSC will be payable upon such exchange, but a CDSC may be payable
upon the redemption of the Class B and Class C shares acquired as a result of
an exchange. The applicable sales charge will be that imposed by the fund in
which shares were initially purchased and the purchase date will be deemed to
be the first day of the month after the initial purchase, rather than the date
of the exchange.
B-25
<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.
CLASS Z. Class Z shares may be exchanged for Class Z shares of other
Prudential Mutual Funds.
Additional details about the Exchange Privilege and prospectuses for each of
the Prudential Mutual Funds are available from the Fund's Transfer Agent,
Prudential Securities or Prusec. The Exchange Privilege may be modified,
terminated or suspended on sixty days' notice, and any fund, including the
Fund, or the Distributor, has the right to reject any exchange application
relating to such fund's shares.
DOLLAR COST AVERAGING
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more
shares when the price is low and fewer shares when the price is high. The
average cost per share is lower than it would be if a constant number of
shares were bought at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class beginning in 2011, the cost of four years at
a private college could reach $210,000 and over $90,000 at a public
university./1/
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals./2/
<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-26
<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.
B-27
<PAGE>
TAX-DEFERRED RETIREMENT ACCOUNTS
INDIVIDUAL RETIREMENT ACCOUNTS. An individual retirement account (IRA)
permits the deferral of federal income tax on income earned in the account
until the earnings are withdrawn. The following chart represents a comparison
of the earnings in a personal savings account with those in an IRA, assuming a
$2,000 annual contribution, an 8% rate of return and a 39.6% federal income
tax bracket and shows how much more retirement income can accumulate within an
IRA as opposed to a taxable individual savings account.
TAX-DEFERRED COMPOUNDING/1/
<TABLE>
<CAPTION>
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
------------- -------- --------
<S> <C> <C>
10 years............................................ $ 26,165 $ 31,291
15 years............................................ 44,675 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 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, or at the bid
price on such day in the absence of an asked price. Corporate bonds (other
than convertible debt securities) and U.S. Government securities that are
actively traded in the over-the-counter market, including listed securities
for which the primary market is believed to be over-the-counter, are valued on
the basis of valuations provided by a pricing agent or principal market maker.
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 trading on the applicable commodities exchange. 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.
B-28
<PAGE>
Securities or other assets for which market quotations are not readily
available, or for which the pricing agent or principal market maker does not
provide a valuation or methodology or provides a valuation or methodology
that, in the judgment of the Manager or Subadviser (or Valuation Committee or
Board of Directors), does not represent fair value, are valued by the
Valuation Committee or Board in consultation with the Manager and Subadviser.
Short-term debt securities are valued at cost, with interest accrued or
discount amortized to the date of maturity, if their original maturity was 60
days or less, unless this is determined by the Board of Directors not to
represent fair value. Short-term securities with remaining maturities of more
than 60 days, for which market quotations are readily available, are valued at
their current market quotations as supplied by an independent pricing agent or
principal market maker. The Fund will compute its net asset value at 4:15
P.M., New York time, on each day the New York Stock Exchange is open for
trading except on days on which no orders to purchase, sell or redeem Fund
shares have been received or days on which changes in the value of the Fund's
portfolio securities do not affect net asset value. In the event the New York
Stock Exchange closes early on any business day, the net asset value of the
Fund's shares shall be determined at the time between such closing and 4:15
P.M., New York time. The New York Stock Exchange is closed on the following
holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
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 and lower than the net asset value of
Class Z shares which are not subject to any distribution fee. It is expected,
however, that the net asset value per share of each class will tend to
converge immediately after the recording of dividends, if any, which will
differ by approximately the amount of the distribution and/or service fee
expense accrual differential among the classes.
TAXES, DIVIDENDS AND DISTRIBUTIONS
The Fund has elected to qualify and intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code.
This relieves the Fund (but not its shareholders) from paying federal income
tax on income 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) (the short-short rule); (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 including net
short-term capital gains other than net capital gains in each year.
The Fund is required to distribute 98% of its ordinary income in the same
calendar year in which it is earned. The Fund is also required to distribute
during the calendar year 98% of the capital gain net income it earned during
the twelve months ending on October 31 of such calendar year. In addition, the
Fund must distribute during the calendar year 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 generally 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 short-term capital gain or loss. If securities are sold by
the Fund pursuant to the exercise of a call option written by it, the Fund
will include the premium
B-29
<PAGE>
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 which may, among other things, require the Fund to defer losses.
In addition, debt securities acquired by the Fund may be subject to original
issue discount and market discount rules, which may cause the Fund to accrue
income in advance of the receipt of cash with respect to interest or cause
gains to be treated as ordinary income.
Special rules apply to most options on stock indices, futures contracts and
options thereon and forward foreign currency exchange contracts in which the
Fund may invest. 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.
Forward currency contracts, options and futures contracts entered into by
the Fund may create "straddles" for federal income tax purposes. 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. Straddles may also result in the loss of the holding period of the
underlying property and, therefore, the Fund's ability to enter into forward
currency contracts, options and futures contracts may be limited by the short-
short rule.
Likewise, the Fund's ability to hold foreign currencies or engage in hedging
activities may be limited by the short-short rule.
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 or
losses, 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 or Class Z shares as a result of the higher
distribution-related fee applicable to the Class B and Class C shares. The per
share distributions of net capital gains, if any, will be in the same amount
for Class A, Class B, Class C and Class Z 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-30
<PAGE>
Dividends received by Corporate shareholders from the Fund 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. 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, and if more than 50% of the
value of the Fund's assets consists of securities of foreign corporations, the
Fund may elect to "pass through" to the Fund's shareholders the amount of
foreign income taxes paid by the Fund, but there can be no assurance that the
Fund will be able to do so. For the fiscal year ended May 31, 1997, 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 does 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. Accordingly, a foreign
shareholder may recognize additional taxable income as a result of the Fund's
election to pass through the foreign taxes to shareholders.
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 from the sale of a security and gain or loss 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.
PERFORMANCE INFORMATION
AVERAGE ANNUAL TOTAL RETURN. The Fund may from time to time advertise its
average annual total return. Average annual total return is determined
separately for Class A, Class B, Class C and Class Z shares. See "How the Fund
Calculates Performance" in the Prospectus.
Average annual total return is computed according to the following formula:
P(1+T)/to the nth power/ = 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-31
<PAGE>
The average annual total returns for Class A shares for the one year, five
year and since inception (January 22, 1990) periods ended May 31, 1997 were
.10%, 12.86% and 8.19%, 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, 1997 were (.49)%, 13.01% and 7.48%, 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
7.47%. The average annual total returns for Class C shares for one year and
since inception (August 1, 1994) periods ended May 31, 1997 were 3.51% and
14.93%, respectively.
AGGREGATE TOTAL RETURN. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B,
Class C and Class Z shares. 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, 1997 were 5.37%,
92.77% and 87.80%, 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, 1997 were 4.51%, 85.40% and 100.90%, respectively.
Without the expense subsidiary the aggregate total return for the Class B
shares for the since inception period would have been 100.64%. The aggregate
total return for Class C shares for the one year and since inception (August
1, 1994) periods ended May 31, 1997 were 4.51% and 48.23%, respectively. The
aggregate total return for the Class Z shares for the since inception
(September 16, 1996) period ended May 31, 1997 was 7.17%.
YIELD. The Fund may from time to time advertise its yield as calculated over
a 30-day period. Yield is calculated separately for Class A, Class B, Class C
and Class Z shares. This yield will be computed by dividing the Fund's net
investment income per share earned during this 30-day period by the maximum
offering price per share on the last day of this period. Yield is calculated
according to the following formula:
a--b
YIELD = 2[(------- +1)/to the 6th power/ -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-32
<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/
-----------------------
Performance
Comparison of Different
Types of Investments
Over the Long Term
(1/1926 - 03/1997)
Common Stocks 10.7%
Long-Term Govt. Bonds 5.0%
Inflation 3.1%
- ---------
/1/Source: Ibbotson Associates, "Stocks, Bonds, Bills and Inflation--1997
Yearbook" (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). 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 LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of the
Fund. It is a wholly-owned subsidiary of PIFM. PMFS provides customary
transfer agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, the payment of dividends and distributions and
related functions. For these services, PMFS receives an annual fee 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, 1997, the Fund
incurred fees of approximately $200,000 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-33
<PAGE>
Portfolio of Investments PRUDENTIAL NATURAL
as of May 31, 1997 RESOURCES FUND, INC.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--95.8%
COMMON STOCKS--92.2%
- ------------------------------------------------------------
Australia--3.3%
553,500 Acacia Resources(a) (Precious
Metals) $ 812,794
398,319 Capral Aluminium Ltd.
(Metals-Non Ferrous) 1,439,561
147,000 Comalco Ltd. (Metals-Non Ferrous) 816,480
61,100 CRA Ltd. (Metals-Non Ferrous) 1,000,947
170,700 Delta Gold NL (Precious Metals) 281,837
130,000 Plutonic Resources Ltd. (Precious
Metals) 475,767
96,564 Western Mining Corp. Hldgs. Ltd.
(Metals-Non Ferrous) 623,776
------------
5,451,162
- ------------------------------------------------------------
Canada--35.3%
116,300 Agnico-Eagle Mines Ltd.
(Precious Metals) 1,241,366
129,000 Alberta Energy Co. Ltd. (Oil &
Natural Gas Production &
Refining) 3,091,054
133,100 Anderson Exploration Ltd. (a) (Oil &
Natural Gas Production) 1,768,610
355,200 Arakis Energy Corp. (a) (Oil &
Natural Gas Production) 1,354,200
213,500 Archer Resources Ltd. (a) (Oil &
Natural Gas Production) 1,030,914
177,100 Arizona Star Resource Ltd. (a)
(Gold Mines) 1,517,412
91,200 Atna Resources Ltd. (a)
(Mineral Resources) 334,418
78,400 Barrick Gold (Precious Metals) 1,986,756
308,900 Barrington Petroleum Ltd. (a)
(Exploration & Production) 1,289,700
523,000 Beau Canada Exploration Ltd. (a)
(Oil & Natural Gas Production) 1,298,766
220,800 Blue Range Resource Corp. (a) (Oil &
Natural Gas Production) 1,491,025
58,900 Cabre Exploration Ltd. (a) (Oil &
Natural Gas Production) $ 1,005,046
199,100 Cambior Inc. (Precious Metals) 2,602,236
85,700 Cameco Corp. (Misc. Materials &
Commodities) 3,350,962
47,100 Canadian Natural Resources Ltd. (a)
(Oil & Natural Gas Production) 1,239,744
198,000 Crestar Energy Inc. (a) (Oil &
Natural Gas Production) 3,752,396
240,000 CS Resources Ltd. (a) (Machinery &
Equipment) 1,760,093
95,500 ELAN Energy Inc. (a) (Oil & Natural
Gas Production) 686,502
84,900 Greenstone Resources Ltd. (a)
(Precious Metals) 801,409
238,236 HCO Energy Ltd. (a) (Oil & Natural
Gas Production) 328,673
104,500 International Pursuit Corp. (a)
(Precious Metals) 191,973
279,000 Kap Resources Ltd. (a) (Chemicals) 648,272
253,200 MacMillan Bloedel Ltd. (Forest
Products & Paper) 3,677,026
180,700 Meridian Gold Inc. (a) (Precious
Metals) 918,458
188,500 Northrock Resources Ltd. (a) (Oil &
Natural Gas Production) 2,497,912
126,600 Northstar Energy Corp. (a)
(Exploration & Production) 1,172,052
177,200 Pacific Forest Products Ltd. (a)
(Forest Products & Paper) 3,216,671
49,000 Placer Dome Inc. (Precious Metals) 894,823
43,200 Potash Corp. (Chemicals) 3,547,800
104,600 Repadre Capital Corp. (a)
(Precious Metals) 668,371
62,500 Rigel Energy Corp. (a) (Oil &
Natural Gas Production) 780,569
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-34
<PAGE>
Portfolio of Investments PRUDENTIAL NATURAL
as of May 31, 1997 RESOURCES FUND, INC.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Canada (cont'd.)
282,000 Rio Alto Exploration Ltd. (a)
(Exploration & Production) $ 2,231,920
63,100 Samax Gold Inc. (a) (Precious
Metals) 308,123
344,700 Tiomin Resources Inc. (a) (Metals-
Non Ferrous) 818,450
176,000 Triton Mining Corp. (a) (Precious
Metals) 460,064
183,400 TVX Gold, Inc. (a) (Precious Metals) 1,185,202
208,114 Westaim Corp. (a) (Misc. Materials &
Commodities) 846,238
384,900 Westmin Resources Ltd. (a) (Metals-
Non Ferrous) 1,942,387
------------
57,937,593
- ------------------------------------------------------------
France--3.2%
38,300 Bouygues Offshore, S.A. (a)
(Engineering & Construction) 964,032
91,037 Coflexip (ADR) (a) (Energy Equipment
& Services) 2,588,865
18,017 Total Francaise Petroleum Ltd. (a)
(Integrated Producers) 1,651,358
------------
5,204,255
- ------------------------------------------------------------
New Zealand--0.8%
988,588 Fletcher Challenge Forest, Ltd.
(Forest Products & Paper) 1,301,670
- ------------------------------------------------------------
South Africa--6.8%
45,600 Durban Roodepoort Deep Ltd. (a)
(Precious Metals) 219,427
131,800 Harmony Gold Mining Co. Ltd. (a)
(Precious Metals) 899,709
255,400 Impala Platinum Holdings Ltd.
(Precious Metals) 2,658,035
75,400 Kloof Gold Mining Co. Ltd. (ADR)
(Precious Metals) 513,662
187,900 Randgold & Exploration Co. (a)
(Precious Metals) 1,177,529
239,400 Rustenburg Platinum Holdings (a)
(Precious Metals) $ 3,924,810
9,800 Vaal Reefs Exploration & Mining Co.
Ltd. (Precious Metals) 587,825
44,400 Western Deep Levels Ltd.
(Precious Metals) 1,257,072
------------
11,238,069
- ------------------------------------------------------------
United States--42.8%
171,900 Abacan Resources Corp. (a) (Oil &
Natural Gas Production) 1,246,275
45,900 Aluminum Co. of America (Metals-
Non Ferrous) 3,379,387
92,483 Ashanti Goldfields Ltd. (GDR)
(Precious Metals) 1,202,279
35,500 Brigham Exploration Co. (a) (Oil &
Gas Exploration/Production) 257,375
116,600 Brush Wellman, Inc. (Metals-
Non Ferrous) 2,477,750
122,400 Champion International Corp. (Forest
Products & Paper) 6,043,500
60,800 Cross Timbers Oil Co. (Oil & Natural
Gas Production) 1,178,000
39,300 Dailey Petroleum Services Corp. (a)
(Machinery & Equipment) 260,363
77,100 Dawson Production Services Inc. (a)
(Oil Services) 867,375
91,100 Freeport-McMoran Copper & Gold Inc.
(Metals-Non Ferrous) 2,528,025
37,200 FX Energy Inc. (a) (Oil & Natural
Gas Production) 316,200
51,111 Getchell Gold Corp. (a)
(Precious Metals) 2,038,051
104,700 Golden Star Resources Ltd. (a)
(Precious Metals) 837,600
156,400 Harcor Energy Inc. (a) (Oil &
Natural Gas Production &
Refining) 948,175
110,300 J. Ray McDermott, S.A. (a) (Energy
Equipment & Services) 3,005,675
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-35
<PAGE>
Portfolio of Investments PRUDENTIAL NATURAL
as of May 31, 1997 RESOURCES FUND, INC.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
United States (cont'd.)
63,200 Louisiana-Pacific Corp. (Forest
Products & Paper) $ 1,232,400
491,000 Mesa, Inc. (Oil & Natural Gas
Production & Refining) 2,700,500
154,800 Newfield Exploration Co.
(Exploration & Production) 3,328,200
84,411 Newmont Mining Corp. (Precious
Metals) 3,302,580
170,222 NGC Corp. (Energy Sources) 3,063,996
135,600 Noble Affiliates, Inc. (Exploration
& Production) 5,712,150
157,700 Nord Resources Corp. (a) (Metals-
Non Ferrous) 453,388
19,400 Precision Drilling Corp. (a) (Energy
Equipment) 868,150
38,900 Rayonier Inc. (Forest Products) 1,667,837
45,600 Reynolds Metals Co. (Aluminum) 3,095,100
273,300 Stillwater Mining Co. (a)
(Precious Metals) 6,354,225
95,500 Stolt Comex Seaway (a) (Energy
Equipment & Services) 2,172,625
67,200 United Meridian Corp. (a) (Oil & Gas
Exploration/Production) 2,419,200
72,007 Weatherford Enterra Inc. (a) (Energy
Equipment & Services) 2,457,239
245,700 Western Gas Resources, Inc.
(Energy Sources) 4,852,575
------------
70,266,195
------------
Total common stocks
(cost US$130,007,372) 151,398,944
------------
PREFERRED STOCKS--2.6%
- ------------------------------------------------------------
United States
Ashanti Goldfields Ltd. (Precious
Metals)
37,128 Ser. A $ 16,708
37,128 Ser. B 16,708
37,128 Ser. C 16,708
37,128 Ser. D 16,708
37,128 Ser. E 16,708
16,400 Freeport-McMoran Copper & Gold Inc.,
(Metals-Non Ferrous) 301,350
14,800 Hecla Mining Co., 7.00%, Conv., Ser.
B, (Precious Metals) 695,600
470,128 Mesa, Inc., 8.00%, Conv., Ser. A (a)
(Oil & Natural Gas Production) 3,114,596
------------
Total preferred stocks
(cost US$2,345,665) 4,195,086
------------
WARRANTS(a)--0.3%
- ------------------------------------------------------------
Canada
Kap Resources Ltd.,
133,900 Expiring 8/3/00 @ CAD $2 (Chemicals) 102,088
Rea Gold Corp.
533,000 Expiring 9/11/97 @ CAD $.85
(Precious Metals) 452,810
------------
Total warrants
(cost US$490,586) 554,898
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-36
<PAGE>
PRUDENTIAL NATURAL
RESOURCES FUND, INC.
Portfolio of Investments as of May 31, 1997
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
CONVERTIBLE BONDS--0.7%
- ------------------------------------------------------------
South Africa--0.2%
ZAR 300 Randgold Finance BVI Ltd.,
Sec'd. Gtd., (Precious Metals)
7.00%, 10/3/01 $ 283,500
- ------------------------------------------------------------
United States--0.5%
US$ 891 Coeur D Alene Mines Corp.,
Sr. Sub. Deb., (Precious Metals)
6.375%, 1/31/04 833,085
------------
Total convertible bonds
(cost US$1,154,094) 1,116,585
------------
- ------------------------------------------------------------
Total Investments--95.8%
(cost US$133,997,717; Note 4) 157,265,513
Other assets in excess of
liabilities--4.2% 6,935,018
------------
Net Assets--100% $164,200,531
------------
------------
</TABLE>
- ---------------
(a) Non-income producing security.
ADR--American Depository Receipt.
GDR--Global Depository Receipt.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-37
<PAGE>
PRUDENTIAL NATURAL
Statement of Assets and Liabilities RESOURCES FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
Assets May 31, 1997
<S> <C>
Investments, at value (cost $133,997,717).................................................................... $157,265,513
Cash......................................................................................................... 126,425
Foreign currency, at value (cost $5,701,809)................................................................. 5,707,975
Receivable for Fund shares sold.............................................................................. 934,812
Receivable for investments sold.............................................................................. 811,423
Dividends and interest receivable............................................................................ 105,669
Other assets................................................................................................. 2,316
------------
Total assets.............................................................................................. 164,954,133
------------
Liabilities
Payable for Fund shares reacquired........................................................................... 387,741
Accrued expenses and other liabilities....................................................................... 158,657
Distribution fee payable..................................................................................... 105,180
Management fee payable....................................................................................... 102,024
------------
Total liabilities......................................................................................... 753,602
------------
Net Assets................................................................................................... $164,200,531
------------
------------
Net assets were comprised of:
Common stock, at par...................................................................................... $ 104,561
Paid-in capital in excess of par.......................................................................... 133,525,216
------------
133,629,777
Accumulated net investment loss........................................................................... (247,519 )
Accumulated net realized gain on investments.............................................................. 7,548,288
Net unrealized appreciation on investments and foreign currencies......................................... 23,269,985
------------
Net assets, May 31, 1997..................................................................................... $164,200,531
------------
------------
Class A:
Net asset value and redemption price per share
($47,054,145 / 2,891,912 shares of common stock issued and outstanding)................................ $16.27
Maximum sales charge (5% of offering price)............................................................... .86
Maximum offering price to public.......................................................................... $17.13
Class B:
Net asset value, offering price and redemption price per share
($111,464,288 / 7,207,097 shares of common stock issued and outstanding)............................... $15.46
Class C:
Net asset value, offering price and redemption price per share
($2,542,376 / 164,409 shares of common stock issued and outstanding)................................... $15.46
Class Z:
Net asset value, offering price and redemption price per share
($3,139,722 / 192,644 shares of common stock issued and outstanding)................................... $16.30
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-38
<PAGE>
PRUDENTIAL NATURAL
RESOURCES FUND, INC.
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income (Loss) May 31, 1997
<S> <C>
Income
Dividends (net of foreign withholding taxes
of $83,865).............................. $ 1,341,360
Interest (net of foreign withholding taxes
of $238)................................. 234,972
------------
Total income............................. 1,576,332
------------
Expenses
Distribution fee--Class A................... 100,983
Distribution fee--Class B................... 1,073,611
Distribution fee--Class C................... 20,413
Management fee.............................. 1,128,718
Transfer agent's fees and expenses.......... 243,000
Custodian's fees and expenses............... 174,000
Registration fees........................... 110,000
Reports to shareholders..................... 65,000
Directors' fees and expenses................ 34,000
Audit fee and expenses...................... 32,000
Legal fees and expenses..................... 30,000
Miscellaneous............................... 31,107
------------
Total expenses........................... 3,042,832
------------
Net investment loss............................ (1,466,500)
------------
Realized and Unrealized Gain (Loss)
on Investments and Foreign
Currency Transactions
Net realized gain (loss) on:
Investment transactions..................... 20,159,569
Foreign currency transactions............... (66,932)
------------
20,092,637
------------
Net change in unrealized
appreciation/depreciation on:
Investments................................. (12,093,668)
Foreign currencies.......................... 6,171
------------
(12,087,497)
------------
Net gain on investments and foreign
currencies.................................. 8,005,140
------------
Net Increase in Net Assets
Resulting from Operations...................... $ 6,538,640
------------
------------
</TABLE>
PRUDENTIAL NATURAL
RESOURCES FUND, INC.
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase in Year Ended May 31,
Net Assets 1997 1996
<S> <C> <C>
Operations
Net investment loss............ $ (1,466,500) $ (727,538)
Net realized gain on investment
and foreign currency
transactions................ 20,092,637 9,504,064
Net change in unrealized
appreciation/depreciation on
investments and foreign
currencies.................. (12,087,497) 22,743,837
------------ ------------
Net increase in net assets
resulting from operations... 6,538,640 31,520,363
------------ ------------
Net equalization credits.......... -- 90,374
------------ ------------
Distributions from net realized
gains (Note 1)
Class A........................ (4,657,286) (1,303,488)
Class B........................ (12,161,558) (4,284,054)
Class C........................ (234,109) (33,008)
Class Z........................ (32,340) --
------------ ------------
(17,085,293) (5,620,550)
------------ ------------
Fund share transactions (net of
share conversions) (Note 5)
Proceeds from shares sold...... 157,545,157 122,535,276
Net asset value of shares
issued in reinvestment of
distributions............... 15,354,101 5,017,619
Cost of shares reacquired...... (145,400,427) (107,356,234)
------------ ------------
Net increase in net assets from
Fund share transactions..... 27,498,831 20,196,661
------------ ------------
Total increase.................... 16,952,178 46,186,848
Net Assets
Beginning of year................. 147,248,353 101,061,505
------------ ------------
End of year....................... $164,200,531 $147,248,353
------------ ------------
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-39
<PAGE>
PRUDENTIAL NATURAL
Notes to Financial Statements RESOURCES FUND, INC.
- --------------------------------------------------------------------------------
Prudential 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 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.
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
- --------------------------------------------------------------------------------
B-40
<PAGE>
PRUDENTIAL NATURAL
Notes to Financial Statements RESOURCES FUND, INC.
- --------------------------------------------------------------------------------
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.
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 and dividends have been provided for in
accordance with the Fund's understanding of the applicable country's tax rules
and rates.
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. 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.
Equalization: Effective June 1, 1996, the Fund discontinued the accounting
practice of equalization. Equalization is a practice whereby a portion of the
proceeds from sales and costs of repurchases of capital shares, equivalent on a
per share basis to the amount of distributable net investment income on the date
of the transaction, is credited or charged to undistributed net investment
income. The balance of $39,777 of undistributed net investment income at May 31,
1996, resulting from equalization was transferred to paid-in capital in excess
of par. Such reclassification has no effect on net assets, results of
operations, or net asset value per share.
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants', Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income; Capital Gain, and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to decrease accumulated net investment loss and decrease
accumulated net realized gain on investments by $1,365,054 for foreign currency
gains realized and tax-basis net operating losses during the fiscal year ended
May 31, 1997.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM has entered into a subadvisory agreement with The Prudential
Investment Corporation ('PIC'); PIC furnishes investment advisory services in
connection with the management of the Fund. PIFM pays for the services of PIC,
the compensation of officers of the Fund, occupancy and certain clerical and
bookkeeping costs of the Fund. The Fund bears all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly, at an annual
rate of .75 of 1% of the Fund's average daily net assets.
The Fund has a distribution agreement with Prudential Securities Incorporated
('PSI'), which acts as the distributor of the Class A, Class B, Class C and
Class Z shares of the Fund. The Fund compensates PSI for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution, (the 'Class A, B and C Plans') regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
No distribution or service fees are paid to PSI as distributor of the Class Z
shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI for its
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%
of the average daily net 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, 1997.
PSI has advised the Fund that it has received approximately $107,000 in
front-end sales charges resulting from sales of Class A shares during the year
ended May 31, 1997. From these fees, PSI paid such sales charges to dealers
which in turn paid commissions to salespersons and incurred other distribution
costs.
PSI has advised the Fund that for the year ended May 31, 1997, it received
approximately $219,400 and $2,100 in contingent deferred sales
- --------------------------------------------------------------------------------
B-41
<PAGE>
PRUDENTIAL NATURAL
Notes to Financial Statements RESOURCES FUND, INC.
- --------------------------------------------------------------------------------
charges imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PSI, PIFM and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America.
The Fund, along with other affiliated registered investment companies (the
'Funds'), entered into a credit agreement (the 'Agreement') on December 31, 1996
with an unaffiliated lender. The maximum commitment under the Agreement is
$200,000,000. The Agreement expires on December 30, 1997. Interest on any such
borrowings outstanding will be at market rates. The purpose of the Agreement is
to serve as an alternative source of funding for capital share redemptions. The
Fund has not borrowed any amounts pursuant to the Agreement as of May 31, 1997.
The Funds pay a commitment fee at an annual rate of .055 of 1% on the unused
portion of the credit facility. The commitment fee is accrued and paid quarterly
on a pro-rata basis by the Funds.
- ------------------------------------------------------------
Note 3. Other Transactions With Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly-owned subsidiary of PIMF,
serves as the Fund's transfer agent and during the year ended May 31, 1997, the
Fund incurred fees of approximately $200,000 for the services of PMFS. As of May
31, 1997, 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, 1997, PSI and/or its foreign affiliates earned
approximately $8,100 in brokerage commissions from portfolio transactions
executed on behalf of the Fund.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments
for the year ended May 31, 1997 aggregated $84,531,466 and $77,965,627,
respectively.
The federal income tax basis of the Fund's investments at May 31, 1997 was
$134,413,278 and accordingly, net unrealized appreciation for federal income tax
purposes was $22,852,235 (gross unrealized appreciation--$29,292,258 gross
unrealized depreciation--$6,440,023).
For federal income tax purposes the Fund will elect to treat net currency losses
of approximately $31,000 incurred in the seven month period ended May 31, 1997
as having been incurred in the following fiscal year.
- ------------------------------------------------------------
Note 5. Capital
The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are
sold with a front-end sales charge of up to 5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a contingent
deferred sales 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. Special exchange privileges are also available for
shareholders who qualify to purchase Class A shares at net asset value. Class Z
shares are not subject to any sales or redemption charge and are offered
exclusively for sale to a limited group of investors.
The Fund has authorized 500 million shares of common stock $.01 par value per
share equally divided into four classes, designated Class A, Class B, Class C
and Class Z common stock.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ----------------------------------- ---------- ------------
<S> <C> <C>
Year ended May 31, 1997:
Shares sold........................ 5,780,788 $ 95,719,238
Shares issued in reinvestment of
distributions.................... 275,315 4,341,728
Shares reacquired.................. (5,504,443) (91,242,896)
---------- ------------
Net increase in shares outstanding
before conversion................ 551,660 8,818,070
Shares issued upon conversion from
Class B.......................... 460,102 7,810,060
---------- ------------
Net increase in shares
outstanding...................... 1,011,762 $ 16,628,130
---------- ------------
---------- ------------
</TABLE>
- --------------------------------------------------------------------------------
B-42
<PAGE>
PRUDENTIAL NATURAL
Notes to Financial Statements RESOURCES FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Shares Amount
- ----------------------------------- ---------- ------------
Year ended May 31, 1996:
<S> <C> <C>
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 B
- -----------------------------------
Year ended May 31, 1997:
Shares sold........................ 3,305,711 $ 53,154,461
Shares issued in reinvestment of
distributions.................... 715,252 10,764,540
Shares reacquired.................. (3,104,475) (49,520,723)
---------- ------------
Net increase in shares outstanding
before conversion................ 916,488 14,398,278
Shares reacquired upon conversion
into Class A..................... (480,006) (7,810,060)
---------- ------------
Net increase in shares
outstanding...................... 436,482 $ 6,588,218
---------- ------------
---------- ------------
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
---------- ------------
---------- ------------
<CAPTION>
Class C Shares Amount
- ----------------------------------- ---------- ------------
<S> <C> <C>
Year ended May 31, 1997:
Shares sold........................ 243,854 $ 4,042,826
Shares issued in reinvestment of
distributions.................... 14,319 215,504
Shares reacquired.................. (186,625) (3,110,098)
---------- ------------
Net increase in shares
outstanding...................... 71,548 $ 1,148,232
---------- ------------
---------- ------------
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
---------- ------------
---------- ------------
<CAPTION>
Class Z
- -----------------------------------
September 16, 1996* through
May 31, 1997:
Shares sold........................ 285,159 $ 4,628,632
Shares issued in reinvestment of
distributions.................... 2,049 32,329
Shares reacquired.................. (94,564) (1,526,710)
---------- ------------
Net increase in shares
outstanding...................... 192,644 $ 3,134,251
---------- ------------
---------- ------------
- ---------------
* Commencement of offering of Class Z shares.
</TABLE>
- --------------------------------------------------------------------------------
B-43
<PAGE>
PRUDENTIAL NATURAL
Financial Highlights RESOURCES FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
--------------------------------------------------------
Year Ended May 31,
--------------------------------------------------------
1997(a) 1996 1995(a) 1994(a) 1993(a)
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 17.34 $ 13.73 $ 12.55 $11.84 $10.02
-------- ------- ------- ------- -------
Income from investment operations
Net investment income (loss).................. (.07) (.01) (.03) .01 .02
Net realized and unrealized gain on investment
and foreign currency transactions.......... .94 4.42 1.21 .70 1.80
-------- ------- ------- ------- -------
Total from investment operations........... .87 4.41 1.18 .71 1.82
-------- ------- ------- ------- -------
Less distributions
Distributions from net realized gains on
investment and foreign currency
transactions............................... (1.94) (.80) -- -- --
-------- ------- ------- ------- -------
Net asset value, end of year.................. $ 16.27 $ 17.34 $ 13.73 $12.55 $11.84
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
TOTAL RETURN(b):.............................. 5.37% 33.51% 9.40% 6.00% 18.16%
<CAPTION>
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $ 47,054 $32,608 $19,682 $6,505 $1,898
Average net assets (000)...................... $ 40,393 $23,106 $10,791 $4,106 $ 758
Ratios to average net assets:
Expenses, including distribution fees...... 1.48% 1.57% 1.73% 1.89% 2.38%
Expenses, excluding distribution fees...... 1.23% 1.32% 1.48% 1.65% 2.18%
Net investment income (loss).................. (.43)% (.09)% (.25)% .11% .13%
For Class A, B, C and Z shares:
Portfolio turnover............................ 53% 41% 36% 19% 50%
Average commission rate per share............. $ .0371 $ .0290 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.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-44
<PAGE>
PRUDENTIAL NATURAL
Financial Highlights RESOURCES FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
------------------------------------------------------------------
Year Ended May 31,
---------------------------------------------------------
1997(a) 1996 1995(a) 1994(a) 1993(a)
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 16.70 $ 13.35 $ 12.29 $ 11.69 $ 9.97
-------- -------- ------- ------- -------
Income from investment operations
Net investment loss........................... (.19) (.10) (.13) (.08) (.07)
Net realized and unrealized gain on investment
and foreign currency transactions.......... .89 4.25 1.19 .68 1.79
-------- -------- ------- ------- -------
Total from investment operations........... .70 4.15 1.06 .60 1.72
-------- -------- ------- ------- -------
Less distributions
Distributions from net realized gains on
investment and foreign currency
transactions............................... (1.94) (.80) -- -- --
-------- -------- ------- ------- -------
Net asset value, end of year.................. $ 15.46 $ 16.70 $ 13.35 $ 12.29 $ 11.69
-------- -------- ------- ------- -------
-------- -------- ------- ------- -------
TOTAL RETURN(b):.............................. 4.51% 32.49% 8.62% 5.13% 17.25%
<CAPTION>
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $111,464 $113,090 $80,774 $64,235 $36,150
Average net assets (000)...................... $107,361 $ 84,396 $74,681 $48,772 $23,464
Ratios to average net assets:
Expenses, including distribution fees...... 2.23% 2.32% 2.48% 2.65% 3.18%
Expenses, excluding distribution fees...... 1.23 1.32% 1.48% 1.65% 2.18%
Net investment loss........................... (1.18)% (.84)% (1.05)% (.67)% (.67)%
</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.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-45
<PAGE>
PRUDENTIAL NATURAL
Financial Highlights RESOURCES FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class Z
---------------------------------- -------------
August 1, September 16,
1994(d) 1996(a)(e)
Year Ended May 31, through through
------------------- May 31, May 31,
1997(a) 1996 1995(a) 1997
------- ------- ---------- -------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 16.70 $13.35 $12.47 $ 17.08
------- ------- ----- -----
Income from investment operations
Net investment loss........................... (.19) (.10) (.13) (.03)
Net realized and unrealized gain on investment
and foreign currency transactions.......... .89 4.25 1.01 1.19
------- ------- ----- -----
Total from investment operations........... .70 4.15 .88 1.16
------- ------- ----- -----
Less distributions
Distributions from net realized gains on
investment and foreign currency
transactions............................... (1.94) (.80) -- (1.94)
------- ------- ----- -----
Net asset value, end of period................ $ 15.46 $16.70 $13.35 $ 16.30
------- ------- ----- -----
------- ------- ----- -----
TOTAL RETURN(b):.............................. 4.51% 32.49% 7.06% 7.17%
<CAPTION>
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $ 2,542 $1,551 $606 $ 3,140
Average net assets (000)...................... $ 2,041 $734 $294 $ 994
Ratios to average net assets:
Expenses, including distribution fees...... 2.23% 2.32% 2.56%(c) 1.23%(c)
Expenses, excluding distribution fees...... 1.23% 1.32% 1.56%(c) 1.23%(c)
Net investment loss........................... (1.18)% (.84)% (1.08)%(c) (.18)%(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.
(e) Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-46
<PAGE>
PRUDENTIAL NATURAL
Report of Independent Accountants RESOURCES FUND, INC.
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of
Prudential 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 Natural Resources Fund,
Inc. (the 'Fund') at May 31, 1997, 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,
1997 by correspondence with the custodian, provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
July 18, 1997
- --------------------------------------------------------------------------------
B-47
<PAGE>
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE, INC.
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.
Prime-1: Issues rated "Prime-1" (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations.
Prime-2: Issues rated "Prime-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: This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high for issues
designated A-1.
A-1
<PAGE>
APPENDIX I--GENERAL INVESTMENT INFORMATION
ASSET ALLOCATION
Asset allocation is a technique for reducing risk and providing balance.
Asset allocation among different types of securities within an overall
investment portfolio helps to reduce risk and to potentially provide stable
returns, while enabling investors to work toward their financial goal(s).
Asset allocation is also a strategy to gain exposure to better performing
asset classes while maintaining investment in other asset classes.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable
returns. Owning a portfolio of securities mitigates the individual risks (and
returns) of any one security. Additionally, diversification among types of
securities reduces the risks (and general returns) of any one type of
security.
DURATION
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to
changes in interest rates. When interest rates fall, bond prices generally
rise. Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, i.e., principal and interest
rate payments. Duration is expressed as a measure of time in years--the longer
the duration of a bond (or a bond portfolio), the greater the impact of
interest rate changes on the bond's (or the bond portfolio's) price. Duration
differs from effective maturity in that duration takes into account call
provisions, coupon rates and other factors. Duration measures interest rate
risk only and not other risks, such as credit risk and, in the case of non-
U.S. dollar denominated securities, currency risk. Effective maturity measures
the final maturity dates of a bond (or a bond portfolio).
MARKET TIMING
Market timing--buying securities when prices are low and selling them when
prices are relatively higher--may not work for many investors because it is
impossible to predict with certainty how the price of a security will
fluctuate. However, owning a security for a long period of time may help
investors 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.
I-1
<PAGE>
APPENDIX II--HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
The following chart shows the long-term performance of various asset classes
and the rate of inflation.
[THE FOLLOWING TABLE WAS DEPICTED AS A LINE GRAPH IN THE PRINTED MATERIAL]
Value of $1.00 Invested on
1/1/26 through 12/31/96
Small Stocks................. $4,495.99
Common Stocks................ $1,370.95
Long-Term Bonds.............. $ 33.73
Treasury Bills............... $ 13.54
Inflation.................... $ 8.87
Source: Stocks, Bonds, Bills and Inflation 1996 Yearbook, Ibbotson Associates,
Chicago, Illinois (annually updates work by Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. This chart is for illustrative purposes
only and is not indicative of the past, present, or future performance of any
asset class or any Prudential Mutual Fund.
Generally, stock returns are due to capital appreciation and the reinvestment
of any gains. Bond returns are due mainly to reinvesting interest. Also, stock
prices are usually more volatile than bond prices over the long-term. Small
stock returns for 1926-1980 are those of stocks comprising the 5th quintile of
the New York Stock Exchange. Thereafter, returns are those of the Dimensional
Fund Advisors (DFA) Small Company Fund. Common stock returns are based on the
S&P Composite Index, a market-weighted, unmanaged index of 500 stocks
(currently) in a variety of industries. It is often used as a broad measure of
stock market performance.
Long-term government bond returns are measured using a constant one-bond
portfolio with a maturity of roughly 20 years. Treasury bill returns are for a
one-month bill. Treasuries are guaranteed by the government as to the timely
payment of principal and interest; equities are not. Inflation is measured by
the consumer price index (CPI).
II-1
<PAGE>
Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart 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 1996. 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
<TABLE>
YEAR 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
- ---- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury
Bonds 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% -3.4% 18.4% 2.7%
U.S. Mortgage
Securities 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% -1.6% 16.8% 5.4%
U.S. Investment Grade
Corporate Bonds 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% -3.9% 22.3% 3.3%
U.S. High Yield
Corporate Bonds 5.0% 12.5% 0.8% -9.6% 46.2% 15.8% 17.1% -1.0% 19.2% 11.4%
World Gov't.
Bonds 35.2% 2.3% -3.4% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1%
Difference Between
Highest and Lowest 33.2% 10.2% 18.8% 24.9% 30.9% 11.0% 10.3% 9.9% 5.5% 8.7%
Returns (In Percent)
</TABLE>
/1/ LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over
150 public issues of the U.S. Treasury having maturities of at least one
year.
/2/ LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index
that includes over 600 15- and 30-year fixed-rate mortgage-backed securities
of the Government National Mortgage Association (GNMA), Federal National
Mortgage Association (FNMA), and the Federal Home Loan Mortgage Corporation
(FHLMC).
/3/ LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-
rate, nonconvertible investment-grade bonds. All bonds are U.S. dollar-
denominated issues and include debt issued or guaranteed by foreign sovereign
governments, municipalities, governmental agencies or international agencies.
All bonds in the index have maturities of at least one year.
/4/ LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising
over 750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower
by Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or
Fitch Investors Service). All bonds in the index have maturities of at least
one year.
/5/ SALOMON BROTHERS WORLD GOVERNMENT INDEX (NON U.S.) includes over 800 bonds
issued by various foreign governments or agencies, excluding those in the
U.S., but including those in Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.
II-2
<PAGE>
This chart 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]
FOREIGN STOCK MARKETS HAVE OFTEN
OUTPERFORMED THOSE IN THE U.S. 1969-1996
Average Annual Total Returns of Capital Appreciation and
Major World Stock Markets Reinvesting Dividends -- $228,416
(6/30/87-6/30/97)
Capital Appreciation Only -- $80,463
[CHART]
Hong Kong 19.9% Source: Stocks, Bonds, Bills, and
Netherlands 17.2% Inflation 1996 Yearbook, Ibbotson
Sweden 17.1% Associates, Chicago (annually
Switzerland 16.8% updates work by Roger G. Ibbotson
Denmark 15.7% and Rex A. Sinquefield). Used with
United States 15.0% permission. All rights reserved.
Belgium 13.9% This chart is used for illustrative
purposes only and is not intended to
Source: Morgan Stanley Capital represent the past, present or
International based on data future performance of any Prudential
retrieved from Lipper Analytical Mutual Fund. Common stock total
New Applications (LANA) as of return is based on the Standard &
6/30/97. Used with permission. Poor's 500 Stock Index, a market-
Morgan Stanley Country indices are value-weighted index made up of 500
unmanaged indices which include of the largest stocks in the U.S.
those stocks making up the largest based upon their stock market value.
two-thirds of each country's total Investors cannot invest directly in
stock market capitalization. indices.
Returns reflect the reinvestment
of all distributions. This chart
is for illustrative purposes only
and is not indicative of the past,
present or future performance of
any specific investment. Investors
cannot invest directly in stock
indices.
---------------------------------------
WORLD STOCK MARKET CAPITALIZATION BY
REGION
World Total: $12.4 Trillion
[CHART]
Pacific Basin 22.6%
Europe 29.5%
U.S. 45.5%
Canada 2.4%
Source: Morgan Stanley Capital
International, June 30, 1997. Used
with permission. This chart
represents the capitalization of
major world stock markets as
measured by the Morgan Stanley
Capital International (MSCI) World
Index. The total market
capitalization is based on the value
of 1579 companies in 22 countries
(representing approximately 60% of
the aggregate market value of the
stock exchanges). This chart is for
illustrative purposes only and does
not represent the allocation of any
Prudential Mutual Fund.
II-3
<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 (1926-1996)
[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 1926-1996. Yields
represent that of an annually renewed one-bond portfolio with a remaining
maturity of approximately 20 years. This chart is for illustrative purposes
and should not be construed to represent the yields of any Prudential Mutual
Fund.
II-4
<PAGE>
APPENDIX III--INFORMATION RELATING TO PRUDENTIAL
Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating
to the Prudential Mutual Funds. See "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, 1996 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, 1996. Principal products and services include life and health insurance,
other healthcare products, property and casualty insurance, securities
brokerage, asset management, investment advisory services and real estate
brokerage. Prudential (together with its subsidiaries) employs almost 81,000
persons worldwide, and maintains a sales force of approximately 11,500 agents
and 6,400 financial advisors. Prudential is a major issuer of annuities,
including variable annuities. Prudential seeks to develop innovative products
and services to meet consumer needs in each of its business areas. Prudential
uses the rock of Gibraltar as its symbol. The Prudential rock is a recognized
brand name throughout the world.
Insurance. Prudential has been engaged in the insurance business since 1875.
It insures or provides financial services to nearly 50 million people
worldwide. Long one of the largest issuers of individual life insurance, the
Prudential has 22 million life insurance policies in force today with a face
value of $1 trillion. Prudential has the largest capital base ($12.1 billion)
of any life insurance company in the United States. Prudential provides auto
insurance for approximately 1.6 million cars and insures approximately 1.2
million homes.
Money Management. Prudential is one of the largest pension fund managers in
the country, providing pension services to 1 in 3 Fortune 500 firms. It
manages $36 billion of individual retirement plan assets, such as 401(k)
plans. As of December 31, 1996, Prudential had more than $332 billion in
assets under management. Prudential Investments, a business group of
Prudential (of which Prudential Mutual Funds is a key part) manages over $190
billion in assets of institutions and individuals. In Pensions & Investments,
May 12, 1997, Prudential was ranked third in terms of total assets under
management.
Real Estate. The Prudential Real Estate Affiliates, the fourth largest real
estate brokerage network in the United States, has more than 37,000 brokers
and agents across the United States./2/
Healthcare. Over two decades ago, Prudential introduced the first federally-
funded, for-profit HMO in the country. Today, approximately 4.6 million
Americans receive healthcare from a Prudential managed care membership.
Financial Services. The Prudential Bank, a wholly-owned subsidiary of
Prudential, has over $1 billion in assets and serves nearly 1.5 million
customers across 50 states.
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
As of June 30, 1997 Prudential Investments Fund Management is the fifteenth
largest mutual fund company in the country, with over 2.5 million shareholders
invested in more than 50 mutual fund portfolios and variable annuities with
more than 3.7 million shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers who manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment
portfolios.
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser
in national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in
surveys conducted by national and regional publications and media
organizations such as The Wall Street Journal, The New York Times, Barron's
and USA Today.
- ---------
/1/ Prudential Investments, a business group 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 the subadviser to Nicholas-Applegate Fund,
Inc., Jennison Associates Capital Corp. as the subadviser to Prudential
Jennison Series Fund, Inc. and Prudential Active Balanced Fund, a portfolio
of Prudential Dryden Fund, Mercator Asset Management LP as the subadviser
to International Stock Series, a portfolio of Prudential World 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, 1996.
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.
- ---------
/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.
III-2
<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 B+).
In 1995, Prudential Securities' equity research team ranked 8th in
Institutional Investor magazine's 1995 "All America Research Team" survey.
Five Prudential Securities analysts were ranked as first-team finishers./8/
In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial Architect SM, a state-of-the-art asset allocation software program
which helps Financial Advisors to evaluate a client's objectives and overall
financial plan, and a comprehensive mutual fund information and analysis
system that compares different mutual funds.
For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
- ---------
/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.
III-3
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS:
(1) Financial statements incorporated by reference from the Prospectus
constituting Part A of the Registration Statement:
Financial Highlights.
(2) Financial statements incorporated by reference from the Statement of
Additional Information constituting Part B of the Registration Statement:
Portfolio of Investments at May 31, 1997.
Statement of Assets and Liabilities at May 31, 1997.
Statement of Operations for the fiscal year ended May 31, 1997.
Statement of Changes in Net Assets for the fiscal years ended May 31,
1997 and 1996.
Notes to Financial Statements.
Financial Highlights.
Report of Independent Accountants.
(B) EXHIBITS:
1.(a) Articles of Restatement, incorporated by reference to Exhibit No.
1 to Post-Effective Amendment No. 14 to the Registration Statement on
Form N-1A filed via EDGAR on July 28, 1995 (File No. 33-15166).
(b) Articles of Amendment, incorporated by reference to Exhibit No.
1(b) to Post-Effective Amendment No. 15 to the Registration Statement
on Form N-1A filed via EDGAR on July 26, 1996 (File No. 33-15166).
(c) Articles Supplementary, incorporated by reference to Exhibit No.
1(c) to Post-Effective Amendment No. 15 to the Registration Statement
on Form N-1A filed via EDGAR on July 26, 1996 (File No. 33-15166).
2.(a) By-Laws of the Registrant, incorporated by reference to Exhibit
No. 2 to Post-Effective Amendment No. 13 to the Registration
Statement on Form N-1A filed via EDGAR on July 28, 1994 (File No. 33-
15166).
4.(a) Specimen certificate for Class B shares of common stock, $.01 par
value, of the Registrant.*
(b) Specimen certificate for Class A shares of common stock, $.01 par
value, of the Registrant.*
(c) Specimen certificate for Class C shares of common stock, $.01 par
value, of the Registrant.*
5.(a) Management Agreement between the Registrant and Prudential Mutual
Fund Management, Inc.*
(b) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation.*
6.Restated Distribution Agreement, incorporated by reference to Exhibit
No. 6 to Post-Effective Amendment No. 15 to the Registration
Statement on Form N-1A filed via EDGAR on July 26, 1996 (File No. 33-
15166).
8.Custodian Contract between the Registrant and State Street Bank and
Trust Company.*
9.Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc.*
10.Not applicable.
11.Consent of Independent Accountants.*
13.Not applicable.
15.(a) Distribution and Service Plan for Class A shares, incorporated by
reference to Exhibit No. 15(a) to Post-Effective Amendment No. 14 to
the Registration Statement on Form N-1A filed via EDGAR on July 28,
1995 (File No. 33-15166).
(b) Distribution and Service Plan for Class B shares, incorporated by
reference to Exhibit No. 15(b) to Post-Effective Amendment No. 14 to
the Registration Statement on Form N-1A filed via EDGAR on July 28,
1995 (File No. 33-15166).
(c) Distribution and Service Plan for Class C shares, incorporated by
reference to Exhibit No. 15(c) to Post-Effective Amendment No. 14 to
the Registration Statement on Form N-1A filed via EDGAR on July 28,
1995 (File No. 3-15166).
16.(a) Schedule of Computation of Performance Quotations for Class A,
Class B and Class C Shares.*
C-1
<PAGE>
18.Rule 18f-3 Plan, incorporated by reference to Exhibit No. 18 to Post-
Effective Amendment No.15 to the Registration Statement on Form N-1A
filed via EDGAR on July 26, 1996 (File No. 33-15166).
27.Financial Data Schedules.*
- ---------
* Filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of July 11, 1997 there were 6,322, 13,627, 306 and 208 record holders of
Class A, Class B, Class C and Class Z shares, respectively, of common stock,
$.01 par value per share, of the Registrant.
ITEM 27. INDEMNIFICATION.
As permitted by Sections 17(h) and (i) of the Investment Company Act of
1940, as amended (the 1940 Act) and pursuant to Article VI of the Fund's By-
Laws (Exhibit 2 to the Registration Statement), officers, directors, employees
and agents of the Registrant will not be liable to the Registrant, any
stockholder, officer, director, employee, agent or other person for any action
or failure to act, except for bad faith, willful misfeasance, gross negligence
or reckless disregard of duties, and those individuals may be indemnified
against liabilities in connection with the Registrant, subject to the same
exceptions. Section 2-418 of Maryland General Corporation Law permits
indemnification of directors who acted in good faith and reasonably believed
that the conduct was in the best interests of the Registrant. As permitted by
Section 17(i) of the 1940 Act, pursuant to Section 10 of the Distribution
Agreement (Exhibit 6 to the Registration Statement), the Distributor of the
Registrant may be indemnified against liabilities which it may incur, except
liabilities arising from bad faith, gross negligence, willful misfeasance or
reckless disregard of duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (Securities Act) may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the foregoing provisions
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the 1940 Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in connection with the
successful defense of any action, suit or proceeding) is asserted against the
Registrant by such director, officer or controlling person in connection with
the shares being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the 1940 Act and will be governed
by the final adjudication of such issue.
The Registrant has purchased an insurance policy insuring its officers and
directors against liabilities, and certain costs of defending claims against
such officers and directors, to the extent such officers and directors are not
found to have committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of
indemnification payments to officers and directors under certain
circumstances.
Section 9 of the Management Agreement (Exhibit 5(a) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit 5(b) to the
Registration Statement) limit the liability of Prudential Investments Fund
Management LLC (PIFM) and The Prudential Investment Corporation (PIC),
respectively, to liabilities arising from willful misfeasance, bad faith or
gross negligence in the performance of their respective duties or from
reckless disregard by them of their respective obligations and duties under
the agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and the Distribution Agreement in a manner
consistent with Release No. 11330 of the Securities and Exchange Commission
under the 1940 Act so long as the interpretation of Sections 17(h) and 17(i)
of such Act remain in effect and are consistently applied.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(i) Prudential Investments Fund Management LLC (PIFM).
See "How the Fund is Managed--Manager" in the Prospectus constituting Part A
of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
C-2
<PAGE>
The business and other connections of the officers of PIFM are listed in
Schedules A and D of Form ADV of PIFM as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference
(File No. 801-31104).
The business and other connections of PIFM's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is Gateway Center Three, Newark, New Jersey 07102-4077.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATIONS
- ---------------- ------------------ ---------------------
<S> <C> <C>
Brian Storms Officer-in-Charge, President, President, Prudential Mutual Funds & Annuities
Chief Executive Officer and (PMF&A); Officer-in-Charge, President, Chief
Chief Operating Officer Executive Officer and Chief Operating Officer, PIFM
Robert F. Gunia Executive Vice President Controller, Prudential Investments; Executive Vice
and Treasurer President and Treasurer, PIFM; Senior Vice President,
Prudential Securities Incorporated.
Thomas A. Early Executive Vice President, Vice President and General Counsel, PMF&A; Executive
Secretary and General Vice President, Secretary and General Counsel, PIFM
Counsel
Susan C. Cote Executive Vice President and Vice President of Finance, PMF&A; Executive Vice
Chief Financial Officer President and Chief Financial Officer, PIFM
Neil A. McGuinness Executive Vice President Executive Vice President and Director of Marketing,
PMF&A; Executive Vice President, PIFM
Robert J. Sullivan Executive Vice President Executive Vice President, PMF&A; Executive Vice
President, PIFM
(ii) The Prudential Investment Corporation (PIC)
See "How the Fund is Managed--Manager" in the Prospectus constituting Part A
of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
The business and other connections of PIC's directors and executive officers
are as set forth below. The address of each person is Prudential Plaza,
Newark, New Jersey 07102.
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- ---------------- ----------------- ---------------------
<S> <C> <C>
E. Michael Caulfield Chairman of the Board, Chief Executive Officer of Prudential Investments of
President and Chief Executive The Prudential Insurance Company of America
Officer and Director (Prudential)
Jonathan M. Greene Senior Vice President and President--Investment Management of Prudential
Director Investments of Prudential
John R. Strangfeld Vice President and Director President of Private Asset Management Group of Pruden-
tial
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Prudential Securities Incorporated
Prudential Securities Incorporated is distributor for The Target Portfolio
Trust, The BlackRock Government Income Trust, Command Government Fund, Command
Money Fund, Command Tax-Free Fund, The Global Government Plus Fund, Inc., The
Global Total Return Fund, Inc., Global Utility Fund, Inc., Nicholas-Applegate
Fund, Inc. (Nicholas-Applegate Growth Equity Fund), Prudential Allocation
Fund, Prudential California Municipal Fund, Prudential Distressed Securities
Fund, Inc., Prudential Diversified Bond Fund, Inc., Prudential Dryden Fund,
Prudential Emerging Growth Fund, Inc., Prudential Equity Fund, Inc.,
Prudential Equity Income Fund, Prudential Europe Growth Fund, Inc., Prudential
Global Genesis Fund, Inc., Prudential Global Limited Maturity Fund, Inc.,
Prudential Government Income Fund, Inc., Prudential Government Securities
Trust, Prudential High Yield Fund, Inc., Prudential Institutional Liquidity
Portfolio, Inc., Prudential Intermediate Global Income Fund, Inc., Prudential
Jennison Series Fund, Inc., Prudential MoneyMart Assets, Inc., Prudential
Mortgage Income Fund, Inc., Prudential Multi-Sector Fund, Inc., Prudential
Municipal Bond Fund, Prudential Municipal Series Fund, Prudential National
Municipals Fund, Inc., Prudential Natural Resources Fund, Inc.,
C-3
<PAGE>
Prudential Pacific Growth Fund, Inc., Prudential Small Company Value Fund,
Inc., Prudential Special Money Market Fund, Inc., Prudential Structured
Maturity Fund, Inc., Prudential Tax-Free Money Fund, Inc., Prudential Utility
Fund, Inc., Prudential World Fund, Inc. Prudential Securities is also a
depositor for the following unit investment trusts:
Corporate Investment Trust Fund
Prudential Equity Trust Shares
National Equity Trust
Prudential Unit Trusts
Government Securities Equity Trust
National Municipal Trust
(b) Information concerning the officers and directors of Prudential
Securities Incorporated is set forth below.
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(/1/) UNDERWRITER REGISTRANT
- --------- ------------- -------------
<S> <C> <C>
Alan D. Hogan........... Executive Vice President, Chief Administrative Officer and Director None
George A. Murray........ Executive Vice President and Director None
Leland B. Paton......... Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Martin Pfinsgraff....... Executive Vice President, Chief Financial Officer and Director None
Vincent T. Pica, II..... Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Hardwick Simmons........ Chief Executive Officer, President and Director None
Lee B. Spencer, Jr. .... Executive Vice President, General Counsel, Secretary and Director None
Brian Storms............ Director None
</TABLE>
- ---------
(/1/)The address of each person named is One Seaport Plaza, New York, New York
10292 unless otherwise indicated.
(c) Registrant has no principal underwriter who is not an affiliated
person of the Registrant.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder are maintained at the offices
of State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts, The Prudential Investment Corporation, Prudential Plaza, 751
Broad Street, Newark, New Jersey, the Registrant, Gateway Center Three, 100
Mulberry Street, Newark, New Jersey 07102, and Prudential Mutual Fund Services
LLC, Raritan Plaza One, Edison, New Jersey. Documents required by Rules 31a-
1(b)(5), (6), (7), (9), (10) and (11) and 31a-1(f) will be kept at Gateway
Center Three, documents required by Rules 31a-1(b)(4) and (11) and 31a-1(d) at
One Seaport Plaza and the remaining accounts, books and other documents
required by such other pertinent provisions of Section 31(a) and the Rules
promulgated thereunder will be kept by State Street Bank and Trust Company and
Prudential Mutual Fund Services LLC.
ITEM 31. MANAGEMENT SERVICES
Other than as set forth under the captions "How the Fund is Managed--
Manager" and "How the Fund is Managed--Distributor" in the Prospectus and the
captions "Manager" and "Distributor" in the Statement of Additional
Information, constituting Parts A and B, respectively, of this Post-Effective
Amendment to the Registration Statement, Registrant is not a party to any
management-related service contract.
ITEM 32. UNDERTAKINGS
The Registrant hereby undertakes to furnish each person to whom a Prospectus
is delivered with a copy of Registrant's latest annual report to shareholders
upon request and without charge.
C-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of
1933 and has duly caused this Post-Effective Amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Newark and State of New Jersey, on the 25th day of
July, 1997.
PRUDENTIAL NATURAL RESOURCES FUND, INC.
/s/ Richard A. Redeker
---------------------------------
(RICHARD A. REDEKER, PRESIDENT)
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Edward D. Beach Director July 25, 1997
_________________________
EDWARD D. BEACH
/s/ Stephen C. Eyre Director July 25, 1997
_________________________
STEPHEN C. EYRE
/s/ Delayne D. Gold Director July 25, 1997
_________________________
DELAYNE D. GOLD
/s/ Robert F. Gunia Director July 25, 1997
_________________________
ROBERT F. GUNIA
/s/ Don G. Hoff Director July 25, 1997
_________________________
DON G. HOFF
/s/ Robert E. LaBlanc Director July 25, 1997
_________________________
ROBERT E. LABLANC
/s/ Mendel A. Melzer Director July 25, 1997
_________________________
MENDEL A. MELZER
/s/ Richard A. Redeker President and Director July 25, 1997
_________________________
RICHARD A. REDEKER
/s/ Robin B. Smith Director July 25, 1997
_________________________
ROBIN B. SMITH
/s/ Stephen Stoneburn Director July 25, 1997
_________________________
STEPHEN STONEBURN
/s/ Nancy H. Teeters Director July 25, 1997
_________________________
NANCY H. TEETERS
/s/ Grace C. Torres Treasurer, Principal July 25, 1997
_________________________ Financial and
GRACE C. TORRES Accounting Officer
</TABLE>
C-5
<PAGE>
PRUDENTIAL NATURAL RESOURCES FUND, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION PAGE NUMBER
-------------- ----------- -----------
<C> <S> <C>
1(a) Articles of Restatement, incorporated by refer- --
ence to Exhibit No. 1 to Post-Effective Amendment
No. 14 to the Registration Statement on Form N-1A
filed via EDGAR on July 28, 1995 (File No.
33-15166).
1(b) Articles of Amendment, incorporated by reference --
to Exhibit No. 1(b) to Post-Effective Amendment
No. 15 to the Registration Statement on Form N-1A
filed via EDGAR on July 26, 1996 (File No. 33-
15166).
1(c) Articles Supplemental, incorporated by reference --
to Exhibit No. 1(c) to Post-Effective Amendment
No. 15 to the Registration Statement on Form N-1A
filed via EDGAR on July 26, 1996 (File No. 33-
15166).
2 By-Laws of the Registrant, incorporated by refer- --
ence to Exhibit No. 2 to Post-Effective Amendment
No. 13 to the Registration Statement on Form N-1A
filed via EDGAR on July 28, 1994 (File No.
33-15166).
4(a) Specimen certificate for Class B shares of common --
stock, $.01 par value, of the Registrant.*
4(b) Specimen certificate for Class A shares of common --
stock, $.01 par value, of the Registrant.*
4(c) Specimen certificate for Class C shares of common
stock, $.01 par value, of the Registrant.*
5(a) Management Agreement between the Registrant and --
Prudential Mutual Fund Management, Inc.*
5(b) Subadvisory Agreement between Prudential Mutual --
Fund Management, Inc. and The Prudential Invest-
ment Corporation.*
6 Restated Distribution Agreement, incorporated by --
reference to Exhibit No. 6 to Post-Effective
Amendment No. 15 to the Registration Statement on
Form N-1A filed via EDGAR on July 26, 1996 (File
No. 33-15166).
8 Custodian Contract between the Registrant and --
State Street Bank and Trust Company.*
9 Transfer Agency and Service Agreement between the --
Registrant and Prudential Mutual Fund Services,
Inc.*
10 Not Applicable. --
11 Consent of Independent Accountants.*
13 Not Applicable. --
15(a) Distribution and Service Plan for Class A shares, --
incorporated by reference to Exhibit No. 15(a) to
Post-Effective Amendment No. 14 to the Registra-
tion Statement on Form N-1A filed via EDGAR on
July 28, 1995 (File No. 33-15166).
15(b) Distribution and Service Plan for Class B shares, --
incorporated by reference to Exhibit No. 15(b) to
Post-Effective Amendment No. 14 to the Registra-
tion Statement on Form N-1A filed via EDGAR on
July 28, 1995 (File No. 33-15166).
15(c) Distribution and Service Plan for Class C shares, --
incorporated by reference to Exhibit No. 15(c) to
Post-Effective Amendment No. 14 to the Registra-
tion Statement on Form N-1A filed via EDGAR on
July 28, 1995 (File No. 33-15166).
16(a) Schedule of Computation of Performance Quotations --
for Class A, Class B and Class C Shares.*
18 Rule 18f-3 Plan, incorporated by reference to Ex- --
hibit No. 18 to Post-Effective Amendment No.15 to
the Registration Statement on Form N-1A filed via
EDGAR on July 26, 1996 (File No. 33-15166).
27 Financial Data Schedules.* --
</TABLE>
- ---------
* Filed herewith.
<PAGE>
EXHIBIT 99.4(a)
NUMBER SHARES
[ ] [ ]
PRUDENTIAL-BACHE GLOBAL NATURAL RESOURCES FUND, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
ACCOUNT NO. ALPHA CODE
[ CUSIP 743920 10 0 ]
SEE REVERSE FOR CERTAIN DEFINITIONS
THIS IS TO CERTIFY that
SPECIMEN VOID
is the owner of
FULLY-PAID AND NON-ASSESSABLE SHARES OF THE PAR VALUE OF $.01
EACH OF THE COMMON STOCK OF
- -------------PRUDENTIAL-BACHE GLOBAL NATURAL RESOURCES FUND, INC.---------------
hereafter called the "Corporation", transferable on the books of the Corporation
by the owner in person or by duly authorized attorney upon surrender of this
Certificate properly endorsed.
This Certificate and the shares represented hereby are issued and shall
be held subject to the provisions of the Charter and By-Laws of the Corporation
and all amendments thereof, copies of which are on file at the office of the
Corporation, to all of which the holder, by acceptance hereof assents.
This Certificate is not valid unless countersigned by the Transfer
Agent.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed in its name by its proper officers and to be sealed with its Corporate
Seal.
Dated:
[SEAL]
Secretary President
COUNTERSIGNED:
PRUDENTIAL MUTUAL FUND SERVICES, INC.
(NEW JERSEY)
BY TRANSFER AGENT
Authorized Signature
<PAGE>
EXHIBIT 99.4(b)
CLASS A
NUMBER SHARES
[ ] [ ]
PRUDENTIAL GLOBAL NATURAL RESOURCES FUND, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
ACCOUNT NO. ALPHA CODE
[ CUSIP 744334 10 3 ]
SEE REVERSE SIDE FOR CERTAIN DEFINITIONS
THIS IS TO CERTIFY that
SPECIMEN
is the owner of
FULLY-PAID AND NON-ASSESSABLE SHARES OF THE PAR VALUE OF $.01
EACH OF THE COMMON STOCK OF
- ------------------PRUDENTIAL GLOBAL NATURAL RESOURCES FUND, INC.----------------
hereafter called the "Corporation", transferable on the books of the Corporation
by the owner in person or by duly authorized attorney upon surrender of this
Certificate properly endorsed.
This Certificate and the shares represented hereby are issued and shall
be held subject to the provisions of the Charter and By-Laws of the Corporation
and all amendments thereof, copies of which are on file at the office of the
Corporation, to all of which the holder, by acceptance hereof assents.
This Certificate is not valid unless countersigned by the Transfer
Agent.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed in its name by its proper officers and to be sealed with its Corporate
Seal.
Dated:
[SEAL]
Secretary President
COUNTERSIGNED:
PRUDENTIAL MUTUAL FUND SERVICES, INC.
(NEW JERSEY)
BY TRANSFER AGENT,
AUTHORIZED OFFICER
<PAGE>
The following abbreviations, when used in the inscription on the face of this
Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C> <C>
TEN COM -as tenants in common UNIF GIFT MIN Act--..........Custodian..........
TEN ENT -as tenants by the entireties (Cust) (Minor)
JT TEN -as joint tenants with right
of survivorship and not as
tenants in common (STATE)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received,................. hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
.......................................
..............................................................................
Please print or typewrite name and address including postal zip code of
assignee
..............................................................................
..............................................................................
........................................................................Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint............................................
..............................................................................
Attorney to transfer the said shares on the books of the within-named
Corporation with full power of substitution with full power of substitution in
the premises.
Dated,.................................
.......................................
________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION
OF ENLARGEMENT, OR ANY CHANGE WHATEVER.
<PAGE>
EXHIBIT 99.4(c)
CLASS C
NUMBER SHARES
[ ] [ ]
PRUDENTIAL GLOBAL NATURAL RESOURCES FUND, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
ACCOUNT NO. ALPHA CODE
[ CUSIP 744334 30 1 ]
SEE REVERSE SIDE FOR CERTAIN DEFINITIONS
THIS IS TO CERTIFY that
SPECIMEN
is the owner of
FULLY-PAID AND NON-ASSESSABLE SHARES OF THE PAR VALUE OF $.01
EACH OF THE COMMON STOCK OF
- ----------------PRUDENTIAL GLOBAL NATURAL RESOURCES FUND, INC.------------------
hereafter called the "Corporation", transferable on the books of the Corporation
by the owner in person or by duly authorized attorney upon surrender of this
Certificate properly endorsed.
This Certificate and the shares represented hereby are issued and shall
be held subject to the provisions of the Charter and By-Laws of the Corporation
and all amendments thereof, copies of which are on file at the office of the
Corporation, to all of which the holder, by acceptance hereof assents.
This Certificate is not valid unless countersigned by the Transfer
Agent.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed in its name by its proper officers and to be sealed with the Seal its
Corporate Seal.
Dated:
[SEAL]
Secretary President
COUNTERSIGNED:
PRUDENTIAL MUTUAL FUND SERVICES, INC.
(NEW JERSEY)
BY TRANSFER AGENT,
AUTHORIZED SIGNATURE
<PAGE>
The following abbreviations, when used in the inscription on the face of this
Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C> <C>
TEN COM --as tenants in common UNIF GIFT MIN Act--..........Custodian..........
TEN ENT --as tenants by the entireties (Cust) (Minor)
JT TEN --as joint tenants with right under Uniform Gifts to Minors Act
of survivorship and not as
tenants in common ..............................
(STATE)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received,................. hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
.......................................
..............................................................................
Please print or typewrite name and address including postal zip code of
assignee
..............................................................................
..............................................................................
........................................................................Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint............................................
..............................................................................
Attorney to transfer the said shares on the books of the within-named
Corporation with full power of substitution with full power of substitution in
the premises.
Dated,.................................
.......................................
________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT
ALTERATION OF ENLARGEMENT, OR ANY CHANGE WHATEVER.
<PAGE>
EXHIBIT 99.5(a)
PRUDENTIAL-BACHE GLOBAL NATURAL RESOURCES FUND, INC.
Management Agreement
--------------------
Agreement, made this 1st day of March 1988 between Prudential-Bache
Global Natural Resources Fund, Inc., a Maryland corporation (the "Fund"), and
Prudential Mutual Fund Management, Inc., a Delaware corporation (the "Manager").
W I T N E S S E T H
WHEREAS, the Fund is a diversified, open-end management investment
company registered under the Investment Company Act of 1940, as amended (the
1940 Act); and
WHEREAS, the Fund desires to retain the Manager to render or contract
to obtain as hereinafter provided investment advisory services to the Fund and
the Fund also desires to avail itself of the facilities available to the Manager
with respect to the administration of its day to day corporate affairs, and the
Manager is willing to render such investment advisory and administrative
services;
NOW, THEREFORE, the parties agree as follows:
1. The Fund hereby appoints the Manager to act as manager of the Fund
and administrator of its corporate affairs for the period and on the terms set
forth in this Agreement. The Manager accepts such appointment and agrees to
render the services herein described, for the compensation herein provided. The
Manager will enter into an agreement, dated the date hereof, with The Prudential
Investment Corporation ("PIC") pursuant to which PIC shall furnish to the Fund
the investment advisory services specified therein in connection with the
management of the Fund. Such agreement in the
<PAGE>
form attached as Exhibit A is hereinafter referred to as "the Subadvisory
Agreement". The Manager will continue to have responsibility for all investment
advisory services furnished pursuant to the Subadvisory Agreement.
2. Subject to the supervision of the Board of Directors of the Fund,
the Manager shall administer the Fund's corporate affairs and, in connection
therewith, shall furnish the Fund with office facilities and with clerical,
bookkeeping and recordkeeping services at such office facilities and, subject to
Section 1 hereof and the Subadvisory Agreement, the Manager shall manage the
investment operations of the Fund and the composition of the Fund's portfolio,
including the purchase, retention and disposition thereof, in accordance with
the Fund's investment objectives, policies and restrictions as stated in the
Prospectus (hereinafter defined) and subject to the following understandings:
(a) The Manager shall provide supervision of the Fund's investments and
determine from time to time what investments or securities will be purchased,
retained, sold or loaned by the Fund, and what portion of the assets will be
invested or held uninvested as cash.
(b) The Manager, in the performance of its duties and obligations under
this Agreement, shall act in conformity with the Articles of Incorporation, By-
Laws and Prospectus (hereinafter defined) of the Fund and with the instructions
and directions of the Board of Directors of the Fund and will conform to and
comply with the requirements of the 1940 Act and
2
<PAGE>
all other applicable federal and state laws and regulations.
(c) The Manager shall determine the securities and futures contracts to be
purchased or sold by the Fund and will place orders pursuant to its
determinations with or through such persons, brokers, dealers or futures
commission merchants (including but not limited to Prudential-Bache Securities
Inc.) in conformity with the policy with respect to brokerage as set forth in
the Fund's Registration Statement and Prospectus (hereinafter defined) or as the
Board of Directors may direct from time to time. In providing the Fund with
investment supervision, it is recognized that the Manager will give primary
consideration to securing the most favorable price and efficient execution.
Consistent with this policy, the Manager may consider the financial
responsibility, research and investment information and other services provided
by brokers, dealers or futures commission merchants who may effect or be a party
to any such transaction or other transactions to which other clients of the
Manager may be a party. It is understood that Prudential-Bache Securities Inc.
may be used as principal broker for securities transactions but that no formula
has been adopted for allocation of the Fund's investment transaction business.
It is also understood that it is desirable for the Fund that the Manager have
access to supplemental investment and market research and security and economic
analysis provided by brokers or futures commission merchants and that such
brokers may execute brokerage transactions at a higher cost to
3
<PAGE>
the Fund than may result when allocating brokerage to other brokers or futures
commission merchants on the basis of seeking the most favorable price and
efficient execution. Therefore, the Manager is authorized to pay higher
brokerage commissions for the purchase and sale of securities and futures
contracts for the Fund to brokers or futures commission merchants who provide
such research and analysis, subject to review by the Fund's Board of Directors
from time to time with respect to the extent and continuation of this practice.
It is understood that the services provided by such broker or futures commission
merchant may be useful to the Manager in connection with its services to other
clients.
On occasions when the Manager deems the purchase or sale of a security or a
futures contract to be in the best interest of the Fund as well as other clients
of the Manager or the Subadviser, the Manager, to the extent permitted by
applicable laws and regulations, may, but shall be under no obligation to,
aggregate the securities or futures contracts to be so sold or purchased in
order to obtain the most favorable price or lower brokerage commissions and
efficient execution. In such event, allocation of the securities or futures
contracts so purchased or sold, as well as the expenses incurred in the
transaction, will be made by the Manager in the manner it considers to be the
most equitable and consistent with its fiduciary obligations to the Fund and to
such other clients.
(d) The Manager shall maintain all books and records with
4
<PAGE>
respect to the Fund's portfolio transactions and shall render to the Fund's
Board of Directors such periodic and special reports as the Board may reasonably
request.
(e) The Manager shall be responsible for the financial and accounting
records to be maintained by the Fund (including those being maintained by the
Fund's Custodian).
(f) The Manager shall provide the Fund's Custodian on each business day
with information relating to all transactions concerning the Fund's assets.
(g) The investment management services of the Manager to the Fund under
this Agreement are not to be deemed exclusive, and the Manager shall be free to
render similar services to others.
3. The Fund has delivered to the Manager copies of each of the
following documents and will deliver to it all future amendments and
supplements, if any:
(a) Articles of Incorporation of the Fund, as filed with the Secretary of
State of Maryland (such Articles of Incorporation, as in effect on the date
hereof and as amended from time to time, are herein called the "Articles of
Incorporation");
(b) By-Laws of the Fund (such By-Laws, as in effect on the date hereof and
as amended from time to time, are herein called the "By-Laws");
(c) Certified resolutions of the Board of Directors of the Fund authorizing
the appointment of the Manager and
5
<PAGE>
approving the form of this agreement;
(d) Registration Statement under the 1940 Act and the Securities Act of
1933, as amended, on Form N-1A (the "Registration Statement"), as filed with
the Securities and Exchange Commission (the "Commission") relating to the Fund
and shares of the Fund's Common Stock and all amendments thereto;
(e) Notification of Registration of the Fund under the 1940 Act on Form N-
8A as filed with the Commission and all amendments thereto; and
(f) Prospectus of the Fund (such Prospectus and Statement of Additional
Information, as currently in effect and as amended or supplemented from time to
time, being herein called the "Prospectus").
4. The Manager shall authorize and permit any of its directors,
officers and employees who may be elected as directors or officers of the Fund
to serve in the capacities in which they are elected. All services to be
furnished by the Manager under this Agreement may be furnished through the
medium of any such directors, officers or employees of the Manager.
5. The Manager shall keep the Fund's books and records required to be
maintained by it pursuant to paragraph 2 hereof. The Manager agrees that all
records which it maintains for the Fund are the property of the Fund and it will
surrender promptly to the Fund any such records upon the Fund's request,
provided however that the Manager may retain a copy of such records. The
Manager further agrees to preserve for the periods prescribed by Rule 31a-2
6
<PAGE>
under the 1940 Act any such records as are required to be maintained by the
Manager pursuant to Paragraph 2 hereof.
6. During the term of this Agreement, the Manager shall pay the
following expenses:
(i) the salaries and expenses of all personnel of the Fund and the Manager
except the fees and expenses of directors who are not affiliated persons of the
Manager or the Fund's investment adviser,
(ii) all expenses incurred by the Manager or by the Fund in connection with
managing the ordinary course of the Fund's business other than those assumed by
the Fund herein, and
(iii) the costs and expenses payable to PIC pursuant to the Subadvisory
Agreement.
The Fund assumes and will pay the expenses described below:
(a) the fees and expenses incurred by the Fund in connection with the
management of the investment and reinvestment of the Fund's assets,
(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 expenses of the Custodian that relate to (i) the custodial
function and the recordkeeping connected therewith, (ii) preparing and
maintaining the general accounting records of the Fund and the providing of any
such records to the Manager useful to the Manager in connection with the
Manager's responsibility for the accounting records of the
7
<PAGE>
Fund pursuant to Section 31 of the 1940 Act and the rules promulgated
thereunder, (iii) the pricing of the shares of the Fund, including the cost of
any pricing service or services which may be retained pursuant to the
authorization of the Board of Directors of the Fund, and (iv) for both mail and
wire orders, the cashiering function in connection with the issuance and
redemption of the Fund's securities,
(d) the fees and expenses of the Fund's Transfer and Dividend Disbursing
Agent, which may be the Custodian, that relate to the maintenance of each
shareholder account,
(e) the charges and expenses of legal counsel and independent accountants
for the Fund,
(f) brokers' commissions and any issue or transfer taxes chargeable to the
Fund in connection with its securities and futures transactions,
(g) all taxes and corporate fees payable by the Fund to federal, state or
other governmental agencies,
(h) the fees of any trade associations of which the Fund may be a member,
(i) the cost of stock certificates representing, and/or non-negotiable
share deposit receipts evidencing, shares of the Fund,
(j) the cost of fidelity, directors and officers and errors and omissions
insurance,
(k) the fees and expenses involved in registering and maintaining
registration of the Fund and of its shares with the
8
<PAGE>
Securities and Exchange Commission, registering the Fund as a broker or dealer
and qualifying its shares under state securities laws, including the preparation
and printing of the Fund's registration statements, prospectuses and statements
of additional information for filing under federal and state securities laws for
such purposes,
(l) allocable communications expenses with respect to investor services and
all expenses of shareholders' and directors' meetings and of preparing, printing
and mailing reports to shareholders in the amount necessary for distribution to
the shareholders,
(m) litigation and indemnification expenses and other extraordinary
expenses not incurred in the ordinary course of the Fund's business, and
(n) any expenses assumed by the Fund pursuant to a Plan of Distribution
adopted in conformity with Rule 12b-1 under the 1940 Act.
7. In the event the expenses of the Fund for any fiscal year
(including the fees payable to the Manager 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) exceed the lowest applicable annual expense limitation
established and enforced pursuant to the statute or regulations of any
jurisdictions in which shares of the Fund are then qualified for offer and sale,
the compensation due the Manager will be
9
<PAGE>
reduced by the amount of such excess, or, if such reduction exceeds the
compensation payable to the Manager, the Manager will pay to the Fund the amount
of such reduction which exceeds the amount of such compensation.
8. For the services provided and the expenses assumed pursuant to this
Agreement, the Fund will pay to the Manager as full compensation therefor a fee
at an annual rate of .75 of 1% of the Fund's average daily net assets. This fee
will be computed daily and will be paid to the Manager monthly. Any reduction
in the fee payable and any payment by the Manager to the Fund pursuant to
paragraph 7 shall be made monthly. Any such reductions or payments are subject
to readjustment during the year.
9. The Manager shall not be liable for any error of judgment or for any
loss suffered by the Fund in connection with the matters to which this Agreement
relates, except a loss resulting from a breach of fiduciary duty with respect to
the receipt of compensation for services (in which case any award of damages
shall be limited to the period and the amount set forth in Section 36(b)(3) of
the 1940 Act) or loss resulting from willful misfeasance, bad faith or gross
negligence on its part in the performance of its duties or from reckless
disregard by it of its obligations and duties under this Agreement.
10. This Agreement shall continue in effect for a period of more than
two years from the date hereof only so long as such continuance is specifically
approved at least annually in
10
<PAGE>
conformity with the requirements of the 1940 Act; provided, however, that this
Agreement may be terminated by the Fund at any time, without the payment of any
penalty, by the Board of Directors of the Fund or by vote of a majority of the
outstanding voting securities (as defined in the 1940 Act) of the Fund, or by
the Manager at any time, without the payment of any penalty, on not more than 60
days' nor less than 30 days' written notice to the other party. This Agreement
shall terminate automatically in the event of its assignment (as defined in the
1940 Act).
11. Nothing in this Agreement shall limit or restrict the right of any
director, officer or employee of the Manager who may also be a director, officer
or employee of the Fund to engage in any other business or to devote his or her
time and attention in part to the management or other aspects of any business,
whether of a similar or dissimilar nature, nor limit or restrict the right of
the Manager to engage in any other business or to render services of any kind to
any other corporation, firm, individual or association.
12. Except as otherwise provided herein or authorized by the Board of
Directors of the Fund from time to time, the Manager shall for all purposes
herein be deemed to be an independent contractor and shall have no authority to
act for or represent the Fund in any way or otherwise be deemed an agent of the
Fund.
13. During the term of this Agreement, the Fund agrees to furnish the
Manager at its principal office all prospectuses, proxy statements, reports to
shareholders, sales literature, or
11
<PAGE>
other material prepared for distribution to shareholders of the Fund or the
public, which refer in any way to the Manager, prior to use thereof and not to
use such material if the Manager reasonably objects in writing within five
business days (or such other time as may be mutually agreed) after receipt
thereof. In the event of termination of this Agreement, the Fund will continue
to furnish to the Manager copies of any of the above mentioned materials which
refer in any way to the Manager. Sales literature may be furnished to the
Manager hereunder by first-class or overnight mail, facsimile transmission
equipment or hand delivery. The Fund shall furnish or otherwise make available
to the Manager such other information relating to the business affairs of the
Fund as the Manager at any time, or from time to time, reasonably requests in
order to discharge its obligations hereunder.
14. This Agreement may be amended by mutual consent, but the consent
of the Fund must be obtained in conformity with the requirements of the 1940
Act.
15. Any notice or other communication required to be given pursuant to
this Agreement shall be deemed duly given if delivered or mailed by registered
mail, postage prepaid, (1) to the Manager at One Seaport Plaza, New York, N.Y.
10292, Attention: Secretary; or (2) to the Fund at One Seaport Plaza, New York,
N.Y. 10292, Attention: President.
16. This Agreement shall be governed by and construed in accordance
with the laws of the State of New York.
17. The Fund may use the name "Prudential-Bache Global
12
<PAGE>
Natural Resources Fund, Inc." or any name including the words "Prudential" or
"Bache" only for so long as this Agreement or any extension, renewal or
amendment hereof remains in effect, including any similar agreement with any
organization which shall have succeeded to the Manager's business as Manager or
any extension, renewal or amendment thereof remain in effect. At such time as
such an agreement shall no longer be in effect, the Fund will (to the extent
that it lawfully can) cease to use such a name or any other name indicating that
it is advised by, managed by or otherwise connected with the Manager, or any
organization which shall have so succeeded to such businesses. In no event
shall the Fund use the name "Prudential-Bache Global Natural Resources Fund,
Inc." or any name including the word "Prudential" or "Bache" if the Manager's
function is transferred or assigned to a company of which The Prudential
Insurance Company of America does not have control.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
PRUDENTIAL-BACHE GLOBAL NATURAL
RESOURCES FUND, INC.
By: Laurence C. McQuade
-----------------------
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC.
By [illegible]
-------------------------------
13
<PAGE>
EXHIBIT 99.5(b)
PRUDENTIAL-BACHE GLOBAL NATURAL RESOURCES FUND, INC.
Subadvisory Agreement
Agreement made as of this 1st day of March, 1988 between Prudential Mutual
Fund Management Inc., a Delaware Corporation ("PMF" or the "Manager"), and The
Prudential Investment Corporation, a New Jersey Corporation (the "Subadviser").
WHEREAS, the Manager has entered into a Management Agreement, dated March
1, 1988(the "Management Agreement"), with Prudential-Bache Global Natural
Resources Fund, Inc. (the "Fund"), a Maryland corporation and a diversified
open-end management investment company registered under the Investment Company
Act of 1940 (the "1940 Act"), pursuant to which PMF will act as Manager of the
Fund.
WHEREAS, PMF desires to retain the Subadviser to provide investment
advisory services to the Fund in connection with the management of the Fund and
the Subadviser is willing to render such investment advisory services.
NOW, THEREFORE, the Parties agree as follows:
1. (a) Subject to the supervision of the Manager and of the Board of Directors
of the Fund, the Subadviser shall manage the investment operations of the Fund
and the composition of the Fund's portfolio, including the purchase, retention
and disposition thereof, in accordance with the Fund's investment objectives,
policies and restrictions as stated in the Prospectus (such Prospectus and
Statement of Additional Information as currently in effect and as amended or
supplemented from time to time, being herein called the "Prospectus"), and
subject to the following understandings:
(i) The Subadviser shall provide supervision of the Fund's
investments and determine from time to time what investments and securities will
be purchased, retained, sold or loaned by the Fund, and what portion of the
assets will be invested or held uninvested as cash.
(ii) In the performance of its duties and obligations under this
Agreement, the Subadviser shall act in conformity with the Articles of
Incorporation, By-Laws and Prospectus of the Fund and with the instructions and
directions of the Manager and of the Board of Directors of the Fund and will
conform to and comply with the requirements of the 1940 Act, the Internal
Revenue Code of 1986 and all other applicable federal and state laws and
regulations.
<PAGE>
(iii) The Subadviser shall determine the securities to be purchased
or sold by the Fund and will place orders with or through such persons, brokers,
dealers or futures commission merchants (including but not limited to
Prudential-Bache Securities Inc.) to carry out the policy with respect to
brokerage as set forth in the Fund's Registration Statement and Prospectus or as
the Board of Directors may direct from time to time. In providing the Fund with
investment supervision, it is recognized that the Subadviser will give primary
consideration to securing the most favorable price and efficient execution.
Within the framework of this policy, the Subadviser may consider the financial
responsibility, research and investment information and other services provided
by brokers, dealers or futures commission merchants who may effect or be a party
to any such transaction or other transactions to which the Subadviser's other
clients may be a party. It is understood that Prudential-Bache Securities Inc.
may be used as principal broker for securities transactions but that no formula
has been adopted for allocation of the Fund's investment transaction business.
It is also understood that it is desirable for the Fund that the Subadviser have
access to supplemental investment and market research and security and economic
analysis provided by brokers or futures commission merchants who may execute
brokerage transactions at a higher cost to the Fund than may result when
allocating brokerage to other brokers on the basis of seeking the most favorable
price and efficient execution. Therefore, the Subadviser is authorized to place
orders for the purchase and sale of securities and futures contracts for the
Fund with such brokers or future commission merchants, subject to review by the
Fund's Board of Directors from time to time with respect to the extent and
continuation of this practice. It is understood that the services provided by
such brokers or futures commission merchants may be useful to the Subadviser in
connection with the Subadviser's services to other clients.
On occasions when the Subadviser deems the purchase or sale of a
security or futures contract to be in the best interest of the Fund as well as
other clients of the Subadviser, the Subadviser, to the extent permitted by
applicable laws and regulations, may, but shall be under no obligation to,
aggregate the securities or futures contract to be sold or purchased in order to
obtain the most favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of the securities or futures contract so
purchased or sold, as well as the expenses incurred
2
<PAGE>
in the transaction, will be made by the Subadviser in the manner the
Subadviser considers to be the most equitable and consistent with its
fiduciary obligations to the Fund and to such other clients.
(iv) The Subadviser shall maintain all books and records with respect
to the Fund's portfolio transactions required by subparagraphs (b)(5), (6),
(7), (9), (10) and (11) and paragraph (f) of Rule 31a-1 under the 1940 Act
and shall render to the Fund's Board of Directors such periodic and special
reports as the Board may reasonably request.
(v) The Subadviser shall provide the Fund's Custodian on each business
day with information relating to all transactions concerning the Fund's
assets and shall provide the Manager with such information upon request of
the Manager.
(vi) The investment management services provided by the Subadviser
hereunder are not to be deemed exclusive, and the Subadviser shall be free
to render similar services to others.
(b) The Subadviser shall authorize and permit any of its directors, officers
and employees who may be elected as directors or officers of the Fund to
serve in the capacities in which they are elected. Services to be
furnished by the Subadviser under this Agreement may be furnished through
the medium of any of such directors, officers or employees.
(c) The Subadviser shall keep the Fund's books and records required to be
maintained by the Subadviser pursuant to paragraph 1(a) hereof and shall
timely furnish to the Manager all information relating to the Subadviser's
services hereunder needed by the Manager to keep the other books and
records of the Fund required by Rule 31a-1 under the 1940 Act. The
Subadviser agrees that all records which it maintains for the Fund are the
property of the Fund and the Subadviser will surrender promptly to the Fund
any of such records upon the Fund's request, provided however that the
Subadviser may retain a copy of such records. The Subadviser further
agrees to preserve for the periods prescribed by Rule 31a-2 of the
Commission under the 1940 Act any such records as are required to be
maintained by it pursuant to paragraph 1(a) hereof.
2. The Manager shall continue to have responsibility for all services to be
provided to the Fund pursuant to the Management Agreement and shall oversee and
review the Subadviser's performance of its duties under this Agreement.
3
<PAGE>
3. The Manager shall reimburse the Subadviser for reasonable costs and
expenses incurred by the Subadviser determined in a manner acceptable to the
Manager in furnishing the services described in paragraph 1 hereof.
4. The Subadviser shall not be liable for any error of judgment or for any
loss suffered by the Fund or the Manager in connection with the matters to which
this Agreement relates, except a loss resulting from willful misfeasance, bad
faith or gross negligence on the Subadviser's part in the performance of its
duties or from its reckless disregard of its obligations and duties under this
Agreement.
5. This Agreement shall continue in effect for a period of more than two
years from the date hereof only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940 Act;
provided, however, that this Agreement may be terminated by the Fund at any
time, without the payment of any penalty, by the Board of Directors of the Fund
or by vote of a majority of the outstanding voting securities (as defined in the
1940 Act) of the Fund, or by the Manager or the Subadviser at any time, without
the payment of any penalty, on not more than 60 days' nor less than 30 days'
written notice to the other party. This Agreement shall terminate automatically
in the event of its assignment (as defined in the 1940 Act) or upon the
termination of the Management Agreement.
6. Nothing in this Agreement shall limit or restrict the right of any of the
Subadviser's directors, officers, or employees who may also be a director,
officer or employee of the Fund to engage in any other business or to devote his
or her time and attention in part to the management or other aspects of any
business, whether of a similar or a dissimilar nature, nor limit or restrict the
Subadviser's right to engage in any other business or to render services of any
kind to any other corporation, firm, individual or association.
7. During the term of this Agreement, the Manager agrees to furnish the
Subadviser at its principal office all prospectuses, proxy statements, reports
to stockholders, sales literature or other material prepared for distribution to
stockholders of the Fund or the public, which refer to the Subadviser in any
way, prior to use thereof and not to use material if the Subadviser reasonably
objects in writing five business days (or such other time as may be mutually
agreed) after receipt thereof. Sales literature may be furnished to the
Subadviser hereunder by first-class or overnight mail, facsimile transmission
equipment or hand delivery.
4
<PAGE>
8. This Agreement may be amended by mutual consent, but the consent of the
Fund must be obtained in conformity with the requirements of the 1940 Act.
9. This Agreement shall be governed by the laws of the State of New York.
IN WITNESS WHEREOF, the Parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC.
BY /s/ Michael J. Downey
------------------------------------
THE PRUDENTIAL INVESTMENT CORPORATION
BY /s/ Roger Ford
---------------------------
5
<PAGE>
EXHIBIT 99.8
CUSTODIAN CONTRACT
Between
PRUDENTIAL-BACHE GLOBAL NATURAL RESOURCES FUND, INC.
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Employment of Custodian and Property to be Held by It............................ -1-
2. Duties to the Custodian with Respect to Property of the Fund Held by the
Custodian in the United States.................................................... -2-
2.1 Holding Securities.................................................... -2-
2.2 Delivery of Securities...............................................
2.3 Registration of Securities............................................ -6-
2.4 Bank Accounts......................................................... -6-
2.5 Availability of Federal Funds......................................... -7-
2.6 Collection of Income.................................................. -7-
2.7 Payment of Fund Monies................................................ -8-
2.8 Liability for Payment in Advance of Receipt of Securities Purchased... -10-
2.9 Appointment of Agents................................................. -10-
2.10 Deposit of Securities in Securities Systems........................... -10-
2.10A Fund Assets Held in the Custodian's Direct Paper System............... -12-
2.11 Segregated Account.................................................... -14-
2.12 Ownership Certificates for Tax Purposes............................... -14-
2.13 Proxies............................................................... -15-
2.14 Communications Relating to Fund Portfolio Securities.................. -15-
2.15 Reports to Fund by Independent Public Accountants..................... -15-
3. Duties of the Custodian with Respect to Property of the Fund Held Outside
of the United States.............................................................. -16-
3.1 Appointment of Foreign Sub-Custodians....................................... -16-
3.2 Assets to be Held........................................................... -16-
3.3 Foreign Securities Depositories............................................. -16-
3.4 Segregation of Securities................................................... -17-
3.5 Agreements with Foreign Banking Institutions................................ -17-
3.6 Access of Independent Accountants of the Fund............................... -18-
3.7 Reports by Custodian........................................................ -18-
3.8 Transactions in Foreign Custody Account..................................... -18-
3.9 Liability of Foreign Sub-Custodians......................................... -19-
3.10 Monitoring Responsibilities................................................. -19-
3.11 Branches of U.S. Banks...................................................... -20-
4. Payments for Repurchases or Redemptions and Sales of Shares of the Fund........... -20-
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
5. Proper Instructions.............................................................. -21-
6. Actions Permitted without Express Authority...................................... -22-
7. Evidence of Authority............................................................ -23-
8. Duties of Custodian with Respect to the Books of Account and Calculation of
Net Asset Value and Net Income................................................... -23-
9. Records.......................................................................... -24-
10. Opinion of Fund's Independent Accountant......................................... -24-
11. Compensation of Custodian........................................................ -24-
12. Responsibility of Custodian...................................................... -25-
13. Effective Period, Termination and Amendment...................................... -26-
14. Successor Custodian.............................................................. -27-
15. Interpretive and Additional Provisions......................................... -29-
16. Massachusetts Law to Apply..................................................... -29-
17. Prior Contracts................................................................ -29-
</TABLE>
-ii-
<PAGE>
CUSTODIAN CONTRACT
------------------
This Contract between Prudential-Bache Global Natural Resources Fund, Inc.,
a corporation organized and existing under the laws of Maryland, having its
principal place of business at One Seaport Plaza, New York, New York 10292,
hereinafter called the "Fund", and State Street Bank and Trust Company, a
Massachusetts trust company, having its principal place of business at 225
Franklin Street, Boston, Massachusetts, 02110, hereinafter called the
"Custodian",
WITNESSETH: That in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
-----------------------------------------------------
The Fund hereby employs the Custodian as the custodian of its assets,
including securities it desires to be held in places within the United States
("domestic securities") and securities it desires to be held outside the United
States ("foreign securities") pursuant to the provisions of the Articles of
Incorporation. The Fund agrees to deliver to the Custodian all securities and
cash owned by it, and all payments of income, payments of principal or capital
distributions received by it with respect to all securities owned by the Fund
from time to time, and the cash consideration received by it for such new or
treasury shares of capital stock, $01 par value ("Shares") of the Fund as may be
issued or sold from time to time. The Custodian shall not be responsible for
any property of the Fund held or received by the Fund and not delivered to the
Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article 5),
the Custodian shall from time to time employ one or more sub-custodians located
in the United States, but only in accordance with an applicable vote by the
Board of Directors of the Fund, and provided that the
<PAGE>
Custodian shall have no more or less responsibility or liability to the Fund on
account of any actions or omissions of any sub-custodian so employed than any
such sub-custodian has to the Custodian, The Custodian may employ as sub-
custodians for the Fund's securities and other assets the foreign banking
institutions and foreign securities depositories designated in Schedule "A"
hereto but only in accordance with the provisions of Article 3.
2. Duties of the Custodian with Respect to Property of the Fund Held By the
------------------------------------------------------------------------
Custodian in the United States
- ------------------------------
2.1 Holding Securities . The Custodian shall hold and physically segregate
-------------------
for the account of the Fund all non-cash property, to be held by it in the
United States, including all domestic securities owned by the Fund, other than
(a) securities which are maintained pursuant to Section 2.10 in a clearing
agency which acts as a securities depository or in a book-entry system
authorized by the U.S. Department of the Treasury, collectively referred to
herein as "Securities System" and (b) commercial paper of an issuer for which
State Street Bank and Trust Company acts as issuing and paying agent ("Direct
Paper") which is deposited and/or maintained in the Direct Paper System of the
Custodian pursuant to Section 2.10A.
2.2 Delivery of Securities . The Custodian shall release and deliver
-----------------------
domestic securities owned by the Fund held by the Custodian or in a Securities
System account of the Custodian or in the Custodian's Direct Paper book-entry
system account ("Direct Paper System Account" ) only upon receipt of Proper
Instructions, which may be continuing instructions when deemed appropriate by
the parties, and only in the following cases:
(1) Upon sale of such securities for the account of the Fund and receipt
of payment therefor;
-2-
<PAGE>
(2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Fund;
(3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 2.10 hereof;
(4) To the depository agent in connection with tender or other similar
offers for portfolio securities of the Fund;
(5) To the issuer thereof or its agent when such securities are called,
redeemed, retired or otherwise become payable; provided that, in any
such case, the cash or other consideration is to be delivered to the
Custodian;
(6) To the issuer thereof, or its agent, for transfer into the name of the
Fund or into the name of any nominee or nominees of the Custodian or
into the name or nominee name of any agent appointed pursuant to
Section 2.9 or into the name or nominee name of any sub-custodian
appointed pursuant to Article 1; or for exchange for a different
number of bonds, certificates or other evidence representing the same
aggregate face amount or number of units; provided that, in any such
--------
case, the new securities are to be delivered to the Custodian;
(7) Upon the sale of such securities for the account of the Fund, to the
broker or its clearing agent, against a receipt, for examination in
accordance with "street delivery" custom; provided that in any such
case, the Custodian shall have no responsibility or liability for any
loss arising from the delivery of such securities prior to receiving
payment for such securities except as may arise from the Custodian's
own negligence or willful misconduct;
-3-
<PAGE>
(8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of the
securities of the issuer of such securities, or pursuant to provisions
for conversion contained in such securities, or pursuant to any
deposit agreement; provided that, in any such case, the new securities
and cash, if any, are to be delivered to the Custodian;
(9) In the case of warrants, rights or similar securities, the surrender
thereof in the exercise of such warrants, rights or similar securities
or the surrender of interim receipts or temporary securities for
definitive securities; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the Custodian;
(10) For delivery in connection with any loans of securities made by the
Fund, but only against receipt of adequate collateral as agreed upon
--- ----
from time to time by the Custodian and the Fund, which may be in the
form of cash or obligations issued by the United States government,
its agencies or instrumentalities, except that in connection with any
loans for which collateral is to be credited to the Custodian's
account in the book-entry system authorized by the U.S. Department of
the Treasury, the Custodian will not be held liable or responsible for
the delivery of securities owned by the Fund prior to the receipt of
such collateral;
(11) For delivery as security in connection with any borrowings by the Fund
requiring a pledge of assets by the Fund, but only against receipt of
amounts borrowed;
-4-
<PAGE>
(12) For delivery in accordance with the provisions of any agreement among
the Fund, the Custodian and a broker-dealer registered under the
Securities Exchange Act of 1934 (the "Exchange Act") and a member of
The National Association of Securities Dealers, Inc. ("NASD"),
relating to compliance with the rules of The Options Clearing
Corporation and of any registered national securities exchange, or of
any similar organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Fund;
(13) For delivery in accordance with the provisions of any agreement among
the Fund, the Custodian, and a Futures Commission Merchant registered
under the Commodity Exchange Act, relating to compliance with the
rules of the Commodity Futures Trading Commission and/or any Contract
Market, or any similar organization or organizations, regarding
account deposits in connection with transactions by the Fund;
(14) Upon receipt of instructions from the transfer agent ("Transfer
Agent") for the Fund, for delivery to such Transfer Agent or to the
holders of shares in connection with distributions in kind, as may be
described from time to time in the Fund's currently effective
prospectus and statement of additional information ("prospectus"), in
satisfaction of requests by holders of Shares for repurchase or
redemption; and
(15) For any other proper corporate purpose, but only upon receipt of, in
--------
addition to Proper Instructions, a certified copy of a resolution of
the Board of Directors or of the Executive Committee signed by an
officer of the Fund and
-5-
<PAGE>
certified by the Secretary or an Assistant Secretary, specifying the
securities to be delivered, setting forth the purpose for which such
delivery is to be made, declaring such purpose to be a proper
corporate purpose, and naming the person or persons to whom delivery
of such securities shall be made.
2.3 Registration of Securities. Domestic securities held by the Custodian
--------------------------
(other than bearer securities) shall be registered in the name of the Fund or in
the name of any nominee of the Fund or of any nominee of the Custodian which
nominee shall be assigned exclusively to the Fund, unless the Fund has
------
authorized in writing the appointment of a nominee to be used in common with
other registered investment companies having the same investment adviser as the
Fund, or in the name or nominee name of any agent appointed pursuant to Section
2.9 or in the name or nominee name of any sub-custodian appointed pursuant to
Article 1. All securities accepted by the Custodian on behalf of the Fund under
the terms of this Contract shall be in "street name" or other good delivery
form.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
-------------
account or accounts in the United States in the name of the Fund, subject only
to draft or order by the Custodian acting pursuant to the terms of this
Contract, and shall hold in such account or accounts, subject to the provisions
hereof, all cash received by it from or for the account of the Fund, other than
cash maintained by the Fund, other than cash maintained by the Fund in a bank
account established and used in accordance with Rule 17f-3 under the Investment
Company Act of 1940. Funds held by the Custodian for the Fund may be deposited
by it to its credit as Custodian in the Banking Department of the Custodian or
in such other banks or trust companies as it may in its discretion deem
necessary or desirable; provided, however, that every such bank or trust
--------
company shall be qualified to act as a custodian under the Investment Company
Act of 1940 and that each such bank or trust company
-6-
<PAGE>
and the funds to be deposited with each such bank or trust company shall be
approved by vote of a majority of the Board of Directors of the Fund. Such funds
shall be deposited by the Custodian in its capacity as Custodian and shall be
withdrawable by the Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between the Fund
------------------------------
and the Custodian, the Custodian shall, upon the receipt of Proper Instructions,
make federal funds available to the Fund as of specified times agreed upon from
time to time by the Fund and the Custodian in the amount of checks received in
payment for Shares of the Fund which are deposited into the Fund's account.
2.6 Collection of Income. The Custodian shall collect on a timely basis
---------------------
all income and other payments with respect to United States registered
securities held hereunder to which the Fund shall be entitled either by law or
pursuant to custom in the securities business, and shall collect on a timely
basis all income and other payments with respect to United States bearer
securities if, on the date of payment by the issuer, such securities are held by
the Custodian or its agent thereof and shall credit such income, as collected,
to the Fund's custodian account. Without limiting the generality of the
foregoing, the Custodian shall detach and present for payment all coupons and
other income items requiring presentation as and when they become due and shall
collect interest when due on securities held hereunder. Income due the Fund on
United States securities loaned pursuant to the provisions of Section 2.2 (10)
shall be the responsibility of the Fund. The Custodian will have no duty or
responsibility in connection therewith, other than to provide the Fund with such
information or data as may be necessary to assist the Fund in arranging for the
timely delivery to the Custodian of the income to which the Fund is properly
entitled.
-7-
<PAGE>
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions, which may
----------------------
be continuing instructions when deemed appropriate by the parties, the Custodian
shall pay out monies of the Fund in the following cases only:
(1) Upon the purchase of domestic securities, options, futures
contracts or options on futures contracts for the account of the
Fund but only (a) against the delivery of such securities, or
evidence of title to such options, futures contracts or options on
futures contracts, to the Custodian (or any bank, banking firm or
trust company doing business in the United States or abroad which
is qualified under the Investment Company Act of 1940, as amended,
to act as a custodian and has been designated by the Custodian as
its agent for this purpose) registered in the name of the Fund or
in the name of a nominee of the Custodian referred to in Section
2.3 hereof or in proper form for transfer; (b) in the case of a
purchase effected through a Securities System, in accordance with
the conditions set forth in Section 2.10 hereof or (c) in the case
of a purchase involving the Direct Paper System, in accordance with
the conditions set forth in Section 2.10A; or (d) in the case of
repurchase agreements entered into between the Fund and the
Custodian, or another bank, or a broker-dealer which is a member of
NASD, (i) against delivery of the securities either in certificate
form or through an entry crediting the Custodian's account at the
Federal Reserve Bank with such securities or (ii) against delivery
of the receipt evidencing purchase by the Fund of securities
-8-
<PAGE>
owned by the Custodian along with written evidence of the agreement
by the Custodian to repurchase such securities from the Fund;
(2) In connection with conversion, exchange or surrender of securities
owned by the Fund as set forth in Section 2.2 hereof;
(3) For the redemption or repurchase of Shares issued by the Fund as
set forth in Article 4 hereof;
(4) For the payment of any expense or liability incurred by the Fund,
including but not limited to the following payments for the account
of the Fund: interest, taxes, management, accounting, transfer
agent and legal fees, and operating expenses of the Fund whether or
not such expenses are to be in whole or part capitalized or treated
as deferred expenses;
(5) For the payment of any dividends declared pursuant to the governing
documents of the Fund;
(6) For payment of the amount of dividends received in respect of
securities sold short;
(7) For any other proper purpose, but only upon receipt of, in addition
to Proper Instructions, a certified copy of a resolution of Board
of Directors or of the Executive Committee of the Fund signed by an
officer of the Fund and certified by its Secretary or an Assistant
Secretary, specifying the amount of such payment, setting forth the
purpose for which such payment is to be made, declaring such
purpose to be a proper purpose, and naming the person or persons to
whom such payment is to be made.
-9-
<PAGE>
2.8 Liability for Payment in Advance of Receipt of Securities Purchased.
-------------------------------------------------------------------
In any and every case where payment for purchase of domestic securities for the
account of the Fund is made by the Custodian in advance of receipt of the
securities purchased in the absence of specific written instructions from the
Fund to so pay in advance, the Custodian shall be absolutely liable to the Fund
for such securities to the same extent as if the securities had been received by
the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in its
---------------------
discretion appoint (and may at any time remove) any other bank or trust company
which is itself qualified under the Investment Company Act of 1940, as amended,
to act as a custodian, as its agent to carry out such of the provisions of this
Article 2 as the Custodian may from time to time direct; provided, however, that
--------
the appointment of any agent shall not relieve the Custodian of its
responsibilities or liabilities hereunder.
2.10 Deposit of Securities in Securities Systems. The Custodian may deposit
-------------------------------------------
and/or maintain domestic securities owned by the Fund in a clearing agency
registered with the Securities and Exchange Commission under Section 17A of the
Securities Exchange Act of 1934, which acts as a securities depository, or in
the book-entry system authorized by the U.S. Department of the Treasury and
certain federal agencies, collectively referred to herein as "Securities System"
in accordance with applicable Federal Reserve Board and Securities and Exchange
Commission rules and regulations, if any, and subject to the following
provisions:
(1) The Custodian may keep domestic securities of the Fund in a
Securities System provided that such securities are represented in
an account ("Account") of the Custodian in the Securities System
which shall not include
-10-
<PAGE>
any assets of the Custodian other than assets held as a fiduciary,
custodian or otherwise for customers;
(2) The records of the Custodian with respect to domestic securities of
the Fund which are maintained in a Securities System shall identify
by book-entry those securities belonging to the Fund;
(3) The Custodian shall pay for domestic securities purchased for the
account of the Fund upon (i) receipt of advice from the Securities
System that such securities have been transferred to the Account,
and (i.) the making of an entry on the records of the Custodian to
reflect such payment and transfer for the account of the Fund. The
Custodian shall transfer domestic securities sold for the account
of the Fund upon (i) receipt of advice from the Securities System
that payment for such securities has been transferred to the
Account, and (ii) the making of an entry on the records of the
Custodian to reflect such transfer and payment for the account of
the Fund. Copies of all advices from the Securities System of
transfers of domestic securities for the account of the Fund shall
identify the Fund, be maintained for the Fund by the Custodian and
be provided to the Fund at its request. Upon request, the Custodian
shall furnish the Fund confirmation of each transfer to or from the
account of the Fund in the form of a written advice or notice and
shall furnish promptly to the Fund copies of daily transaction
sheets reflecting each day's transactions in the Securities System
for the account of the Fund.
-11-
<PAGE>
(4) The Custodian shall provide the Fund with any report obtained by
the Custodian on the Securities System's accounting system,
internal accounting control and procedures for safeguarding
securities deposited in the Securities System;
(5) The Custodian shall have received the initial or annual
certificate, as the case may be, required by Article 13 hereof;
(6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for any loss or damage to the
Fund resulting from use of the Securities System by reason of any
negligence, misfeasance or misconduct of the Custodian or any of
its agents or of any of its or their employees or from failure of
the Custodian or any such agent to enforce effectively such rights
as it may have against the Securities System; at the election of
the Fund, it shall be entitled to be subrogated to the rights of
the Custodian with respect to any claim against the Securities
System or any other person which the Custodian may have as a
consequence of any such loss or damage if and to the extent that
the Fund has not been made whole for any such loss or damage.
2.10A Fund Assets Held in the Custodian's Direct Paper System. The
-------------------------------------------------------
Custodian may deposit and/or maintain securities owned by the Fund in the Direct
Paper System of the Custodian subject to the following provisions:
(1) No transaction relating to securities in the Direct Paper System
will be effected in the absence of Proper Instructions;
-12-
<PAGE>
(2) The Custodian may keep securities of the Fund in the Direct Paper
System only if such securities are represented in an account
("Account") of the Custodian in the Direct Paper System which shall
not include any assets of the Custodian other than assets held as a
fiduciary, custodian or otherwise for customers;
(3) The records of the Custodian with respect to securities of the Fund
which are maintained in the Direct Paper System shall identify by
book-entry those securities belonging to the Fund;
(4) The Custodian shall pay for securities purchased for the account of
the Fund upon the making of an entry on the records of the Custodian
to reflect such payment and transfer of securities to the account of
the Fund. The Custodian shall transfer securities sold for the
account of the Fund upon the making of an entry on the records of
the Custodian to reflect such transfer and receipt of payment for
the account of the Fund;
(5) The Custodian shall furnish the Fund confirmation of each transfer
to or from the account of the Fund, in the form of a written advice
or notice, of Direct Paper on the next business day following such
transfer and shall furnish to the Fund copies of daily transaction
sheets reflecting each day's transaction in the Securities System
for the account of the Fund;
(6) The Custodian shall provide the Fund with any report on its system
of internal accounting control as the Fund may reasonably request
from time to time;
-13-
<PAGE>
2.11 Segregated Account. The Custodian shall upon receipt of Proper
------------------
Instructions establish and maintain a segregated account or accounts for and on
behalf of the Fund, into which account or accounts may be transferred cash
and/or securities, including securities maintained in an account by the
Custodian pursuant to Section 2.10 hereof, (i) in accordance with the provisions
of any agreement among the Fund, the Custodian and a broker-dealer registered
under the Exchange Act and a member of the NASD (or any futures commission
merchant registered under the Commodity Exchange Act), relating to compliance
with the rules of The Options Clearing Corporation and of any registered
national securities exchange (or the Commodity Futures Trading Commission or any
registered contract market), or of any similar organization or organizations,
regarding escrow or other arrangements in connection with transactions by the
Fund, (ii) for purposes of segregating cash, government securities or liquid
high-grade debt obligations in connection with options purchased, sold or
written by the Fund or commodity futures contracts or options thereon purchased
or sold by the Fund, (iii) for the purposes of compliance by the Fund with the
procedures required by Investment Company Act Release No. 10666, or any
subsequent release or releases of the Securities and Exchange Commission
relating to the maintenance of segregated accounts by registered investment
companies and (iv) for other proper corporate purposes, but only, in the case of
--------
clause (iv), upon receipt of, in addition to Proper Instructions, a certified
copy of a resolution of the Board of Directors or of the Executive Committee
signed by an officer of the Fund and certified by the Secretary or an Assistant
Secretary, setting forth the purpose or purposes of such segregated account and
declaring such purposes to be proper corporate purposes.
2.12 Ownership Certificates for Tax Purposes. The Custodian shall execute
----------------------------------------
ownership and other certificates and affidavits for all federal and state tax
purposes in connection with receipt of
-14-
<PAGE>
income or other payments with respect to domestic securities of the Fund held by
it and in connection with transfers of such securities.
(2.13) Proxies. The Custodian shall, with respect to the domestic
-------
securities held hereunder, cause to be promptly executed by the registered
holder of such securities, if the securities are registered otherwise than in
the name of the Fund or a nominee of the Fund, all proxies, without indication
of the manner in which such proxies are to be voted, and shall promptly deliver
to the Fund such proxies, all proxy soliciting materials and all notices
relating to such securities.
(2.14) Communications Relating to Fund Portfolio Securities. The
----------------------------------------------------
Custodian shall transmit promptly to the Fund all written information
(including, without limitation, pendency of calls and maturities of domestic
securities and expirations of rights in connection therewith and notices of
exercise of call and put options written by the Fund and the maturity of futures
contracts purchased or sold by the Fund) received by the Custodian from issuers
of the domestic securities being held for the Fund. With respect to tender or
exchange offers, the Custodian shall transmit promptly to the Fund all written
information received by the Custodian from issuers of the securities whose
tender or exchange is sought and from the party (or his agents) making the
tender or exchange offer. If the Fund desires to take action with respect to
any tender offer, exchange offer or any other similar transaction, the Fund
shall notify the Custodian at least three business days prior to the date on
which the Custodian is to take such action.
2.15 Reports to Fund by Independent Public Accountants. The Custodian shall
-------------------------------------------------
provide the Fund, at such times as the Fund may reasonably require, with reports
by independent public accountants on the accounting system, internal accounting
control and procedures for safeguarding securities, futures contracts and
options on futures contracts, including securities deposited and/or
-15-
<PAGE>
maintained in a Securities System, relating to the services provided by the
Custodian under this Contract; such reports shall be of sufficient scope and in
sufficient detail, as may reasonably be required by the Fund to provide
reasonable assurance that any material inadequacies would be disclosed by such
examination, and, if there are no such inadequacies, the reports shall so state.
3. Duties of the Custodian with Respect to Property of the Fund Held Outside of
----------------------------------------------------------------------------
the United States
- -----------------
3.1 Appointment of Foreign Sub-Custodians. The Custodian is authorized and
-------------------------------------
instructed to employ as sub-custodians for the Fund's securities and other
assets maintained outside the United States the foreign banking institutions and
foreign securities depositories designated on Schedule A hereto ("foreign sub-
custodians"). Upon receipt of "Proper Instructions", together with a certified
resolution of the Fund's Board of Directors, the Custodian and the Fund may
agree to amend Schedule A hereto from time to time to designate additional
foreign banking institutions and foreign securities depositories to act as sub-
custodians. Upon receipt of Proper Instructions from the Fund the Custodian
shall cease the employment of any one or more such sub-custodians for
maintaining custody of the Fund's assets.
3.2 Assets to be Held. The Custodian shall limit the securities and other
------------------
assets maintained in the custody of the foreign sub-custodians to: (a) "foreign
securities", as defined in paragraph (c)(1) of Rule 17f-5 under the Investment
Company Act of 1940, and (b) cash and cash equivalents in such amounts as the
Custodian or the Fund may determine to be reasonably necessary to effect the
Fund's foreign securities transactions.
3.3 Foreign Securities Depositories. Except as may otherwise be agreed
-------------------------------
upon in writing by the Custodian and the Fund, assets of the Fund shall be
maintained in foreign securities
-16-
<PAGE>
depositories only through arrangements implemented by the foreign banking
institutions serving as sub-custodians pursuant to the terms hereof.
3.4 Segregation of Securities. The Custodian shall identify on its books
-------------------------
as belonging to the Fund, the foreign securities of the Fund held by each
foreign sub-custodian. Each agreement pursuant to which the Custodian employs a
foreign banking institution shall require that such institution establish a
custody account for the Custodian on behalf of the Fund and physically segregate
in that account, securities and other assets of the Fund, and, in the event that
such institution deposits the Fund's securities in a foreign securities
depository, that it shall identify on its books as belonging to the Custodian,
as agent for the Fund, the securities so deposited (all collectively referred to
as the "Account").
3.5 Agreements with Foreign Banking Institutions . Each agreement with a
--------------------------------------------
foreign banking institution shall be substantially in the form set forth in
Exhibit I hereto and shall provide that: (a) the Fund's assets will not be
subject to any right, charge, security interest, lien or claim of any kind in
favor of the foreign banking institution or its creditors, except a claim of
payment for their safe custody or administration; (b) beneficial ownership of
the Fund's assets will be freely transferable without the payment of money or
value other than for custody or administration; (c) adequate records will be
maintained identifying the assets as belonging to the Fund; (d) officers of or
auditors employed by, or other representatives of the Custodian, including to
the extent permitted under applicable law the independent public accountants for
the Fund, will be given access to the books and records of the foreign banking
institution relating to its actions under its agreement with the Custodian; and
(e) assets of the Fund held by the foreign sub-custodian will be subject only to
the instructions of the Custodian or its agents.
-17-
<PAGE>
3.6 Access of Independent Accountants of the Fund. Upon request of the
----------------------------------------------
Fund, the Custodian will use its best efforts to arrange for the independent
accountants of the Fund to be afforded access to the books and records of any
foreign banking institution employed as a foreign sub-custodian insofar as such
books and records relate to the performance of such foreign banking institution
under its agreement with the Custodian.
3.7 Reports by Custodian. The Custodian will supply to the Fund from
--------------------
time to time, as mutually agreed upon, statements in respect of the securities
and other assets of the Fund held by foreign sub-custodians, including but not
limited to an identification of entities having possession of the Fund's
securities and other assets and advices or notifications of any transfers of
securities to or from each custodial account maintained by a foreign banking
institution for the Custodian on behalf of the Fund indicating, as to securities
acquired for the Fund, the identity of the entity having physical possession of
such securities.
3.8 Transactions in Foreign Custody Account.
----------------------------------------
(a) Upon receipt of Proper Instructions, which may be continuing
instructions when deemed appropriate by the parties, the Custodian shall make or
cause its foreign sub-custodian to transfer, exchange or deliver foreign
securities owned by the Fund, but except to the extent explicitly provided
herein only in any of the cases specified in Section 2.2
(b) Upon receipt of Proper Instructions, which may be continuing
instructions when deemed appropriate by the parties the Custodian shall pay out
or cause its foreign sub-custodians to pay out monies of the Fund, but except to
the extent explicitly provided herein only in any of the cases specified in
Section 2.7.
-18-
<PAGE>
(c) Notwithstanding any provision of this Contract to the contrary,
settlement and payment for securities received for the account of the Fund and
delivery of securities maintained for the account of the Fund may be effected in
accordance with the customary established securities trading or securities
processing practices and procedures in the jurisdiction or market in which the
transaction occurs, including, without limitation, delivering securities to the
purchaser thereof or to a dealer therefor (or an agent for such purchaser or
dealer) against a receipt with the expectation of receiving later payment for
such securities from such purchaser or dealer.
(d) Securities maintained in the custody of a foreign sub-custodian
may be maintained in the name of such entity's nominee to the same extent as set
forth in Section 2.3 of this Contract, and the Fund agrees to hold any such
nominee harmless from any liability as a holder of record of such securities.
3.9 Liability of Foreign Sub-Custodians. Each agreement pursuant to
-----------------------------------
which the Custodian employs a foreign banking institution as a foreign sub-
custodian shall require the institution to exercise reasonable care in the
performance of its duties and to indemnify, and hold harmless, the Custodian and
Fund from and against any loss, damage, cost, expense, liability or claim
arising out of or in connection with the institution's performance of such
obligations. At the election of the Fund, it shall be entitled to be subrogated
to the rights of the Custodian with respect to any claims against a foreign
banking institution as a consequence of any such loss, damage, cost, expense,
liability or claim if and to the extent that the Fund has not been made whole
for any such loss, damage, cost, expense, liability or claim.
3.10 Monitoring Responsibilities. The Custodian shall furnish annually
---------------------------
to the Fund, during the month of June, information concerning the foreign sub-
custodians employed by the Custodian.
-19-
<PAGE>
Such information shall be similar in kind and scope to that furnished to the
Fund in connection with the initial approval of this Contract. In addition, the
Custodian will promptly inform the Fund in the event that the Custodian learns
of a material adverse change in the financial condition of a foreign sub-
custodian or is notified by a foreign banking institution employed as a foreign
sub-custodian that there appears to be a substantial likelihood that its
shareholders' equity will decline below $200 million (U.S. dollars or the
equivalent thereof) or that its shareholders' equity has declined below $200
million (in each case computed in accordance with generally accepted U.S.
accounting principles).
3.11 Branches of U.S. Banks.
-----------------------
(a) Except as otherwise set forth in this Contract, the provisions
hereof shall not apply where the custody of the Fund assets maintained in a
foreign branch of a banking institution which is a "bank" as defined by Section
2(a)(5) of the Investment Company Act of 1940 which meets the qualification set
forth in Section 26(a) of said Act. The appointment of any such branch as a sub-
custodian shall be governed by Article 1 of this Contract.
4. Payments for Repurchases or Redemptions and Sales of Shares of the Fund
-----------------------------------------------------------------------
From such funds as may be available for the purpose but subject to the
limitations of the Articles of Incorporation and any applicable votes of the
Board of Directors of the Fund pursuant thereto, the Custodian shall, upon
receipt of instructions from the Transfer Agent, make funds available for
payment to holders of Shares who have delivered to the Transfer Agent a request
for redemption or repurchase of their Shares. In connection with the redemption
or repurchase of Shares of the Fund, the Custodian is authorized upon receipt of
instructions from the Transfer Agent to wire funds to or through a commercial
bank designated by the redeeming shareholders. In connection with
-20-
<PAGE>
the redemption or repurchase of Shares of the Fund, the Custodian shall honor
checks drawn on the Custodian by a holder of Shares, which checks have been
furnished by the Fund to the holder of Shares, when presented to the Custodian
in accordance with such procedures and controls as are mutually agreed upon from
time to time between the Fund and the Custodian.
The Custodian shall receive from the distributor for the Fund's Shares or
from the Transfer Agent of the Fund and deposit into the Fund's account such
payments as are received for Shares of the Fund issued or sold from time to time
by the Fund. The Custodian will provide timely notification to the Fund and the
Transfer Agent of any receipt by it of payments for Shares of the Fund.
5. Proper Instructions
-------------------
Proper Instructions as used herein means a writing signed or initialled by
one or more person or persons as the Board of Directors shall have from time to
time authorized. Each such writing shall set forth the specific transaction or
type of transaction involved, including a specific statement of the purpose for
which such action is requested. Oral instructions will be considered Proper
Instructions if the Custodian reasonably believes them to have been given by a
person authorized to give such instructions with respect to the transaction
involved. The Fund shall cause all oral instructions to be confirmed in
writing. It is understood and agreed that the Board of Directors has authorized
(i) The Prudential Insurance Company of America ("Prudential"), as investment
adviser of the Fund pursuant to an Investment Advisory Agreement dated September
18, 1987, between Prudential and the Fund, to deliver proper instructions with
respect to all matters for which proper instructions are required by Article 2
or Article 3 except Section 2.2 (13), Section 2.2 (14), Section 2.7 (3), Section
2.7 (4), Section 2.7 (5), and Section 2.7 (7) hereof and (ii) Prudential Mutual
Fund Management, Inc. ("PMF"), as administrator of the Fund pursuant to an
Administration Agreement dated September
-21-
<PAGE>
18, 1987, between PMF and the Fund, to deliver proper instructions with respect
to matters set forth in Section 2.2 (13), Section 2.7 (3), Section 2.7(4) and
Section 2.7 (5). The Custodian may rely upon the certificate of an officer of
Prudential or PMF as the case may be, with respect to the person or persons
authorized on behalf of Prudential and PMF, respectively, to sign, initial or
give proper instructions for the purposes of Article 2 or Article 3. Upon
receipt of a certificate of the Secretary or an Assistant Secretary as to the
authorization by the Board of Directors of the Fund accompanied by a detailed
description of procedures approved by the Board of Directors, Proper
Instructions may include communications effected directly between electro-
mechanical or electronic devices provided that the Board of Directors and the
Custodian are satisfied that such procedures afford adequate safeguards for the
Fund's assets.
6. Actions Permitted without Express Authority
-------------------------------------------
The Custodian may in its discretion, without express authority from the
Fund:
(1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this Contract,
provided that all such payments shall be accounted for to the Fund;
- --------
(2) surrender securities in temporary form for securities in definitive
form;
(3) endorse for collection, in the name of the Fund, checks, drafts and
other negotiable instruments; and
(4) in general, attend to all non-discretionary details in connection
with the sale, exchange, substitution, purchase, transfer and other dealings
with the securities and property of the Fund except as otherwise directed by the
Board of Directors of the Fund.
-22-
<PAGE>
7. Evidence of Authority
---------------------
The Custodian shall be protected in acting upon any instructions, notice,
request, consent, certificate or other instrument or paper believed by it to be
genuine and to have been properly executed by or on behalf of the Fund. The
Custodian may receive and accept a certified copy of a vote of the Board of
Directors of the Fund as conclusive evidence (a) of the authority of any person
to act in accordance with such vote or (b) of any determination or of any action
by the Board of Directors pursuant to the Articles of Incorporation as described
in such vote, and such vote may be considered as in full force and effect until
receipt by the Custodian of written notice to the contrary.
8. Duties of Custodian with Respect to the Books of Account and Calculation
------------------------------------------------------------------------
of Net Asset Value and Net Income
- ---------------------------------
The Custodian shall cooperate with and supply necessary information to the
entity or entities appointed by the Board of Directors of the Fund to keep the
books of account of the Fund and/or compute the net asset value per share of the
outstanding shares of the Fund or, if directed in writing to do so by the Fund,
shall itself keep such books of account and/or compute such net asset value per
share. If so directed, the Custodian shall also calculate daily the net income
of the Fund as described in the Fund's currently effective prospectus and shall
advise the Fund and the Transfer Agent daily of the total amounts of such net
income and, if instructed in writing by an officer of the Fund to do so, shall
advise the Transfer Agent periodically of the division of such net income among
its various components. The calculations of the net asset value per share and
the daily income of the Fund shall be made at the time or times described from
time to time in the Fund's currently effective prospectus.
-23-
<PAGE>
9. Records
-------
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet the
obligations of the Fund under the Investment Company Act of 1940, with
particular attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder,
applicable federal and state tax laws and any other law or administrative rules
or procedures which may be applicable to the Fund. All such records shall be
the property of the Fund and shall at all times during the regular business
hours of the Custodian be open for inspection by duly authorized officers,
employees or agents of the Fund and employees and agents of the Securities and
Exchange Commission. The Custodian shall, at the Fund's request, supply the
Fund with a tabulation of securities owned by the Fund and held by the Custodian
and shall, when requested to do so by the Fund and for such compensation as
shall be agreed upon between the Fund and the Custodian, include certificate
numbers in such tabulations.
10. Opinion of Fund's Independent Accountant
----------------------------------------
The Custodian shall take all reasonable action, as the Fund may from time
to time request, to obtain from year to year favorable opinions from the Fund's
independent accountants with respect to its activities hereunder in connection
with the preparation of the Fund's Form N-1A, and Form N-SAR or other annual
reports to the Securities and Exchange Commission and with respect to any other
requirements of such Commission.
11. Compensation of Custodian
-------------------------
The Custodian shall be entitled to reasonable compensation for its services
and expenses as Custodian, as agreed upon from time to time between the Fund and
the Custodian.
-24-
<PAGE>
12. Responsibility of Custodian
---------------------------
So long as and to the extent that it is in the exercise of reasonable care,
the Custodian shall not be responsible for the title, validity or genuineness of
any property or evidence of title thereto received by it or delivered by it
pursuant to this Contract and shall be held harmless in acting upon any notice,
request, consent, certificate or other instrument reasonably believed by it to
be genuine and to be signed by the proper party or parties. The Custodian shall
be held to the exercise of reasonable care in carrying out the provisions of
this Contract, but shall be kept indemnified by and shall be without liability
to the Fund for any action taken or omitted by it in good faith without
negligence. It shall be entitled to rely on and may act upon advice of counsel
(who may be counsel for the Fund) on all matters, and shall be without liability
for any action reasonably taken or omitted pursuant to such advice.
Notwithstanding the foregoing, the responsibility of the Custodian with respect
to redemptions effected by check shall be in accordance with a separate
Agreement entered into between the Custodian and the Fund.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution appointed pursuant to the provisions of Article 3 to the
same extent as set forth in Article 1 hereof with respect to sub-custodians
located in the United States and, regardless of whether assets are maintained in
the custody of a foreign banking institution, a foreign securities depository or
a branch of a U.S. bank as contemplated by paragraph 3.11 hereof, the Custodian
shall not be liable for any loss, damage, cost, expense, liability or claim
resulting from, or caused by, the direction of or authorization by the Fund to
maintain custody or any securities or cash of the Fund in a foreign country
including, but not limited to, losses resulting from nationalization,
expropriation, currency restrictions, or acts of war or terrorism.
-25-
<PAGE>
If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned to
the Fund being liable for the payment of money or incurring liability of some
other form, the Fund, as a prerequisite to requiring the Custodian to take such
action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.
If the Fund requires the Custodian to advance cash or securities for any
purpose or in the event that the Custodian or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or liabilities in
connection with the performance of this Contract, except such as may arise from
its or its nominee's own negligent action, negligent failure to act or wilful
misconduct, any property at any time held for the account of the Fund shall be
security therefor and should the Fund fail to repay the Custodian promptly, the
Custodian shall be entitled to utilize available cash and to dispose of the Fund
assets to the extent necessary to obtain reimbursement.
13. Effective Period, Termination and Amendment
-------------------------------------------
This Contract shall become effective as of its execution, shall continue in
full force and effect until terminated as hereinafter provided, may be amended
at any time by mutual agreement of the parties hereto and may be terminated by
either party by an instrument in writing delivered or mailed, postage prepaid to
the other party, such termination to take effect not sooner than thirty (30)
days after the date of such delivery or mailing; provided, however that the
--------
Custodian shall not act under Section 2.10 hereof in the absence of receipt of
an initial certificate of the Secretary or an Assistant Secretary that the Board
of Directors of the Fund has approved the initial use of a particular Securities
System and the receipt of an annual certificate of the Secretary or an Assistant
Secretary that the Board of Directors has reviewed the use by the Fund of such
Securities System, as required
-26-
<PAGE>
in each case by Rule 17f-4 under the Investment Company Act of 1940, as amended
and that the Custodian shall not act under Section 2.10A hereof in the absence
of receipt of an initial certificate of the Secretary or an Assistant Secretary
that the Board of Directors has approved the initial use of the Direct Paper
System and the receipt of an annual certificate of the Secretary or an Assistant
Secretary that the Board of Directors has reviewed the use by the Fund of the
Direct Paper System; provided further, however, that the Fund shall not amend or
----------------
terminate this Contract in contravention of any applicable federal or state
regulations, or any provision of the Articles of Incorporation and further
provided, that the Fund may at any time by action of its Board of Directors (i)
substitute another bank or trust company for the Custodian by giving notice as
described above to the Custodian, or (ii) immediately terminate this Contract in
the event of the appointment of a conservator or receiver for the Custodian by
the Comptroller of the Currency or upon the happening of a like event at the
direction of an appropriate regulatory agency or court of competent
jurisdiction.
Upon termination of the Contract, the Fund shall pay to the Custodian such
compensation as may be due as of the date of such termination and shall likewise
reimburse the Custodian for its costs, expenses and disbursements.
14. Successor Custodian
-------------------
If a successor custodian shall be appointed by the Board of Directors of
the Fund, the Custodian shall, upon termination, deliver to such successor
custodian at the office of the Custodian, duly endorsed and in the form for
transfer, all securities then held by it hereunder and shall transfer to an
account of the successor custodian all of the Fund's securities held in a
Securities System.
-27-
<PAGE>
If no such successor custodian shall be appointed, the Custodian shall, in
like manner, upon receipt of a certified copy of a vote of the Board of
Directors of the Fund, deliver at the office of the Custodian and transfer such
securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Directors shall have been delivered to
the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or trust
company, which is a "bank" as defined in the Investment Company Act of 1940,
doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus, and undivided profits, as shown by its last
published report, of not less than $25,000,000, all securities, funds and other
properties held by the Custodian and all instruments held by the Custodian
relative thereto and all other property held by it under this Contract and to
transfer to an account of such successor custodian all of the Fund's securities
held in any Securities System. Thereafter, such bank or trust company shall be
the successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Directors to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties and
the provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in full force and effect.
-28-
<PAGE>
15. Interpretive and Additional Provisions
--------------------------------------
In connection with the operation of this Contract, the Custodian and the
Fund may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, provided that no such interpretive or additional provisions
--------
shall contravene any applicable federal or state regulations or any provision of
the Articles of Incorporation of the Fund. No interpretive or additional
provisions made as provided in the preceding sentence shall be deemed to be an
amendment of this Contract.
16. Massachusetts Law to Apply
--------------------------
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of the Commonwealth of Massachusetts.
17. Prior Contracts
---------------
This Contract supersedes and terminates, as of the date hereof, all prior
contracts between the Fund and the Custodian relating to the custody of the
Fund's assets.
-29-
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the 18th day of September 1987.
ATTEST PRUDENTIAL-BACHE GLOBAL
NATURAL RESOURCES FUND, INC.
/s/ S. Jane Rose By Andrew H. Freund
- ---------------- ----------------
ATTEST STATE STREET BANK AND TRUST COMPANY
[illegible] By /s/ Patricia A. Nonan
- --------------------------- --------------------------------
Assistant Secretary Vice President
-30-
<PAGE>
EXHIBIT 1
CUSTODIAN AGREEMENT
-------------------
To:
Gentlemen:
The undersigned ("State Street") hereby requests that you (the Bank)
establish a custody account and a cash account for each custodian/employee
benefit plan identified in the Schedule attached to this Agreement and each
additional account which is identified to this Agreement. Each such custody or
cash account as applicable will be referred to herein as the "Account" and will
be subject to the following terms and conditions:
1. The Bank shall hold as agent for State Street and shall physically
segregate in the Account such cash, bullion, coin, stocks, shares,
bonds, debentures, notes and other securities and other property
which is delivered to the Bank for that State Street Account (the
"Property").
2. a. Without the prior approval of State Street it will not
deposit securities in any securities depository or utilize a
clearing agency, incorporated or organized under the laws of
a country other than the United States, unless such
depository or clearing house operates the central system for
handling of securities or equivalent book-entries in that
country or operates a transnational system for the central
handling of securities or equivalent book-entries;
b. When securities held for an Account are deposited in a
securities depository or clearing agency by the Bank, the
Bank shall identify on its books as belonging to State
Street as agent for such Account, the securities so
deposited.
3. The Bank represents that either:
a. It currently has stockholders' equity in excess of $200
million (U.S. dollars or the equivalent of U.S. dollars
computed in accordance with generally accepted U.S.
accounting principles) and will promptly inform State Street
in the event that there appears to be a substantial
likelihood that its stockholders' equity will decline below
$200 million, or in any event, at such time as its
stockholders' equity in fact declines below $200 million; or
b. It is the subject of an exemptive order issued by the United
States Securities and Exchange Commission, which such order
permits State Street to employ the Bank as a subcustodian,
notwithstanding the fact that the Bank's stockholders'
equity currently below $200 million or may in the future
decline below $200 million due to currency fluctuation.
<PAGE>
4. Upon the written instructions of State Street, as permitted by
Paragraph 8, the Bank is authorized to pay cash from the Account
and to sell, assign, transfer, deliver or exchange, or to purchase
for the Account, any and all stocks, shares, bonds, debentures,
notes and other securities ("Securities"), bullion, coin and any
other property, but only as provided in such written instructions.
The bank shall not be held liable for any act or omission to act
instructions given on purported to be given should there be any
error in such instructions.
5. Unless the Bank receives written instructions of State Street to
the contrary, the Bank is authorized:
a. To promptly receive and collect all income and principal
with respect to the Property and to credit cash receipts to
the Account;
b. To promptly exchange securities where the exchange is purely
ministerial (including, without limitation, the exchange of
temporary securities for those in definitive form and the
exchange of warrants, or other documents of entitlement to
securities, for the securities themselves);
c. To promptly surrender securities at maturity or when called
for redemption upon receiving payment therefor;
d. Whenever notification of a rights entitlement or a
fractional interest resulting from a rights issue, stock
dividend or a split is received for the Account and such
rights entitlement or fractional interest bears an
expiration date, the Bank endeavor to obtain State Street
Bank's instructions, but these not be received in time for
the Bank to take timely action, the Bank is authorized to
sell such rights entitlements or fractional interest and to
credit the Account;
e. To hold registered in the name of the nominee of the Bank
its agents such Securities as are ordinarily held in
registered form;
f. To execute in State Street's name for the Account, whenever
the Bank deems it appropriate, such ownership and other
certificates as may be required to obtain the payment of
income from the property; and
g. To pay or cause to be paid, from the Account any and all
taxes and levies in the nature of taxes imposed on such
assets by any governmental authority and shall use
reasonable efforts, to promptly reclaim any foreign
withholding tax relating to the Account.
6. If the Bank shall receive any proxies, notices, reports or other
communications relative to any to the Securities of the Account in
connection with tender offers, reorganization, mergers,
consolidations, or similar events which may have an impact upon
issuer thereof, the Bank shall promptly transmit any such
communication to State Street Bank by means as will permit State
Street Bank to take timely action with respect thereto.
<PAGE>
7. The Bank is authorized in its discretion to appoint brokers and
agents in connection with the Bank's handling of transactions
relating to the Property provided that any such appointment shall
not relieve the Bank of any of its responsibilities or
liabilities hereunder.
8. Written instructions shall include (i) instructions in writing
signed by such persons as are designated in writing by State
Street; (ii) telex or tested telex instructions of State Street;
(iii) other forms of instruction in computer readable form as
shall be customarily utilized for the transmission of like
information; and (iv) such other forms of communication as from
time to time shall be agreed upon by State Street and the Bank.
9. The Bank shall supply periodic reports with respect to the
safekeeping of assets held by it under this agreement. The
content of such reports shall include but not be limited to any
transfer to or from any account held by the Bank hereunder and
such other information as State Street may reasonably request.
10. In addition to its obligations under Section 23 hereof, the Bank
shall maintain such other records as may be necessary to identify
the assets hereunder as belonging to each custodian/employee
benefit plan identified in our Schedule attached to this
agreement and each additional account which is identified to this
agreement.
11. The Bank agrees that its books and records relating to its action
under this Agreement shall be opened to the physical, on-premises
inspection and audit at reasonable times by officers of, auditors
employed by or other representatives of State Street (including
to the extent permitted under law the independent public
accountants for any entity hose Property is being held hereunder
and shall be retained for such period as shall be agreed by State
Street and the Bank.
12. The Bank shall be entitled to reasonable compensation for its
services and expenses as custodian under this Agreement, as
agreed upon from time to time by the Bank and State Street.
13. The Bank shall exercise reasonable care in the performance of its
duties, as are set forth or contemplated herein or contained in
instructions given to the Bank which are not contrary to this
Agreement, shall maintain adequate insurance and agrees to
indemnify and hold harmless, State Street and each Account from
and against loss, damage, cost, expense, liability or claim
arising out of or in connection with the Bank's performance of
its obligations hereunder.
14. The bank agrees (i) the property held hereunder is not subject to
any right, charge, security interest, lien or claim of any kind
in favor of the Bank or any of its agents or its creditors except
a claim of payment for their safe custody and administration and
(ii) the beneficial ownership of the property shall be freely
transferable without the payment of money or other value other
than for safe custody or administration.
15. The bank agrees to meet State Street Operating Requirements (See
Exhibit A).
<PAGE>
16. This Agreement may be terminated by the Bank or State Street by
60 days' written notice to the other, sent by registered mail or
express courier. The Bank, upon the date this Agreement
terminates pursuant to notice which has been given in a timely
fashion, shall deliver the Property to the beneficial owner
unless the Bank received from the beneficial owner 60 days' prior
to the date which this Agreement is to be terminated written
instructions or State Street specifying the name(s) of the
person(s) to whom the Property shall be delivered.
17. The Bank and State Street shall each use its best efforts to
maintain the confidentiality of the Property in each Account,
subject, however, to the provisions of any laws requiring the
disclosure of the Property.
18. Unless otherwise specified in this Agreement, all notices with
respect to matters contemplated by this Agreement shall be deemed
duly given when received in writing or by confirmed telex by the
Bank or State Street at their respective addresses set forth
below or at such other address as be specified in each case in a
notice similarly given:
To State Street Master Trust Division, Global Custody
STATE STREET BANK AND TRUST COMPANY
P.O. Box 1713
Boston, Massachusetts 02105
U.S.A.
To the Bank
19. This Agreement shall be governed by and construed in accordance
with the laws of except to the extent that such laws are
preempted by the laws of the United States of America.
Please acknowledge your agreement to the foregoing by executing a copy
of this letter.
Very truly yours,
STATE STREET BANK AND TRUST COMPANY
By: /s/ Patricia A. Noonan
----------------------------------
Vice President
Date: 9-18-87
--------------------------------
Agreed to by:
By: /s/ Anita L. Jennings
- ---------------------------
Date: 9-18-87
----------------------
<PAGE>
Prudential Mutual Funds
State Street
Global Custody Network
----------------------
<TABLE>
<CAPTION>
SECURITIES DEPOSITORY
OR
COUNTRY BANK CLEARING AGENCY
- ------- ---- ---------------
<S> <C> <C>
Argentina Citibank, N.A. Caja de Valores S.A.
Australia Westpac Banking Austraclear Limited; a:
Corporation Reserve Bank Information
and Transfer System (RI
Austria GiroCredit Bank Oesterreichische
Aktiengesellschaft Kontrollbank AG
der Sparkassen (Wertpapiersammelbank
Division)
Bangladesh* Standard Chartered Bank None
Belgium Generale Bank Caisse Interprofessionne
de Depots et de Vireme:
de Titres S.A. (CIK); Ba:
Nationale de Belgique
Brazil Citibank, N.A. Bolsa de Valores de SA
Paulo (Bovespa); Bc
Central do Brasil, Sys
Especial de Liquidaca
Custodia (SELIC)
Canada Canada Trustco The Canadian Depository
Mortgage Company Securities Limited (CD
Chile Citibank, N.A. None
China The HongKong and Shanghai Shanghai Securities
Banking Corporation Limited, Central Clearing and
Shanghai and Shenzhen branches Registration Corporati
(SSCCRC)
Shenzhen Securities
Central Clearing Co.,
Ltd. (SSCC)
Columbia Cititrust Columbia S.A. None
Sociedad Fiduciaria
Cyprus* Barclays Bank PLC None
Cyprus Offshore Banking Unit
Czech Republic Ceskoclovenska Obchodni Stredisko Cennych Papi
Banka A.S. (SCP); Czech National
(CNB)
Denmark Den Danske Bank Vaerdipapircentralen,
The Danish Securities
Center (VP)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SECURITIES DEPOSITORY
OR
COUNTRY BANK CLEARING AGENCY
- ------- ---- ---------------
<S> <C> <C>
Egypt* National Bank of Egypt None
Finland Merita Bank Limited The Central Share Registe
of Finland
France Banque Paribas Societe Interprofessionnell
pour la Compensation des
Valeurs Mobilieres (SICOVAM)
Banque de France, Saturn
System
Germany Dresdner Bank AG The Deutscher Kassenverei
AG
Greece National Bank of Greece S.A. The Central Depository
(Apothetirio Titlon A.E.)
Hong Kong Standard Chartered Bank The Central Clearing an
Settlement System (CCASS)
Hungary Citibank Budapest Rt. The Central Depository an
Clearing House (Budapest
Ltd. (KELLER Ltd.)
India The HongKong and Shanghai None
Banking Corporation Limited
Deutsche Bank AG
Indonesia Standard Chartered Bank None
Ireland Bank of Ireland The Central Bank of Ireland
The Gilt Settlement Office
(GSO)
Israel Bank Hapoalim B.M. The Clearing House of the
Tel Aviv Stock Exchange
Italy Morgan Guaranty Monte Titoli, S.p.A.;
Trust Company Banca d'Italia
Banque Paribas
Japan The Daiwa Bank, Limited Japan Securities Depository
Center (JASDEC); Bank of
Sumitomo Trust & Banking Japan Net System
Co., Ltd.
The Fuji Bank, Limited
Korea SEOULBANK Korea Securities Depository
(KSD)
Luxembourg -- Cedel
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
SECURITIES DEPOSITORY
OR
COUNTRY BANK CLEARING AGENCY
- ------- ---- ---------------
<S> <C> <C>
Malaysia Standard Chartered Bank Malaysian Central Deposit
Malaysia Berhad Sdn. Bhd. (MCD)
Mexico Citibank Mexico, N.A. S.D.INDEVAL, S.A. de C.
(Instituto para el Depos
de Valores); Banco de Mexico
Morocco* Banque Commerciale du Maroc None
Netherlands MeesPierson N.V. Nederlands Centraal
Instituut voor Giraal
Effectenverkeer B .V.
(NECIGEF)
New Zealand ANZ Banking Group New Zealand Central
(New Zealand) Limited Securities Depository
Limited (NZCSD)
Norway Christiania Bank og Verdipapirsentralen,
Kreditkasse The Norwegian Registry
of Securities (VPS)
Pakistan Deutsche Bank AG None
Peru Citibank, N.A. Caja de Valores (CAVAL
Philippines Standard Chartered Bank None
Poland Citibank Poland, S.A. The National Depository
Securities (Krajowy Dep
Papierow Wartosciowych'
National Bank of Poland
Portugal Banco Comercial Portugues Central de Valores
Mobiliarios (Central)
Singapore The Development Bank The Central Depository
of Singapore Ltd. (Pte) Limited (CDP)
Slovak Republic Chekoslovenska Obchodna Stredisko Cennych Papie
Banka A.S. (SCP); National Bank of
Slovakia
South Africa Standard Bank of The Central Depository
South Africa Ltd. Limited
Spain Banco Santander, S.A. Servicio de Compensacico
Liquidacion de Valc
(SCLV); Banco de Esp
Anotaciones en Cuenta
Sri Lanka* The HongKong and Shanghai The Central Depository
Banking Corporation Limited System (Pvt) Limited
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
SECURITIES DEPOSITORY
OR
COUNTRY BANK CLEARING AGENCY
- ------- ---- ---------------
<S> <C> <C>
Sweden Skandinaviska Vardepapperscentralen,
Enskilda Banken VPC, AB, The Swedish
Securities Depository
Switzerland Union Bank of Switzerland Schweizerische Effekten
Giro AG (SEGA)
Taiwan Central Trust of China The Taiwan Securities
Central Depository Company
Ltd. (TSCD)
Thailand Standard Chartered Bank Thailand Securities Cental
Depository Company, Lt
(TSCD)
Turkey Citibank, N.A. Takas ve Sakaama Bankas:
A.S. (TAKASBANK); Centr
Bank of Turkey
Transnational -- The Euroclear System
Cedel
United Kingdom State Street Bank and The Bank of England,
Trust Company, London The Central Gilts Offic
branch, and State Street (CGO); The Central London
Limited, a subsidiary Moneymarkets Office (CM
of State Street Bank
and Trust Company
Uruguay Citibank, N.A. None
Venezuela Citibank, N.A. None
</TABLE>
- --------------------------------------------------------------------------------
* Funds marked by an asterisk have been approved only for The Target Portfolio
Trust
4
<PAGE>
EXHIBIT 99.9
TRANSFER AGENCY AND SERVICE AGREEMENT
between
PRUDENTIAL-BACHE GLOBAL NATURAL RESOURCES FUND, INC.
and
PRUDENTIAL MUTUAL FUND SERVICES, INC.
<PAGE>
TABLE OF CONTENTS
-----------------
Article 1 Terms of Appointment; Duties of the Agent...... 1
Article 2 Fees and Expenses.............................. 5
Article 3 Representations and Warranties of the Agent.... 5
Article 4 Representations of Warranties of the Fund...... 6
Article 5 Duty of Care and Indemnification............... 7
Article 6 Documents and Covenants of the Fund and the
Agent.......................................... 10
Article 7 Termination of Agreement....................... 12
Article 8 Assignment..................................... 12
Article 9 Affiliations................................... 13
Article 10 Amendment...................................... 13
Article 11 Applicable Law................................. 14
Article 12 Miscellaneous.................................. 14
Article 13 Merger of Agreement............................ 15
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
-------------------------------------
AGREEMENT made as of the 1st day of January, 1988 by and between
PRUDENTIAL-BACHE GLOBAL NATURAL RESOURCES FUND, INC., a Maryland corporation,
having its principal office and place of business at One Seaport Plaza, New
York, New York 10292 (the Fund), and PRUDENTIAL MUTUAL FUND SERVICES, INC., a
New Jersey corporation, having its principal office and place of business at
Raritan Plaza I, Edison, New Jersey 08818 (the "Agent" or "PMFS").
WHEREAS, the Fund desires to appoint PMFS as its transfer agent,
dividend disbursing agent and shareholder servicing agent in connection with
certain other activities, and PMFS desires to accept such appointment;
NOW THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
Article 1 Terms of Appointment; Duties of PMFS
------------------------------------
1.01 Subject to the terms and conditions set forth in this Agreement,
the Fund hereby employs and appoints PMFS to act as, and PMFS agrees to act as,
the transfer agent for the authorized and issued shares of the common stock of
each series of the Fund, $.01 par value ("Shares"), dividend disbursing agent
and shareholder servicing agent in connection with any accumulation, open-
account or similar plans provided to the shareholders of the Fund or any series
thereof ("Shareholders") and set out in the
1
<PAGE>
currently effective prospectus and statement of additional information
("prospectus") of the Fund, including without limitation any periodic investment
plan or periodic withdrawal program.
1.02 PMFS agrees that it will perform the following services:
(a) In accordance with procedures established from time to time by
agreement between the Fund and PMFS, PMFS shall:
(i) Receive for acceptance, orders for the purchase of Shares, and
promptly deliver payment and appropriate documentation therefor to the Custodian
of the Fund authorized pursuant to the Articles of Incorporation of the Fund
(the "Custodian");
(ii) Pursuant to purchase orders, issue the appropriate number of Shares
and hold such Shares in the appropriate Shareholder account;
(iii) Receive for acceptance redemption requests and redemption
directions and deliver the appropriate documentation therefor to the Custodian;
(iv) At the appropriate time as and when it receives monies paid to it by
the Custodian with respect to any redemption, pay over or cause to be paid over
in the appropriate manner such monies as instructed by the redeeming
Shareholders;
(v) Effect transfers of Shares by the registered owners thereof upon
receipt of appropriate instructions;
(vi) Prepare and transmit payments for dividends and distributions
declared by the Fund;
(vii) Calculate any sales charges payable by a Shareholder on
2
<PAGE>
purchases and/or redemptions of Shares of the Fund as such charges may be
reflected in the prospectus;
(viii) Maintain records of account for and advise the Fund and its
Shareholders as to the foregoing; and
(ix) Record the issuance of Shares of the Fund and maintain pursuant to Rule
17Ad-10(e) under the Securities Exchange Act of 1934 ("1934 Act") a record of
the total number of Shares of the Fund which are authorized, based upon data
provided to it by the Fund, and issued and outstanding. PMFS shall also provide
to the Fund on a regular basis the total number of Shares which are authorized,
issued and outstanding and shall notify the Fund in case any proposed issue of
Shares by the Fund would result in an overissue. In case any issue of Shares
would result in an overissue, PMFS shall refuse to issue such Shares and shall
not countersign and issue any certificates requested for such Shares. When
recording the issuance of Shares, PMFS shall have no obligation to take
cognizance of any Blue Sky laws relating to the issue or sale of such Shares,
which functions shall be the sole responsibility of the Fund.
(b) In addition to and not in lieu of the services set forth in the above
paragraph (a), PMFS shall: (i) perform all of the customary services of a
transfer agent, dividend disbursing agent and, as relevant, shareholder
servicing agent in connection with accumulation, open-account or similar plans
(including without limitation any periodic investment plan or periodic
withdrawal program), including but not limited to, maintaining all
3
<PAGE>
Shareholder accounts, preparing Shareholder meeting lists, mailing proxies,
receiving and tabulating proxies, mailing Shareholder reports and prospectuses
to current Shareholders, withholding taxes on non-resident alien accounts,
preparing and filing appropriate forms required with respect to dividends and
distributions by federal tax authorities for all Shareholders, preparing and
mailing confirmation forms and statements of account to Shareholders for all
purchases and redemptions of Shares and other confirmable transactions in
Shareholder accounts, preparing and mailing activity statements for Shareholders
and providing Shareholder account information and (ii) provide a system which
will enable the Fund to monitor the total number of Shares sold in each State or
other jurisdiction.
(c) In addition, the Fund shall (i) identify to PMFS in writing those
transactions and assets to be treated as exempt from Blue Sky reporting for each
State and (ii) verify the establishment of transactions for each State on the
system prior to activation and thereafter monitor the daily activity for each
State. The responsibility of PMFS for the Fund's registration status under the
Blue Sky or securities laws of any State or other jurisdiction is solely limited
to the initial establishment of transactions subject to Blue Sky compliance by
the Fund and the reporting of such transactions to the Fund as provided above
and as agreed from time to time by the Fund and PMFS.
PMFS may also provide such additional services and functions
not specifically described herein as may be mutually agreed between
4
<PAGE>
PMFS and the Fund and set forth in Schedule B hereto.
Procedures applicable to certain of these services may be established
from time to time by agreement between the Fund and PMFS.
Article 2 Fees and Expenses
-----------------
2.01 For performance by PMFS pursuant to this Agreement, the Fund
agrees to pay PMFS an annual maintenance fee for each Shareholder account and
certain transactional fees as set out in the fee schedule attached hereto as
Schedule A. Such fees and out-of-pocket expenses and advances identified under
Section 2.02 below may be changed from time to time subject to mutual written
agreement between the Fund and PMFS.
2.02 In addition to the fees paid under Section 2.01 above, the Fund
agrees to reimburse PMFS for out-of-pocket expenses or advances incurred by PMFS
for the items set out in Schedule A attached hereto. In addition, any other
expenses incurred by PMFS at the request or with the consent of the Fund will be
reimbursed by the Fund.
2.03 The Fund agrees to pay all fees and reimbursable expenses within
a reasonable period of time following the mailing of the respective billing
notice. Postage for mailing of dividends, proxies, Fund reports and other
mailings to all Shareholder accounts shall be advanced to PMFS by the Fund upon
request prior to the mailing date of such materials.
Article 3 Representations and Warranties of PMFS
--------------------------------------
PMFS represents and warrants to the Fund that:
5
<PAGE>
3.01 It is a corporation duly organized and existing and in good
standing under the laws of New Jersey and it is duly qualified to carry on its
business in New Jersey.
3.02 It is and will remain registered with the U.S. Securities and
Exchange Commission ("SEC") as a Transfer Agent pursuant to the requirements of
Section 17A of the 1934 Act.
3.03 It is empowered under applicable laws and by its charter and
By-Laws to enter into and perform this Agreement.
3.04 All requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement.
3.05 It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and obligations under
this Agreement.
Article 4 Representations and Warranties of the Fund
------------------------------------------
The Fund represents and warrants to PMFS that:
4.01 It is a corporation duly organized and existing and in good
standing under the laws of Maryland.
4.02 It is empowered under applicable laws and by its Articles of
Incorporation and By-Laws to enter into and perform this Agreement.
4.03 All corporate proceedings required by said Articles of
Incorporation and By-Laws have been taken to authorize it to enter into and
perform this Agreement.
4.04 It is an investment company registered with the SEC under the
Investment Company Act of 1940, as amended (the "1940 Act").
6
<PAGE>
4.05 A registration statement under the Securities Act of 1933 (the
"1933 Act") is currently effective and will remain effective, and appropriate
state securities law filings have been made and will continue to be made, with
respect to all Shares of the Fund being offered for sale.
Article 5 Duty of Care and Indemnification
--------------------------------
5.01 PMFS shall not be responsible for, and the Fund shall indemnify
and hold PMFS harmless from and against, any and all losses, damages, costs,
charges, counsel fees, payments, expenses and liability arising out of or
attributable to:
(a) All actions of PMFS or its agents or subcontractors required to be
taken pursuant to this Agreement, provided that such actions are taken in good
faith and without negligence or willful misconduct.
(b) The Fund's refusal or failure to comply with the terms of this
Agreement, or which arise out of the Fund's lack of good faith, negligence or
willful misconduct or which arise out of the breach of any representation or
warranty of the Fund hereunder.
(c) The reliance on or use by PMFS or its agents or subcontractors of
information, records and documents which (i) are received by PMFS or its agents
or subcontractors and furnished to it by or on behalf of the Fund, and (ii) have
been prepared and/or maintained by the Fund or any other person or firm on
behalf of the Fund.
(d) The reliance on, or the carrying out by PMFS or its
7
<PAGE>
agents or subcontractors of, any instructions or requests of the Fund.
(e) The offer or sale of Shares in violation of any requirement under
the federal securities laws or regulations or the securities or Blue Sky laws of
any State or other jurisdiction that such Shares be registered in such State or
other jurisdiction or in violation of any stop order or other determination or
ruling by any federal agency or any State or other jurisdiction with respect to
the offer or sale of such Shares in such State or other jurisdiction.
5.02 PMFS shall indemnify and hold the Fund harmless from and against
any and all losses, damages, costs, charges, counsel fees, payments, expenses
and liability arising out of or attributable to any action or failure or
omission to act by PMFS as a result of PMFS' lack of good faith, negligence or
willful misconduct.
5.03 At any time PMFS may apply to any officer of the Fund for
instructions, and may consult with legal counsel, with respect to any matter
arising in connection with the services to be performed by PMFS under this
Agreement, and PMFS and its agents or subcontractors shall not be liable and
shall be indemnified by the Fund for any action taken or omitted by it in
reliance upon such instructions or upon the opinion of such counsel. PMFS, its
agents and subcontractors shall be protected and indemnified in acting upon any
paper or document furnished by or on behalf of the Fund, reasonably believed to
be genuine and to have been signed by the
8
<PAGE>
proper person or persons, or upon any instruction, information, data, records or
documents provided to PMFS or its agents or subcontractors by machine readable
input, telex, CRT data entry or other similar means authorized by the Fund, and
shall not be held to have notice of any change of authority of any person, until
receipt of written notice thereof from the Fund. PMFS, its agents and
subcontractors shall also be protected and indemnified in recognizing stock
certificates which are reasonably believed to bear the proper manual or
facsimile signature of the officers of the Fund, and the proper countersignature
of any former transfer agent or registrar, or of a co-transfer agent or co-
registrar.
5.04 In the event either party is unable to perform its obligations
under the terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage reasonably beyond its control, or other causes
reasonably beyond its control, such party shall not be liable for damages to the
other for any damages resulting from such failure to perform or otherwise from
such causes.
5.05 Neither party to this Agreement shall be liable to the other party
for consequential damages under any provision of this Agreement or for any act
or failure to act hereunder.
5.06 In order that the indemnification provisions contained in this
Article 5 shall apply, upon the assertion of a claim for which either party may
be required to indemnify the other, the party seeking indemnification shall
promptly notify the other party of such assertion, and shall keep the other
party advised with
9
<PAGE>
respect to all developments concerning such claim. The party who may be required
to indemnify shall have the option to participate with the party seeking
indemnification in the defense of such claim. The party seeking indemnification
shall in no case confess any claim or make any compromise in any case in which
the other party may be required to indemnify it except with the other party's
prior written consent.
Article 6 Documents and Covenants of the Fund and PMFS
--------------------------------------------
6.01 The Fund shall promptly furnish to PMFS the following:
(a) A certified copy of the resolution of the Board of Directors of the
Fund authorizing the appointment of PMFS and the execution and delivery of this
Agreement;
(b) A certified copy of the Articles of Incorporation and By-Laws of the
Fund and all amendments thereto;
(c) The current registration statements and any amendments and
supplements thereto filed with the SEC pursuant to the requirements of the 1933
Act and the 1940 Act;
(d) A specimen of the certificate for Shares of the Fund in the form
approved by the Board of Directors, with a certificate of the Secretary of the
Fund as to such approval;
(e) All account application forms or other documents relating to
Shareholder accounts and/or relating to any plan program or service offered or
to be offered by the Fund; and
(f) Such other certificates, documents or opinions as the Agent deems to
be appropriate or necessary for the proper performance of its duties.
10
<PAGE>
6.02 PMFS hereby agrees to establish and maintain facilities and
procedures reasonably acceptable to the Fund for safekeeping of stock
certificates, check forms and facsimile signature imprinting devices, if any;
and for the preparation or use, and for keeping account of, such certificates,
forms and devices.
6.03 PMFS shall prepare and keep records relating to the services to be
performed hereunder, in the form and manner as it may deem advisable. To the
extent required by Section 31 of the 1940 Act, and the Rules and Regulations
thereunder, PMFS agrees that all such records prepared or maintained by PMFS
relating to the services to be performed by PMFS hereunder are the property of
the Fund and will be preserved, maintained and made available in accordance with
such Section 31 of the 1940 Act, and the Rules and Regulations thereunder, and
will be surrendered promptly to the Fund on and in accordance with its request.
6.04 PMFS and the Fund agree that all books, records, information and
data pertaining to the business of the other party which are exchanged or
received pursuant to the negotiation or the carrying out of this Agreement shall
remain confidential and shall not be voluntarily disclosed to any other person
except as may be required by law or with the prior consent of PMFS and the Fund.
6.05 In case of any requests or demands for the inspection of the
Shareholder records of the Fund, PMFS will endeavor to notify the Fund and to
secure instructions from an authorized officer of the Fund as to such
inspection. PMFS reserves the
11
<PAGE>
right, however, to exhibit the Shareholder records to any person whenever it is
advised by its counsel that it may be held liable for the failure to exhibit the
Shareholder records to such person.
Article 7 Termination of Agreement
------------------------
7.01 This Agreement may be terminated by either party upon one hundred
twenty (120) days written notice to the other.
7.02 Should the Fund exercise its right to terminate, all out-of-pocket
expenses associated with the movement of records and other materials will be
borne by the Fund. Additionally, PMFS reserves the right to charge for any
other reasonable fees and expenses associated with such termination.
Article 8 Assignment
----------
8.01 Except as provided in Section 8.03 below, neither this Agreement
nor any rights or obligations hereunder may be assigned by either party without
the written consent of the other party.
8.02 This Agreement shall inure to the benefit of and be binding upon
the parties and their respective permitted successors and assigns.
8.03 PMFS may, in its sole discretion and without further consent by
the Fund, subcontract, in whole or in part, for the performance of its
obligations and duties hereunder with any person or entity including but not
limited to: (i) Prudential-Bache Securities Inc.("Prudential-Bache"), a
registered broker-dealer, (ii) The Prudential Insurance Company of America
("Prudential"), (iii) Pruco Securities Corporation, a registered
12
<PAGE>
broker-dealer, (iv) any Prudential-Bache or Prudential subsidiary or affiliate
duly registered as a broker-dealer and/or a transfer agent pursuant to the 1934
Act or (vi) any other Prudential-Bache or Prudential affiliate or subsidiary;
provided, however, that PMFS shall be as fully responsible to the Fund for the
acts and omissions of any agent or subcontractor as it is for its own acts and
omissions.
Article 9 Affiliations
------------
9.01 PMFS may now or hereafter, without the consent of or notice to
the Fund, function as Transfer Agent and/or Shareholder Servicing Agent for any
other investment company registered with the SEC under the 1940 Act, including
without limitation any investment company whose adviser, administrator, sponsor
or principal underwriter is or may become affiliated with Prudential-Bache
and/or Prudential or any of its or their direct or indirect subsidiaries or
affiliates.
9.02 It is understood and agreed that the directors, officers,
employees, agents and Shareholders of the Fund, and the directors, officers,
employees, agents and shareholders of the Fund's investment adviser and/or
distributor, are or may be interested in the Agent as directors, officers,
employees, agents, shareholders or otherwise, and that the directors, officers,
employees, agents or shareholders of the Agent may be interested in the Fund as
directors, officers, employees, agents, Shareholders or otherwise, or in the
investment adviser and/or distributor as officers, directors, employees, agents,
shareholders or otherwise.
13
<PAGE>
Article 10 Amendment
---------
10.01 This Agreement may be amended or modified by a written
agreement executed by both parties and authorized or approved by a resolution of
the Board of Directors of the Fund.
Article 11 Applicable Law
--------------
11.01 This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of the State of New Jersey.
Article 12 Miscellaneous
-------------
12.01 In the event of an alleged loss or destruction of any Share
certificate, no new certificate shall be issued in lieu thereof, unless there
shall first be furnished to PMFS an affidavit of loss or non-receipt by the
holder of Shares with respect to which a certificate has been lost or destroyed,
supported by an appropriate bond satisfactory to PMFS and the Fund issued by a
surety company satisfactory to PMFS, except that PMFS may accept an affidavit of
loss and indemnity agreement executed by the registered holder (or legal
representative) without surety in such form as PMFS deems appropriate
indemnifying PMFS and the Fund for the issuance of a replacement certificate, in
cases where the alleged loss is in the amount of $1000 or less.
12.02 In the event that any check or other order for payment of money
on the account of any Shareholder or new investor is returned unpaid for any
reason, PMFS will (a) give prompt notification to the Fund's distributor
("Distributor") of such non-payment; and (b) take such other action, including
imposition
14
<PAGE>
of a reasonable processing or handling fee, as PMFS may, in its sole discretion,
deem appropriate or as the Fund and the Distributor may instruct PMFS.
12.03 Any notice or other instrument authorized or required by this
Agreement to be given in writing to the Fund or to PMFS shall be sufficiently
given if addressed to that party and received by it at its office set forth
below or at such other place as it may from time to time designate in writing.
To the Fund:
Prudential-Bache Global Natural Resources Fund, Inc.
One Seaport Plaza
New York, NY 10292
Attention: President
To PMFS:
Prudential Mutual Fund Services, Inc.
Raritan Plaza I
Edison, NJ 08818
Attention: President
Article 13 Merger of Agreement
-------------------
13.01 This Agreement constitutes the entire agreement between the
parties hereto and supersedes any prior agreement with respect to the subject
matter hereof whether oral or written.
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed in their names and on their behalf under their seals by and through
their duly authorized officers, as of the day and year first above written.
PRUDENTIAL-BACHE GLOBAL
NATURAL RESOURCES FUND, INC.
BY: illegible
------------------------
ATTEST:
/s/ S. Jane Rose
- -----------------------
PRUDENTIAL MUTUAL FUND
SERVICES, INC.
BY: illegible
--------------------------
ATTEST:
/s/ Lynda M. Puglisi
- -------------------------------------
16
<PAGE>
Schedule A
----------
Prudential Mutual Fund Services, Inc.
Fee Schedule
Fee Information for Services as
Transfer Agent, Dividend Disbursing Agent
and Shareholder Servicing Agent
PRUDENTIAL-BACHE GLOBAL NATURAL RESOURCES FUND, INC.
General - fees are based on an annual per shareholder account charge for account
- -------
maintenance plus out-of-pocket expenses. The effective period of this fee
schedule is January 1, 1990 through December 31, 1990 and shall continue
thereafter from year to year, unless otherwise amended.
Annual Maintenance Charges - The annual maintenance charge includes the
- --------------------------
processing of all transactions and correspondence. The fee is billable on a
monthly basis at the rate of 1/12 of the annual fee. A charge is made for an
account in the month that an account opens or closes.
Basic Annual Per Account Fee $9.00
New Account Set-up Fee for Manually $2.00
Established Accounts
Inactive Account Fee - $.20 per month. A monthly fee is charged for inactive
- --------------------
accounts with a zero balance.
Out-of-Pocket Expenses - Out-of-pocket expenses include but are not limited to:
- ----------------------
postage, stationery and printing, allocable communication costs, microfilm,
microfiche, and expenses incurred at the specific direction of the Fund.
Payment - An invoice will be presented to the Fund on a monthly basis assessing
- -------
the Fund the appropriate fee and out-of-pocket expenses.
PRUDENTIAL-BACHE GLOBAL NATURAL PRUDENTIAL MUTUAL FUND
RESOURCES FUND, INC. SERVICES, INC.
NAME: /s/Susan Cote NAME: /s/Robert F. Gunia
--------------- -------------------
TITLE: Treasurer TITLE: Executive Vice President
--------------- ------------------------
DATE: January 1, 1990 DATE: January 1, 1990
--------------- ---------------
<PAGE>
Exhibit 99.11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 17 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated July
18, 1997, relating to the financial statements and financial highlights of
Prudential Natural Resources Fund, Inc., which appears in such Statement of
Additional Information, and to the incorporation by reference of our report into
the Prospectus which constitutes part of this Registration Statement. We also
consent to the reference to us under the heading "Custodian, Transfer and
Dividend Disbursing Agent and Independent Accountants" in such Statement of
Additional Information and to the reference to us under the heading "Financial
Highlights" in such Prospectus.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
July 21, 1997
<PAGE>
EXHIBIT 16(a)
PRUDENTIAL NATURAL RESOURCES FUND, INC.
CLASS A
AVERAGE ANNUAL TOTAL RETURN
CALCULATION
ERV = P * (1 + T) /to the nth power/
P = hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value
================================================================================
1 Year 5 Year Inception
P = $1,000.00 $1,000.00 $1,000.00
n = 1 5 7.359
ERV = $1,001.00 $1,831.05 $1,784.76
T = 0.10% 12.86% 8.19%
<PAGE>
EXHIBIT 16(a)
PRUDENTIAL NATURAL RESOURCES FUND, INC.
CLASS B
AVERAGE ANNUAL TOTAL RETURN
CALCULATION
ERV = P * (1 + T) /to the nth power/
P = hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value
================================================================================
1 Year 5 Year Inception
P = $1,000.00 $1,000.00 $1,000.00
n = 1 5 9.679
ERV = $995.10 $1,843.25 $2,010.18
T = -0.49% 13.01% 7.48%
================================================================================
SUBSIDY ADJUSTED 1 Year 5 Year Inception
$1,000.00 $1,000.00 $1,000.00
1 5 9.679
$995.10 $1,843.25 $2,008.37
-0.49% 13.01% 7.47%
<PAGE>
EXHIBIT 16(a)
PRUDENTIAL NATURAL RESOURCES FUND, INC.
CLASS C
AVERAGE ANNUAL TOTAL RETURN
CALCULATION
ERV = P * (1 + T) /to the nth power/
P = hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value
================================================================================
1 Year Inception
P = $1,000.00 $1,000.00
n = 1 2.833
ERV = $1,035.10 $1,483.20
T = 3.51% 14.93%
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> PRUDENTIAL NATURAL RESOURCES FUND (CLASS A)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> MAY-31-1997
<INVESTMENTS-AT-COST> 133,997,717
<INVESTMENTS-AT-VALUE> 157,265,513
<RECEIVABLES> 1,851,904
<ASSETS-OTHER> 5,836,716
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 164,954,133
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 753,602
<TOTAL-LIABILITIES> 753,602
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 133,629,777
<SHARES-COMMON-STOCK> 10,456,062
<SHARES-COMMON-PRIOR> 8,743,626
<ACCUMULATED-NII-CURRENT> (247,519)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 7,548,288
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 23,269,985
<NET-ASSETS> 164,200,531
<DIVIDEND-INCOME> 1,341,360
<INTEREST-INCOME> 234,972
<OTHER-INCOME> 0
<EXPENSES-NET> 3,042,832
<NET-INVESTMENT-INCOME> (1,466,500)
<REALIZED-GAINS-CURRENT> 20,092,637
<APPREC-INCREASE-CURRENT> (12,087,497)
<NET-CHANGE-FROM-OPS> 6,538,640
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (17,085,293)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 157,545,157
<NUMBER-OF-SHARES-REDEEMED> (145,400,427)
<SHARES-REINVESTED> 15,354,101
<NET-CHANGE-IN-ASSETS> 16,952,178
<ACCUMULATED-NII-PRIOR> (106,296)
<ACCUMULATED-GAINS-PRIOR> 5,905,998
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,128,718
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,042,832
<AVERAGE-NET-ASSETS> 40,393,000
<PER-SHARE-NAV-BEGIN> 17.34
<PER-SHARE-NII> (0.07)
<PER-SHARE-GAIN-APPREC> 0.94
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (1.94)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 16.27
<EXPENSE-RATIO> 1.48
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> PRUDENTIAL NATURAL RESOURCES FUND (CLASS B)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> MAY-31-1997
<INVESTMENTS-AT-COST> 133,997,717
<INVESTMENTS-AT-VALUE> 157,265,513
<RECEIVABLES> 1,851,904
<ASSETS-OTHER> 5,836,716
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 164,954,133
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 753,602
<TOTAL-LIABILITIES> 753,602
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 133,629,777
<SHARES-COMMON-STOCK> 10,456,062
<SHARES-COMMON-PRIOR> 8,743,626
<ACCUMULATED-NII-CURRENT> (247,519)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 7,548,288
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 23,269,985
<NET-ASSETS> 164,200,531
<DIVIDEND-INCOME> 1,341,360
<INTEREST-INCOME> 234,972
<OTHER-INCOME> 0
<EXPENSES-NET> 3,042,832
<NET-INVESTMENT-INCOME> (1,466,500)
<REALIZED-GAINS-CURRENT> 20,092,637
<APPREC-INCREASE-CURRENT> (12,087,497)
<NET-CHANGE-FROM-OPS> 6,538,640
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (17,085,293)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 157,545,157
<NUMBER-OF-SHARES-REDEEMED> (145,400,427)
<SHARES-REINVESTED> 15,354,101
<NET-CHANGE-IN-ASSETS> 16,952,178
<ACCUMULATED-NII-PRIOR> (106,296)
<ACCUMULATED-GAINS-PRIOR> 5,905,998
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,128,718
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,042,832
<AVERAGE-NET-ASSETS> 107,361,000
<PER-SHARE-NAV-BEGIN> 16.70
<PER-SHARE-NII> (0.19)
<PER-SHARE-GAIN-APPREC> 0.89
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (1.94)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 15.46
<EXPENSE-RATIO> 2.23
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> PRUDENTIAL NATURAL RESOURCES FUND (CLASS C)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> MAY-31-1997
<INVESTMENTS-AT-COST> 133,997,717
<INVESTMENTS-AT-VALUE> 157,265,513
<RECEIVABLES> 1,851,904
<ASSETS-OTHER> 5,836,716
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 164,954,133
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 753,602
<TOTAL-LIABILITIES> 753,602
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 133,629,777
<SHARES-COMMON-STOCK> 10,456,062
<SHARES-COMMON-PRIOR> 8,743,626
<ACCUMULATED-NII-CURRENT> (247,519)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 7,548,288
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 23,269,985
<NET-ASSETS> 164,200,531
<DIVIDEND-INCOME> 1,341,360
<INTEREST-INCOME> 234,972
<OTHER-INCOME> 0
<EXPENSES-NET> 3,042,832
<NET-INVESTMENT-INCOME> (1,466,500)
<REALIZED-GAINS-CURRENT> 20,092,637
<APPREC-INCREASE-CURRENT> (12,087,497)
<NET-CHANGE-FROM-OPS> 6,538,640
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (17,085,293)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 157,545,157
<NUMBER-OF-SHARES-REDEEMED> (145,400,427)
<SHARES-REINVESTED> 15,354,101
<NET-CHANGE-IN-ASSETS> 16,952,178
<ACCUMULATED-NII-PRIOR> (106,296)
<ACCUMULATED-GAINS-PRIOR> 5,905,998
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,128,718
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,042,832
<AVERAGE-NET-ASSETS> 2,041,000
<PER-SHARE-NAV-BEGIN> 16.70
<PER-SHARE-NII> (0.19)
<PER-SHARE-GAIN-APPREC> 0.89
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (1.94)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 15.46
<EXPENSE-RATIO> 2.23
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 004
<NAME> PRUDENTIAL NATURAL RESOURCES FUND (CLASS Z)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> MAY-31-1997
<INVESTMENTS-AT-COST> 133,997,717
<INVESTMENTS-AT-VALUE> 157,265,513
<RECEIVABLES> 1,851,904
<ASSETS-OTHER> 5,836,716
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 164,954,133
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 753,602
<TOTAL-LIABILITIES> 753,602
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 133,629,777
<SHARES-COMMON-STOCK> 10,456,062
<SHARES-COMMON-PRIOR> 8,743,626
<ACCUMULATED-NII-CURRENT> (247,519)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 7,548,288
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 23,269,985
<NET-ASSETS> 164,200,531
<DIVIDEND-INCOME> 1,341,360
<INTEREST-INCOME> 234,972
<OTHER-INCOME> 0
<EXPENSES-NET> 3,042,832
<NET-INVESTMENT-INCOME> (1,466,500)
<REALIZED-GAINS-CURRENT> 20,092,637
<APPREC-INCREASE-CURRENT> (12,087,497)
<NET-CHANGE-FROM-OPS> 6,538,640
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (17,085,293)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 157,545,157
<NUMBER-OF-SHARES-REDEEMED> (145,400,427)
<SHARES-REINVESTED> 15,354,101
<NET-CHANGE-IN-ASSETS> 16,952,178
<ACCUMULATED-NII-PRIOR> (106,296)
<ACCUMULATED-GAINS-PRIOR> 5,905,998
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,128,718
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,042,832
<AVERAGE-NET-ASSETS> 994,000
<PER-SHARE-NAV-BEGIN> 17
<PER-SHARE-NII> (0)
<PER-SHARE-GAIN-APPREC> 1
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (2)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16
<EXPENSE-RATIO> 1
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
