<PAGE>
As filed with the Securities and Exchange Commission on July 31, 1998
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. [_]
[X]
POST-EFFECTIVE AMENDMENT NO.18
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [_]
[X]
AMENDMENT NO.19
(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: (973) 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):
[X] immediately upon filing pursuant to paragraph (b)
[_] on (date) 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.
Title of Securities Being Registered... Shares of common stock, $.01
par value per share.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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.......................... Not Applicable
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
Services............................. Manager; Distributor;
Custodian, Transfer and
Dividend Disbursing Agent and
Independent Accountants
Item 17. Brokerage Allocation and Other
Practices............................ Portfolio Transactions and
Brokerage
Item 18. Capital Stock and Other Securities... Not Applicable
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered............. Purchase and Redemption of
Fund Shares; Shareholder
Investment Account; Net Asset
Value
Item 20. Tax Status........................... Taxes, 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 31, 1998
- -------------------------------------------------------------------------------
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 equity
related securities (including common stock, preferred stock, rights, warrants
and debt securities or preferred stock which are convertible or exchangeable
for common stock or preferred stock and master limited partnerships) of
natural resource companies and in asset-based securities. The Fund may also
invest in equity related securities of companies in other industries and
fixed-income securities (including money market instruments), engage in
various derivatives transactions, including options on equity securities,
financial indices, foreign currencies and futures contracts on foreign
currencies and may purchase and sell futures contracts on foreign currencies,
groups of foreign currencies and financial indices to hedge its portfolio and
attempt to enhance return. 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 financial 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--Risk Factors and Special Considerations of Investing in Foreign
Securities."
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing and is available at the Web
site of the Prudential Insurance Company of America
(http://www.prudential.com). Additional information about the Fund has been
filed with the Securities and Exchange Commission (the Commission) in a
Statement of Additional Information, dated July 31, 1998, 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. The Commission maintains a Web site
(http://www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference and other information regarding the Fund.
- -------------------------------------------------------------------------------
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 equity related 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 investment 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. Investing in foreign
securities involves certain risks and considerations not typically associated
with investments in U.S. Government securities and securities of domestic
companies, including 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. See "How the Fund Invests--Risk Factors and Special
Considerations of Investing in Foreign Securities" at page 11. In addition, the
Fund may engage in various hedging and return enhancement strategies including
the use of derivatives transactions. 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, 1998, PIFM
served as manager or administrator to 67 investment companies, including 45
mutual funds, with aggregate assets of approximately $66.8 billion. The
Prudential Investment Corporation, doing business as Prudential Investments
(PI, the Subadviser or the investment adviser), furnishes investment advisory
services in connection with the management of the Fund under a Subadvisory
Agreement with 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 Investment Management Services LLC (the Distributor) acts as the
Distributor of the Fund's Class A, Class B, Class C and Class Z shares and is
paid a distribution and service fee with respect to Class A shares, 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. The
Distributor 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 is $1,000 per class for Class A and Class B
shares 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 the Distributor or brokers or
dealers that have entered into agreements to act as participating or
introducing brokers for the Distributor (Dealers) or directly from the Fund
through its transfer agent, Prudential Mutual Fund Services LLC (PMFS or the
Transfer Agent). In each case, sales are made at the net asset value per share
(NAV) next determined after receipt of your purchase order by the Transfer
Agent, a Dealer or the Distributor 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 NAV without any sales charge. Dealers may charge their customers a
separate fee for handling purchase transactions. Participants in programs
sponsored by Prudential Retirement Services should contact their client
representative for more information about Class Z shares. 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 but, 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 Class C
shares do not convert to another class.
.Class Z Shares:
Sold without either an initial sales charge or CDSC 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 your
Dealer, the Distributor or the Transfer Agent receives your sell order. The
proceeds of redemptions of Class B and Class C shares may be subject to a CDSC.
Dealers may charge their customers a separate fee for handling sale
transactions. Participants in programs sponsored by Prudential Retirement
Services should contact their client representative for more information about
selling their Class Z shares. 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 or
Deferred Sales Load
Imposed on Reinvested
Dividends............. None None None None
Maximum Deferred Sales
Load (as a percentage
of original purchase
price or redemption
proceeds, whichever is
lower)................ None 5% during the 1% on None
first year, redemptions
decreasing by made within
1% annually to one year
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........ .55 .55 .55 .55
---- ---- ---- ----
Total Fund Operating
Expenses (After
Reduction)............ 1.55%++ 2.30% 2.30% 1.30%
==== ==== ==== =====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
EXAMPLE ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 in-
vestment, assuming
(1) 5% annual return and (2) redemption at the end of
each time period:
Class A.............................................. $65 $ 97 $130 $225
Class B.............................................. $73 $102 $133 $236
Class C.............................................. $33 $ 72 $123 $264
Class Z.............................................. $13 $ 41 $ 71 $157
You would pay the following expenses on the same in-
vestment, assuming no
redemption:
Class A.............................................. $65 $ 97 $130 $225
Class B.............................................. $23 $ 72 $123 $236
Class C.............................................. $23 $ 72 $123 $264
Class Z.............................................. $13 $ 41 $ 71 $157
</TABLE>
The above example is based on data for the Fund's fiscal year ended May 31,
1998. 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."
+ Dealers may independently charge additional fees for shareholder
transactions or advisory services. 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% 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 .25 of
1% of the average daily net assets of the Class A shares. Total Fund
Operating Expenses without such limitation would be 1.60%. This voluntary
waiver may be terminated at any time without notice. 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 for each of the fiscal years in the five
year period ended May 31, 1998 have been audited by PricewaterhouseCoopers
LLP, independent accountants, whose reports thereon were 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
1998(C) 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> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period.... $16.27 $17.34 $ 13.73 $ 12.55 $11.84 $10.02 $ 9.73 $10.17 $10.58
-------- -------- ------- ------- ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(loss)................. (.08) (.07) (.01) (.03) .01 .02 .01 .13 .04
Net realized and
unrealized gain (loss)
on investment and
foreign currency
transactions........... (2.33) .94 4.42 1.21 .70 1.80 .38 (.39) (.45)
-------- -------- ------- ------- ------ ------ ------ ------ ------
Total from investment
operations............. (2.41) .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.. (2.17) (1.94) (.80) -- -- -- (.01) -- --
-------- -------- ------- ------- ------ ------ ------ ------ ------
Total distributions..... (2.17) (1.94) (.80) -- -- -- (.10) (.18) --
-------- -------- ------- ------- ------ ------ ------ ------ ------
Net asset value, end of
period................. $11.69 $16.27 $ 17.34 $ 13.73 $12.55 $11.84 $10.02 $ 9.73 $10.17
======== ======== ======= ======= ====== ====== ====== ====== ======
TOTAL RETURN(D):........ (14.41)% 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)........... $ 28,491 $ 47,054 $32,608 $19,682 $6,505 $1,898 $590 $770 $427
Average net assets
(000).................. $ 37,933 $ 40,093 $23,106 $10,791 $4,106 $758 $647 $664 $279
Ratios to average net
assets:
Expenses, including
distribution fees.... 1.55 % 1.48% 1.57% 1.73% 1.89% 2.38% 2.59% 2.22% 2.72%(b)
Expenses, excluding
distribution fees.... 1.30 % 1.23% 1.32% 1.48% 1.65% 2.18% 2.39% 2.02% 2.52%(b)
Net investment income
(loss)............... (.54)% (.43)% (0.09)% (0.25)% 0.11% 0.13% 0.44% 1.47% 1.86%(b)
Portfolio turnover...... 25 % 53% 41% 36% 19% 50% 36% 40% 34%
Average commission rate
per share.............. $ .0386(e) $ .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.
(e) Unaudited.
5
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS B SHARES)
The following financial highlights for each of the fiscal years in the five
year period ended May 31, 1998 have been audited by PricewaterhouseCoopers
LLP, independent accountants, whose reports thereon were 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 years indicated. The information is based on data contained in
the financial statements. Further performance information is contained in the
annual report, which may be obtained without charge. See "Shareholder Guide--
Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS B
---------------------------------------------------------------------------------------------------
YEAR ENDED MAY 31,
---------------------------------------------------------------------------------------------------
1998(A) 1997(A) 1996 1995(A) 1994(A) 1993(A) 1992(A) 1991(A) 1990(A) 1989(A)
------- -------- -------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of year....... $15.46 $ 16.70 $ 13.35 $ 12.29 $ 11.69 $ 9.97 $ 9.72 $ 10.14 $ 9.86 $ 10.00
------- -------- -------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(loss).................. (.17) (.19) (.10) (.13) (.08) (.07) (.08) .06 .02 .04(b)
Net realized and
unrealized gain (loss)
on investment and
foreign currency
transactions............ (2.20) .89 4.25 1.19 .68 1.79 .39 (.39) .92 (.66)
------- -------- -------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations.............. (2.37) .70 4.15 1.06 .60 1.72 .31 (.33) .94 (.62)
------- -------- -------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends from net
investment income....... -- -- -- -- -- -- (.05) (.09) (.06) (.02)
Distributions from net
realized gains on
investment and foreign
currency transactions... (2.17) (1.94) (.80) -- -- -- (.01) -- (.60) --
------- -------- -------- ------- ------- ------- ------- ------- ------- -------
Total distributions...... (2.17) (1.94) (.80) -- -- -- (.06) (.09) (.66) --
------- -------- -------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of
year.................... $10.92 $ 15.46 $ 16.70 $ 13.35 $ 12.29 $ 11.69 $ 9.97 $ 9.72 $ 10.14 $ 9.36
======= ======== ======== ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN(c):......... (14.96)% 4.51% 32.49% 8.62% 5.13% 17.25% 3.26% (3.31)% 9.63% (6.23)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(000)................... $67,029 $111,464 $113,090 $80,774 $64,235 $36,150 $23,228 $33,653 $47,579 $50,577
Average net assets (000). $86,864 $107,361 $ 84,396 $74,681 $48,772 $23,464 $26,877 $40,090 $48,251 $42,945
Ratios to average net
assets:
Expenses, including
distribution fees...... 2.30% 2.23% 2.32% 2.48% 2.65% 3.18% 3.39% 3.02% 3.07% 1.69%(b)
Expenses, excluding
distribution fees...... 1.30% 1.23% 1.32% 1.48% 1.65% 2.18% 2.39% 2.02% 2.07% 2.69%(b)
Net investment income
(loss)................. (1.28)% (1.18)% (0.84)% (1.05)% (0.67)% (0.67)% (0.34)% 0.58% 0.16% 0.76%(b)
Portfolio turnover....... 25% 53 % 41 % 36% 19% 50% 36% 40% 34% 24%
Average commission rate
per share............... $ .0386(d) $ .0371 $ .0290 N/A N/A N/A N/A N/A N/A N/A
</TABLE>
--------
(a) Calculated based upon average shares outstanding during the fiscal year,
by class.
(b) Net of expense reimbursement.
(c) Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a sale
on the last day of each year reported and includes reinvestment of
dividends and distributions.
(d) Unaudited.
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
PricewaterhouseCoopers LLP, independent accountants, whose reports thereon
were 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,
1998(C) 1997(C) 1996 1995(C)
------- ------- ------ ---------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period. $15.46 $16.70 $13.35 $12.47
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss)......... (.18) (.19) (.10) (.13)
Net realized and unrealized gain
(loss) on investment and foreign
currency transactions............... (2.19) .89 4.25 1.01
------ ------ ------ ------
Total from investment operations..... (2.37) .70 4.15 .88
------ ------ ------ ------
LESS DISTRIBUTIONS
Distributions from net realized gains
on investment and foreign currency
transactions........................ (2.17) (1.94) (.80) --
------ ------ ------ ------
Net asset value, end of period....... $10.92 $15.46 $16.70 $13.35
====== ====== ====== ======
TOTAL RETURN(D):..................... 14.96% 4.51% 32.49% 7.06%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)...... $1,844 $2,542 $1,551 $ 606
Average net assets (000)............. $2,060 $2,041 $ 734 $ 294
Ratios to average net assets:
Expenses, including distribution
fees.............................. 2.30% 2.23% 2.32 % 2.56 %(b)
Expenses, excluding distribution
fees.............................. 1.30% 1.23% 1.32 % 1.56 %(b)
Net investment income (loss)....... (1.35)% (1.18)% (0.84)% (1.08)%(b)
Portfolio turnover................... 25% 53% 41% 36%
Average commission rate per share.... $.0386(e) $.0371 $.0290 N/A
</TABLE>
--------
(a) Commencement of offering of Class C shares.
(b) Annualized.
(c) Calculated based upon average shares outstanding during the fiscal
period, by class.
(d) Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a sale
on the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a
full year are not annualized.
(e) Unaudited.
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
PricewaterhouseCoopers LLP, independent accountants, whose reports thereon
were 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
1998(C) MAY 31, 1997(C)
------- ----------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $16.30 $17.08
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss)...................... (.05) (.03)
Net realized and unrealized gain (loss) on
investment and foreign currency transactions..... (2.32) 1.19
------ ------
Total from investment operations.................. (2.37) 1.16
------ ------
LESS DISTRIBUTIONS
Distributions from net realized gains on
investment and foreign currency transactions..... (2.17) (1.94)
------ ------
Net asset value, end of period.................... $11.76 $16.30
====== ======
TOTAL RETURN(D):.................................. (14.12)% 7.17%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $1,761 $3,140
Average net assets (000).......................... $2,581 $ 994
Ratios to average net assets:
Expenses........................................ 1.30 % 1.23% (b)
Net investment income (loss).................... (.33)% (.18%)(b)
Portfolio turnover................................ 25 % 53%
Average commission rate per share................. $.0386(e) $.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.
(e) Unaudited.
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 INVESTMENT OBJECTIVE BY INVESTING PRIMARILY IN
EQUITY RELATED 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 EQUITY RELATED
SECURITIES (INCLUDING COMMON STOCK, PREFERRED STOCK, RIGHTS, WARRANTS AND DEBT
SECURITIES OR PREFERRED STOCK WHICH ARE CONVERTIBLE OR EXCHANGEABLE FOR COMMON
STOCK OR PREFERRED STOCK AND MASTER LIMITED PARTNERSHIPS), OF NATURAL RESOURCE
COMPANIES AND IN ASSET-BASED SECURITIES. THERE CAN BE NO ASSURANCE THAT SUCH
INVESTMENT OBJECTIVE WILL BE ACHIEVED. SEE "INVESTMENT OBJECTIVE AND POLICIES"
IN THE STATEMENT OF ADDITIONAL INFORMATION.
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 issued by
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 CONVERTIBLE SECURITIES. 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.
As a fixed income security, a convertible security tends to increase in
market value when interest rates decline and decrease in value when interest
rates rise. However, the price of a convertible security is also influenced by
the market value of the security's underlying 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.
THE FUND MAY ALSO 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, commercial paper rated at least A-2 or P-2 by S&P or
Moody's, respectively, or asset-based securities that are comparably rated by
a nationally recognized statistical rating organization (NRSRO) or, if
unrated, 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 Appendix to 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
10
<PAGE>
appreciation in the underlying asset. An example of an asset-based security
would be a debt security that will be repaid at a price based on, for
instance, gold or crude oil prices over a specified period of time. Assume,
for example, that gold is selling at a market price of $300 per ounce and an
issuer sells a $1,000 face amount gold-related note with a four year maturity,
payable at maturity 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 EQUITY RELATED
SECURITIES OF NATURAL RESOURCE COMPANIES AND ASSET-BASED SECURITIES; HOWEVER,
UNDER NORMAL CIRCUMSTANCES, THE FUND MAY INVEST UP TO 35% OF ITS TOTAL ASSETS
IN EQUITY RELATED SECURITIES OF COMPANIES OTHER THAN NATURAL RESOURCE
COMPANIES AND IN DEBT SECURITIES. 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, commercial paper rated at least A-2 or
Prime-2 by S&P or Moody's, respectively, or debt securities or commercial
paper that are comparably rated by a nationally recognized statistical rating
organization (NRSRO) or, if unrated, 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 Appendix to 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 EQUITY
SECURITIES, FINANCIAL INDICES AND FOREIGN CURRENCIES, (III) PURCHASE AND SELL
FUTURES CONTRACTS ON FOREIGN CURRENCIES, GROUPS OF FOREIGN CURRENCIES AND
FINANCIAL 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 (WHICH DURING PERIODS
OF MARKET VOLATILITY COULD BE FOR AN EXTENDED PERIOD OF TIME) 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."
RISK FACTORS AND SPECIAL CONSIDERATIONS OF INVESTING IN FOREIGN SECURITIES
FOREIGN SECURITIES INVOLVE CERTAIN RISKS WHICH SHOULD BE CONSIDERED
CAREFULLY BY AN INVESTOR IN THE FUND. THESE RISKS INCLUDE POLITICAL OR
ECONOMIC INSTABILITY IN THE COUNTRY OF THE ISSUER, THE DIFFICULTY OF
PREDICTING INTERNATIONAL TRADE PATTERNS, THE POSSIBILITY OF IMPOSITION OF
EXCHANGE CONTROLS AND THE RISK OF CURRENCY FLUCTUATIONS. Such securities may
be subject to greater fluctuations in price than securities issued by U.S.
corporations or issued or guaranteed by the U.S. Government, its
instrumentalities or agencies. In addition, there may be less publicly
available information about a foreign company 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.
11
<PAGE>
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. 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.
ADDITIONAL COSTS COULD BE INCURRED IN CONNECTION WITH THE FUND'S
INTERNATIONAL INVESTMENT ACTIVITIES. Foreign brokerage commissions are
generally higher than United States brokerage commissions. Increased custodian
costs as well as administrative difficulties (such as the applicability of
foreign laws to foreign custodians in various circumstances) may be associated
with the maintenance of assets in foreign jurisdictions.
IF 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 amount
of such currency at the time the expenses were incurred. The Fund may, but
need not, enter into forward foreign currency exchange contracts, options on
foreign currencies and futures contracts on foreign currencies and related
options, for hedging purposes, including: locking-in U.S. dollar price of the
purchase or sale of securities denominated in a foreign currency; locking-in
the U.S. dollar equivalent of interest or dividends to be paid on such
securities which are held by the Fund; and protecting the U.S. dollar value of
such securities which are held by the Fund.
HEDGING AND RETURN ENHANCEMENT STRATEGIES
THE FUND MAY ENGAGE IN VARIOUS PORTFOLIO STRATEGIES, INCLUDING DERIVATIVES
TRANSACTIONS, 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 U.S. 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.
12
<PAGE>
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 to the purchaser,
depending upon the terms of the option contract, the underlying securities or
currency upon receipt of the exercise price or a specified amount of cash.
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 underlying the option at
the exercise price or deliver a specified amount of cash to the purchaser. The
Fund might, therefore, be obligated to purchase the underlying securities or
currency for more than their current market price.
THE FUND WILL WRITE ONLY "COVERED" OPTIONS. An option is "covered" if, as
long as the Fund is obligated under the option, it (i) owns an offsetting
position in the underlying security or currency or (ii) segregates 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 (including cross hedges) with respect to a particular currency
for an amount greater than the aggregate market value (determined at the time
of making any sale of foreign currency) of the securities held in its
portfolio denominated or quoted in, or currently convertible into, such
currency. See "Investment Objective and Policies--Risks Related to Forward
Foreign 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, RISK MANAGEMENT AND RETURN ENHANCEMENT PURPOSES IN ACCORDANCE
WITH REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION. The Fund, and
thus investors, 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
European economic cooperative organization.) 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.
13
<PAGE>
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,
REQUIRES SKILLS AND TECHNIQUES DIFFERENT FROM THOSE USED IN SELECTING
PORTFOLIO SECURITIES AND IS SUBJECT TO VARIOUS ADDITIONAL RISKS. 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 AND 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
investors, 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 segregate cash, or other liquid,
unencumbered assets, having a value equal to or greater than the Fund's
purchase commitments. The securities so purchased are subject to market
fluctuation and no
14
<PAGE>
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. See "Investment Objective and Policies--When-Issued and Delayed
Delivery Securities" in the Statement of Additional Information.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements whereby the seller of a
security agrees to repurchase that security from the Fund at a mutually agreed
upon time and price. The repurchase date is usually quite short, possibly
overnight or a few days, although it may extend over a number of months. The
resale price is in excess of the purchase price, reflecting an agreed-upon
rate of return effective for the period of time the Fund's money is invested
in the repurchase agreement. The Fund's repurchase agreements will at all
times be fully collateralized in an amount at least equal to the resale price.
The instruments held as collateral are valued daily, and if the value of the
instruments declines, the Fund will require additional collateral. If the
seller defaults and the value of the collateral securing the repurchase
agreement declines, the Fund may incur a loss. The Fund participates in a
joint repurchase account with other investment companies managed by Prudential
Investments Fund Management LLC pursuant to an order of the Securities and
Exchange Commission (SEC). See "Investment Objective and Policies--Repurchase
Agreements" in the Statement of Additional Information.
ILLIQUID SECURITIES
The Fund may hold up to 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 hedge, for a limited period of
time, certain long positions maintained by the Fund. 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.
15
<PAGE>
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 segregated pursuant to applicable regulations. During the time
portfolio securities are on loan, the borrower will pay the Fund an amount
equivalent to any dividend or interest paid on such securities and the Fund
may invest the cash collateral and earn additional income, or it may receive
an agreed-upon amount of interest income from the borrower. As a matter of
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 (over 100%) 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, 1998, 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 1.55%, 2.30%, 2.30% and 1.30%, 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. For the fiscal year ended May 31, 1998,
the Fund paid management fees to PIFM of .75 of 1% of the Fund's average daily
net assets. See "Manager" in the Statement of Additional Information.
As of June 30, 1998, PIFM served as the manager to 45 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 $66.8 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.
16
<PAGE>
PURSUANT TO A SUBADVISORY AGREEMENT BETWEEN PIFM AND PRUDENTIAL INVESTMENT
CORPORATION (PIC), DOING BUSINESS AS PRUDENTIAL INVESTMENTS (PI, THE
SUBADVISER OR THE INVESTMENT ADVISER), PI FURNISHES INVESTMENT ADVISORY
SERVICES IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY
PIFM FOR ITS REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH
SERVICES. PIC's address is Prudential Plaza, Newark, New Jersey 07102-3777.
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 indirect wholly-owned subsidiaries of The Prudential
Insurance Company of America (Prudential), a major diversified insurance and
financial services company.
DISTRIBUTOR
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC (THE DISTRIBUTOR), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS A LIMITED
LIABILITY COMPANY ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AND SERVES
AS THE DISTRIBUTOR OF THE CLASS A, CLASS B, CLASS C AND CLASS Z SHARES OF THE
FUND. PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES, ALSO REFERRED
TO AS THE DISTRIBUTOR), ONE SEAPORT PLAZA, NEW YORK, NEW YORK 10292, SERVED AS
THE DISTRIBUTOR OF FUND SHARES PRIOR TO JULY 1, 1998. 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), THE DISTRIBUTOR INCURS THE EXPENSES OF DISTRIBUTING
THE FUND'S CLASS A, CLASS B AND CLASS C SHARES. The Distributor 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
Dealers or financial institutions which have entered into agreements with the
Distributor, advertising expenses, the cost of printing and mailing
prospectuses to potential investors and indirect and overhead costs of the
Distributor associated with the sale of Fund shares, including lease, utility,
communications and sales promotion expenses.
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.
The distribution and/or service fees may also be used by the Distributor to
compensate Dealers on a continuing basis in consideration for the
distribution, marketing, administrative and other services and activities
provided by Dealers with respect to the promotion of the sale of the Fund's
shares and the maintenance of related shareholder accounts.
UNDER THE CLASS A PLAN, THE FUND MAY PAY THE DISTRIBUTOR FOR ITS
DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL
RATE OF UP TO .30 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES.
The Class A Plan provides that (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. The Distributor
has voluntarily limited its distribution-related fees payable under the Class
A Plan to .25 of 1% of the average daily net assets of the Class A shares.
This voluntary waiver may be terminated at any time without notice.
UNDER THE CLASS B AND CLASS C PLANS, THE FUND PAYS THE DISTRIBUTOR FOR ITS
DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C SHARES AT
AN ANNUAL RATE OF UP TO 1% OF THE AVERAGE DAILY NET ASSETS OF EACH OF THE
17
<PAGE>
CLASS B AND CLASS C SHARES. The Class B and Class C Plans provide for the
payment to the Distributor of (i) an asset-based sales charge of .75 of 1% of
the average daily net assets of each of the Class B and Class C shares and
(ii) a service fee of .25 of 1% of the average daily net assets of each of the
Class B and Class C shares. The service fee is used to pay for personal
service and/or the maintenance of shareholder accounts. The Distributor 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, 1998, 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 and 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 and other persons which
distribute shares of the Fund (including Class Z shares). Such payments may be
calculated by reference to the net asset value of shares sold by such persons
or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc., governing maximum sales charges. See "Distributor"
in the Statement of Additional Information.
FEE WAIVERS AND SUBSIDY
PIFM may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Fund. Fee waivers
and expense subsidies will increase the Fund's total return. The Distributor
has voluntarily waived a portion of its distribution fee for the Class A
shares as described above under "Distributor." The voluntary waivers or
subsidies may be terminated at any time without notice. See "Performance
Information" in the Statement of Additional Information and "Fund Expenses."
PORTFOLIO TRANSACTIONS
Affiliates of the Distributor may also act as brokers or futures commission
merchants for the Fund, provided that the commissions, fees or other
remuneration they receive 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.
18
<PAGE>
Prudential Mutual Fund Services LLC (the Transfer Agent), 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. The Transfer Agent is a wholly-owned subsidiary of PIFM. Its mailing
address is P.O. Box 15005, New Brunswick, New Jersey 08906-5005.
YEAR 2000
The services provided to the Fund and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those outside service providers.
Many computer software systems in use today cannot distinguish the year 2000
from the year 1900 because of the way dates are encoded and calculated. Such
event could have a negative impact on handling securities trades, payments of
interest and dividends, pricing and account services. Although at this time,
there can be no assurance that there will be no adverse impact on the Fund,
the Manager, the Distributor, the Transfer Agent and the Custodian have
advised the Fund that they have been actively working on necessary changes to
their computer systems to prepare for the year 2000 and expect that their
systems, and those outside service provides, will be adapted in time for the
event.
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. 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, or, if such quotations are deemed not representative of
fair value, at fair value as determined in good faith under procedures
established by the Fund's Board of Directors. For valuation purposes,
quotations of foreign securities in a foreign currency are converted to U.S.
dollar equivalents. 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.
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)
19
<PAGE>
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.
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.
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.
Both regular and capital gains dividends are taxable to shareholders in the
year in which received, whether they are received in cash or in additional
shares. In addition, certain dividends declared by the Fund will be treated as
received by shareholders on December 31 of the year the dividends are
declared. This rule applies to dividends declared by the Fund in October,
November or December of a calendar year, payable to shareholders of record on
a date in any such month, if such dividends are paid during January of the
following calendar year.
20
<PAGE>
Dividends received by corporate shareholders are eligible for a dividends
received deduction of 70% to the extent the Fund's income is derived from
qualified dividends received by the Fund from domestic corporations. Dividends
attributable to interest income, capital and currency gain, gain or loss from
Section 1256 contracts, dividend income from foreign corporations and income
from some other sources will not be eligible for the corporate dividends-
received deduction. See "Taxes, 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.
Any loss realized on a sale, redemption or exchange of shares of the Fund by
a shareholder will be disallowed to the extent the shares are replaced within
a 61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
take into account certain sales charges incurred in acquiring such shares for
purposes of calculating gain or loss realized upon a sale or exchange of
shares of the Fund.
Distributions by the Fund to a shareholder that is a qualified retirement
plan would generally not be taxable to participants in the plan. Distributions
from a qualified retirement plan (or non-qualified arrangement) to a
participant or beneficiary are subject to special rules. These rules vary
greatly with individual situations; therefore, potential investors are urged
to consult with their own tax advisors.
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 certain shareholders who fail to furnish their
correct 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 OF ANY CAPITAL GAINS IN EXCESS OF NET LONG-TERM CAPITAL LOSSES
AT LEAST ANNUALLY. 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 per share for each class of shares. See
"How the Fund Values its Shares."
21
<PAGE>
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES BASED ON
THE NAV OF EACH CLASS ON THE RECORD DATE OR SUCH OTHER DATE AS THE BOARD OF
DIRECTORS MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT LESS
THAN FIVE BUSINESS DAYS PRIOR TO THE RECORD DATE TO RECEIVE SUCH DIVIDENDS AND
DISTRIBUTIONS IN CASH. Such election should be submitted to Prudential Mutual
Fund Services LLC, Attention: Account Maintenance, P.O. Box 15015, New
Brunswick, New Jersey 08906-5015. The Fund will notify each shareholder after
the close of the Fund's taxable year both of the dollar amount and the taxable
status of that year's dividends and distributions on a per share basis.
IF YOU BUY SHARES ON OR IMMEDIATELY BEFORE THE RECORD DATE (THE DATE THAT
DETERMINES WHO RECEIVES THE DIVIDEND), YOU WILL RECEIVE A PORTION OF THE MONEY
YOU INVESTED AS A TAXABLE DIVIDEND. THEREFORE, YOU SHOULD CONSIDER THE TIMING
OF DIVIDENDS WHEN BUYING SHARES OF THE FUND.
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 CONSISTING 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. Currently, the Fund is offering four classes,
designated Class A, Class B, Class C and Class Z shares.
The Board of Directors may increase or decrease the number of authorized
shares without approval by the shareholders. Shares of the Fund, when issued,
are fully paid, nonassessable, fully transferable and redeemable at the option
of the holder. Shares are also redeemable at the option of the Fund under
certain circumstances as described under "Shareholder Guide--How to Sell Your
Shares." Each share of each class of common stock is equal as to earnings,
assets and voting privileges, except as noted above, and each class (with the
exception of Class Z shares, which are not subject to any distribution or
service fees) bears the expenses related to the distribution of its shares.
Except for the conversion feature applicable to 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 Class Z shares are not subject to any distribution
and/or service fees. The Fund's shares do not have cumulative voting rights
for the election of Directors.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF DIRECTORS IS REQUIRED TO BE
ACTED ON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF
THE FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE
OR MORE DIRECTORS OR TO TRANSACT ANY OTHER BUSINESS.
22
<PAGE>
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 Commission
under the Securities Act of 1933. Copies of the Registration Statement may be
obtained at a reasonable charge from the Commission or may be examined,
without charge, at the office of the Commission in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE FUND THROUGH THE DISTRIBUTOR, THROUGH
DEALERS, INCLUDING PRUDENTIAL SECURITIES OR 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 (in accordance with
procedures established by the Transfer Agent in connection with investors'
accounts) by the Distributor, your Dealer or the Transfer Agent, 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.
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 the Transfer Agent or the
Distributor. 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 placement of the
order.
Dealers may charge their customers a separate fee for processing purchases
and redemptions. In addition, transactions in Fund shares may be subject to
postage and handling charges imposed by your Dealer. Any such charges are
retained by the Dealer and are not remitted to the Fund.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, you
must complete an application and telephone the Transfer Agent 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
23
<PAGE>
Trust Company (State Street), Boston, Massachusetts, Custody and Shareholder
Services Division, Attention: Prudential Natural Resources Fund, Inc.,
specifying on the wire the account number assigned by the Transfer Agent 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 the Transfer
Agent 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 CDSC of 5% of the 1% Shares convert to Class
lesser of the amount invested A shares approximately
or the redemption proceeds; seven years after
declines to zero after six purchase
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, (iii) each class has a different exchange
privilege; (iv) only Class B shares have a conversion feature and (v) Class Z
shares are offered exclusively for sale to a limited group of investors. See
"How to Exchange Your Shares" below. The income attributable to each class and
the dividends payable on the shares of 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 NAV, 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 "Class
A Shares--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. Dealers may
be deemed to be underwriters, as that term is defined under the federal
securities laws. The Distributor reserves the right, without prior notice to
any Dealer, to suspend or eliminate Dealer concessions or commissions.
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
may pay Dealers, financial advisers and other persons which distribute shares
a finders' fee from its own resources based on a percentage of the NAV 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 Prudential Securities or
its subsidiaries (Prudential Securities or Subsidiary Prototype Benefit
Plans), Class A shares may be purchased at NAV by participants who are
repaying loans made from such plans to the participant.
Prudential Retirement Programs. Class A shares may be purchased at NAV by
certain savings, retirement and deferred compensation plans, qualified or non-
qualified under the Internal Revenue Code, for which Prudential 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 NAV
to Benefit Plans or non-qualified plans sponsored by employers which are
members of a common trade, professional or membership association
(Association) that participate in the PruArray 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 NAV without regard
to the assets or number of participants in the individual employer's qualified
Plan(s) or non-qualified plans so long as the employers in the Association (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
Transfer Agent.
26
<PAGE>
PruArray Savings Program. Class A shares are also offered at NAV to
employees of companies that enter into a written agreement with Prudential
Retirement Services to participate in the PruArray Savings Program. Under this
Program, a limited number of Prudential Mutual Funds are available for
purchase at NAV by Individual Retirement Accounts and Savings Accumulation
Plans of the company's employees. The Program is available only to (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
the Distributor or the Transfer Agent, by the following persons: (a) officers
of the Prudential Mutual Funds (including the Fund), (b) employees of the
Distributor, Prudential Securities, PIFM and their subsidiaries and members of
the families of such persons who maintain an "employee related" account at
Prudential Securities or the Transfer Agent, (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 the Distributor, 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, (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 or
administrator, (h) orders placed by broker-dealers, investment advisers or
financial planners who have entered into an agreement with the Distributor,
who place trades for their own accounts or the accounts of their clients and
who charge a management, consulting or other fee for their services (e.g.
mutual fund "wrap" or asset allocation programs), and (i) orders placed by
clients of broker-dealers, investment advisers or financial planners who place
trades for their own accounts if the accounts are linked to the master account
of such broker-dealer, investment adviser or financial planner on the books
and records of the broker-dealer, investment adviser or financial planner
(e.g. mutual fund "supermarket programs").
For an investor to obtain any reduction or waiver of the initial sales
charges, at the time of the sale either the Transfer Agent must be notified
directly by the investor or the Distributor must be notified by the Dealer
facilitating the transaction that the sale qualifies for the reduced or waived
sales charge. The reduction or waiver will be granted subject to confirmation
of your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions. 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, your Dealer or the Distributor.
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, from its
own resources, 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
27
<PAGE>
Managed--Distributor." In connection with the sale of Class C shares, the
Distributor will pay, from its own resources, 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.
PruArray or SmartPath Plans. The CDSC will be waived on redemptions of Class
C shares by qualified and non-qualified retirement and deferred compensation
plans that participate in the Transfer Agent's PruArray and SmartPath
Programs.
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 an affiliate of the Distributor 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 an affiliate of the Distributor for
whom Class Z shares of the Prudential Mutual Funds are an available investment
option; (iv) Benefit Plans for which an affiliate of the Distributor serves as
recordkeeper and that, 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); (vi)
employees of Prudential or Prudential Securities who participate in an
employer sponsored employee savings plan; and (vii) Prudential with an
investment of $10 million or more. After a Benefit Plan qualifies to purchase
Class Z shares, all subsequent purchases will be for Class Z shares.
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 YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE FUND AT ANY TIME FOR CASH AT THE NAV NEXT
DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM (IN
ACCORDANCE WITH PROCEDURES ESTABLISHED BY THE TRANSFER AGENT IN CONNECTION
WITH INVESTORS' ACCOUNTS) BY THE TRANSFER AGENT, THE DISTRIBUTOR OR YOUR
DEALER. SEE "HOW THE FUND VALUES ITS SHARES." In certain cases, however,
redemption proceeds will be reduced by the amount of any applicable CDSC, as
described in "Contingent Deferred Sales Charges" below. If you are redeeming
your shares through a Dealer, your Dealer must receive your sell order before
the Fund computes its NAV for that day (i.e., 4:15 P.M., New York time) in
order to receive that day's NAV. Your Dealer will be responsible for
furnishing all necessary documentation to the Distributor and may charge you
for its services in connection with redeeming shares of the Fund.
IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM YOUR SHARES THROUGH PRUDENTIAL SECURITIES. PLEASE CONTACT YOUR
PRUDENTIAL SECURITIES FINANCIAL ADVISOR.
IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION
SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD
CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE
CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT, THE DISTRIBUTOR OR YOUR
DEALER 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.
28
<PAGE>
All correspondence and documents concerning redemptions should be sent to the
Fund in care of the Transfer Agent, Prudential Mutual Fund Services LLC,
Attention: Redemption Services, P.O. Box 15010, New Brunswick, New Jersey
08906-5010, the Distributor or to your Dealer.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to
a person other than the record owner, (c) are to be sent to an address other
than the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the
redemption request and on the certificates, if any, or stock power must be
guaranteed by an eligible guarantor institution. An eligible guarantor
institution includes any bank, broker, dealer or credit union. The Transfer
Agent reserves the right to request additional information from, and make
reasonable inquiries of, any eligible guarantor institution. For clients of
Prusec, a signature guarantee may be obtained from the agency or office
manager of most Prudential Insurance and Financial Services or Preferred
Services offices. In the case of redemptions from a PruArray or SmartPath
Plan, if the proceeds of the redemption are invested in another investment
option of the plan, in the name of the record holder and at the same address
as reflected in the Transfer Agent's records, a signature guarantee is not
required.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN
SEVEN DAYS AFTER RECEIPT BY THE TRANSFER AGENT, THE DISTRIBUTOR OR YOUR DEALER
OF THE CERTIFICATE AND/OR WRITTEN REQUEST, EXCEPT AS INDICATED BELOW. IF YOU
HOLD SHARES THROUGH A DEALER, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL
BE CREDITED TO YOUR ACCOUNT AT YOUR DEALER 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 Commission, by order, so permits; provided that
applicable rules and regulations of the Commission 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, WHICH MAY TAKE UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT
OF THE PURCHASE CHECK BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY
PURCHASING SHARES BY WIRE OR BY CERTIFIED OR CASHIER'S CHECK.
REDEMPTION IN KIND. If the Board of Directors determines that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price
in whole or in part by a distribution in kind of securities from the
investment portfolio of the Fund, in lieu of cash, in conformity with
applicable rules of the Commission. Securities will be readily marketable and
will be valued in the same manner as 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 NAV of the Fund during any 90-day period for any one
shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Board
of Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose
account has a net asset value of less than $500 due to a redemption. The Fund
will give such shareholders 60 days' prior written notice in which to purchase
sufficient additional shares to avoid such redemption. No CDSC will be imposed
on any such involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of the Fund at the NAV next
determined after the order is received, which must be within 90 days after the
date of the redemption. Any CDSC paid in connection with such redemption will
be credited (in shares) to your account. (If less than a full repurchase is
made, the credit will be on a pro rata basis.) You must notify the Fund's
Transfer Agent, either directly or through the Distributor or your Dealer, at
29
<PAGE>
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.
For more information on the rule which disallows a loss on the sale or
exchange of shares of the Fund which are replaced, see "Taxes, Dividends and
Distributions."
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C
shares redeemed within one year of purchase will be subject to a 1% CDSC. The
CDSC will be deducted from the redemption proceeds and reduce the amount paid
to you. The CDSC will be imposed on any redemption by you which reduces the
current value of your Class B or Class C shares to an amount which is lower
than the amount of all payments by you for shares during the preceding six
years, in the case of Class B shares, and one year, in the case of Class C
shares. A CDSC will be applied on the lesser of the original purchase price or
the current value of the shares being redeemed. Increases in the value of your
shares or shares acquired through reinvestment of dividends or distributions
are not subject to a CDSC. The amount of any contingent deferred sales charge
will be paid to and retained by the Distributor. See "How the Fund is
Managed--Distributor" 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 generally in the lowest possible rate.
It will be assumed that the redemption is made first of amounts representing
shares acquired pursuant to the reinvestment of dividends and distributions;
then of amounts representing the increase in NAV above the total amount of
payments for the purchase of Fund shares made during the preceding six years
(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
30
<PAGE>
to redeem $500 of your investment. Assuming at the time of the redemption the
NAV had appreciated to $12 per share, the value of your Class B shares would
be $1,260 (105 shares at $12 per share). The CDSC would not be applied to the
value of the reinvested dividend shares and the amount which represents
appreciation ($260). Therefore, $240 of the $500 redemption proceeds ($500
minus $260) would be charged at a rate of 4% (the applicable rate in the
second year after purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC
will be waived in the case of a redemption following the death or disability
of a shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint
tenancy (with rights of survivorship), or a trust, at the time of death or
initial determination of disability, provided that the shares were purchased
prior to death or disability.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions are: (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 (including a Roth IRA,) a lump-sum or other distribution
after attaining age 59 1/2 or a periodic distribution based on life
expectancy; (iii) in the case of a Section 403(b) custodial account, a lump
sum or other distribution after attaining age 59 1/2 and (iv) a tax-free
return of an excess contribution or plan distributions following the death or
disability of the shareholder, provided that the shares were purchased prior
to death or disability. The waiver does not apply in the case of a tax-free
rollover or transfer of assets, other than one following a separation from
service (i.e., following voluntary or involuntary termination of employment or
following retirement). Under no circumstances will the CDSC be waived on
redemptions resulting from the termination of a tax-deferred retirement plan,
unless such redemptions otherwise qualify for a waiver as described above. In
the case of Direct Account and Prudential Securities or Subsidiary Prototype
Benefit Plans, the CDSC will be waived on redemptions which represent
borrowings from such plans. Shares purchased with amounts used to repay a loan
from such plans on which a CDSC was not previously deducted will thereafter be
subject to a CDSC without regard to the time such amounts were previously
invested. In the case of a 401(k) plan, the CDSC will also be waived upon the
redemption of shares purchased with amounts used to repay loans made from the
account to the participant and from which a CDSC was previously deducted. In
addition, the CDSC will be waived on redemptions of shares held by a Director
of the Fund.
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.
You must notify the Transfer Agent either directly or through your Dealer,
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 PruArray and SmartPath Programs.
31
<PAGE>
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 NAV without the imposition of any additional sales charge. The
first conversion of Class B shares occurred in February 1995, when the
conversion feature was first implemented.
Since the Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will
be determined on each conversion date in accordance with the following
formula: (i) the ratio of (a) the amounts paid for Class B shares purchased at
least seven years prior to the conversion date to (b) the total amount paid
for all Class B shares purchased and then held in your account (ii) multiplied
by the total number of Class B shares purchased and then held in your account.
Each time any Eligible Shares in your account convert to Class A shares, all
shares or amounts representing Class B shares then in your account that were
acquired through the automatic reinvestment of dividends and other
distributions will convert to Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different NAV's 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 NAV of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. 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
32
<PAGE>
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.
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.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISOR.
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 the account of a shareholder who qualifies to
purchase Class A shares at NAV will automatically be exchanged for Class A
shares 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, Prusec or
another Dealer 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
NAV.
33
<PAGE>
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.
FREQUENT TRADING. The Fund and the other Prudential Mutual Funds are not
intended to serve as vehicles for frequent trading in response to short-term
fluctuations in the market. Due to the disruptive effect that market timing
investment strategies and excessive trading can have on efficient portfolio
management, the Fund reserves the right to refuse purchase orders and
exchanges by any person, group or commonly controlled accounts, if, in the
Manager's sole judgment, such person, group or accounts were following a
market timing strategy or were otherwise engaging in excessive trading (Market
Timers).
To implement this authority to protect the Fund and its shareholders from
excessive trading, the Fund will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Fund or its affiliates pursuant to which the Market Timer has agreed to
abide by certain procedures, which include a daily dollar limit on trading.
The Fund may notify the Market Timer of rejection of an exchange or purchase
order subsequent to the day on which the order was placed.
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 your Dealer, you should contact your Dealer.
. 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 brokerage account (including a Command
Account). For additional information about this service, you may contact the
Distributor, your Dealer 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 the Distributor, your
Dealer 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
34
<PAGE>
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
(732) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
35
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential offers a broad range of mutual funds designed to meet your
individual needs. We welcome you to review the investment options available
through our family of funds. For more information on the Prudential Mutual
Funds, including charges and expenses, contact your Prudential Securities
financial adviser or Prusec representative or telephone the Fund at (800) 225-
1852 for a free prospectus. Read the prospectus carefully before you invest or
send money.
<TABLE>
<CAPTION>
TAXABLE BOND FUNDS EQUITY FUNDS
<S> <C>
Prudential Diversified Bond Fund, Inc. Prudential Balanced Fund
Prudential Government Income Fund, Inc. Prudential Distressed Securities
Prudential Government Securities Trust Fund, Inc.
Short-Intermediate Term Series Prudential Emerging Growth Fund, Inc.
Prudential High Yield Fund, Inc. Prudential Equity Fund, Inc.
Prudential High Yield Total Return Fund, Inc. Prudential Equity Income Fund
Prudential Mortgage Income Fund, Inc. Prudential Index Series Fund
Prudential Structured Maturity Fund, Inc. Prudential Bond Market Index Fund
Income Portfolio Prudential Europe Index Fund
Prudential Pacific Index Fund
TAX-EXEMPT BOND Prudential Small-Cap Index Fund
FUNDS Prudential Stock Index Fund
The Prudential Investment Portfolios, Inc.
Prudential California Municipal Fund Prudential Active Balanced Fund
California Series Prudential Jennison Growth Fund
California Income Series Prudential Jennison Growth & Income Fund
Prudential Municipal Bond Fund Prudential Mid-Cap Value Fund
High Income Series Prudential Real Estate Securities Fund
Insured Series Prudential Small-Cap Quantum Fund, Inc.
Intermediate Series Prudential Small Company Value Fund, Inc.
Prudential Municipal Series Fund Prudential 20/20 Focus Fund
Florida Series Prudential Utility Fund, Inc.
Maryland Series Nicholas-Applegate Fund, Inc.
Massachusetts Series Nicholas-Applegate Growth Equity Fund
Michigan Series
New Jersey Series MONEY MARKET FUNDS
New York Series
North Carolina Series . Taxable Money Market Funds
Ohio Series Cash Accumulation Trust
Pennsylvania Series Liquid Assets Fund
Prudential National Municipals National Money Market Fund
Fund, Inc. Prudential Government Securities Trust
Money Market Series
GLOBAL FUNDS U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Prudential Developing Markets Fund Money Market Series
Prudential Developing Markets Equity Fund Prudential MoneyMart Assets, Inc.
Prudential Latin America Equity Fund . Tax-Free Money Market Funds
Prudential Europe Growth Fund, Inc. Prudential Tax-Free Money Fund, Inc.
Prudential Global Genesis Fund, Inc. Prudential California Municipal Fund
Prudential Global Limited Maturity Fund, Inc. California Money Market Series
Limited Maturity Portfolio Prudential Municipal Series Fund
Prudential Intermediate Global Income Fund, Inc. Connecticut Money Market Series
Prudential International Bond Fund, Inc. Massachusetts Money Market Series
Prudential Natural Resources Fund, Inc. New Jersey Money Market Series
Prudential Pacific Growth Fund, Inc. New York Money Market Series
Prudential World Fund, Inc. . Command Funds
Global Series Command Money Fund
International Stock Series Command Government Fund
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
</TABLE>
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
Risk Factors and Special Considerations of Investing in Foreign
Securities............................................................. 11
Hedging and Return Enhancement Strategies................................ 12
Other Investments and Policies........................................... 14
Investment Restrictions.................................................. 16
HOW THE FUND IS MANAGED................................................... 16
Manager.................................................................. 16
Distributor.............................................................. 17
Fee Waivers and Subsidy.................................................. 18
Portfolio Transactions................................................... 18
Custodian and Transfer and Dividend Disbursing Agent..................... 18
Year 2000................................................................ 19
HOW THE FUND VALUES ITS SHARES............................................ 19
HOW THE FUND CALCULATES
PERFORMANCE............................................................. 19
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....................................... 32
How to Exchange Your Shares.............................................. 32
Shareholder Services..................................................... 34
THE PRUDENTIAL MUTUAL FUND FAMILY......................................... A-1
</TABLE>
- --------------------------------------------------------------------------------
MF135A
<TABLE>
<S> <C>
Class A: 743970105
Class B: 743970204
CUSIP Nos.: Class C: 743970303
Class Z: 743970402
</TABLE>
<PAGE>
PRUDENTIAL NATURAL RESOURCES FUND, INC.
Statement of Additional Information
dated July 31, 1998
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 equity related 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 equity related securities (including common stock,
preferred stock, rights, warrants and debt securities or preferred stock which
are convertible or exchangeable for common stock or preferred stock and master
limited partnerships) of natural resource companies and in asset-based
securities. The Fund may also invest in equity related securities of companies
in other industries and fixed-income securities (including money market
instruments), engage in various derivatives transactions, including options on
equity securities, financial indices, foreign currencies and futures contracts
on foreign currencies and may purchase and sell futures contracts on foreign
currencies, groups of currencies and on financial indices to hedge its
portfolio and attempt to enhance return. 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 31, 1998, 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>
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-19 18
Purchase and Redemption of Fund Shares................... B-21 23
Shareholder Investment Account........................... B-24 34
Net Asset Value.......................................... B-27 19
Taxes, Dividends and Distributions....................... B-28 20
Performance Information.................................. B-30 19
Custodian, Transfer and Dividend Disbursing Agent and In-
dependent Accountants................................... B-32 18
Financial Statements..................................... B-33 --
Report of Independent Accountants........................ B-45 --
Appendix I--Description of Security Ratings.............. I-1 --
Appendix II--General Investment Information.............. II-1 --
Appendix III--Historical Performance Data................ III-1 --
Appendix IV--Information Relating to Prudential.......... IV-1 --
</TABLE>
- -------------------------------------------------------------------------------
MF135B
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is long-term growth of capital. It seeks to
achieve this investment objective by investing primarily in equity related
securities (including common stock, preferred stock, rights, warrants and debt
securities or preferred stock which are convertible or exchangeable for common
stock or preferred stock and master limited partnerships) 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 segregated by the Fund in cash or other
liquid unencumbered assets, marked-to-market daily. A put option written by
the Fund is "covered" if the Fund segregates cash, U.S. Government obligations
or other liquid, unencumbered assets, marked to market daily, with a value
equal to the exercise price, or else holds on a share-for-share basis a put of
the same security as the put written if 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.
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
B-2
<PAGE>
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 SECURITIES INDICES. In addition to options on equity securities,
the Fund may also purchase and sell put and call options on securities indices
traded on U.S. and foreign securities exchanges, listed on NASDAQ or traded in
the over-the-counter markets. Options on securities indices are similar to
options on securities except that, rather than the right to take or make
delivery of a security at a specified price, an option on a securities index
gives the holder the right to receive, upon exercise of the option, an amount
of cash if the closing level of the securities index upon which the option is
based is greater than, in the case of a call, or less than, in the case of a
put, the exercise price of the option. This amount of cash is equal to such
difference between the closing price of the index and the exercise price of
the option, 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. All settlements are in cash, and gain or loss
depends on price movements in the securities market generally (or in a
particular industry or segment of the market) rather than price movements in
individual securities.
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 securities, 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 security, whether the Fund
will realize a gain or loss on the purchase or sale of an option on an index
depends upon movements in the level of security prices in the securities
market generally or in an industry or market segment rather than movements in
the price of a particular security. Accordingly, successful use by the Fund of
options on indices would be subject to the investment adviser's ability to
predict correctly movements in the direction of the securities market
generally or of a particular industry. This requires different skills and
techniques than predicting changes in the price of individual securities. The
investment adviser currently uses such techniques in conjunction with the
management of other mutual funds.
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.
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.
B-3
<PAGE>
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 Securities 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 options on individual securities.
Index prices may be distorted if trading of certain securities 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 securities included in the index. If this occurred, the Fund would
not be able to close out options which it had purchased or written and, if
restrictions on exercise were imposed, may be unable to exercise an option it
holds, which could result in substantial losses to the Fund. It is the Fund's
policy to purchase or write options only on indices which include a number of
securities sufficient to minimize the likelihood of a trading halt in the
index.
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 individual securities in the
index.
B-4
<PAGE>
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 securities, 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 Securities 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 securities 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 securities in its portfolio. As with
options on securities, the Fund will not learn that an index option has been
exercised until the day following the exercise date but, unlike a call on a
security 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 options on securities. 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
Options on foreign currencies involve the currencies of two nations and
therefore, developments in either or both countries can affect the values of
options on foreign currencies. Risks include those described in the Prospectus
under "How the Fund Invests--Investment Objective and Policies--Risk Factors
and Special Considerations of Investing in Foreign Securities," including
government actions affecting currency valuation and the movements of
currencies 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 FOREIGN 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
B-5
<PAGE>
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 Manager and Subadviser
believe 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 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. 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.
B-6
<PAGE>
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 securities 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 various foreign currencies, including the Australian Dollar,
British Pound, Canadian Dollar, Japanese Yen, Swiss Franc, German Mark and
Eurodollars. Futures contracts are also available on the S&P 500 Stock Index,
the NYSE Composite Index, the Major Market Index and other global indices.
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 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 various foreign currencies, including the Australian Dollar,
British Pound, Canadian Dollar, Japanese Yen, Swiss Franc, German Mark and
Eurodollars. With respect to stock indices, options are traded on futures
contracts for the S&P 500 Stock Index, 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.
B-7
<PAGE>
LIMITATIONS ON PURCHASE AND SALE OF STOCK OPTIONS AND OPTIONS ON SECURITIES
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 securities indices and foreign
currencies only if they are covered by segregating with the Fund's Custodian
an amount of cash or other liquid assets equal to the aggregate exercise price
of the puts.
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 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 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 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 or
other liquid assets 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 (which during periods
of market volatility could be for an extended period of time), the Fund may
invest without limit in money market instruments, including commercial paper
of domestic corporations, certificates of deposit, bankers' acceptances and
other obligations of domestic and foreign banks, and obligations issued or
guaranteed by the U.S. Government, its agencies or its instrumentalities. Such
investments may be subject to certain risks, including future political and
economic developments, the possible imposition of withholding taxes on
interest income, the seizure or nationalization of foreign deposits and
foreign exchange controls or other restrictions.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
From time to time, in the ordinary course of business, the Fund may purchase
securities on a when-issued or delayed delivery basis; that is, delivery and
payment can take place in the future after the date of the transaction. The
Fund will make commitments
B-8
<PAGE>
for such when-issued or delayed delivery transactions only with the intention
of actually acquiring the securities. The Fund's Custodian will segregate cash
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 hedge, for a limited period of
time, certain long positions maintained by the Fund. 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
Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities to brokers, dealers and financial institutions, provided
that outstanding loans do not exceed in the aggregate 30% of the value of the
Fund's total assets and provided that such loans are callable at any time by
the Fund and are at all times secured by cash or equivalent collateral (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.
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
B-9
<PAGE>
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 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."
B-10
<PAGE>
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, 1998 and May 31, 1997, the
Fund's portfolio turnover rates were 25% and 53%, 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.)
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.
B-11
<PAGE>
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 D. Beach (73) Director President and Director of BMC Fund, Inc., a closed-end
investment company; previously, Vice Chairman of
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; and Director of The High Yield
Income Fund, Inc.
Stephen C. Eyre (75) Director Executive Director (May 1985 through December 1997) of
The John A. Hartford Foundation, Inc. (charitable
foundation); and Trustee Emeritus of Pace University.
Delayne Dedrick Gold (59) Director Marketing and Management Consultant; Director of The
High Yield Income Fund, Inc.
*Robert F. Gunia (51) Director Vice President of Prudential Investments (since Sep-
tember 1997); Executive Vice President and Treasurer
(since December 1996) of Prudential Investments Fund
Management LLC (PIFM); Senior Vice President (since
March 1987) of Prudential Securities Incorporated
(Prudential Securities); formerly Chief Administra-
tive Officer (July 1990-September 1996), Director
(January 1989-September 1996) and Executive Vice
President, Treasurer and Chief Financial Officer
(June 1987-September 1996) of Prudential Mutual Fund
Management, Inc. (PMF); Vice President and Director
(since May 1989) of The Asia Pacific Fund, Inc.; Di-
rector of The High Yield Income Fund, Inc.
Don G. Hoff (62) Director Chairman and Chief Executive Officer (since 1980) of
Intertec, Inc. (investments); Chairman and Chief
Executive Officer of The Lamaur Corporation; Director
of Innovative Capital Management, Inc. and The Greater
China Fund, Inc.; and Chairman and Director of The Asia
Pacific Fund, Inc.
Robert E. LaBlanc (63) Director President (since 1981) of Robert E. LaBlanc Associ-
ates, Inc. (telecommunications); formerly General
Partner at Salomon Brothers; and Vice-Chairman of
Continental Telecom; Director of Storage Technology
Corporation, Titan Corporation, Salient 3 Communica-
tions, Inc. and Tribune Company; and Trustee of Man-
hattan College.
*Mendel A. Melzer, CFA (37) Director Chief Investment Officer (since October 1996) of Pru-
751 Broad Street dential Mutual Funds; formerly Chief Financial Offi-
Newark, NJ 07102 cer (November 1995-September 1996) of Prudential In-
vestments; Senior Vice President and Chief
Financial Officer of Prudential Preferred Financial
Services (April 1993-November 1995), Managing Direc-
tor of Prudential Investment Advisors (April 1991-
April 1993) and Senior Vice President of Prudential
Capital Corporation (July 1989-April 1991); Chairman
and Director of Prudential Series Fund, Inc.; and Di-
rector of The High Yield Income Fund, Inc.
*Richard A. Redeker (54) President and Director Employee of Prudential Investments; formerly Presi-
751 Broad Street dent, Chief Executive Officer and Director (October
Newark, NJ 07102 1993-September 1996) of PMF; Executive Vice Presi-
dent, Director and Member of Operating Committee (Oc-
tober 1993-September 1996) of Prudential Securities;
Director (October 1993-September 1996) of Prudential
Securities Group, Inc. (PSG), Executive Vice Presi-
dent of the Prudential Investment Corporation (July
1994-September 1996), 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); and 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 (58) Director Chairman and Chief Executive Of-
ficer (since August 1996) of
Publishers Clearing House; for-
merly President and Chief Execu-
tive Officer (January 1988-Au-
gust 1996) and President and
Chief Operating Officer (Septem-
ber 1981-December 1988) of Pub-
lishers Clearing House; Director
of BellSouth Corporation, Texaco
Inc., Springs Industries Inc.
and Kmart Corporation.
Stephen Stoneburn (54) Director President and Chief Executive Of-
ficer (since June 1996) of Quad-
rant Media Corp. (a publishing
Company); formerly President
(June 1995-June 1996) of Argus
Integrated Media, Inc., Senior
Vice President and Managing Di-
rector (January 1993-1995),
Cowles Business Media; 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 Fair-
child Publications, Inc.
Nancy H. Teeters (67) Director Economist; Director of Inland
Steel Industries; formerly, Vice
President and Chief Economist of
International Business Machines;
Member of the Board of Governors
of the Federal Reserve System;
Governor of the Horace H.
Rackham School of Graduate Stud-
ies of the University of Michi-
gan; Assistant Director of the
Committee on the Budget of the
US House of Representatives; Se-
nior Fellow at the Library of
Congress; Senior Fellow at the
Brookings Institution; staff at
Office of Management and Budget,
Council of Economics Advisors
and the Federal Reserve Board.
S. Jane Rose (52) Secretary Senior Vice President (since De-
cember 1996) of PIFM; Senior
Vice President and Senior Coun-
sel (since July 1992) of Pruden-
tial Securities; formerly Senior
Vice President (January 1991-
September 1996) and Senior Coun-
sel (June 1987-December 1990) of
PMF.
Robert C. Rosselot (38) Assistant Secretary Assistant General Counsel (since
September 1997) of PIFM; former-
ly, partner with the firm of
Howard & Howard, Bloomfield
Hills, Michigan (December 1995-
September 1997) and Corporate
Counsel, Federated Investors
(1990-1995).
Grace C. Torres (38) Treasurer and First Vice President (since De-
Principal cember 1996) of PIFM; First Vice
Financial and President (since March 1994) of
Accounting Prudential Securities; formerly
Officer First Vice President (March
1994-September 1996) of Pruden-
tial Mutual Fund Management,
Inc. and Vice President (July
1989-March 1994) of Bankers
Trust.
Stephen M. Ungerman (44) Assistant Vice President and Tax Director
Treasurer (since March 1996) of Prudential
Investments; formerly First Vice
President of Prudential Mutual
Fund Management, Inc. (February
1993-September 1996).
</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 or 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 or Prudential Investment Management Services LLC.
The officers conduct and supervise the daily business operations of the
Fund, while the Directors, in addition to their functions set forth under
"Manager" and "Distributor," review such actions and decide on general policy.
The Board of Directors has adopted a retirement policy which calls for the
retirement of Directors on December 31 of the year in which they reach the age
of 72, except that retirement is being phased in for Directors who were age 68
or older as of December 31, 1993. Under this phase-in provision, Messrs. Eyre
and Beach are scheduled to retire on December 31, 1998 and 1999, respectively.
B-14
<PAGE>
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 (the Fund rate). Payment of the
interest so accrued is also deferred and accruals become payable at the option
of the Director. The Fund's obligation to make payments of deferred Directors'
fees, together with interest thereon, is a general obligation of the Fund.
The following table sets forth the aggregate compensation paid by the Fund
to the Directors who are not affiliated with the Manager for the fiscal year
ended May 31, 1998 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, 1997.
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............... $3,500 None N/A $135,000 (38/63)*
Stephen C. Eyre--
Director............... $3,500 None N/A $ 45,000 (12/13)*
Delayne D. Gold--
Director............... $3,500 None N/A $135,000 (38/63)*
Robert F. Gunia(1)--
Director............... -- None N/A --
Don G. Hoff--Director... $3,500 None N/A $ 45,000 (12/13)*
Robert F. LaBlanc--
Director............... $3,500 None N/A $ 45,000 (12/13)*
Mendel A. Melzer(1)--
Director............... -- None N/A --
Richard A. Redeker(1)--
Director............... -- None N/A --
Robin B. Smith--
Director............... $3,500 None N/A $ 90,000 (27/34)*
Stephen Stoneburn--
Director............... $3,500 None N/A $ 45,000 (12/13)*
Nancy H. Teeters--
Director............... $3,500 None N/A $ 90,000 (23/42)*
</TABLE>
- ---------
* 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, 1997, including amounts deferred at the election
of Directors under the funds' deferred compensation plans. Including
accrued interest, total deferred compensation amounted to $139,081 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 10, 1998, the Directors and officers of the Fund, as a group,
owned beneficially less than 1% of the outstanding common stock of the Fund.
As of July 10, 1998, the beneficial owners, directly or indirectly, of more
than 5% of the outstanding shares of any class of shares of the Fund were:
Grandview Pharmacy Inc., Profit Sharing Plan, Howard Eldridge Trustee, Ralph
Eldridge Trustee, 2230 N. Park Rd., Connersville, IN 47331 held 8,972 Class C
shares (or approximately 5% of the outstanding Class C shares; Prudential
Trust Company FBO PRU-DC Trust Accounts, ATTN. John Surdy, 30 Scranton Office
Park, Moosic, PA 18507-1791 held 52,207 Class Z (or approximately 42% of the
outstanding Class Z shares); Mr. Mendel Melzer, 6 Gelsey Ln., Basking Ridge,
NJ 07920 held 8,319 Class Z shares (or approximately 7% of the outstanding
Class Z shares); Jack Gebhardt 704 S. Stella, Harrisonville, MO 64701 held
7,758 Class Z shares (or approximately 6% of the outstanding Class Z shares)
and Ms. Florence Schifferdecker, c/o John Schifferdecker, 411 N. Cherokee,
Girard, KS 66743 held 9,056 Class Z shares (or approximately 7% of the
outstanding Class Z shares).
B-15
<PAGE>
As of July 10, 1998, Prudential Securities was record holder for other
beneficial owners of 1,436,620 Class A shares (or 60% of the outstanding Class
A shares), 4,355,210 Class B shares (or 74% of the outstanding Class B
shares), 125,190 Class C shares (or 75% of the outstanding Class C shares) and
67,966 Class Z shares (or 55% 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 (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, 1998, PIFM
managed and/or administered open-end and closed-end management investment
companies with assets of approximately $66.8 billion. According to the
Investment Company Institute, as of December 31, 1997, the Prudential Mutual
Funds were the 18th largest family of mutual funds in the United States.
PIFM is a subsidiary of Prudential Securities. 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, 1998. 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), 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 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 Commission and
the states,
B-16
<PAGE>
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 13, 1998 and by shareholders of the Fund on
February 19, 1988.
For the fiscal years ended May 31, 1998, 1997 and 1996, the Fund paid
management fees to PIFM of $970,786, $1,128,718, and $811,776, 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 13, 1998, 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 Investment Management Services LLC (PIMS or the Distributor),
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, acts
as the distributor of the shares of the Fund. Prior to July 1, 1998,
Prudential Securities Incorporated (Prudential Securities, also referred to as
the Distributor) was the Fund's distributor.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the
Fund under Rule 12b-1 under the Investment Company Act and a distribution
agreement (the Distribution Agreement), the Distributor incurs the expenses of
distributing the Fund's Class A, Class B and Class C shares. The Distributor
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
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
B-17
<PAGE>
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 13, 1998.
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, 1998, the Distributor
received payments of $94,831 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, 1998, the
Distributor also received approximately $51,100 in initial sales charges.
CLASS B PLAN. For the fiscal year ended May 31, 1998, the Distributor
received $868,640 from the Fund under the Class B Plan and spent approximately
$568,900 in distributing the Fund's Class B shares. It is estimated that of
the latter amount, approximately 0.5% ($3,100) was spent on printing and
mailing of prospectuses to other than current shareholders; 15.1% ($85,700)
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 84.4% ($480,100) on the aggregate of (i) payments of commissions
and account servicing fees to financial advisers (21.9% or $124,600) and (ii)
an allocation on account of overhead and other branch office distribution-
related expenses (62.5% or $355,500). The term "overhead and other branch
office distribution-related expenses" represents (a) the expenses of operating
branch offices of Prusec and the Distributor in connection with the sale of
Fund shares, including lease costs, the salaries and employee benefits of
operations and sales support personnel, utility costs, communications costs
and the costs of stationery and supplies, (b) the costs of client sales
seminars, (c) expenses of mutual fund sales coordinators to promote the sale
of Fund shares and (d) other incidental expenses relating to branch promotion
of Fund sales.
The Distributor 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, 1998, the
Distributor received approximately $261,000 in contingent deferred sales
charges attributable to Class B shares.
CLASS C PLAN. For the fiscal year ended May 31, 1998, Prudential Securities
received $20,602 under the Class C Plan and spent approximately $21,300 in
distributing Class C shares. It is estimated that of the latter amount, 0.5%
or $100 was spent on printing and mailing to other than current shareholders;
6.1% ($1,300) 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 93.4% or $19,900 was spent on the
aggregate of (i) payments or commissions and account servicing fees to
financial advisers (67.1% or $14,300) and (ii) an allocation of overhead and
other branch office distribution-related expenses for payments of related
expenses (26.3% or $5,600).
The Distributor 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, 1998, the
Distributor received approximately $1,500 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 of the Directors who are not
interested persons of the Fund and who have no direct or indirect financial
interest in the Class A, Class B, or Class C Plan or in any agreement related
to the Plans (the Rule 12b-1 Directors), at a meeting called for the purpose
of voting on such continuance. A Plan may be terminated at any time, without
penalty, by the vote of a majority of the Rule 12b-1 Directors or by the vote
of the holders of a majority of the outstanding shares of the applicable class
of the Fund on not more than 30 days' written notice to any other party to the
Plan. A Plan may not be amended to increase materially the amounts to be spent
for the services described therein without approval by
B-18
<PAGE>
the shareholders of the applicable class (by both Class A and Class B
shareholders, voting separately, in the case of material amendments to the
Class A Plan), and all material amendments are required to be approved by the
Board of Directors in the manner described above. Each Plan will automatically
terminate in the event of its assignment. The Fund will not be 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 the
Distributor 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 13, 1998.
NASD MAXIMUM SALES CHARGE RULE. Pursuant to rules of the NASD, the
Distributor is required to limit aggregate initial sales charges, deferred
sales charges and asset-based sales charges to 6.25% of total gross sales of
each class of shares. Interest charges on unreimbursed distribution expenses
equal to the prime rate plus one percent per annum may be added to the 6.25%
limitation. Sales from the reinvestment of dividends and distributions are not
included in the calculation of the 6.25% limitation. The annual asset-based
sales charge on shares of the Fund may not exceed .75 of 1% per class. The
6.25% limitation applies to each class of the Fund rather than on a per
shareholder basis. If aggregate sales charges were to exceed 6.25% of total
gross sales of any class, all sales charges on shares of that class would be
suspended.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for decisions to buy and sell securities and
options on securities and futures for the Fund, the selection of brokers,
dealers and futures commission merchants to effect the transactions and the
negotiation of brokerage commissions, if any. For purposes of this section,
the term "Manager" includes the Subadviser. Broker-dealers may receive
brokerage commissions on Fund portfolio transactions, including options and
the purchase and sale of underlying securities upon the exercise of option. On
foreign securities exchanges, commissions may be fixed. Orders may be directed
to any broker or futures commission merchant including, to the extent and in
the manner permitted by applicable law, Prudential Securities and its
affiliates. 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
B-19
<PAGE>
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. The Fund will not pay for
research in principal transactions.
Portfolio securities may not be purchased from any underwriting or selling
syndicate of which Prudential Securities (or any affiliate), during the
existence of the syndicate, is a principal underwriter (as defined in the
Investment Company Act), except in accordance with rules of the Commission.
This limitation, in the opinion of the Fund, will not significantly affect the
Fund's ability to pursue its present investment objective. However, in the
future in other circumstances, the Fund may be at a disadvantage because of
this limitation in comparison to other funds with similar objectives but not
subject to such limitations.
Subject to the above considerations, Prudential Securities may act as a
securities broker or futures commission merchant for the Fund. In order for
Prudential Securities (or any affiliate) to effect any portfolio transactions
for the Fund, the commissions, fees or other remuneration received by
Prudential Securities (or any affiliate) must be reasonable and fair compared
to the commissions, fees or other remuneration paid to other brokers or
futures commission merchants in connection with comparable transactions
involving similar securities or futures contracts being purchased or sold on
an exchange or board of trade during a comparable period of time. This
standard would allow Prudential Securities (or any affiliate) to receive no
more than the remuneration which would be expected to be received by an
unaffiliated broker or futures commission merchant in a commensurate arm's-
length transaction. Furthermore, the Board of Directors of the Fund, including
a majority of the non-interested Directors, has adopted procedures which are
reasonably designed to provide that any commissions, fees or other
remuneration paid to Prudential Securities (or any affiliate) are consistent
with the foregoing standard. In accordance with Section 11(a) of the
Securities Exchange Act of 1934, Prudential Securities may not retain
compensation for effecting transactions on a national securities exchange for
the Fund unless the Fund has expressly authorized the retention of such
compensation. Prudential Securities must furnish to the Fund at least annually
a statement setting forth the total amount of all compensation retained by
Prudential Securities from transactions effected for the Fund during the
applicable period. Brokerage and futures transactions with Prudential
Securities (or any affiliate) are also subject to such fiduciary standards as
may be imposed upon Prudential Securities (or such affiliate) by applicable
law.
Transactions in options by the Fund will be subject to limitations
established by each of the exchanges governing the maximum number of options
which may be written or held by a single investor or group of investors acting
in concert, regardless of whether the options are written or held on the same
or different exchanges or are written or held in one or more accounts or
through one or more brokers. Thus, the number of options which the Fund may
write or hold may be affected by options written or held by the Manager and
other investment advisory clients of the Manager. An exchange may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
The table below sets forth information concerning the payment of commissions
by the Fund, including the amount of such commissions paid to Prudential
Securities for the three years ended May 31, 1998:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
YEAR ENDED YEAR ENDED YEAR ENDED
MAY 31, 1998 MAY 31, 1997 MAY 31, 1996
------------ ------------ ------------
<S> <C> <C> <C>
Total brokerage commissions paid by the
Fund.................................. $246,434 $442,486 $302,200
Total brokerage commissions paid to
Prudential Securities and its foreign
affiliates............................ $ 3,600 $ 8,100 $ 2,200
Percentage of total brokerage commis-
sions paid to Prudential Securities
and its foreign affiliates............ 1.46% 1.83% 0.73%
</TABLE>
The Fund effected approximately 0.61% of the total dollar amount of its
transactions involving the payment of commissions through Prudential
Securities during the year ended May 31, 1998. Of the total brokerage
commissions paid during that period, approximately $207,494.90 (or 84%) 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.
B-20
<PAGE>
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value (NAV) 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 NAV 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."
ISSUANCE OF FUND SHARES FOR SECURITIES
Transactions involving the issuance of Fund shares for securities (rather
than cash) will be limited to: (i) reorganizations, (ii) statutory mergers, or
(iii) other acquisitions of portfolio securities that: (a) meet the investment
objective and policies of the Fund, (b) are liquid and not subject to
restrictions on resale, (c) have a value that is readily ascertainable via
listing on or trading in a recognized United States or international exchange
or market, and (d) is approved by the Fund's investment adviser.
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares of the Fund are sold at a maximum sales charge of
5% and Class B*, Class C* and Class Z shares are sold at NAV. Using the Fund's
NAV at May 31, 1998, 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............ $11.69
Maximum sales charge (5% of offering price)....................... .62
------
Maximum offering price to public.................................. $12.31
======
<CAPTION>
CLASS B
<S> <C>
Net asset value, offering price and redemption price per Class B
share*........................................................... $10.92
======
<CAPTION>
CLASS C
<S> <C>
Net asset value, offering price and redemption price per Class C
share*........................................................... $10.92
======
<CAPTION>
CLASS Z
<S> <C>
Net asset value, offering price and redemption price per Class Z
share............................................................ $11.76
======
</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);
B-21
<PAGE>
(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 Transfer Agent, the Distributor or your Dealer 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 your Dealer will not be
aggregated to determine the reduced sales charge. The value of existing
holdings for purposes of determining the reduced sales charge is calculated
using the maximum offering price (NAV plus maximum sales charge) as of the
previous business day. See "How the Fund Values its Shares" in the Prospectus.
The Distributor or the Transfer Agent 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 NAV by entering into a Letter of
Intent whereby they agree to enroll, within a thirteen-month period, a
specified number of eligible employees or participants (Participant Letter of
Intent).
For purposes of the Investment Letter of Intent, all shares of the Fund and
shares of other Prudential Mutual Funds (excluding money market funds other
than those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent
and through your Dealer will not be aggregated to determine the reduced sales
charge. All shares must be held either directly with the Transfer Agent or
through your Dealer.
A Letter of Intent permits a purchaser, in the case of an Investment Letter
of Intent, to establish a total investment goal to be achieved by any number
of investments over a thirteen-month period and, in the case of a Participant
Letter of Intent, to establish a minimum eligible employee or participant
enrollment goal over a thirteen-month period. Each investment made during the
period, in the case of an Investment Letter of Intent, will receive the
reduced sales charge applicable to the amount represented by the goal, as if
it were a single investment. In the case of a Participant Letter of Intent,
each investment made during the period will be made at net asset value.
Escrowed Class A shares totaling 5% of the dollar amount of the Letter of
Intent will be held by the Transfer Agent in the name of the purchaser, except
in the case of retirement and group plans where the employer or plan sponsor
will be responsible for paying any applicable sales charge. The effective date
of an Investment Letter of Intent (except in the case of retirement and group
plans) may be back-dated up to 90 days, in order that any 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 charge
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.
B-22
<PAGE>
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will, in the
case of an Investment Letter of Intent, be granted subject to confirmation of
the investor's holdings or in the case of a Participant Letter of Intent,
subject to confirmation of the number of eligible employees or participants in
the retirement or group plan. Letters of Intent are not available to
individual participants in any retirement or group plans.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
The contingent deferred sales charge (CDSC) is waived under circumstances
described in the Prospectus. See "Shareholder Guide-- How to Sell Your
Shares--Waiver of the Contingent Deferred Sales Charges--Class B Shares" in
the Prospectus. In connection with these waivers, the Transfer Agent will
require you to submit the supporting documentation set forth below.
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
Death A copy of the shareholder's death
certificate or, in the case of a trust,
a copy of the grantor's death
certificate, plus a copy of the trust
agreement identifying the grantor.
Disability - An individual A copy of the Social Security
will be considered disabled if Administration award letter or a letter
he or she is unable to engage from a physician on the physician's
in any substantial letterhead stating that the shareholder
gainful activity by reason of any (or, in the case of a trust, the
medically determinable grantor) is permanently disabled. The
physical or mental impairment letter must also indicate the date of
which can be expected to disability.
result in death or to be of
long-continued and indefinite
duration.
Distribution from an IRA or A copy of the distribution form from
403(b) Custodial Account the custodial firm indicating (i) the
date of birth of the shareholder and
(ii) that the shareholder is over 59
1/2 and is taking a normal
distribution--signed by the
shareholder.
Distribution from Retirement A letter signed by the plan
Plan administrator/trustee indicating the
reason for the distribution.
Excess Contributions A letter from the shareholder (for an
IRA) or the plan administrator/ trustee
on company letterhead indicating the
amount of the excess and whether or not
taxes have been paid.
The Transfer Agent reserves the right to request such additional documents
as it may deem appropriate.
QUANTITY DISCOUNT--CLASS B SHARES PURCHASED PRIOR TO AUGUST 1, 1994
The CDSC is reduced on redemptions of Class B shares of the Fund purchased
prior to August 1, 1994 if immediately after a purchase of such shares, the
aggregate cost of all Class B shares of the Fund owned by you in a single
account exceeded $500,000. For example, if you purchased $100,000 of Class B
shares of the Fund and the following year purchased an additional $450,000 of
Class B shares with the result that the aggregate cost of your Class B shares
of the Fund following the second purchase was $550,000, the quantity discount
would be available for the second purchase of $450,000 but not for the first
purchase of $100,000. The quantity discount will be imposed at the following
rates depending on whether the aggregate value exceeded $500,000 or $1
million:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF DOLLARS INVESTED
OR REDEMPTION PROCEEDS
YEAR SINCE PURCHASE --------------------------------------
PAYMENT MADE $500,001 TO $1 MILLION OVER $1 MILLION
- ------------------- ---------------------- ---------------
<S> <C> <C>
First.................................... 3.0% 2.0%
Second................................... 2.0% 1.0%
Third.................................... 1.0% 0%
Fourth and thereafter.................... 0% 0%
</TABLE>
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to the reduced CDSC. The reduced CDSC will be granted subject to
confirmation of your holdings.
B-23
<PAGE>
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which the shares are held for the
investor by the Transfer Agent. If a stock certificate is desired, it must be
requested in writing for each transaction. Certificates are issued only for
full shares and may be redeposited in the Account at any time. There is no
charge to the investor for issuance of a certificate. The Fund makes available
to its shareholders the following privileges and plans.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund. An
investor may direct the Transfer Agent in writing not less than five full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. In the case of recently
purchased shares for which registration instructions have not been received on
the record date, cash payment will be made directly to the dealer. Any
shareholder who receives a cash payment representing a dividend or
distribution may reinvest such distribution at NAV by returning the check or
the proceeds to the Transfer Agent within 30 days after the payment date. Such
investment will be made at the NAV per share next determined after receipt of
the check or proceeds by the Transfer Agent. Such shareholder will receive
credit for any CDSC paid in connection with the amount of proceeds being
reinvested.
EXCHANGE PRIVILEGE
The Fund makes available to its shareholders the privilege of exchanging
their shares of the Fund for shares of certain other Prudential Mutual Funds,
including one or more specified money market funds, subject in each case to
the minimum investment requirements of such funds. Shares of such other
Prudential Mutual Funds may also be exchanged for shares of the Fund. All
exchanges are made on the basis of relative NAV next determined after receipt
of an order in proper form. An exchange will be treated as a redemption and
purchase for tax purposes. Shares may be exchanged for shares of another fund
only if shares of such fund may legally be sold under applicable state laws.
For retirement and group plans having a limited menu of Prudential Mutual
Funds, the exchange privilege is available for those funds eligible for
investment in the particular program.
It is contemplated that the exchange privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
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) (Class A Shares)
(U.S. Treasury Money Market Series) (Class A Shares)
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-24
<PAGE>
Class B and Class C shares of the Fund may also be exchanged for shares of
Prudential Special Money Market Fund, Inc. without imposition of any CDSC at
the time of exchange. Upon subsequent redemption from such money market fund
or after re-exchange into the Fund, such shares will be subject to the CDSC
calculated without regard to the time such shares were held in the money
market fund. In order to minimize the period of time in which shares are
subject to a CDSC, shares exchanged out of the money market fund will be
exchanged on the basis of their remaining holding periods, with the longest
remaining holding periods being transferred first. In measuring the time
period shares are held in a money market fund and "tolled" for purposes of
calculating the CDSC holding period, exchanges are deemed to have been made on
the last day of the month. Thus, if shares are exchanged into the Fund from a
money market fund during the month (and are held in the Fund at the end of
month), the entire month will be included in the CDSC holding period.
Conversely, if shares are exchanged into a money market fund prior to the last
day of the month (and are held in the money market fund on the last day of the
month), the entire month will be excluded from the CDSC holding period. For
purposes of calculating the seven year holding period applicable to the Class
B conversion feature, the time period during which Class B shares were held in
a money market fund will be excluded.
At any time after acquiring shares of other funds participating in the Class
B or Class C Exchange Privilege, a shareholder may again exchange those shares
(and any reinvested dividends and distributions) for Class B or Class C shares
of the Fund, respectively, without subjecting such shares to any CDSC. Shares
of any fund participating in the Class B or Class C exchange privilege that
were acquired through reinvestment of dividends or distributions may be
exchanged for Class B or Class C shares, respectively, of other funds without
being subject to any CDSC.
CLASS Z. Class Z shares may be exchanged for Class Z shares of other
Prudential Mutual Funds. No fee or sales load will be imposed on the exchange.
Additional details about the exchange privilege and prospectuses for each of
the Prudential Mutual Funds are available from the Transfer Agent, the
Distributor or your Dealer. The exchange privilege may be modified, terminated
or suspended on sixty days' notice, and any fund, including the Fund, or the
Distributor, has the right to reject any exchange application relating to such
fund's shares.
DOLLAR COST AVERAGING
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more
shares when the price is low and fewer shares when the price is high. The
average cost per share is lower than it would be if a constant number of
shares were bought at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class beginning in 2011, the cost of four years at
a private college could reach $210,000 and over $90,000 at a public
university./1/
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals./2/
<TABLE>
<CAPTION>
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
-------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
25 Years............................... $ 110 $ 165 $ 220 $ 275
20 Years............................... 176 264 352 440
15 Years............................... 296 444 592 740
10 Years............................... 555 833 1,110 1,388
5 Years................................ 1,371 2,057 2,742 3,428
</TABLE>
See "Automatic Savings Accumulation Plan."
- ---------
/1/Source information concerning the costs of education at public and
private universities is available from The College Board Annual Survey of
Colleges, 1993. Average costs for private institutions include tuition, fees,
room and board for the 1993-1994 academic year.
/2/The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not
intended to reflect the performance of an investment in shares of the Fund.
The investment return and principal value of an investment will fluctuate so
that an investor's shares when redeemed may be worth more or less than their
original cost.
B-25
<PAGE>
AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP)
Under ASAP, an investor may arrange to have a fixed amount automatically
invested in shares of the Fund monthly by authorizing his or her bank account
or brokerage account (including a Prudential Securities Command Account) to be
debited to invest specified dollar amounts in shares of the Fund. The
investor's bank must be a member of the Automatic Clearing House System. Stock
certificates are not issued to ASAP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, the Distributor or your Dealer.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders through the
Transfer Agent, the Distributor or your Dealer. 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 NAV on
shares held under this plan. See "Shareholder Investment Account--Automatic
Reinvestment of Dividends and/or Distributions."
The Distributor and the Transfer Agent act as agents for the shareholder in
redeeming sufficient full and fractional shares to provide the amount of the
periodic withdrawal payment. The systematic withdrawal plan may be terminated
at any time, and the Distributor reserves the right to initiate a fee of up to
$5 per withdrawal, upon 30 days' written notice to the shareholder.
Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must generally be recognized for federal income tax
purposes. In addition, withdrawals made concurrently with the purchases of
additional shares are inadvisable because of the sales charge applicable to
(i) the purchase of Class A shares and (ii) the withdrawal of Class B and
Class C shares. Each shareholder should consult his or her own tax adviser
with regard to the tax consequences of the systematic withdrawal plan,
particularly if used in connection with a retirement plan.
TAX-DEFERRED RETIREMENT PLANS
Various tax-deferred retirement plans, including a 401(k) plan, self-
directed individual retirement accounts and "tax-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 your Dealer or the Transfer Agent.
Investors who are considering the adoption of such a plan should consult
with their own legal counsel or tax adviser with respect to the establishment
and maintenance of any such plan.
TAX-DEFERRED RETIREMENT ACCOUNTS
INDIVIDUAL RETIREMENT ACCOUNTS. An individual retirement account (IRA)
permits the deferral of federal income tax on income earned in the account
until the earnings are withdrawn (or, in the case of a Roth IRA, the avoidance
of federal income tax on such income). 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.
B-26
<PAGE>
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 a traditional IRA account will be subject to tax when withdrawn from the
account. Distributions from a Roth IRA which meet the conditions required
under the Internal Revenue Code will not be subject to tax upon withdrawal
from the account.
MUTUAL FUND PROGRAMS
From time to time, the Fund may be included in a mutual fund program with
other Prudential Mutual Funds. Under such a program, a group of portfolios
will be selected and thereafter marketed collectively. Typically, these
programs are created with an investment theme, e.g., to seek greater
diversification, protection from interest rate movements or access to
different management styles. In the event such a program is instituted, there
may be a minimum investment requirement for the program as a whole. The Fund
may waive or reduce the minimum initial investment requirements in connection
with such a program.
The mutual funds in the program may be purchased individually or as part of
a program. Since the allocation of portfolios included in the program may not
be appropriate for all investors, individuals should consult their financial
advisor concerning the appropriate blend of portfolios for them. If investors
elect to purchase the individual mutual funds that constitute the program in
an investment ratio different from that offered by the program, the standard
minimum investment requirements for the individual mutual funds will apply.
NET ASSET VALUE
Under the Investment Company Act, with respect to securities for which
market quotations are not readily available, 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 such exchange system on the day of valuation
or, if there was no sale on such day, the mean between the last bid and asked
prices on such day, or at the bid price on such day in the absence of an asked
price. Corporate bonds (other than convertible debt securities) and U.S.
Government securities that are actively traded in the over-the-counter market,
including listed securities for which the primary market is believed by the
Manager in consultation with the Subadviser to be over-the-counter, are valued
on the basis of valuations provided by an independent pricing agent or
principal market maker. Convertible debt securities that are actively traded
in the over-the-counter market, including listed securities for which the
primary market is believed by the Manager in consultation with the Subadviser
to be over-the-counter, are valued at the mean between the last reported bid
and asked prices provided by principal market makers. Options on securities
and securities 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.
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 of Directors in consultation with the Manager or
the Subadviser, including its portfolio manager, traders, and its research and
credit analysts, on the basis of the following factors: cost of the security,
transactions in comparable securities,
B-27
<PAGE>
relationships among various securities and such other factors as may be
determined by the Manager, Subadviser, Board of Directors or Valuation
Committee to materially affect the value of the security. Short-term debt
securities are valued at cost, with interest accrued or discount amortized to
the date of maturity, if their original maturity was 60 days or less, unless
this is determined by the Board of Directors not to represent fair value.
Short-term securities with remaining maturities of 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 NAV at 4:15 P.M., New York time, on
each day the New York Stock Exchange is open for trading except on days on
which no orders to purchase, sell or redeem Fund shares have been received or
days on which changes in the value of the Fund's portfolio securities do not
affect NAV. In the event the New York Stock Exchange closes early on any
business day, the NAV of the Fund's shares shall be determined at 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.
NAV is calculated separately for each class. 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 and lower than the NAV of Class Z shares which are not subject to any
distribution fee. It is expected, however, that the NAV 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 and capital gains which are distributed to shareholders, and
permits net capital gains of the Fund (i.e., the excess of net long-term
capital gains over net short-term capital losses) to be treated as long-term
capital gains of the shareholders, regardless of how long 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 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 (c) 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-28
<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 straddle constructive sale and conversion
transaction provisions of the Internal Revenue Code which may, among other
things, require the Fund to recognize gain, defer losses or cause gain to be
treated as ordinary income rather than as capital gain. 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.
A "passive foreign investment company" (PFIC) is a foreign corporation that,
in general, meets either of the following tests: (a) at least 75% of its gross
income is passive or (b) an average of at least 50% of its assets produce, or
are held for the production of, passive income. If the Fund acquires and holds
stock in a PFIC beyond the date of the taxable year of its acquisition, the
Fund will be subject to federal income tax on a portion of any "excess
distribution" received on the stock or of any gain from the disposition of
such stock (collectively, "PFIC income"), plus interest thereon, even if the
Fund distributes the PFIC income as a taxable dividend to its shareholders.
The Fund may make a "mark-to-market" election with respect to certain stock it
holds in a PFIC and avoid the foregoing tax and interest obligation. If the
election is in effect, at the end of the Fund's taxable year, the Fund will
recognize the amount of current year appreciation, if any, on shares of such
PFIC stock that are held. Any loss will be recognized on the PFIC stock to the
extent of previously recognized mark-to-market gains. Alternatively, the Fund
may elect to treat any PFIC in which it invests as a "qualified electing
fund", in which case, in lieu of the foregoing tax and interest obligation,
the Fund will be required to include in income in each taxable year its pro
rata share of the qualified electing fund's annual ordinary earnings and net
capital gain, even if they are not distributed to the Fund; those amounts
would be subject to the annual distribution requirements applicable to the
Fund described above. Because the election to treat a PFIC as a qualified
electing fund cannot be made without the provision of certain information by
the PFIC, it is unlikely that the Fund will be able to make such an election.
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.
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
B-29
<PAGE>
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.
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, 1998, 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)n = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value at the end of the 1, 5 or 10 year periods
(or fractional portion thereof) of a hypothetical $1,000 payment made
at the beginning of the 1, 5 or 10 year periods.
Average annual total return takes into account any applicable initial or
contingent deferred sales charges but does not take into account any federal
or state income taxes that may be payable upon redemption.
B-30
<PAGE>
The average annual total return for Class A shares for the one year, five
year and since inception (January 22, 1990) periods ended May 31, 1998 were
(18.69)%, 5.81% and 5.20%, respectively. The average annual total returns for
Class B shares for the one year, five year and ten year periods ended May 31,
1998 were (19.96)%, 5.94% and 6.18%, respectively. Without the expense subsidy
the average annual total return with respect to the Class B shares of the Fund
for the ten year period would have been 6.17%. The average annual total return
for Class C shares for the one year and since inception (August 1, 1994)
periods ended May 31, 1998 were (15.96)% and 6.23%, respectively. The average
annual total return for Class Z shares for the one year and since inception
(September 16, 1996) periods ended May 31, 1998 were (14.12)% and (4.76)%,
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 return for Class A shares for the one year, five year
and since inception (January 21, 1990) periods ended May 31, 1998 were
(14.41)%, 39.63% and 60.73%, respectively. The aggregate total return for
Class B shares for the one year, five year and ten year periods ended May 31,
1998 were (14.96)%, 34.47% and 82.19%, respectively. Without the expense
subsidy the aggregate total return for the Class B shares for the ten year
period would have been 82.02%. The aggregate total return for Class C shares
for the one year and since inception (August 1, 1994) periods ended May 31,
1998 were (14.96)% and 26.06%, respectively. The aggregate total return for
the Class Z shares for the one year and since inception (September 16, 1996)
periods ended May 31, 1998 were (14.12)% and (7.97)%, respectively.
YIELD. The Fund may from time to time advertise its yield as calculated over
a 30-day period. Yield is calculated separately for Class A, Class B, 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-31
<PAGE>
From time to time, the performance of the Fund may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long-term and the rate of
inflation./1/
A Look at Performance Over the Long-Term
Average Annual Returns
1/1/26 - 12/31/97
[BAR GRAPH APPEARS HERE]
Common Stocks 11.0%
Long-Term Gov't Bonds 5.2%
Inflation 3.1%
- ---------
/1/Source: Ibbotson Associates, "Stocks, Bonds, Bills and Inflation--1998
Yearbook" (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). 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, 1998, the Fund
incurred fees of approximately $205,700 for such services.
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036, serves as the Fund's independent accountants and in that capacity has
audited the Fund's financial statements for the fiscal year ended May 31,
1998.
B-32
<PAGE>
Portfolio of Investments as of May 31, 1998
PRUDENTIAL NATURAL
RESOURCES FUND, INC.
- ---------------------------------------------------------------
Shares Description Value (Note 1)
- ---------------------------------------------------------------
LONG-TERM INVESTMENTS--99.2%
COMMON STOCKS--98.2%
- ---------------------------------------------------------------
Australia--2.3%
489,400 Acacia Resources Ltd. $ 608,058
352,219 Capral Aluminium Ltd. 598,149
130,000 Comalco Ltd. 499,168
151,000 Delta Gold NL 179,126
39,882 Homestake Mining Company 423,306
-----------
2,307,807
- ---------------------------------------------------------------
Canada--36.6%
102,900 Agnico-Eagle Mines Ltd. 660,589
129,200 Alberta Energy Co. Ltd. 2,865,296
114,100 Anderson Exploration Ltd. (a) 1,245,625
314,000 Arakis Energy Corp. (a) 451,375
156,600 Arizona Star Resource Ltd. (a) 189,238
123,600 Atna Resources Ltd. (a) 81,469
67,300 Barrick Gold Corp. 1,296,141
273,200 Barrington Petroleum Ltd. (a) 703,423
462,600 Beau Canada Exploration Ltd. (a) 746,411
195,300 Blue Range Resource Corp. (a) 918,538
52,100 Cabre Exploration Ltd. (a) 500,807
159,300 Cambior, Inc. 1,077,349
88,300 Cameco Corp. 2,576,642
41,600 Canadian Natural Resources Ltd. (a) 764,050
148,600 Crestar Energy, Inc. (a) 1,836,520
29,400 Francisco Gold Corp. (a) 280,082
91,800 Golden Knight Resources, Inc. (a) 75,636
141,300 Greenstone Resources Ltd. (a) 635,459
107,800 International African Mining Gold
Corp. (a) 347,873
92,400 International Pursuit Corp. (a) 97,701
279,000 Kap Resources Ltd. (a) 287,343
207,000 MacMillan Bloedel Ltd. 2,508,531
159,800 Meridian Gold, Inc. (a) $ 477,277
141,600 Northrock Resources Ltd. (a) 1,822,926
112,000 Northstar Energy Corp. (a) 669,024
114,300 Placer Dome, Inc. 1,432,232
137,200 Poco Petroleums Ltd. (a) 1,474,256
50,200 Potash Corp. of Saskatchewan, Inc. 4,320,337
169,681 Ranger Oil Ltd. (a) 1,100,955
112,100 Repadre Capital Corp. (a) 346,356
55,300 Rigel Energy Corp. (a) 457,527
219,700 Rio Alto Exploration Ltd. (a) 2,353,201
125,200 Samax Gold, Inc. (a) 537,265
63,800 Sutton Resources Ltd. (a) 449,003
304,800 Tiomin Resources, Inc. (a) 94,174
156,400 Triton Mining Corp. (a) 26,846
162,200 TVX Gold, Inc. (a) 514,514
-----------
36,221,991
- ---------------------------------------------------------------
France--1.7%
32,900 Bouygues Offshore, S.A. 1,681,459
- ---------------------------------------------------------------
Japan--0.4%
50,000 Globaly Corp. 188,951
62,000 Nihon Unicom Corp. 201,720
-----------
390,671
- ---------------------------------------------------------------
New Zealand--0.5%
874,188 Fletcher Challenge Ltd. 537,995
- ---------------------------------------------------------------
South Africa--8.9%
209,700 Anglo American Platinum Holdings (a) 2,542,188
9,100 Anglogold Ltd. 451,867
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-33
<PAGE>
Portfolio of Investments as of May 31, 1998
PRUDENTIAL NATURAL
RESOURCES FUND, INC.
- ----------------------------------------------------------------
Shares Description Value (Note 1)
- ----------------------------------------------------------------
South Africa (cont'd.)
587,900 Avgold Ltd. (a) $ 396,837
42,400 Durban Roodepoort Deep Ltd. (a) 118,429
122,700 Harmony Gold Mining Co., Ltd. (a) 511,696
298,600 Impala Platinum Holdings Ltd. 3,185,530
174,900 Randgold & Exploration Co., Ltd. (a) 169,625
84,300 Western Areas Gold Mining Co.,
Ltd.(a) 348,286
41,300 Western Deep Levels Ltd. 1,033,401
-----------
8,757,859
- ---------------------------------------------------------------
United States--47.8%
55,300 Apex Silver Mines Ltd. (a) 580,650
105,083 Ashanti Goldfields Ltd. (GDR) 972,018
104,900 Boise Cascade Corp. 3,501,037
31,400 Brigham Exploration Co. (a) 376,800
87,500 Brush Wellman, Inc. 2,132,813
85,600 Champion International Corp. 4,108,800
73,350 Cross Timbers Oil Co. 1,269,872
36,000 Dawson Production Services, Inc. (a) 400,500
98,200 Freeport-McMoRan Copper & Gold Inc. (a) 1,522,100
32,800 FX Energy, Inc. (a) 342,350
113,511 Getchell Gold Corp. (a) 2,156,709
32,272 Gold Fields Ltd. ADR (a) 181,530
92,600 Golden Star Resources Ltd. (a) 277,800
73,200 J. Ray McDermott, S.A. (a) 2,955,450
59,900 Louisiana-Pacific Corp. 1,194,256
44,200 Miller Exploration Co. (a) 348,075
147,900 Newfield Exploration Co. (a) 3,309,262
165,311 Newmont Mining Corp. 4,122,443
141,422 NGC Corp. 2,147,847
49,700 Noble Affiliates, Inc. 1,941,406
118,286 Pioneer Natural Resources Co. 2,779,721
31,600 Rayonier, Inc. $ 1,483,225
259,400 Stillwater Mining Co. (a) 6,290,450
185,300 Western Gas Resources, Inc. 2,999,544
-----------
47,394,658
-----------
Total common stocks
(cost US$108,461,918) 97,292,440
-----------
PREFERRED STOCKS--0.8%
- ---------------------------------------------------------------
United States
14,500 Freeport-McMoRan Copper & Gold, Inc. 262,812
12,400 Hecla Mining Co., 7.00%, Conv.,
Series B (a) 562,650
-----------
Total preferred stocks
(cost US$920,890) 825,462
-----------
WARRANTS(a)
- ---------------------------------------------------------------
Canada
Kap Resources Ltd.,
120,800 Expiring 8/3/00 @ CAD $2 16,588
-----------
- ---------------------------------------------------------------
South Africa
Durban Roodepoort Deep Ltd.
21,650 Expiring 6/30/02 @ ZAR $6,000 9,449
Randfontein Estates Gold Mining Co.
11,180 Expiring 7/1/02 @ ZAR $2,500 7,156
-----------
16,605
-----------
Total warrants
(cost US$81,640) 33,193
-----------
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-34
<PAGE>
Portfolio of Investments as of May 31, 1998
PRUDENTIAL NATURAL
RESOURCES FUND, INC.
- ---------------------------------------------------------------
Principal
Amount
(000) Description Value (Note 1)
- ---------------------------------------------------------------
CONVERTIBLE BONDS--0.2%
- ---------------------------------------------------------------
South Africa
ZAR 300 Randgold Finance BVI Ltd.,
Sec'd. Gtd.,
7.00%, 9/30/01
(cost US$300,000) $ 159,000
-----------
- ---------------------------------------------------------------
Total Investments--99.2%
(cost US$109,764,448; Note 4) 98,310,095
Other assets in excess of
liabilities--0.8% 815,174
-----------
Net Assets--100% $99,125,269
===========
- ---------------
(a) Non-income producing security.
ADR--American Depository Receipt.
GDR--Global Depository Receipt.
- --------------------------------------------------------------------------------
The industry classification of portfolio holdings and other assets in excess of
liabilities shown as a percentage of net assets as of May 31, 1998 was as
follows:
Gold.................................................. 20.4%
Canadian Oil & Gas.................................... 17.1
Forest Products....................................... 13.5
Platinum.............................................. 12.1
American Oil and Gas.................................. 10.5
Nonferrous Metals..................................... 6.6
Gas Pipelines......................................... 5.2
Oil Services.......................................... 5.1
Chemicals............................................. 4.7
Silver................................................ 1.2
Aluminum.............................................. 1.1
Retail................................................ 0.9
Financial Services.................................... 0.4
Gold Mining Finance................................... 0.3
Base Metals........................................... 0.1
-----
99.2%
Other assets in excess of liabilities................. 0.8
-----
100.0%
=====
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-35
<PAGE>
PRUDENTIAL NATURAL
Statement of Assets and Liabilities RESOURCES FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets May 31, 1998
------------
<S> <C>
Investments, at value (cost $109,764,448)..................................................... $ 98,310,095
Foreign currency, at value (cost $1,486,658).................................................. 1,456,841
Receivable for Fund shares sold............................................................... 113,704
Dividends and interest receivable............................................................. 84,227
Other assets.................................................................................. 2,169
------------
Total assets............................................................................... 99,967,036
------------
Liabilities
Payable for Fund shares reacquired............................................................ 413,875
Accrued expenses and other liabilities........................................................ 271,834
Distribution fee payable...................................................................... 70,635
Management fee payable........................................................................ 69,202
Payable for investments purchased............................................................. 16,221
------------
Total liabilities.......................................................................... 841,767
------------
Net Assets.................................................................................... $ 99,125,269
============
Net assets were comprised of:
Common stock, at par....................................................................... $ 88,963
Paid-in capital in excess of par........................................................... 106,625,186
------------
106,714,149
Accumulated net investment loss............................................................ (401,440)
Accumulated net realized gain on investments............................................... 4,299,915
Net unrealized depreciation on investments and foreign currencies.......................... (11,487,355)
------------
Net assets, May 31, 1998...................................................................... $ 99,125,269
============
Class A:
Net asset value and redemption price per share
($28,491,349 / 2,436,972 shares of common stock issued and outstanding)................. $11.69
Maximum sales charge (5% of offering price)................................................ .62
------
Maximum offering price to public........................................................... $12.31
======
Class B:
Net asset value, offering price and redemption price per share
($67,028,511 / 6,140,588 shares of common stock issued and outstanding)................. $10.92
======
Class C:
Net asset value, offering price and redemption price per share
($1,844,249 / 168,953 shares of common stock issued and outstanding).................... $10.92
======
Class Z:
Net asset value, offering price and redemption price per share
($1,761,160 / 149,800 shares of common stock issued and outstanding).................... $11.76
======
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-36
<PAGE>
PRUDENTIAL NATURAL
RESOURCES FUND, INC.
Statement of Operations
- --------------------------------------------------------------
Year Ended
Net Investment Income (Loss) May 31, 1998
------------
Income
Dividends (net of foreign withholding taxes
of $51,070).............................. $ 1,149,776
Interest.................................... 165,300
------------
Total income............................. 1,315,076
------------
Expenses
Management fee.............................. 970,786
Distribution fee--Class A................... 94,831
Distribution fee--Class B................... 868,640
Distribution fee--Class C................... 20,602
Transfer agent's fees and expenses.......... 250,000
Custodian's fees and expenses............... 188,000
Registration fees........................... 100,000
Reports to shareholders..................... 80,000
Audit fee................................... 32,000
Directors' fees and expenses................ 28,000
Legal fees and expenses..................... 22,000
Miscellaneous............................... 14,284
------------
Total expenses........................... 2,669,143
------------
Net investment loss............................ (1,354,067)
------------
Realized and Unrealized Gain (Loss)
on Investments and Foreign
Currency Transactions
Net realized gain (loss) on:
Investment transactions..................... 16,608,219
Foreign currency transactions............... (310,849)
------------
16,297,370
------------
Net change in unrealized depreciation on:
Investments................................. (34,722,148)
Foreign currencies.......................... (35,192)
------------
(34,757,340)
------------
Net loss on investments and foreign
currencies.................................. (18,459,970)
------------
Net Decrease in Net Assets
Resulting from Operations...................... $(19,814,037)
============
PRUDENTIAL NATURAL
RESOURCES FUND, INC.
Statement of Changes in Net Assets
- ---------------------------------------------------------------------------
Increase (Decrease) in Year Ended May 31,
Net Assets -----------------------------
1998 1997
------------- -------------
Operations
Net investment loss.................. $ (1,354,067) $ (1,466,500)
Net realized gain on investment
and foreign currency
transactions...................... 16,297,370 20,092,637
Net change in unrealized
depreciation on investments
and foreign currencies............ (34,757,340) (12,087,497)
------------ ------------
Net increase (decrease) in net
assets resulting from
operations........................ (19,814,037) 6,538,640
------------ ------------
Distributions from net realized gains
(Note 1)
Class A.............................. (5,225,285) (4,657,286)
Class B.............................. (12,416,227) (12,161,558)
Class C.............................. (289,629) (234,109)
Class Z.............................. (414,456) (32,340)
------------ ------------
(18,345,597) (17,085,293)
------------ ------------
Fund share transactions (net of share
conversions) (Note 5)
Proceeds from shares sold............ 104,445,079 157,545,157
Net asset value of shares
issued in reinvestment of
distributions..................... 16,191,113 15,354,101
Cost of shares reacquired............ (147,551,820) (145,400,427)
------------ ------------
Net increase (decrease) in net
assets from Fund share
transactions...................... (26,915,628) 27,498,831
------------ ------------
Total increase (decrease)............... (65,075,262) 16,952,178
Net Assets
Beginning of year....................... 164,200,531 147,248,353
------------ ------------
End of year(a).......................... $ 99,125,269 $164,200,531
============ ============
(a)Includes undistributed net
investment loss of: $ (401,440) $ (247,519)
------------ ------------
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-37
<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 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.
- --------------------------------------------------------------------------------
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 or at the bid price in the
absence of an asked price. 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 (losses) 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 depreciation on foreign currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin as a result of,
among other factors, the possibility of political and economic instability and
the level of governmental supervision and the regulation of foreign securities
markets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses from investment and
foreign 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.
- --------------------------------------------------------------------------------
B-38
<PAGE>
PRUDENTIAL NATURAL
Notes to Financial Statements RESOURCES FUND, INC.
- --------------------------------------------------------------------------------
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 foreign investment companies'
transactions.
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income; Capital Gain, and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to decrease accumulated net investment loss and decrease
accumulated net realized gain on investments by $1,200,146 for foreign currency
gains realized and tax-basis net operating losses during the fiscal year ended
May 31, 1998. Net realized gains and net assets were not affected by this
change.
- --------------------------------------------------------------------------------
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. Effective July 1, 1998, Prudential Investment Management
Services LLC ("PIMS") will become the distributor of the Fund and will serve the
Fund under the same terms and conditions as under the arrangement with PSI.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI for its
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%
of the average daily net 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, 1998.
PSI has advised the Fund that it has received approximately $51,100 in front-end
sales charges resulting from sales of Class A shares during the year ended May
31, 1998. From these fees, PSI paid such sales charges to dealers which in turn
paid commissions to salespersons and incurred other distribution costs.
PSI has advised the Fund that for the year ended May 31, 1998, it received
approximately $261,000 and $1,500 in contingent deferred sales charges imposed
upon certain redemptions by Class B and Class C shareholders, respectively.
PSI, PIFM, PIC and PIMS are indirect, wholly owned subsidiaries of The
Prudential Insurance Company of America.
The Fund, along with other affiliated registered investment companies (the
"Funds"), has a credit agreement (the "Agreement") with an unaffiliated lender.
The maximum commitment under the Agreement is $200,000,000. Interest on any such
borrowings outstanding will be at market rates. The purpose of the Agreement is
to serve as an alternative source of funding for capital share redemptions. The
Fund did not borrow
- --------------------------------------------------------------------------------
B-39
<PAGE>
PRUDENTIAL NATURAL
Notes to Financial Statements RESOURCES FUND, INC.
- --------------------------------------------------------------------------------
any amounts pursuant to the Agreement during the fiscal year ended May 31, 1998.
The Funds pay a commitment fee at an annual rate of .055 of 1% on the unused
portion of the credit facility. The commitment fee is accrued and paid quarterly
on a pro rata basis by the Funds. The Agreement expired on December 30, 1997 and
has been extended through December 29, 1998 under the same terms.
- -------------------------------------------------------------------------------
Note 3. Other Transactions With Affiliates
Prudential Mutual Fund Services LLC ("PMFS"), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent and during the year ended May 31, 1998, the
Fund incurred fees of approximately $205,700 for the services of PMFS. As of May
31, 1998, approximately $16,300 of such fees were due to PMFS. Transfer agent
fees and expenses in the Statement of Operations include certain out-of-pocket
expenses paid to nonaffiliates.
For the year ended May 31, 1998, PSI and/or its foreign affiliates earned
approximately $3,600 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, 1998 aggregated $30,786,104 and $71,631,596,
respectively.
The federal income tax basis of the Fund's investments at May 31, 1998 was
$110,507,398 and accordingly, net unrealized depreciation for federal income tax
purposes was $12,197,303 (gross unrealized appreciation--$11,609,502 gross
unrealized depreciation--$23,806,805).
For federal income tax purposes the Fund will elect to treat net currency losses
of approximately $155,000 incurred in the seven month period ended May 31, 1998
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. A special exchange privilege is 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:
Class A Shares Amount
- ------- ------------ ------------
Year ended May 31, 1998:
Shares sold.................................... 4,276,146 $ 68,660,515
Shares issued in reinvestment of
distributions................................ 432,316 4,906,784
Shares reacquired.............................. (5,385,633) (84,912,401)
------------ ------------
Net decrease in shares outstanding
before conversion............................ (677,171) (11,345,102)
Shares issued upon conversion from
Class B...................................... 222,232 3,424,064
------------ ------------
Net decrease in shares
outstanding.................................. (454,939) $ (7,921,038)
============ ============
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
============ ============
Class B
- --------
Year ended May 31, 1998:
Shares sold.................................... 1,305,235 $ 17,085,567
Shares issued in reinvestment of
distributions................................ 1,003,247 10,674,545
Shares reacquired.............................. (3,140,113) (42,797,561)
------------ ------------
Net decrease in shares outstanding
before conversion............................ (831,631) (15,037,449)
Shares reacquired upon conversion
into Class A................................. (234,878) (3,424,064)
------------ ------------
Net decrease in shares
outstanding.................................. (1,066,509) $(18,461,513)
============ ============
- --------------------------------------------------------------------------------
B-40
<PAGE>
PRUDENTIAL NATURAL
Notes to Financial Statements RESOURCES FUND, INC.
- --------------------------------------------------------------------------------
Class B Shares Amount
- ------- ----------- ------------
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
============ ============
Class C
- -------
Year ended May 31, 1998:
Shares sold..................................... 79,026 $ 1,034,902
Shares issued in reinvestment of
distributions................................. 22,874 243,380
Shares reacquired............................... (97,356) (1,331,031)
------------ ------------
Net increase in shares
outstanding................................... 4,544 $ (52,749)
============ ============
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
============ =============
Class Z
- -------
Year ended May 31, 1998:
Shares sold..................................... 1,119,455 $ 17,664,095
Shares issued in reinvestment of
distributions................................. 32,141 366,404
Shares reacquired............................... (1,194,440) (18,510,827)
------------ ------------
Net decrease in shares
outstanding................................... (42,844) $ (480,328)
============ ============
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.
- --------------------------------------------------------------------------------
B-41
<PAGE>
PRUDENTIAL NATURAL
Financial Highlights RESOURCES FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
-------------------------------------------------------
Year Ended May 31,
-------------------------------------------------------
1998(a) 1997(a) 1996 1995(a) 1994(a)
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 16.27 $ 17.34 $ 13.73 $ 12.55 $11.84
Income from investment operations
Net investment income (loss).................. (.08) (.07) (.01) (.03) .01
Net realized and unrealized gain (loss) on
investment and foreign currency
transactions............................... (2.33) .94 4.42 1.21 .70
------- ------- ------- ------- -------
Total from investment operations........... (2.41) .87 4.41 1.18 .71
------- ------- ------- ------- -------
Less distributions
Distributions from net realized gains......... (2.17) (1.94) (.80) -- --
------- ------- ------- ------- -------
Net asset value, end of year.................. $ 11.69 $ 16.27 $ 17.34 $ 13.73 $12.55
======= ======= ======= ======= =======
TOTAL RETURN(b):.............................. (14.41)% 5.37% 33.51% 9.40% 6.00 %
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $28,491 $47,054 $32,608 $19,682 $6,505
Average net assets (000)...................... $37,933 $40,393 $23,106 $10,791 $4,106
Ratios to average net assets:
Expenses, including distribution fees...... 1.55% 1.48% 1.57% 1.73% 1.89 %
Expenses, excluding distribution fees...... 1.30% 1.23% 1.32% 1.48% 1.65 %
Net investment income (loss).................. (.54)% (.43)% (.09)% (.25)% .11 %
For Class A, B, C and Z shares:
Portfolio turnover............................ 25% 53% 41% 36% 19 %
</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 year reported and includes reinvestment of dividends and
distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-42
<PAGE>
PRUDENTIAL NATURAL
Financial Highlights RESOURCES FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
---------------------------------------------------------
Year Ended May 31,
---------------------------------------------------------
1998(a) 1997(a) 1996 1995(a) 1994(a)
------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 15.46 $ 16.70 $ 13.35 $ 12.29 $ 11.69
------- -------- -------- ------- -------
Income from investment operations
Net investment loss........................... (.17) (.19) (.10) (.13) (.08)
Net realized and unrealized gain (loss) on
investment and foreign currency
transactions............................... (2.20) .89 4.25 1.19 .68
------- -------- -------- ------- -------
Total from investment operations........... (2.37) .70 4.15 1.06 .60
------- -------- -------- ------- -------
Less distributions
Distributions from net realized gains......... (2.17) (1.94) (.80) -- --
------- -------- -------- ------- -------
Net asset value, end of year.................. $ 10.92 $ 15.46 $ 16.70 $ 13.35 $ 12.29
======= ======== ======== ======= =======
TOTAL RETURN(b):.............................. (14.96)% 4.51% 32.49% 8.62% 5.13%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $67,029 $111,464 $113,090 $80,774 $64,235
Average net assets (000)...................... $86,864 $107,361 $ 84,396 $74,681 $48,772
Ratios to average net assets:
Expenses, including distribution fees...... 2.30% 2.23% 2.32% 2.48% 2.65%
Expenses, excluding distribution fees...... 1.30% 1.23 1.32% 1.48% 1.65%
Net investment loss........................... (1.28)% (1.18)% (.84)% (1.05)% (.67)%
</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 year reported and includes reinvestment of dividends and
distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-43
<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 Year Ended Through
------------------------------ May 31, May 31, May 31,
1998(a) 1997(a) 1996 1995(a) 1998(a) 1997
------- ------- ------ ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $15.46 $16.70 $13.35 $12.47 $16.30 $ 17.08
------- ------- ------ ----- ----- -----
Income from investment operations
Net investment loss........................... (.18) (.19) (.10) (.13) (.05) (.03)
Net realized and unrealized gain on investment
and foreign currency transactions.......... (2.19) .89 4.25 1.01 (2.32) 1.19
------- ------- ------ ----- ----- -----
Total from investment operations........... (2.37) .70 4.15 .88 (2.37) 1.16
------- ------- ------ ----- ----- -----
Less distributions
Distributions from net realized gains on
investment and foreign currency
transactions............................... (2.17) (1.94) (.80) -- (2.17) (1.94)
------- ------- ------ ----- ----- -----
Net asset value, end of period................ $10.92 $15.46 $16.70 $13.35 $11.76 $ 16.30
======= ======= ====== ===== ===== =====
TOTAL RETURN(b):.............................. (14.96)% 4.51% 32.49% 7.06% (14.12)% 7.17%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $1,844 $2,542 $1,551 $606 $1,761 $ 3,140
Average net assets (000)...................... $2,060 $2,041 $734 $294 $2,581 $ 994
Ratios to average net assets:
Expenses, including distribution fees...... 2.30% 2.23% 2.32% 2.56%(c) 1.30% 1.23%(c)
Expenses, excluding distribution fees...... 1.30% 1.23% 1.32% 1.56%(c) 1.30% 1.23%(c)
Net investment loss........................... (1.35)% (1.18)% (.84)% (1.08)%(c) (.33)% (.18)%(c)
</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. 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-44
<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, 1998, 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 periods
presented, 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,
1998 by correspondence with the custodian and broker, provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
July 20, 1998
- --------------------------------------------------------------------------------
B-45
<PAGE>
APPENDIX I--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.
I-1
<PAGE>
APPENDIX II--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.
STANDARD DEVIATION
Standard deviation is an absolute (non-relative) measure of volatility
which, for a mutual fund, depicts how widely the returns varied over a certain
period of time. When a fund has a high standard deviation, its range of
performance has been very wide, implying greater volatility potential.
Standard deviation is only one of several measures of a fund's volatility.
II-1
<PAGE>
APPENDIX III--HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
The following chart shows the long-term performance of various asset classes
and the rate of inflation.
Historical Performance Data
[LINE GRAPH APPEARS HERE]
Source: Stocks, Bonds, Bills and Inflation 1998 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 distributions. Bond returns are attributable mainly to the reinvestment of
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).
III-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 1997. The total returns of the indices include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Fund or of any sector in which the
Fund invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees
of a mutual fund. See "Fund Expenses" in the prospectus. The net effect of the
deduction of the operating expenses of a mutual fund on these historical total
returns, including the compounded effect over time, could be substantial.
Historical Total Returns of Different Bond Market Sectors
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
YEAR 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
Treasury
Bonds/1/ 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% -3.4% 18.4% 2.7% 9.6%
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. Government
Mortgage
Securities/2/ 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% -1.6% 16.8% 5.4% 9.5%
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. Investment Grade
Corporate Bonds/3/ 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% -3.9% 22.3% 3.3% 10.2%
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. High Yield
Corporate Bonds/4/ 5.0% 12.5% 0.8% -9.6% 46.2% 15.8% 17.1% -1.0% 19.2% 11.4% 12.8%
- ----------------------------------------------------------------------------------------------------------------------------------
World Government
Bonds/5/ 35.2% 2.3% -3.4% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1% (4.3%)
- ----------------------------------------------------------------------------------------------------------------------------------
Difference between
highest and lowest
returns percent 33.2% 10.2% 18.8% 24.9% 30.9% 11.0% 10.3% 9.9% 5.5% 8.7% 17.1
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/1/ LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over
150 public issues of the U.S. Treasury having maturities of at least one
year.
/2/ LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of
the Government National Mortgage Association (GNMA), Federal National
Mortgage Association (FNMA), and the Federal Home Loan Mortgage Corporation
(FHLMC).
/3/ LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign
governments, municipalities, governmental agencies or international
agencies. All bonds in the index have maturities of at least one year.
/4/ LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or
Fitch Investors Service). All bonds in the index have maturities of at least
one year.
/5/ SALOMON BROTHERS WORLD GOVERNMENT INDEX (NON U.S.) includes over 800 bonds
issued by various foreign governments or agencies, excluding those in the
U.S., but including those in Japan, Germany, France, the U.K., Canada,
Italy, Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and
Austria. All bonds in the index have maturities of at least one year.
III-2
<PAGE>
This chart shows the growth of a
This chart illustrates the hypothetical $10,000 investment made
performance of major world stock in the stocks representing the S&P
markets for the period from 500 stock index with and without
December 31, 1985 through December reinvested dividends.
1, 1997. It does not represent the
performance of any Prudential
Mutual Fund.
[LINE GRAPH APPEARS HERE]
FOREIGN STOCK MARKETS HAVE OFTEN
OUTPERFORMED THOSE IN THE U.S.
Source: Stocks, Bonds, Bills, and
Average Annual Total Returns of Inflation 1998 Yearbook, Ibbotson
Major World Stock Markets Associates, Chicago (annually
(12/31/85-12/31/97) updates work by Roger G. Ibbotson
and Rex A. Sinquefield). Used with
Netherlands 20.5% permission. All rights reserved.
Spain 20.4% This chart is used for illustrative
Sweden 20.4% purposes only and is not intended to
Hong Kong 19.7% represent the past, present or
Belgium 19.5% future performance of any Prudential
Switzerland 17.9% Mutual Fund. Common stock total
USA 17.1% return is based on the Standard &
UK 16.6% Poor's 500 Stock Index, a market-
France 15.6% value-weighted index made up of 500
Germany 12.1% of the largest stocks in the U.S.
Austria 9.6% based upon their stock market value.
Japan 6.6% Investors cannot invest directly in
indices.
Source: Morgan Stanley Capital
International based on data
retrieved from Lipper Analytical
New Applications (LANA) as of
12/31/97. Used with permission.
Morgan Stanley Country indices are
unmanaged indices which include
those stocks making up the largest
two-thirds of each country's total
stock market capitalization.
Returns reflect the reinvestment
of all distributions. This chart
is for illustrative purposes only
and is not indicative of the past,
present or future performance of
any specific investment. Investors
cannot invest directly in stock
indices.
------------------------------------------------
WORLD STOCK MARKET CAPITALIZATION BY REGION
World Total: $12.5 Trillion
[PIE CHART APPEARS HERE]
Pacific Basin 15.6%
Europe 32.1%
U.S. 49.8%
Canada 2.5%
------------------------------------------------
Source: Morgan Stanley Capital
International, December 31, 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 1577 companies in 22 countries
(representing approximately 60% of
the aggregate market value of the
stock exchanges). This chart is for
illustrative purposes only and does
not represent the allocation of any
Prudential Mutual Fund.
III-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 (1926-1997)
[LINE GRAPH APPEARS HERE]
- ---------------------------------------
Source: Stocks, Bonds, Bills and Inflation 1998 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. The chart illustrates the
historical yield of the long-term U.S. Treasury Bond from 1926-1997. 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.
III-4
<PAGE>
APPENDIX IV--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, 1997 and is subject to change thereafter. All information relies
on data provided by The Prudential Investment Corporation (PIC) or from other
sources believed by the Manager to be reliable. Such information has not been
verified by the Fund.
INFORMATION ABOUT PRUDENTIAL
The Manager and PIC/1/ are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December
31, 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 79,000
persons worldwide, and maintains a sales force of approximately 10,100 agents
and 6,500 financial advisors. Prudential is a major issuer of annuities,
including variable annuities. Prudential seeks to develop innovative products
and services to meet consumer needs in each of its business areas. Prudential
uses the rock of Gibraltar as its symbol. The Prudential rock is a recognized
brand name throughout the world.
Insurance. Prudential has been engaged in the insurance business since 1875.
It insures or provides financial services to nearly 40 million people
worldwide. Long one of the largest issuers of individual life insurance, the
Prudential has 25 million life insurance policies and group certificates in
force today with a face value of almost $1 trillion. Prudential has the
largest capital base ($12.3 billion) of any life insurance company in the
United States. Prudential provides auto insurance for approximately 1.5
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, 1997, Prudential had more than $370 billion in
assets under management. Prudential Investments, a business group of
Prudential (of which Prudential Mutual Funds is a key part) manages over $211
billion in assets of institutions and individuals. In Pensions & Investments,
May 12, 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 4.9 million
Americans receive healthcare from a Prudential managed care membership.
Financial Services. The Prudential Bank, a wholly-owned subsidiary of
Prudential, has over $4 billion in assets and serves nearly 1.5 million
customers across 50 states.
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
As of December 31, 1997 Prudential Investments Fund Management LLC is the
eighteenth largest mutual fund company in the country, with over 2.5 million
shareholders invested in more than 50 mutual fund portfolios and variable
annuities with more than 3.7 million shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers who manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment
portfolios.
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser
in national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in
surveys conducted by national and regional publications and media
organizations such as The Wall Street Journal, The New York Times, Barron's
and USA Today.
- ---------
/1Prudential/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 LLC as one of the subadvisers to The Prudential
Investment Portfolios, Inc. and Mercator Asset Management LP as the
subadviser to International Stock Series, a portfolio of Prudential World
Fund, Inc. There are multiple subadvisers for The Target Portfolio Trust.
/2As/of December 31, 1996.
IV-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
approximately 200 issues held in the Prudential High Yield Fund (currently the
largest fund of its kind in the country) along with 100 or so other high yield
bonds, which may be considered for purchase./3/ Non-investment grade bonds,
also known as junk bonds or high yield bonds, are subject to a greater risk of
loss of principal and interest including default risk than higher-rated bonds.
Prudential high yield portfolio managers and analysts meet face-to-face with
almost every bond issuer in the High Yield Fund's portfolio annually, and have
additional telephone contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets--from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from Pulp and Paper Forecaster to Women's
Wear Daily--to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential
mutual fund.
Prudential Mutual Funds trade approximately $31 billion in U.S. and foreign
government securities a year. PIC seeks information from government policy
makers. In 1995, Prudential's portfolio managers met with several senior U.S.
and foreign government officials, on issues ranging from economic conditions
in foreign countries to the viability of index-linked securities in the United
States.
Prudential Mutual Funds' portfolio managers and analysts met with over 1,200
companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.
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.
- ---------
/3As/of December 31, 1995. The number of bonds and the size of the Fund are
subject to change.
/4Trading/data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PIC serves as the subadviser, portfolios
of the Prudential Series Fund and institutional and non-US accounts managed
by Prudential Mutual Fund Investment Management, a division of PIC, for the
year ended December 31, 1995.
/5Based/on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate
U.S. Government, Short Investment Grade Debt, Intermediate Investment Grade
Debt, General U.S. Treasury, General U.S. Government and Mortgage funds.
/6As/of December 31, 1994.
IV-2
<PAGE>
INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 6,000 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1997, assets held by Prudential Securities for
its clients approximated $235 billion.
During 1997, approximately 29,000 new customer accounts were opened each
month at Prudential Securities.
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./7/
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.
Standard & Poor's rates Prudential Securities Incorporated BBB+, with a
"stable outlook."
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/ 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.
IV-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, 1998.
Statement of Assets and Liabilities at May 31, 1998.
Statement of Operations for the fiscal year ended May 31, 1998.
Statement of Changes in Net Assets for the fiscal years ended May 31,
1998 and 1997.
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, incorporated by reference to Exhibit 4(a)
to Post-Effective Amendment No. 17 to the Registration Statement on
Form N-1A filed via EDGAR on July 25, 1997 (File No. 33-15166).
(b) Specimen certificate for Class A shares of common stock, $.01 par
value, of the Registrant, incorporated by reference to Exhibit 4(b)
to Post-Effective Amendment No. 17 to the Registration Statement on
Form N-1A filed via EDGAR on July 25, 1997 (File No. 33-15166).
(c) Specimen certificate for Class C shares of common stock, $.01 par
value, of the Registrant, incorporated by reference to Exhibit 4(c)
to Post-Effective Amendment No. 17 to the Registration Statement on
Form N-1A filed via EDGAR on July 25, 1997 (File No. 33-15166).
5.(a) Management Agreement between the Registrant and Prudential Mutual
Fund Management, Inc., incorporated by reference to Exhibit 5(a) to
Post-Effective Amendment No. 17 to the Registration Statement on Form
N-1A filed via EDGAR on July 25, 1997 (File No. 33-15166).
(b) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation, incorporated by
reference to Exhibit 5(b) to Post-Effective Amendment No. 17 to the
Registration Statement on Form N-1A filed via EDGAR on July 25, 1997
(File No. 33-15166).
6.(a) 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).
(b) Distribution Agreement between the Registrant and Prudential
Investment Management Services LLC.*
(c) Form of Dealer Agreement.*
8.Custodian Contract between the Registrant and State Street Bank and
Trust Company, incorporated by reference to Exhibit 8 to Post-
Effective Amendment No. 17 to the Registration Statement on Form N-1A
filed via EDGAR on July 25, 1997 (File No., 33-15166).
9.Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc., incorporated by reference to
Exhibit 9 to Post-Effective Amendment No. 17 to the Registration
Statement on Form N-1A filed via EDGAR on July 25, 1997 (File No. 33-
15166).
10.Not applicable.
11.Consent of Independent Accountants.*
C-1
<PAGE>
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).
(d) Amended Distribution and Service Plan for Class A shares.*
(e) Amended Distribution and Service Plan for Class B shares.*
(f) Amended Distribution and Service Plan for Class C shares.*
16.(a) Schedule of Computation of Performance Quotations for Class A,
Class B and Class C Shares, incorporated by reference to Exhibit 16
to Post-Effective Amendment No. 17 to the Registration Statement on
Form N-1A filed via EDGAR on July 25, 1997 (File No. 3-15166).
17.Financial Data Schedules.*
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).
- ---------
* Filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of July 10, 1998 there were 5,152, 10,323, 277 and 122 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 (Exhibits 6(a) and (b) to the Registration Statement), the
Distributor of the Registrant may be indemnified against liabilities which it
may incur, except liabilities arising from bad faith, gross negligence,
willful misfeasance or reckless disregard of duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (Securities Act) may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the foregoing provisions
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the 1940 Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in connection with the
successful defense of any action, suit or proceeding) is asserted against the
Registrant by such director, officer or controlling person in connection with
the shares being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the 1940 Act and will be governed
by the final adjudication of such issue.
The Registrant has purchased an insurance policy insuring its officers and
directors against liabilities, and certain costs of defending claims against
such officers and directors, to the extent such officers and directors are not
found to have committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of their duties. The
C-2
<PAGE>
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 remains in effect and is 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 Post-Effective Amendment to the Registration Statement and "Manager"
in the Statement of Additional Information constituting Part B of this Post-
Effective Amendment to the Registration Statement.
The business and other connections of the officers of PIFM are listed in
Schedules A and D of Form ADV of PIFM as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference
(File No. 801-31104).
The business and other connections of PIFM's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is Gateway Center Three, Newark, New Jersey 07102-4077.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATIONS
- ---------------- ------------------ ---------------------
<S> <C> <C>
Frank W. Giordano Executive Vice President, Executive Vice President, Secretary and General
Secretary and General Counsel Counsel, PIFM; Senior Vice President, Prudential
Securities Incorporated (Prudential Securities)
Robert F. Gunia Executive Vice President Vice President, Prudential Investments; Executive Vice
and Treasurer President and Treasurer, PIFM; Senior Vice President,
Prudential Securities.
Neil A. McGuinness Executive Vice President Executive Vice President and Director of Marketing,
Prudential Mutual Fund & Annuities (PMF&A); Executive
Vice President, PIFM
Brian Storms Officer-in-Charge, President, President, PMF&A; Officer-in-Charge, President, Chief
Chief Executive Officer and Executive Officer and Chief Operating Officer, PIFM
Chief Operating Officer
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 Post-Effective Amendment to the Registration Statement and "Manager"
in the Statement of Additional Information constituting Part B of this Post-
Effective Amendment to the 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; Senior Vice President of Prudential
</TABLE>
C-3
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Prudential Securities Incorporated
Prudential Investment Management Services LLC is distributor for The Target
Portfolio Trust, Cash Accumulation Trust, Command Government Fund, Command
Money Fund, Command Tax-Free Fund, The Global Total Return Fund, Inc., Global
Utility Fund, Inc., Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth
Equity Fund), Prudential Balanced Fund, Prudential California Municipal Fund,
Prudential Developing Markets Fund, Prudential Distressed Securities Fund,
Inc., Prudential Diversified Bond Fund, Inc., Prudential Emerging Growth Fund,
Inc., Prudential Equity Fund, Inc., Prudential Equity Income Fund, Prudential
Europe Growth Fund, Inc., Prudential Global Genesis Fund, Inc., Prudential
Global Limited Maturity Fund, Inc., Prudential Government Income Fund, Inc.,
Prudential Government Securities Trust, Prudential High Yield Fund, Inc.,
Prudential High Yield Total Return Fund, Inc., Prudential Index Series Fund,
Inc., Prudential Institutional Liquidity Portfolio, Inc., Prudential
Intermediate Global Income Fund, Inc., Prudential International Bond Fund,
Inc., The Prudential Investment Portfolios, Inc., Prudential Mid-Cap Value
Fund, Prudential MoneyMart Assets, Inc., Prudential Mortgage Income Fund,
Inc., Prudential Municipal Bond Fund, Prudential Municipal Series Fund,
Prudential National Municipals Fund, Inc., Prudential Natural Resources Fund,
Inc., Prudential Pacific Growth Fund, Inc., Prudential Real Estate Securities
Fund, Prudential Small-Cap Quantum Fund, Inc., Prudential Small Company Value
Fund, Inc., Prudential Special Money Market Fund, Inc., Prudential Structured
Maturity Fund, Inc., Prudential 20/20 Focus Fund, Prudential Tax-Free Money
Fund, Inc., Prudential Utility Fund, Inc., and Prudential World Fund, Inc.
Prudential Investment Management Services LLC 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
Investment Management Services LLC is set forth below.
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME UNDERWRITER REGISTRANT
- ---- ------------- -------------
<S> <C> <C>
E. Michael Caulfield.... President None
Mark R. Fetting......... Executive Vice President None
Jonathan M. Greene...... Executive Vice President None
Jean D. Hamilton........ Executive Vice President None
Ronald P. Joelson....... Executive Vice President None
Brian M. Storms......... Executive Vice President None
John R. Strangfeld...... Executive Vice President None
Mario A. Mosse.......... Senior Vice President and Chief Operating Officer None
Scott S. Wallner........ Vice President, Secretary and Chief Legal Officer None
Michael G. Williamson... Vice President, Comptroller and Chief Financial Officer None
C. Edward Chaplin....... Treasurer None
</TABLE>
(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,
C-4
<PAGE>
New Jersey. Documents required by Rules 31a-1(b)(4),(5), (6), (7), (9), (10)
and (11) and 31a-1(d) and (f) will be kept at Gateway Center Three, Newark,
New Jersey 07102-4077 and the remaining accounts, books and other documents
required by such other pertinent provisions of Section 31(a) and the Rules
promulgated thereunder will be kept by State Street Bank and Trust Company and
Prudential Mutual Fund Services LLC.
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-5
<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 31st day of
July, 1998.
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.
SIGNATURE TITLE DATE
/s/ Edward D. Beach Director
- ----------------------------- July 31, 1998
EDWARD D. BEACH
/s/ Stephen C. Eyre Director
- ----------------------------- July 31, 1998
STEPHEN C. EYRE
/s/ Delayne D. Gold Director
- ----------------------------- July 31, 1998
DELAYNE D. GOLD
/s/ Robert F. Gunia Director
- ----------------------------- July 31, 1998
ROBERT F. GUNIA
/s/ Don G. Hoff Director
- ----------------------------- July 31, 1998
DON G. HOFF
/s/ Robert E. LaBlanc Director
- ----------------------------- July 31, 1998
ROBERT E. LABLANC
/s/ Mendel A. Melzer Director
- ----------------------------- July 31, 1998
MENDEL A. MELZER
/s/ Richard A. Redeker President and Director
- ----------------------------- July 31, 1998
RICHARD A. REDEKER
/s/ Robin B. Smith Director
- ----------------------------- July 31, 1998
ROBIN B. SMITH
/s/ Stephen Stoneburn Director
- ----------------------------- July 31, 1998
STEPHEN STONEBURN
/s/ Nancy H. Teeters Director
- ----------------------------- July 31, 1998
NANCY H. TEETERS
/s/ Grace C. Torres Treasurer, Principal
- ----------------------------- Financial and July 31, 1998
GRACE C. TORRES Accounting Officer
C-6
<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, incor-
porated by reference to Exhibit 4(a) to Post-Ef-
fective Amendment No. 17 to the Registration
Statement on Form N-1A filed via EDGAR on July
25, 1997 (File No. 33-15166).
4(b) Specimen certificate for Class A shares of common --
stock, $.01 par value, of the Registrant, incor-
porated by reference to Exhibit 4(b) to Post-Ef-
fective Amendment No. 17 to the Registration
Statement on Form N-1A filed via EDGAR on July
25, 1997 (File No. 33-15166).
4(c) Specimen certificate for Class C shares of common
stock, $.01 par value, of the Registrant, incor-
porated by reference to Exhibit 4(c) to Post-Ef-
fective Amendment No. 17 to the Registration
Statement on Form N-1A filed via EDGAR on July
25, 1997 (File No. 33-15166).
5(a) Management Agreement between the Registrant and --
Prudential Mutual Fund Management, Inc, incorpo-
rated by reference to Exhibit 5(a) to Post-Effec-
tive Amendment No. 17 to the Registration State-
ment on Form N-1A filed via EDGAR on July 25,
1997 (File No. 33-15166).
5(b) Subadvisory Agreement between Prudential Mutual --
Fund Management, Inc. and The Prudential Invest-
ment Corporation, incorporated by reference to
Exhibit 5(b) to Post-Effective Amendment No. 17
to the Registration Statement on Form N-1A filed
via EDGAR on July 25, 1997 (File No. 33-15166).
6(a) 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).
6(b) Distribution Agreement between the Registrant and --
Prudential Investment Management Services LLC.*
6(c) Form of Dealer Agreement.* --
8 Custodian Contract between the Registrant and --
State Street Bank and Trust Company, incorporated
by reference to Exhibit 8 to Post-Effective
Amendment No. 17 to the Registration Statement on
Form N-1A filed via EDGAR on July 25, 1997 (File
No. 33-15166).
9 Transfer Agency and Service Agreement between the --
Registrant and Prudential Mutual Fund Services,
Inc, incorporated by reference to Exhibit 9 to
Post-Effective Amendment No. 17 to the Registra-
tion Statement on Form N-1A filed via EDGAR on
July 25, 1997 (File No. 33-15166).
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).
15(d) Amended Distribution and Service Plan for Class A --
shares.*
15(e) Amended Distribution and Service Plan for Class B --
shares.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION PAGE NUMBER
-------------- ----------- -----------
<C> <S> <C>
15(f) Amended Distribution and Service Plan for Class C
shares.*
16(a) Schedule of Computation of Performance Quotations --
for Class A, Class B and Class C Shares, incorpo-
rated by reference to Exhibit 16(a) to Post-Ef-
fective Amendment No. 17 to the Registration
Statement on Form N-1A filed via EDGAR on July
25, 1997 (File No. 33-15166).
17 Financial Data Schedules.* --
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).
</TABLE>
- ---------
* Filed herewith.
<PAGE>
EXHIBIT 99.6(b)
PRUDENTIAL NATURAL RESOURCES FUND, INC.
Distribution Agreement
----------------------
Agreement made as of June 1, 1998, between Prudential Natural
Resources Fund, Inc. (the Fund), and Prudential Investment Management Services
LLC, a Delaware limited liability company (the Distributor).
WITNESSETH
WHEREAS, the Fund is registered under the Investment Company Act of
1940, as amended (the Investment Company Act), as a diversified, open-end,
management investment company and it is in the interest of the Fund to offer its
shares for sale continuously;
WHEREAS, the shares of the Fund may be divided into classes and/or
series (all such shares being referred to herein as Shares) and the Fund
currently is authorized to offer Class A, Class B, Class C and Class Z Shares;
WHEREAS, the Distributor is a broker-dealer registered under the
Securities Exchange Act of 1934, as amended, and is engaged in the business of
selling shares of registered investment companies either directly or through
other broker-dealers;
WHEREAS, the Fund and the Distributor wish to enter into an agreement
with each other, with respect to the continuous offering of the Fund's Shares
from and after the date hereof in order to promote the growth of the Fund and
facilitate the distribution of its Shares; and
WHEREAS, the Fund has adopted a plan (or plans) of distribution
pursuant to Rule 12b-1 under the Investment Company Act with respect to certain
of its classes and/or series of Shares (the Plans) authorizing payments by the
Fund to the Distributor with respect to the distribution of such classes and/or
series of Shares and the maintenance of related shareholder accounts.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor
------------------------------
The Fund hereby appoints the Distributor as the principal
underwriter and distributor of the Shares of the Fund to sell Shares to the
public on behalf of the Fund and the Distributor hereby accepts such appointment
and agrees to act hereunder. The Fund hereby agrees during the term of this
Agreement to sell Shares of the Fund through the Distributor on the terms and
conditions set forth below.
<PAGE>
Section 2. Exclusive Nature of Duties
--------------------------
The Distributor shall be the exclusive representative of the Fund
to act as principal underwriter and distributor of the Fund's Shares, except
that:
2.1 The exclusive rights granted to the Distributor to sell
Shares of the Fund shall not apply to Shares of the Fund issued in connection
with the merger or consolidation of any other investment company or personal
holding company with the Fund or the acquisition by purchase or otherwise of all
(or substantially all) the assets or the outstanding shares of any such company
by the Fund.
2.2 Such exclusive rights shall not apply to Shares issued by the
Fund pursuant to reinvestment of dividends or capital gains distributions or
through the exercise of any conversion feature or exchange privilege.
2.3 Such exclusive rights shall not apply to Shares issued by the
Fund pursuant to the reinstatement privilege afforded redeeming shareholders.
2.4 Such exclusive rights shall not apply to purchases made
through the Fund's transfer and dividend disbursing agent in the manner set
forth in the currently effective Prospectus of the Fund. The term "Prospectus"
shall mean the Prospectus and Statement of Additional Information included as
part of the Fund's Registration Statement, as such Prospectus and Statement of
Additional Information may be amended or supplemented from time to time, and the
term "Registration Statement" shall mean the Registration Statement filed by the
Fund with the Securities and Exchange Commission and effective under the
Securities Act of 1933, as amended (Securities Act), and the Investment Company
Act, as such Registration Statement is amended from time to time.
Section 3. Purchase of Shares from the Fund
--------------------------------
3.1 The Distributor shall have the right to buy from the Fund on
behalf of investors the Shares needed, but not more than the Shares needed
(except for clerical errors in transmission) to fill unconditional orders for
Shares placed with the Distributor by investors or registered and qualified
securities dealers and other financial institutions (selected dealers).
3.2 The Shares shall be sold by the Distributor on behalf of the
Fund and delivered by the Distributor or selected dealers, as described in
Section 6.4 hereof, to investors at the offering price as set forth in the
Prospectus.
3.3 The Fund shall have the right to suspend the sale of any or
all classes and/or series of its Shares at times when redemption is suspended
pursuant to the conditions in Section 4.3 hereof or at such other times as may
be determined by the Board. The Fund shall also have the right to suspend the
sale of any or all classes
2
<PAGE>
and/or series of its Shares if a banking moratorium shall have been declared by
federal or New Jersey authorities.
3.4 The Fund, or any agent of the Fund designated in writing by
the Fund, shall be promptly advised of all purchase orders for Shares received
by the Distributor. Any order may be rejected by the Fund; provided, however,
that the Fund will not arbitrarily or without reasonable cause refuse to accept
or confirm orders for the purchase of Shares. The Fund (or its agent) will
confirm orders upon their receipt, will make appropriate book entries and upon
receipt by the Fund (or its agent) of payment therefor, will deliver deposit
receipts for such Shares pursuant to the instructions of the Distributor.
Payment shall be made to the Fund in New York Clearing House funds or federal
funds. The Distributor agrees to cause such payment and such instructions to be
delivered promptly to the Fund (or its agent).
Section 4. Repurchase or Redemption of Shares by the Fund
----------------------------------------------
4.1 Any of the outstanding Shares may be tendered for redemption
at any time, and the Fund agrees to repurchase or redeem the Shares so tendered
in accordance with its Declaration of Trust as amended from time to time, and in
accordance with the applicable provisions of the Prospectus. The price to be
paid to redeem or repurchase the Shares shall be equal to the net asset value
determined as set forth in the Prospectus. All payments by the Fund hereunder
shall be made in the manner set forth in Section 4.2 below.
4.2 The Fund shall pay the total amount of the redemption price
as defined in the above paragraph pursuant to the instructions of the
Distributor on or before the seventh day subsequent to its having received the
notice of redemption in proper form. The proceeds of any redemption of Shares
shall be paid by the Fund as follows: (i) in the case of Shares subject to a
contingent deferred sales charge, any applicable contingent deferred sales
charge shall be paid to the Distributor, and the balance shall be paid to or for
the account of the redeeming shareholder, in each case in accordance with
applicable provisions of the Prospectus; and (ii) in the case of all other
Shares, proceeds shall be paid to or for the account of the redeeming
shareholder, in each case in accordance with applicable provisions of the
Prospectus.
4.3 Redemption of any class and/or series of Shares or payment
may be suspended at times when the New York Stock Exchange is closed for other
than customary weekends and holidays, when trading on said Exchange is
restricted, when an emergency exists as a result of which disposal by the Fund
of securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund fairly to determine the value of its net assets, or
during any other period when the Securities and Exchange Commission, by order,
so permits.
3
<PAGE>
Section 5. Duties of the Fund
------------------
5.1 Subject to the possible suspension of the sale of Shares as
provided herein, the Fund agrees to sell its Shares so long as it has Shares of
the respective class and/or series available.
5.2 The Fund shall furnish the Distributor copies of all
information, financial statements and other papers which the Distributor may
reasonably request for use in connection with the distribution of Shares, and
this shall include one certified copy, upon request by the Distributor, of all
financial statements prepared for the Fund by independent public accountants.
The Fund shall make available to the Distributor such number of copies of its
Prospectus and annual and interim reports as the Distributor shall reasonably
request.
5.3 The Fund shall take, from time to time, but subject to the
necessary approval of the Board and the shareholders, all necessary action to
fix the number of authorized Shares and such steps as may be necessary to
register the same under the Securities Act, to the end that there will be
available for sale such number of Shares as the Distributor reasonably may
expect to sell. The Fund agrees to file from time to time such amendments,
reports and other documents as may be necessary in order that there will be no
untrue statement of a material fact in the Registration Statement, or necessary
in order that there will be no omission to state a material fact in the
Registration Statement which omission would make the statements therein
misleading.
5.4 The Fund shall use its best efforts to notify such states as
the Distributor and the Fund may approve of its intention to sell any
appropriate number of its Shares; provided that the Fund shall not be required
to amend its Articles of Incorporation or By-Laws to comply with the laws of any
state, to maintain an office in any state, to change the terms of the offering
of its Shares in any state from the terms set forth in its Registration
Statement, to qualify as a foreign corporation in any state or to consent to
service of process in any state other than with respect to claims arising out of
the offering of its Shares. Any such notification may be withheld, terminated or
withdrawn by the Fund at any time in its discretion. As provided in Section 9
hereof, the expense of notification and maintenance of notification shall be
borne by the Fund. The Distributor shall furnish such information and other
material relating to its affairs and activities as may be required by the Fund
in connection with such notifications.
4
<PAGE>
Section 6. Duties of the Distributor
-------------------------
6.1 The Distributor shall devote reasonable time and effort to
effect sales of Shares, but shall not be obligated to sell any specific number
of Shares. Sales of the Shares shall be on the terms described in the
Prospectus. The Distributor may enter into like arrangements with other
investment companies. The Distributor shall compensate the selected dealers as
set forth in the Prospectus.
6.2 In selling the Shares, the Distributor shall use its best
efforts in all respects duly to conform with the requirements of all federal and
state laws relating to the sale of such securities. Neither the Distributor nor
any selected dealer nor any other person is authorized by the Fund to give any
information or to make any representations, other than those contained in the
Registration Statement or Prospectus and any sales literature approved by
appropriate officers of the Fund.
6.3 The Distributor shall adopt and follow procedures for the
confirmation of sales to investors and selected dealers, the collection of
amounts payable by investors and selected dealers on such sales and the
cancellation of unsettled transactions, as may be necessary to comply with the
requirements of Securities Exchange Act Rule 10b-10 and the rules of the
National Association of Securities Dealers, Inc. (NASD).
6.4 The Distributor shall have the right to enter into selected
dealer agreements with registered and qualified securities dealers and other
financial institutions of its choice for the sale of Shares, provided that the
Fund shall approve the forms of such agreements. Within the United States, the
Distributor shall offer and sell Shares only to such selected dealers as are
members in good standing of the NASD or are institutions exempt from
registration under applicable federal securities laws. Shares sold to selected
dealers shall be for resale by such dealers only at the offering price
determined as set forth in the Prospectus.
Section 7. Payments to the Distributor
---------------------------
7.1 With respect to classes and/or series of Shares which impose
a front-end sales charge, the Distributor shall receive and may retain any
portion of any front-end sales charge which is imposed on such sales and not
reallocated to selected dealers as set forth in the Prospectus, subject to the
limitations of Rule 2830 of the Conduct Rules of the NASD. Payment of these
amounts to the Distributor is not contingent upon the adoption or continuation
of any applicable Plans.
7.2 With respect to classes and/or series of Shares which impose
a contingent deferred sales charge, the Distributor shall receive and may retain
any contingent deferred sales charge which is imposed on such sales as set forth
in the Prospectus, subject to the limitations of Rule 2830 of the Conduct Rules
of the NASD. Payment of these amounts to the Distributor is not contingent upon
the adoption or
5
<PAGE>
continuation of any Plan.
Section 8. Payment of the Distributor under the Plan
-----------------------------------------
8.1 The Fund shall pay to the Distributor as compensation for
services under any Plans adopted by the Fund and this Agreement a distribution
and service fee with respect to the Fund's classes and/or series of Shares as
described in each of the Fund's respective Plans and this Agreement.
8.2 So long as a Plan or any amendment thereto is in effect, the
Distributor shall inform the Board of the commissions and account servicing fees
with respect to the relevant class and/or series of Shares to be paid by the
Distributor to account executives of the Distributor and to broker-dealers,
financial institutions and investment advisers which have dealer agreements with
the Distributor. So long as a Plan (or any amendment thereto) is in effect, at
the request of the Board or any agent or representative of the Fund, the
Distributor shall provide such additional information as may reasonably be
requested concerning the activities of the Distributor hereunder and the costs
incurred in performing such activities with respect to the relevant class and/or
series of Shares.
Section 9. Allocation of Expenses
----------------------
The Fund shall bear all costs and expenses of the continuous
offering of its Shares (except for those costs and expenses borne by the
Distributor pursuant to a Plan and subject to the requirements of Rule 12b-1
under the Investment Company Act), including fees and disbursements of its
counsel and auditors, in connection with the preparation and filing of any
required Registration Statements and/or Prospectuses under the Investment
Company Act or the Securities Act, and all amendments and supplements thereto,
and preparing and mailing annual and periodic reports and proxy materials to
shareholders (including but not limited to the expense of setting in type any
such Registration Statements, Prospectuses, annual or periodic reports or proxy
materials). The Fund shall also bear the cost of expenses of making notice
filings for the Shares for sale, and, if necessary or advisable in connection
therewith, of qualifying the Fund as a broker or dealer, in such states of the
United States or other jurisdictions as shall be selected by the Fund and the
Distributor pursuant to Section 5.4 hereof and the cost and expense payable to
each such state for continuing notification therein until the Fund decides to
discontinue such notification pursuant to Section 5.4 hereof. As set forth in
Section 8 above, the Fund shall also bear the expenses it assumes pursuant to
any Plan, so long as such Plan is in effect.
Section 10. Indemnification
---------------
10.1 The Fund agrees to indemnify, defend and hold the
Distributor, its
6
<PAGE>
officers and directors and any person who controls the Distributor within the
meaning of Section 15 of the Securities Act, free and harmless from and against
any and all claims, demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any
reasonable counsel fees incurred in connection therewith) which the Distributor,
its officers, members or any such controlling person may incur under the
Securities Act, or under common law or otherwise, arising out of or based upon
any untrue statement of a material fact contained in the Registration Statement
or Prospectus or arising out of or based upon any alleged omission to state a
material fact required to be stated in either thereof or necessary to make the
statements in either thereof not misleading, except insofar as such claims,
demands, liabilities or expenses arise out of or are based upon any such untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with information furnished by the Distributor to the Fund
for use in the Registration Statement or Prospectus; provided, however, that
this indemnity agreement shall not inure to the benefit of any such officer,
member or controlling person unless a court of competent jurisdiction shall
determine in a final decision on the merits, that the person to be indemnified
was not liable by reason of willful misfeasance, bad faith or gross negligence
in the performance of its duties, or by reason of its reckless disregard of its
obligations under this Agreement (disabling conduct), or, in the absence of such
a decision, a reasonable determination, based upon a review of the facts, that
the indemnified person was not liable by reason of disabling conduct, by (a) a
vote of a majority of a quorum of directors or directors who are neither
"interested persons" of the Fund as defined in Section 2(a)(19) of the
Investment Company Act nor parties to the proceeding, or (b) an independent
legal counsel in a written opinion. The Fund's agreement to indemnify the
Distributor, its officers and members and any such controlling person as
aforesaid is expressly conditioned upon the Fund's being promptly notified of
any action brought against the Distributor, its officers or members, or any such
controlling person, such notification to be given by letter or telegram
addressed to the Fund at its principal business office. The Fund agrees promptly
to notify the Distributor of the commencement of any litigation or proceedings
against it or any of its officers or directors in connection with the issue and
sale of any Shares.
10.2 The Distributor agrees to indemnify, defend and hold the
Fund, its officers and directors and any person who controls the Fund, if any,
within the meaning of Section 15 of the Securities Act, free and harmless from
and against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending against such claims, demands or liabilities
and any reasonable counsel fees incurred in connection therewith) which the
Fund, its officers and directors or any such controlling person may incur under
the Securities Act or under common law or otherwise, but only to the extent that
such liability or expense incurred by the Fund, its directors or officers or
such controlling person resulting from such claims or demands shall arise out of
or be based upon any alleged untrue statement of a material fact contained in
information furnished by the Distributor to the Fund for use in the Registration
Statement or Prospectus or shall arise out of or be based upon any alleged
7
<PAGE>
omission to state a material fact in connection with such information required
to be stated in the Registration Statement or Prospectus or necessary to make
such information not misleading. The Distributor's agreement to indemnify the
Fund, its officers and directors and any such controlling person as aforesaid,
is expressly conditioned upon the Distributor's being promptly notified of any
action brought against the Fund, its officers and directors or any such
controlling person, such notification being given to the Distributor at its
principal business office.
Section 11. Duration and Termination of this Agreement
------------------------------------------
11.1 This Agreement shall become effective as of the date first
above written and shall remain in force for two years from the date hereof and
thereafter, but only so long as such continuance is specifically approved at
least annually by (a) the Board of the Fund, or by the vote of a majority of the
outstanding voting securities of the applicable class and/or series of the Fund,
and (b) by the vote of a majority of those directors who are not parties to this
Agreement or interested persons of any such parties and who have no direct or
indirect financial interest in this Agreement or in the operation of any of the
Fund's Plans or in any agreement related thereto (Independent directors), cast
in person at a meeting called for the purpose of voting upon such approval.
11.2 This Agreement may be terminated at any time, without the
payment of any penalty, by a majority of the independent directors or by vote of
a majority of the outstanding voting securities of the applicable class and/or
series of the Fund, or by the Distributor, on sixty (60) days' written notice to
the other party. This Agreement shall automatically terminate in the event of
its assignment.
11.3 The terms "affiliated person," "assignment," "interested
person" and "vote of a majority of the outstanding voting securities", when used
in this Agreement, shall have the respective meanings specified in the
Investment Company Act.
Section 12. Amendments to this Agreement
----------------------------
This Agreement may be amended by the parties only if such
amendment is specifically approved by (a) the Board of the Fund, or by the vote
of a majority of the outstanding voting securities of the applicable class
and/or series of the Fund, and (b) by the vote of a majority of the independent
directors cast in person at a meeting called for the purpose of voting on such
amendment.
Section 13. Separate Agreement as to Classes and/or Series
----------------------------------------------
The amendment or termination of this Agreement with respect to
any class and/or series shall not result in the amendment or termination of this
Agreement
8
<PAGE>
with respect to any other class and/or series unless explicitly so provided.
Section 14. Governing Law
-------------
The provisions of this Agreement shall be construed and
interpreted in accordance with the laws of the State of New Jersey as at the
time in effect and the applicable provisions of the Investment Company Act. To
the extent that the applicable law of the State of New Jersey, or any of the
provisions herein, conflict with the applicable provisions of the Investment
Company Act, the latter shall control.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year above written.
Prudential Investment Management Services LLC
/s/ Jonathan M. Greene
By: ____________________________
Jonathan M. Greene
Executive Vice President
Prudential Natural Resources Fund, Inc.
/s/ Richard A. Redeker
By: ____________________________
Richard A. Redeker
President
9
<PAGE>
EXHIBIT 99.6(c)
FORM OF
DEALER AGREEMENT
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC
Prudential Investment Management Services LLC ("Distributor") and
_________________ ("Dealer") have agreed that Dealer will participate in the
distribution of shares ("Shares") of all the funds and series thereof (as they
may exist from time to time) comprising the Prudential Mutual Fund Family (each
a "Fund" and collectively the "Funds") and any classes thereof for which
Distributor now or in the future serves as principal underwriter and
distributor, subject to the terms of this Dealer Agreement ("Agreement"). Any
such additional Funds will be included in this Agreement upon Distributor's
written notification to Dealer.
1. LICENSING
---------
a. Dealer represents and warrants that it is: (i) a broker-dealer
registered with the Securities and Exchange Commission ("SEC"); (ii) a member in
good standing of the National Association of Securities Dealers, Inc. ("NASD");
and (iii) licensed by the appropriate regulatory agency of each state or other
jurisdiction in which Dealer will offer and sell Shares of the Funds, to the
extent necessary to perform the duties and activities contemplated by this
Agreement.
b. Dealer represents and warrants that each of its partners, directors,
officers, employees, and agents who will be utilized by Dealer with respect to
its duties and activities under this Agreement is either appropriately licensed
or exempt from such licensing requirements by the appropriate regulatory agency
of each state or other jurisdiction in which Dealer will offer and sell Shares
of the Funds.
c. Dealer agrees that: (i) termination or suspension of its registration
with the SEC; (ii) termination or suspension of its membership with the NASD; or
(iii) termination or suspension of its license to do business by any state or
other jurisdiction or federal regulatory agency shall immediately cause the
termination of this Agreement. Dealer further agrees to immediately notify
Distributor in writing of any such action or event.
d. Dealer agrees that this Agreement is in all respects subject to the
Conduct Rules of the NASD and such Conduct Rules shall control any provision to
the contrary in this Agreement.
e. Dealer agrees to be bound by and to comply with all applicable state
and federal laws and all rules and regulations promulgated thereunder generally
affecting the sale or distribution of mutual fund shares.
2. ORDERS
------
a. Dealer agrees to offer and sell Shares of the Funds (including those of
each of its classes) only at the regular public offering price applicable to
such Shares and in effect at the time of each transaction. The procedures
relating to all orders and the handling of each order (including the manner of
computing the net asset value of Shares and the effective time of orders
A-1
<PAGE>
received from Dealer) are subject to: (i) the terms of the then current
prospectus and statement of additional information (including any supplements,
stickers or amendments thereto) relating to each Fund, as filed with the SEC
("Prospectus"); (ii) the new account application for each Fund, as supplemented
or amended from time to time; and (iii) Distributor's written instructions and
multiple class pricing procedures and guidelines, as provided to Dealer from
time to time. To the extent that the Prospectus contains provisions that are
inconsistent with this Agreement or any other document, the terms of the
Prospectus shall be controlling.
b. Distributor reserves the right at any time, and without notice to
Dealer, to suspend the sale of Shares or to withdraw or limit the offering of
Shares. Distributor reserves the unqualified right not to accept any specific
order for the purchase or sale of Shares.
c. In all offers and sales of the Shares to the public, Dealer is not
authorized to act as broker or agent for, or employee of, Distributor, any Fund
or any other dealer, and Dealer shall not in any manner represent to any third
party that Dealer has such authority or is acting in such capacity. Rather,
Dealer agrees that it is acting as principal for Dealer's own account or as
agent on behalf of Dealer's customers in all transactions in Shares, except as
provided in Section 3.i. hereof. Dealer acknowledges that it is solely
responsible for all suitability determinations with respect to sales of Shares
of the Funds to Dealer's customers and that Distributor has no responsibility
for the manner of Dealer's performance of, or for Dealer's acts or omissions in
connection with, the duties and activities Dealer provides under this Agreement.
d. All orders are subject to acceptance by Distributor in its sole
discretion and become effective only upon confirmation by Distributor.
e. Distributor agrees that it will accept from Dealer orders placed
through a remote terminal or otherwise electronically transmitted via the
National Securities Clearing Corporation ("NSCC") Fund/Serv Networking program,
provided, however, that appropriate documentation thereof and agreements
relating thereto are executed by both parties to this Agreement, including in
particular the standard NSCC Networking Agreement and any other related
agreements between Distributor and Dealer deemed appropriate by Distributor, and
that all accounts opened or maintained pursuant to that program will be governed
by applicable NSCC rules and procedures. Both parties further agree that, if
the NSCC Fund/Serv Networking program is used to place orders, the standard NSCC
Networking Agreement will control insofar as there is any conflict between any
provision of the Dealer Agreement and the standard NSCC Networking Agreement.
3. DUTIES OF DEALER
----------------
a. Dealer agrees to purchase Shares only from Distributor or from Dealer's
customers.
b. Dealer agrees to enter orders for the purchase of Shares only from
Distributor and only for the purpose of covering purchase orders Dealer has
already received from its customers or for Dealer's own bona fide investment.
A-2
<PAGE>
c. Dealer agrees to date and time stamp all orders received by Dealer and
promptly, upon receipt of any and all orders, to transmit to Distributor all
orders received prior to the time described in the Prospectus for the
calculation of each Fund's net asset value so as to permit Distributor to
process all orders at the price next determined after receipt by Dealer, in
accordance with the Prospectus. Dealer agrees not to withhold placing orders for
Shares with Distributor so as to profit itself as a result of such inaction.
d. Dealer agrees to maintain records of all purchases and sales of Shares
made through Dealer and to furnish Distributor or regulatory authorities with
copies of such records upon request. In that regard, Dealer agrees that, unless
Dealer holds Shares as nominee for its customers or participates in the NSCC
Fund/Serv Networking program, at certain matrix levels, it will provide
Distributor with all necessary information to comply properly with all federal,
state and local reporting requirements and backup and nonresident alien
withholding requirements for its customer accounts including, without
limitation, those requirements that apply by treating Shares issued by the Funds
as readily tradable instruments. Dealer represents and agrees that all Taxpayer
Identification Numbers ("TINs") provided are certified, and that no account that
requires a certified TIN will be established without such certified TIN. With
respect to all other accounts, including Shares held by Dealer in omnibus
accounts and Shares purchased or sold through the NSCC Fund/Serv Networking
program, at certain matrix levels, Dealer agrees to perform all federal, state
and local tax reporting with respect to such accounts, including without
limitation redemptions and exchanges.
e. Dealer agrees to distribute or cause to be delivered to its customers
Prospectuses, proxy solicitation materials and related information and proxy
cards, semi-annual and annual shareholder reports and any other materials in
compliance with applicable legal requirements, except to the extent that
Distributor expressly undertakes to do so in writing.
f. Dealer agrees that if any Share is repurchased by any Fund or is
tendered for redemption within seven (7) business days after confirmation by
Distributor of the original purchase order from Dealer, Dealer shall forfeit its
right to any concession or commission received by Dealer with respect to such
Share and shall forthwith refund to Distributor the full concession allowed to
Dealer or commission paid to Dealer on the original sale. Distributor agrees to
notify Dealer of such repurchase or redemption within a reasonable time after
settlement. Termination or cancellation of this Agreement shall not relieve
Dealer from its obligation under this provision.
g. Dealer agrees that payment for Shares ordered from Distributor shall be
in Fed Funds, New York clearinghouse or other immediately available funds and
that such funds shall be received by Distributor by the earlier of: (i) the end
of the third (3rd) business day following Dealer's receipt of the customer's
order to purchase such Shares; or (ii) the settlement date established in
accordance with Rule 15c6-1 under the Securities Exchange Act of 1934, as
amended. If such payment is not received by Distributor by such date, Dealer
shall forfeit its right to any concession or commission with respect to such
order, and Distributor reserves the right, without notice, forthwith to cancel
the sale, or, at its option, to sell the Shares ordered back to the Fund, in
which case Distributor may hold Dealer responsible for any loss, including loss
of profit, suffered by Distributor resulting from Dealer's failure to make
payment as aforesaid. If a purchase is made by check, the purchase is deemed
made upon conversion of the purchase instrument into Fed Funds, New York
clearinghouse or other immediately available funds.
A-3
<PAGE>
h. Dealer agrees that it: (i) shall assume responsibility for any loss to
the Fund caused by a correction to any order placed by Dealer that is made
subsequent to the trade date for the order, provided such order correction was
not based on any negligence on Distributor's part; and (ii) will immediately pay
such loss to the Fund upon notification.
i. Dealer agrees that in connection with orders for the purchase of Shares
on behalf of any IRAs, 401(k) plans or other retirement plan accounts, by mail,
telephone, or wire, Dealer shall act as agent for the custodian or trustee of
such plans (solely with respect to the time of receipt of the application and
payments), and Dealer shall not place such an order with Distributor until it
has received from its customer payment for such purchase and, if such purchase
represents the first contribution to such a retirement plan account, the
completed documents necessary to establish the retirement plan. Dealer agrees
to indemnify Distributor and its affiliates for any claim, loss, or liability
resulting from incorrect investment instructions received by Distributor from
Dealer.
j. Dealer agrees that it will not make any conditional orders for the
purchase or redemption of Shares and acknowledges that Distributor will not
accept conditional orders for Shares.
k. Dealer agrees that all out-of-pocket expenses incurred by it in
connection with its activities under this Agreement will be borne by Dealer.
l. Dealer agrees that it will keep in force appropriate broker's blanket
bond insurance policies covering any and all acts of Dealer's partners,
directors, officers, employees, and agents adequate to reasonably protect and
indemnify the Distributor and the Funds against any loss which any party may
suffer or incur, directly or indirectly, as a result of any action by Dealer or
Dealer's partners, directors, officers, employees, and agents.
m. Dealer agrees that it will maintain the required net capital as
specified by the rules and regulations of the SEC, NASD and other regulatory
authorities.
4. DEALER COMPENSATION
-------------------
a. On each purchase of Shares by Dealer from Distributor, the total sales
charges and dealer concessions or commissions, if any, payable to Dealer shall
be as stated on Schedule A to this Agreement, which may be amended by
Distributor from time to time. Distributor reserves the right, without prior
notice, to suspend or eliminate such dealer concession or commissions by
amendment, sticker or supplement to the then current Prospectus for each Fund.
Such sales charges and dealer concessions or commissions, are subject to
reduction under a variety of circumstances as described in each Fund's then
current Prospectus. For an investor to obtain any reduction, Distributor must
be notified at the time of the sale that the sale qualifies for the reduced
sales charge. If Dealer fails to notify Distributor of the applicability of a
reduction in the sales charge at the time the trade is placed, neither
Distributor nor any Fund will be liable for amounts necessary to reimburse any
investor for the reduction that should have been effected. Dealer acknowledges
that no sales charge or concession or commission will be paid to Dealer on the
reinvestment of dividends or capital gains reinvestment or on Shares acquired in
exchange for Shares of another Fund, or class thereof, having the same
A-4
<PAGE>
sales charge structure as the Fund, or class thereof, from which the exchange
was made, in accordance with the Prospectus.
b. In accordance with the Funds' Prospectuses, Distributor or any
affiliate may, but is not obligated to, make payments to dealers from
Distributor's own resources as compensation for certain sales that are made at
net asset value ("Qualifying Sales"). If Dealer notifies Distributor of a
Qualifying Sale, Distributor may make a contingent advance payment up to the
maximum amount available for payment on the sale. If any of the Shares
purchased in a Qualifying Sale are redeemed within twelve (12) months of the end
of the month of purchase, Distributor shall be entitled to recover any advance
payment attributable to the redeemed Shares by reducing any account payable or
other monetary obligation Distributor may owe to Dealer or by making demand upon
Dealer for repayment in cash. Distributor reserves the right to withhold
advances to Dealer, if for any reason Distributor believes that it may not be
able to recover unearned advances from Dealer.
c. With respect to any Fund that offers Shares for which distribution
plans have been adopted under Rule 12b-1 under the Investment Company Act of
1940, as amended ("Rule 12b-1 Plans"), Distributor also is authorized to pay the
Dealer continuing distribution and/or service fees, as specified in Schedule A
and the relevant Fund Prospectus, with respect to Shares of any such Fund, to
the extent that Dealer provides distribution, marketing, administrative and
other services and activities regarding the promotion of such Shares and the
maintenance of related shareholder accounts.
d. In connection with the receipt of distribution fees and/or service fees
under Rule 12b-1 Plans applicable to Shares purchased by Dealer's customers,
Distributor directs Dealer to provide enhanced shareholder services such as:
processing purchase and redemption transactions; establishing shareholder
accounts; and providing certain information and assistance with respect to the
Funds. (Redemption levels of shareholder accounts assigned to Dealer will be
considered in evaluating Dealer's continued ability to receive payments of
distribution and/or service fees.) In addition, Dealer agrees to support
Distributor's marketing efforts by, among other things, granting reasonable
requests for visits to Dealer's office by Distributor's wholesalers and
marketing representatives, including all Funds covered by a Rule 12b-1 Plan on
Dealer's "approved," "preferred" or other similar product lists, if applicable,
and otherwise providing satisfactory product, marketing and sales support.
Further, Dealer agrees to provide Distributor with supporting documentation
concerning the shareholder services provided, as Distributor may reasonably
request from time to time.
e. All Rule 12b-1 Plan distribution and/or servicing fees shall be based
on the value of Shares attributable to Dealer's customers and eligible for such
payment, and shall be calculated on the basis of and at the rates set forth in
the compensation schedule then in effect. Without prior approval by a majority
of the outstanding shares of a Fund, the aggregate annual fees paid to Dealer
pursuant to any Rule 12b-1 Plan shall not exceed the amounts stated as the
"annual maximums" in each Fund's Prospectus, which amount shall be a specified
percent of the value of the Fund's net assets held in Dealer's customers'
accounts that are eligible for payment pursuant to the Rule 12b-1 Plans
(determined in the same manner as each Fund uses to compute its net assets as
set forth in its then current Prospectus).
A-5
<PAGE>
f. The provisions of any Rule 12b-1 Plan between the Funds and the
Distributor shall control over this Agreement in the event of any inconsistency.
Each Rule 12b-1 Plan in effect on the date of this Agreement is described in the
relevant Fund's Prospectus. Dealer hereby acknowledges that all payments under
Rule 12b-1 Plans are subject to limitations contained in such Rule 12b-1 Plans
and may be varied or discontinued at any time.
5. REDEMPTIONS, REPURCHASES AND EXCHANGES
--------------------------------------
a. The Prospectus for each Fund describes the provisions whereby the Fund,
under all ordinary circumstances, will redeem Shares held by shareholders on
demand. Dealer agrees that it will not make any representations to shareholders
relating to the redemption of their Shares other than the statements contained
in the Prospectus and the underlying organizational documents of the Fund, to
which it refers, and that Dealer will pay as redemption proceeds to shareholders
the net asset value, minus any applicable deferred sales charge or redemption
fee, determined after receipt of the order as discussed in the Prospectus.
b. Dealer agrees not to repurchase any Shares from its customers at a
price below that next quoted by the Fund for redemption or repurchase, i.e., at
the net asset value of such Shares, less any applicable deferred sales charge,
or redemption fee, in accordance with the Fund's Prospectus. Dealer shall,
however, be permitted to sell Shares for the account of the customer or record
owner to the Funds at the repurchase price then currently in effect for such
Shares and may charge the customer or record owner a fair service fee or
commission for handling the transaction, provided Dealer discloses the fee or
commission to the customer or record owner. Nevertheless, Dealer agrees that it
shall not under any circumstances maintain a secondary market in such
repurchased Shares.
c. Dealer agrees that, with respect to a redemption order it has made, if
instructions in proper form, including any outstanding certificates, are not
received by Distributor within the time customary or the time required by law,
the redemption may be canceled forthwith without any responsibility or liability
on Distributor's part or on the part of any Fund, or Distributor, at its option,
may buy the shares redeemed on behalf of the Fund, in which latter case
Distributor may hold Dealer responsible for any loss, including loss of profit,
suffered by Distributor resulting from Distributor's failure to settle the
redemption.
d. Dealer agrees that it will comply with any restrictions and limitations
on exchanges described in each Fund's Prospectus, including any restrictions or
prohibitions relating to frequent purchases and redemptions (i.e., market
timing).
6. MULTIPLE CLASSES OF SHARES
--------------------------
Distributor may, from time to time, provide Dealer with written
guidelines or standards relating to the sale or distribution of Funds offering
multiple classes of Shares with different sales charges and distribution-related
operating expenses.
7. FUND INFORMATION
----------------
a. Dealer agrees that neither it nor any of its partners, directors,
officers, employees, and agents is authorized to give any information or make
any representations
A-6
<PAGE>
concerning Shares of any Fund except those contained in the Fund's then current
Prospectus or in materials provided by Distributor.
b. Distributor will supply to Dealer Prospectuses, reasonable quantities
of sales literature, sales bulletins, and additional sales information as
provided by Distributor. Dealer agrees to use only advertising or sales
material relating to the Funds that: (i) is supplied by Distributor, or (ii)
conforms to the requirements of all applicable laws or regulations of any
government or authorized agency having jurisdiction over the offering or sale of
Shares of the Funds and is approved in writing by Distributor in advance of its
use. Such approval may be withdrawn by Distributor in whole or in part upon
written notice to Dealer, and Dealer shall, upon receipt of such notice,
immediately discontinue the use of such sales literature, sales bulletins and
advertising. Dealer is not authorized to modify or translate any such materials
without Distributor's prior written consent.
8. SHARES
------
a. Distributor acts solely as agent for the Fund and Distributor shall
have no obligation or responsibility with respect to Dealer's right to purchase
or sell Shares in any state or jurisdiction.
b. Distributor shall periodically furnish Dealer with information
identifying the states or jurisdictions in which it is believed that all
necessary notice, registration or exemptive filings for Shares have been made
under applicable securities laws such that offers and sales of Shares may be
made in such states or jurisdictions. Distributor shall have no obligation to
make such notice, registration or exemptive filings with respect to Shares in
any state or jurisdiction.
c. Dealer agrees not to transact orders for Shares in states or
jurisdictions in which it has been informed that Shares may not be sold or in
which it and its personnel are not authorized to sell Shares.
d. Distributor shall have no responsibility, under the laws regulating the
sale of securities in the United States or any foreign jurisdiction, with
respect to the qualification or status of Dealer or Dealer's personnel selling
Fund Shares. Distributor shall not, in any event, be liable or responsible for
the issue, form, validity, enforceability and value of such Shares or for any
matter in connection therewith.
e. Dealer agrees that it will make no offers or sales of Shares in any
foreign jurisdiction, except with the express written consent of Distributor.
9. INDEMNIFICATION
---------------
a. Dealer agrees to indemnify, defend and hold harmless Distributor and
the Funds and their predecessors, successors, and affiliates, each current or
former partner, officer, director, employee, shareholder or agent and each
person who controls or is controlled by Distributor from any and all losses,
claims, liabilities, costs, and expenses, including attorney fees, that may be
assessed against or suffered or incurred by any of them howsoever they arise,
and as they are incurred, which relate in any way to: (i) any alleged violation
of any statute or
A-7
<PAGE>
regulation (including without limitation the securities laws and regulations of
the United States or any state or foreign country) or any alleged tort or breach
of contract, related to the offer or sale by Dealer of Shares of the Funds
pursuant to this Agreement (except to the extent that Distributor's negligence
or failure to follow correct instructions received from Dealer is the cause of
such loss, claim, liability, cost or expense); (ii) any redemption or exchange
pursuant to instructions received from Dealer or its partners, affiliates,
officers, directors, employees or agents; or (iii) the breach by Dealer of any
of its representations and warranties specified herein or the Dealer's failure
to comply with the terms and conditions of this Agreement, whether or not such
action, failure, error, omission, misconduct or breach is committed by Dealer or
its predecessor, successor, or affiliate, each current or former partner,
officer, director, employee or agent and each person who controls or is
controlled by Dealer.
b. Distributor agrees to indemnify, defend and hold harmless Dealer and
its predecessors, successors and affiliates, each current or former partner,
officer, director, employee or agent, and each person who controls or is
controlled by Dealer from any and all losses, claims, liabilities, costs and
expenses, including attorney fees, that may be assessed against or suffered or
incurred by any of them which arise, and which relate to any untrue statement of
or omission to state a material fact contained in the Prospectus or any written
sales literature or other marketing materials provided by the Distributor to the
Dealer, required to be stated therein or necessary to make the statements
therein not misleading.
c. Dealer agrees to notify Distributor, within a reasonable time, of any
claim or complaint or any enforcement action or other proceeding with respect to
Shares offered hereunder against Dealer or its partners, affiliates, officers,
directors, employees or agents, or any person who controls Dealer, within the
meaning of Section 15 of the Securities Act of 1933, as amended.
d. Dealer further agrees promptly to send Distributor copies of (i) any
report filed pursuant to NASD Conduct Rule 3070, including, without limitation
quarterly reports filed pursuant to Rule 3070(c), (ii) reports filed with any
other self-regulatory organization in lieu of Rule 3070 reports pursuant to Rule
3070(e) and (iii) amendments to Dealer's Form BD.
e. Each party's obligations under these indemnification provisions shall
survive any termination of this Agreement.
10. TERMINATION; AMENDMENT
----------------------
a. In addition to the automatic termination of this Agreement specified
in Section 1.c. of this Agreement, each party to this Agreement may unilaterally
cancel its participation in this Agreement by giving thirty (30) days prior
written notice to the other party. In addition, each party to this Agreement may
terminate this Agreement immediately by giving written notice to the other party
of that other party's material breach of this Agreement. Such notice shall be
deemed to have been given and to be effective on the date on which it was either
delivered personally to the other party or any officer or member thereof, or was
mailed postpaid or delivered to a telegraph office for transmission to the other
party's designated person at the addresses shown herein or in the most recent
NASD Manual.
A-8
<PAGE>
b. This Agreement shall terminate immediately upon the appointment of a
Trustee under the Securities Investor Protection Act or any other act of
insolvency by Dealer.
c. The termination of this Agreement by any of the foregoing means shall
have no effect upon transactions entered into prior to the effective date of
termination and shall not relieve Dealer of its obligations, duties and
indemnities specified in this Agreement. A trade placed by Dealer subsequent to
its voluntary termination of this Agreement will not serve to reinstate the
Agreement. Reinstatement, except in the case of a temporary suspension of
Dealer, will only be effective upon written notification by Distributor.
d. This Agreement is not assignable or transferable and will terminate
automatically in the event of its "assignment," as defined in the Investment
Company Act of 1940, as amended and the rules, regulations and interpretations
thereunder. The Distributor may, however, transfer any of its duties under this
Agreement to any entity that controls or is under common control with
Distributor.
e. This Agreement may be amended by Distributor at any time by written
notice to Dealer. Dealer's placing of an order or accepting payment of any kind
after the effective date and receipt of notice of such amendment shall
constitute Dealer's acceptance of such amendment.
11. DISTRIBUTOR'S REPRESENTATIONS AND WARRANTIES
--------------------------------------------
Distributor represents and warrants that:
a. It is a limited liability company duly organized and existing and in
good standing under the laws of the state of Delaware and is duly registered or
exempt from registration as a broker-dealer in all states and jurisdictions in
which it provides services as principal underwriter and distributor for the
Funds.
b. It is a member in good standing of the NASD.
c. It is empowered under applicable laws and by Distributor's charter and
by-laws to enter into this Agreement and perform all activities and services of
the Distributor provided for herein and that there are no impediments, prior or
existing, regulatory, self-regulatory, administrative, civil or criminal matters
affecting Distributor's ability to perform under this Agreement.
d. All requisite actions have been taken to authorize Distributor to enter
into and perform this Agreement.
12. ADDITIONAL DEALER REPRESENTATIONS AND WARRANTIES
------------------------------------------------
In addition to the representations and warranties found elsewhere in
this Agreement, Dealer represents and warrants that:
a. It is duly organized and existing and in good standing under the
laws of the state, commonwealth or other jurisdiction in which Dealer is
organized and that Dealer will
A-9
<PAGE>
not offer Shares of any Fund for sale in any state or jurisdiction where such
Shares may not be legally sold or where Dealer is not qualified to act as a
broker-dealer.
b. It is empowered under applicable laws and by Dealer's organizational
documents to enter into this Agreement and perform all activities and services
of the Dealer provided for herein and that there are no impediments, prior or
existing, regulatory, self-regulatory, administrative, civil or criminal matters
affecting Dealer's ability to perform under this Agreement.
c. All requisite actions have been taken to authorize Dealer to enter
into and perform this Agreement.
d. It is not, at the time of the execution of this Agreement, subject
to any enforcement or other proceeding with respect to its activities under
state or federal securities laws, rules or regulations.
13. SETOFF; DISPUTE RESOLUTION; GOVERNING LAW
-----------------------------------------
a. Should any of Dealer's concession accounts with Distributor have a
debit balance, Distributor shall be permitted to offset and recover the amount
owed from any other account Dealer has with Distributor, without notice or
demand to Dealer.
b. In the event of a dispute concerning any provision of this
Agreement, either party may require the dispute to be submitted to binding
arbitration under the commercial arbitration rules and procedures of the NASD.
The parties agree that, to the extent permitted under such arbitration rules and
procedures, the arbitrators selected shall be from the securities industry.
Judgment upon any arbitration award may be entered by any state or federal court
having jurisdiction.
c. This Agreement shall be governed and construed in accordance with
the laws of the state of New Jersey, not including any provision which would
require the general application of the law of another jurisdiction.
14. INVESTIGATIONS AND PROCEEDINGS
------------------------------
The parties to this Agreement agree to cooperate fully in any
securities regulatory investigation or proceeding or judicial proceeding with
respect to each's activities under this Agreement and promptly to notify the
other party of any such investigation or proceeding.
15. CAPTIONS
--------
All captions used in this Agreement are for convenience only, are not a
party hereof, and are not to be used in construing or interpreting any aspect
hereof.
16. ENTIRE UNDERSTANDING
--------------------
This Agreement contains the entire understanding of the parties hereto
with respect to the subject matter contained herein and supersedes all previous
agreements. This
A-10
<PAGE>
Agreement shall be binding upon the parties hereto when signed by Dealer and
accepted by Distributor.
A-11
<PAGE>
17. SEVERABILITY
------------
Whenever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law.
If, however, any provision of this Agreement is held under applicable law to be
invalid, illegal, or unenforceable in any respect, such provision shall be
ineffective only to the extent of such invalidity, and the validity, legality
and enforceability of the remaining provisions of this Agreement shall not be
affected or impaired in any way.
18. ENTIRE AGREEMENT
----------------
This Agreement contains the entire understanding of the parties hereto
with respect to the subject matter contained herein and supersedes all previous
agreements and/or understandings of the parties. This Agreement shall be binding
upon the parties hereto when signed by Dealer and accepted by Distributor.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year set forth below.
PRUDENTIAL INVESTMENT MANAGEMENT
SERVICES LLC
By: ___________________________________
Name:___________________________________
Title:__________________________________
Date:___________________________________
DEALER: ________________________________
By: ___________________________________
(Signature)
Name: _________________________________
Title: _________________________________
Address:________________________________
________________________________
________________________________
Telephone: _____________________________
NASD CRD # _____________________________
Prudential Dealer #_____________________
(Internal Use Only)
Date: _________________________________
A-12
<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. 18 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated July
20, 1998, 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 references to us under the heading "Financial
Highlights" in such Prospectus.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
July 24, 1998
<PAGE>
EXHIBIT 99.15(d)
PRUDENTIAL NATURAL RESOURCES FUND, INC.
Amended and Restated
Distribution and Service Plan
(Class A Shares)
--------------
Introduction
------------
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Rule 2830 of the Conduct
Rules of the National Association of Securities Dealers, Inc. (NASD) has been
adopted by Prudential Natural Resources Fund, Inc. (the Fund) and by Prudential
Investment Management Services LLC, the Fund's distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which the
Fund will employ the Distributor to distribute Class A shares issued by the Fund
(Class A shares). Under the Plan, the Fund intends to pay to the Distributor,
as compensation for its services, a distribution and service fee with respect to
Class A shares.
A majority of the Board of Directors of the Fund, including a majority of
those Directors who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of this Plan or any agreements related to it (the Rule 12b-1
Directors), have determined by votes cast in person at a meeting called for the
purpose of voting on this Plan that there is a reasonable likelihood that
adoption and continuation of this Plan will benefit the Fund and its
shareholders. Expenditures under this Plan by the Fund for Distribution
Activities (defined below) are primarily intended to result in the sale of Class
A shares of the Fund within the meaning of paragraph (a)(2) of Rule 12b-1
promulgated under the
1
<PAGE>
Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
The Plan
--------
The material aspects of the Plan are as follows:
1. Distribution Activities
-----------------------
The Fund shall engage the Distributor to distribute Class A shares of the
Fund and to service shareholder accounts using all of the facilities of the
Distributor's distribution network, including sales personnel and branch office
and central support systems, and also using such other qualified broker-dealers
and financial institutions as the Distributor may select, including Prudential
Securities Incorporated (Prudential Securities) and Pruco Securities Corporation
(Prusec). Services provided and activities undertaken to distribute Class A
shares of the Fund are referred to herein as "Distribution Activities."
2. Payment of Service Fee
-----------------------
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class A shares (service
fee). The Fund shall calculate and accrue daily amounts payable by the Class A
shares of the Fund
2
<PAGE>
hereunder and shall pay such amounts monthly or at such other intervals as the
Board of Directors may determine.
3. Payment for Distribution Activities
-----------------------------------
The Fund shall pay to the Distributor as compensation for its services a
distribution fee, together with the service fee (described in Section 2 hereof),
of .30 of 1% per annum of the average daily net assets of the Class A shares of
the Fund for the performance of Distribution Activities. The Fund shall
calculate and accrue daily amounts payable by the Class A shares of the Fund
hereunder and shall pay such amounts monthly or at such other intervals as the
Board of Directors may determine. Amounts payable under the Plan shall be
subject to the limitations of Rule 2830 of the NASD Conduct Rules.
Amounts paid to the Distributor by the Class A shares of the Fund will not
be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class A shares according to the
ratio of the sales of Class A shares to the total sales of the Fund's shares
over the Fund's fiscal year or such other allocation method approved by the
Board of Directors. The allocation of distribution expenses among classes will
be subject to the review of the Board of Directors.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
(a) sales commissions and trailer commissions paid to, or on account of,
account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
Distribution Activities, including central office and branch expenses;
3
<PAGE>
(c) amounts paid to Prudential Securities or Prusec for performing
services under a selected dealer agreement between Prudential
Securities or Prusec and the Distributor for sale of Class A shares of
the Fund, including sales commissions, trailer commissions paid to, or
on account of, agents and indirect and overhead costs associated with
Distribution Activities;
(d) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund prospectuses,
statements of additional information and periodic financial reports
and sales literature to persons other than current shareholders of the
Fund; and
(e) sales commissions (including trailer commissions) paid to, or on
account of, broker-dealers and financial institutions (other than
Prudential Securities or Prusec) which have entered into selected
dealer agreements with the Distributor with respect to Class A shares
of the Fund.
4. Quarterly Reports; Additional Information
-----------------------------------------
An appropriate officer of the Fund will provide to the Board of Directors
of the Fund for review, at least quarterly, a written report specifying in
reasonable detail the amounts expended for Distribution Activities (including
payment of the service fee) and the purposes for which such expenditures were
made in compliance with the requirements of Rule 12b-1. The Distributor will
provide to the Board of Directors of the Fund such additional information as the
Board shall from time to time reasonably request, including information about
Distribution Activities undertaken or to be undertaken by the Distributor.
The Distributor will inform the Board of Directors of the Fund of the
commissions and account servicing fees to be paid by the Distributor to account
executives of the Distributor and to broker-dealers and financial institutions
which have selected dealer agreements with the Distributor.
4
<PAGE>
5. Effectiveness; Continuation
---------------------------
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class A shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities of
the Class A shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the Board of Directors of the Fund and a majority of the Rule 12b-1
Directors by votes cast in person at a meeting called for the purpose of voting
on the continuation of the Plan.
6. Termination
-----------
This Plan may be terminated at any time, without the payment of any
penalty, by a majority of the Rule 12b-1 Directors, or by vote of a majority of
the outstanding voting securities (as defined in the Investment Company Act) of
the Class A shares of the Fund, or by the Distributor, on sixty (60) days'
written notice to the other party. This Plan shall automatically terminate in
the event of its assignments.
7. Amendments
----------
The Plan may not be amended to change the combined service and distribution
fees to be paid as provided for in Sections 2 and 3 hereof so as to increase
materially the amounts payable under this Plan unless such amendment shall be
approved by the vote of a majority of the outstanding voting securities (as
defined in the Investment Company Act) of the Class A shares of the Fund. All
material amendments of the Plan shall be approved by a majority of the Board of
Directors of the Fund and a majority of
5
<PAGE>
the Rule 12b-1 Directors by votes cast in person at a meeting called for the
purpose of voting on the Plan.
8. Rule 12b-1 Directors
--------------------
While the Plan is in effect, the selection and nomination of the Directors
shall be committed to the discretion of the Rule 12b-1 Directors.
9. Records
-------
The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.
Dated: June 1, 1998____
6
<PAGE>
EXHIBIT 99.15(e)
PRUDENTIAL NATURAL RESOURCES FUND, INC.
Amended and Restated
Distribution and Service Plan
(Class B Shares)
--------------
Introduction
------------
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Rule 2830 of the Conduct
Rules of the National Association of Securities Dealers, Inc. (NASD) has been
adopted by Prudential Natural Resources Fund, Inc. (the Fund) and by Prudential
Investment Management Services LLC, the Fund's distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which the
Fund will employ the Distributor to distribute Class B shares issued by the Fund
(Class B shares). Under the Plan, the Fund wishes to pay to the Distributor, as
compensation for its services, a distribution and service fee with respect to
Class B shares.
A majority of the Board of Directors of the Fund, including a majority who
are not "interested persons" of the Fund (as defined in the Investment Company
Act) and who have no direct or indirect financial interest in the operation of
this Plan or any agreements related to it (the Rule 12b-1 Directors), have
determined by votes cast in person at a meeting called for the purpose of voting
on this Plan that there is a reasonable likelihood that adoption and
continuation of this Plan will benefit the Fund and its shareholders.
Expenditures under this Plan by the Fund for Distribution Activities (defined
below) are primarily intended to result in the sale of Class B shares of the
Fund within the meaning of paragraph (a)(2) of Rule 12b-1 promulgated under the
1
<PAGE>
Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
The Plan
--------
The material aspects of the Plan are as follows:
1. Distribution Activities
-----------------------
The Fund shall engage the Distributor to distribute Class B shares of the
Fund and to service shareholder accounts using all of the facilities of the
Distributor's distribution network including sales personnel and branch office
and central support systems, and also using such other qualified broker-dealers
and financial institutions as the Distributor may select, including Prudential
Securities Incorporated (Prudential Securities) and Pruco Securities Corporation
(Prusec). Services provided and activities undertaken to distribute Class B
shares of the Fund are referred to herein as "Distribution Activities."
2. Payment of Service Fee
----------------------
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class B shares (service
fee). The Fund shall calculate and accrue daily amounts payable by the Class B
shares of the Fund
2
<PAGE>
hereunder and shall pay such amounts monthly or at such other intervals as the
Board of Directors may determine.
3. Payment for Distribution Activities
-----------------------------------
The Fund shall pay to the Distributor as compensation for its services a
distribution fee of .75 of 1% per annum of the average daily net assets of the
Class B shares of the Fund for the performance of Distribution Activities. The
Fund shall calculate and accrue daily amounts payable by the Class B shares of
the Fund hereunder and shall pay such amounts monthly or at such other intervals
as the Board of Directors may determine. Amounts payable under the Plan shall
be subject to the limitations of Rule 2830 of the NASD Conduct Rules.
Amounts paid to the Distributor by the Class B shares of the Fund will not
be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class B shares according to the
ratio of the sale of Class B shares to the total sales of the Fund's shares over
the Fund's fiscal year or such other allocation method approved by the Board of
Directors. The allocation of distribution expenses among classes will be
subject to the review of the Board of Directors. Payments hereunder will be
applied to distribution expenses in the order in which they are incurred, unless
otherwise determined by the Board of Directors.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
(a) sales commissions (including trailer commissions) paid to, or on
account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
3
<PAGE>
performance of Distribution Activities including central office and
branch expenses;
(c) amounts paid to Prudential Securities or Prusec for performing
services under a selected dealer agreement between Prudential
Securities or Prusec and the Distributor for sale of Class B shares of
the Fund, including sales commissions and trailer commissions paid to,
or on account of, agents and indirect and overhead costs associated
with Distribution Activities;
(d) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund prospectuses,
statements of additional information and periodic financial reports
and sales literature to persons other than current shareholders of the
Fund; and
(e) sales commissions (including trailer commissions) paid to, or on
account of, broker-dealers and other financial institutions (other
than Prudential Securities or Prusec) which have entered into selected
dealer agreements with the Distributor with respect to Class B shares
of the Fund.
4. Quarterly Reports; Additional Information
-----------------------------------------
An appropriate officer of the Fund will provide to the Board of Directors
of the Fund for review, at least quarterly, a written report specifying in
reasonable detail the amounts expended for Distribution Activities (including
payment of the service fee) and the purposes for which such expenditures were
made in compliance with the requirements of Rule 12b-1. The Distributor will
provide to the Board of Directors of the Fund such additional information as
they shall from time to time reasonably request, including information about
Distribution Activities undertaken or to be undertaken by the Distributor.
The Distributor will inform the Board of Directors of the Fund of the
commissions and account servicing fees to be paid by the Distributor to account
executives of the Distributor and to broker-dealers and other financial
institutions which have selected
4
<PAGE>
dealer agreements with the Distributor.
5. Effectiveness; Continuation
---------------------------
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class B shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities of
the Class B shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the Board of Directors of the Fund and a majority of the Rule 12b-1
Directors by votes cast in person at a meeting called for the purpose of voting
on the continuation of the Plan.
6. Termination
-----------
This Plan may be terminated at any time, without the payment of any
penalty, by a majority of the Rule 12b-1 Directors, or by vote of a majority of
the outstanding voting securities (as defined in the Investment Company Act) of
the Class B shares of the Fund, or by the Distributor, on sixty (60) days'
written notice to the other party. This Plan shall automatically terminate in
the event of its assignment.
7. Amendments
----------
The Plan may not be amended to change the combined service and distribution
expenses to be paid as provided for in Sections 2 and 3 hereof so as to increase
materially the amounts payable under this Plan unless such amendment shall be
approved by the vote of a majority of the outstanding voting securities (as
defined in the Investment Company Act) of the Class B shares of the Fund. All
material amendments
5
<PAGE>
of the Plan shall be approved by a majority of the Board of Directors of the
Fund and a majority of the Rule 12b-1 Directors by votes cast in person at a
meeting called for the purpose of voting on the Plan.
8. Rule 12b-1 Directors
--------------------
While the Plan is in effect, the selection and nomination of the Rule 12b-1
Directors shall be committed to the discretion of the Rule 12b-1 Directors.
9. Records
-------
The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.
Dated: June 1, 1998______
6
<PAGE>
EXHIBIT 99.15(f)
PRUDENTIAL NATURAL RESOURCES FUND, INC.
Amended and Restated
Distribution and Service Plan
(Class C Shares)
--------------
Introduction
------------
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Rule 2830 of the Conduct
Rules of the National Association of Securities Dealers, Inc. (NASD) has been
adopted by Prudential Natural Resources Fund, Inc. (the Fund) and by Prudential
Investment Management Services LLC, the Fund's distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which the
Fund will employ the Distributor to distribute Class C shares issued by the Fund
(Class C shares). Under the Plan, the Fund wishes to pay to the Distributor, as
compensation for its services, a distribution and service fee with respect to
Class C shares.
A majority of the Board of Directors of the Fund, including a majority who
are not "interested persons" of the Fund (as defined in the Investment Company
Act) and who have no direct or indirect financial interest in the operation of
this Plan or any agreements related to it (the Rule 12b-1 Directors), have
determined by votes cast in person at a meeting called for the purpose of voting
on this Plan that there is a reasonable likelihood that adoption and
continuation of this Plan will benefit the Fund and its shareholders.
Expenditures under this Plan by the Fund for Distribution Activities (defined
below) are primarily intended to result in the sale of Class C shares of the
Fund within the meaning of paragraph (a)(2) of Rule 12b-1 promulgated under
1
<PAGE>
the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
The Plan
--------
The material aspects of the Plan are as follows:
1. Distribution Activities
-----------------------
The Fund shall engage the Distributor to distribute Class C shares of the
Fund and to service shareholder accounts using all of the facilities of the
Distributor's distribution network including sales personnel and branch office
and central support systems, and also using such other qualified broker-dealers
and financial institutions as the Distributor may select, including Prudential
Securities Incorporated (Prudential Securities) and Pruco Securities Corporation
(Prusec). Services provided and activities undertaken to distribute Class C
shares of the Fund are referred to herein as "Distribution Activities."
2. Payment of Service Fee
----------------------
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class C shares (service
fee). The Fund shall calculate and accrue daily amounts payable by the Class C
shares of the Fund
2
<PAGE>
hereunder and shall pay such amounts monthly or at such other intervals as the
Board of Directors may determine.
3. Payment for Distribution Activities
-----------------------------------
The Fund shall pay to the Distributor as compensation for its services a
distribution fee of .75 of 1% per annum of the average daily net assets of the
Class C shares of the Fund for the performance of Distribution Activities. The
Fund shall calculate and accrue daily amounts payable by the Class C shares of
the Fund hereunder and shall pay such amounts monthly or at such other intervals
as the Board of Directors may determine. Amounts payable under the Plan shall
be subject to the limitations of Rule 2830 of the NASD Conduct Rules.
Amounts paid to the Distributor by the Class C shares of the Fund will not
be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class C shares according to the
ratio of the sale of Class C shares to the total sales of the Fund's shares over
the Fund's fiscal year or such other allocation method approved by the Board of
Directors. The allocation of distribution expenses among classes will be
subject to the review of the Board of Directors. Payments hereunder will be
applied to distribution expenses in the order in which they are incurred, unless
otherwise determined by the Board of Directors.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
(a) sales commissions (including trailer commissions) paid to, or on
account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
3
<PAGE>
performance of Distribution Activities including central office and
branch expenses;
(c) amounts paid to Prudential Securities or Prusec for performing
services under a selected dealer agreement between Prudential
Securities or Prusec and the Distributor for sale of Class C shares of
the Fund, including sales commissions and trailer commissions paid to,
or on account of, agents and indirect and overhead costs associated
with Distribution Activities;
(d) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund prospectuses,
statements of additional information and periodic financial reports
and sales literature to persons other than current shareholders of the
Fund; and
(e) sales commissions (including trailer commissions) paid to, or on
account of, broker-dealers and other financial institutions (other
than Prudential Securities or Prusec) which have entered into selected
dealer agreements with the Distributor with respect to Class C shares
of the Fund.
4. Quarterly Reports; Additional Information
-----------------------------------------
An appropriate officer of the Fund will provide to the Board of Directors
of the Fund for review, at least quarterly, a written report specifying in
reasonable detail the amounts expended for Distribution Activities (including
payment of the service fee) and the purposes for which such expenditures were
made in compliance with the requirements of Rule 12b-1. The Distributor will
provide to the Board of Directors of the Fund such additional information as
they shall from time to time reasonably request, including information about
Distribution Activities undertaken or to be undertaken by the Distributor.
The Distributor will inform the Board of Directors of the Fund of the
commissions and account servicing fees to be paid by the Distributor to account
executives of the Distributor and to broker-dealers and other financial
institutions which have selected
4
<PAGE>
dealer agreements with the Distributor.
5. Effectiveness; Continuation
---------------------------
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class C shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities of
the Class C shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the Board of Directors of the Fund and a majority of the Rule 12b-1
Directors by votes cast in person at a meeting called for the purpose of voting
on the continuation of the Plan.
6. Termination
-----------
This Plan may be terminated at any time, without the payment of any
penalty, by a majority of the Rule 12b-1 Directors, or by vote of a majority of
the outstanding voting securities (as defined in the Investment Company Act) of
the Class C shares of the Fund, or by the Distributor, on sixty (60) days'
written notice to the other party. This Plan shall automatically terminate in
the event of its assignment.
7. Amendments
----------
The Plan may not be amended to change the combined service and distribution
expenses to be paid as provided for in Sections 2 and 3 hereof so as to increase
materially the amounts payable under this Plan unless such amendment shall be
approved by the vote of a majority of the outstanding voting securities (as
defined in the Investment Company Act) of the Class C shares of the Fund. All
material amendments
5
<PAGE>
of the Plan shall be approved by a majority of the Board of Directors of the
Fund and a majority of the Rule 12b-1 Directors by votes cast in person at a
meeting called for the purpose of voting on the Plan.
8. Rule 12b-1 Directors
--------------------
While the Plan is in effect, the selection and nomination of the Rule 12b-1
Directors shall be committed to the discretion of the Rule 12b-1 Directors.
9. Records
-------
The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.
Dated: June 1, 1998______
6
<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-31-1998
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 111,251,106
<INVESTMENTS-AT-VALUE> 99,766,936
<RECEIVABLES> 197,931
<ASSETS-OTHER> 2,169
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 99,967,036
<PAYABLE-FOR-SECURITIES> 413,875
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 427,892
<TOTAL-LIABILITIES> 841,767
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 106,625,186
<SHARES-COMMON-STOCK> 8,896,313
<SHARES-COMMON-PRIOR> 10,456,062
<ACCUMULATED-NII-CURRENT> (401,440)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 4,299,915
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (11,487,355)
<NET-ASSETS> 99,125,269
<DIVIDEND-INCOME> 1,149,776
<INTEREST-INCOME> 165,300
<OTHER-INCOME> 0
<EXPENSES-NET> 2,669,143
<NET-INVESTMENT-INCOME> (1,354,067)
<REALIZED-GAINS-CURRENT> 16,297,370
<APPREC-INCREASE-CURRENT> (34,757,340)
<NET-CHANGE-FROM-OPS> (19,814,037)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (18,345,597)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 104,445,079
<NUMBER-OF-SHARES-REDEEMED> (147,551,820)
<SHARES-REINVESTED> 16,191,113
<NET-CHANGE-IN-ASSETS> (65,075,262)
<ACCUMULATED-NII-PRIOR> (247,519)
<ACCUMULATED-GAINS-PRIOR> 7,548,288
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 970,786
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,698,357
<AVERAGE-NET-ASSETS> 37,933
<PER-SHARE-NAV-BEGIN> 16.27
<PER-SHARE-NII> (0.08)
<PER-SHARE-GAIN-APPREC> (2.33)
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (2.17)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.69
<EXPENSE-RATIO> 1.55
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</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-31-1998
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 111,251,106
<INVESTMENTS-AT-VALUE> 99,766,936
<RECEIVABLES> 197,931
<ASSETS-OTHER> 2,169
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 99,967,036
<PAYABLE-FOR-SECURITIES> 413,875
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 427,892
<TOTAL-LIABILITIES> 841,767
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 106,625,186
<SHARES-COMMON-STOCK> 8,896,313
<SHARES-COMMON-PRIOR> 10,456,062
<ACCUMULATED-NII-CURRENT> (401,440)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 4,299,915
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (11,487,355)
<NET-ASSETS> 99,125,269
<DIVIDEND-INCOME> 1,149,776
<INTEREST-INCOME> 165,300
<OTHER-INCOME> 0
<EXPENSES-NET> 2,669,143
<NET-INVESTMENT-INCOME> (1,354,067)
<REALIZED-GAINS-CURRENT> 16,297,370
<APPREC-INCREASE-CURRENT> (34,757,340)
<NET-CHANGE-FROM-OPS> (19,814,037)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (18,345,597)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 104,445,079
<NUMBER-OF-SHARES-REDEEMED> (147,551,820)
<SHARES-REINVESTED> 16,191,113
<NET-CHANGE-IN-ASSETS> (65,075,262)
<ACCUMULATED-NII-PRIOR> (247,519)
<ACCUMULATED-GAINS-PRIOR> 7,548,288
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 970,786
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,698,357
<AVERAGE-NET-ASSETS> 86,864
<PER-SHARE-NAV-BEGIN> 15.46
<PER-SHARE-NII> (0.17)
<PER-SHARE-GAIN-APPREC> (2.20)
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (2.17)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.92
<EXPENSE-RATIO> 2.30
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</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-31-1998
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 111,251,106
<INVESTMENTS-AT-VALUE> 99,766,936
<RECEIVABLES> 197,931
<ASSETS-OTHER> 2,169
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 99,967,036
<PAYABLE-FOR-SECURITIES> 413,875
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 427,892
<TOTAL-LIABILITIES> 841,767
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 106,625,186
<SHARES-COMMON-STOCK> 8,896,313
<SHARES-COMMON-PRIOR> 10,456,062
<ACCUMULATED-NII-CURRENT> (401,440)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 4,299,915
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (11,487,355)
<NET-ASSETS> 99,125,269
<DIVIDEND-INCOME> 1,149,776
<INTEREST-INCOME> 165,300
<OTHER-INCOME> 0
<EXPENSES-NET> 2,669,143
<NET-INVESTMENT-INCOME> (1,354,067)
<REALIZED-GAINS-CURRENT> 16,297,370
<APPREC-INCREASE-CURRENT> (34,757,340)
<NET-CHANGE-FROM-OPS> (19,814,037)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (18,345,597)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 104,445,079
<NUMBER-OF-SHARES-REDEEMED> (147,551,820)
<SHARES-REINVESTED> 16,191,113
<NET-CHANGE-IN-ASSETS> (65,075,262)
<ACCUMULATED-NII-PRIOR> (247,519)
<ACCUMULATED-GAINS-PRIOR> 7,548,288
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 970,786
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,698,357
<AVERAGE-NET-ASSETS> 2,060
<PER-SHARE-NAV-BEGIN> 15.46
<PER-SHARE-NII> (0.18)
<PER-SHARE-GAIN-APPREC> (2.19)
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (2.17)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.92
<EXPENSE-RATIO> 2.30
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</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-31-1998
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 111,251,106
<INVESTMENTS-AT-VALUE> 99,766,936
<RECEIVABLES> 197,931
<ASSETS-OTHER> 2,169
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 99,967,036
<PAYABLE-FOR-SECURITIES> 413,875
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 427,892
<TOTAL-LIABILITIES> 841,767
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 106,625,186
<SHARES-COMMON-STOCK> 8,896,313
<SHARES-COMMON-PRIOR> 10,456,062
<ACCUMULATED-NII-CURRENT> (401,440)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 4,299,915
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (11,487,355)
<NET-ASSETS> 99,125,269
<DIVIDEND-INCOME> 1,149,776
<INTEREST-INCOME> 165,300
<OTHER-INCOME> 0
<EXPENSES-NET> 2,669,143
<NET-INVESTMENT-INCOME> (1,354,067)
<REALIZED-GAINS-CURRENT> 16,297,370
<APPREC-INCREASE-CURRENT> (34,757,340)
<NET-CHANGE-FROM-OPS> (19,814,037)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (18,345,597)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 104,445,079
<NUMBER-OF-SHARES-REDEEMED> (147,551,820)
<SHARES-REINVESTED> 16,191,113
<NET-CHANGE-IN-ASSETS> (65,075,262)
<ACCUMULATED-NII-PRIOR> (247,519)
<ACCUMULATED-GAINS-PRIOR> 7,548,288
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 970,786
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,698,357
<AVERAGE-NET-ASSETS> 2,581
<PER-SHARE-NAV-BEGIN> 16.30
<PER-SHARE-NII> (0.05)
<PER-SHARE-GAIN-APPREC> (2.32)
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (2.17)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.76
<EXPENSE-RATIO> 1.30
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
