Prudential Government Securities Trust
(Short-Intermediate Term Series)
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Prospectus dated August 1, 1995
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Prudential Government Securities Trust (the Trust) is a diversified, open-end
management investment company whose shares of beneficial interest are presently
offered in three series. Each series operates as a separate fund with its own
investment objectives and policies designed to meet its specific investment
goals.
The investment objective of the Short-Intermediate Term Series (the Series) is
to achieve a high level of income consistent with providing reasonable safety.
The Series seeks to achieve its objective by investing at least 65% of its total
assets in U.S. Government securities, including U.S. Treasury Bills, Notes,
Bonds and other debt securities issued by the U.S. Treasury, and obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities.
There can be no assurance that the Series' investment objective will be
achieved. See "How the Trust Invests-Investment Objective and Policies."
The Series may also invest up to 35% of its assets in fixed-rate and adjustable
rate mortgage-backed securities, asset-backed securities, corporate debt
securities (among other privately issued instruments), rated A or better by
Standard & Poor's Ratings Group or Moody's Investors Service, Inc. or, if
unrated, determined to be of comparable quality by the Series' investment
adviser, and money market instruments of a comparable short-term rating. See
"How the Trust Invests-Other Investments and Policies." The Series may also
engage in various strategies using derivatives, including the use of put and
call options on securities and financial indices, transactions involving futures
contracts and related options, short selling and use of leverage, including
reverse repurchase agreements and dollar rolls, which entail additional risks to
the Series. See "How the Trust Invests-Investment Objective and Policies-Other
Investments and Investment Techniques."
The Trust's address is One Seaport Plaza, New York, New York 10292, and its
telephone number is (800) 225-1852.
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This Prospectus sets forth concisely the information about the Trust and the
Series that a prospective investor should know before investing. Additional
information about the Trust has been filed with the Securities and Exchange
Commission in a Statement of Additional Information, dated August 1, 1995, which
information is incorporated herein by reference (is legally considered a part of
this Prospectus) and is available without charge upon request to the Trust at
the address or telephone number noted above.
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Investors are advised to read this Prospectus and retain it for future
reference.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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TRUST HIGHLIGHTS
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The following summary is intended to highlight certain information contained
in this prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
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What is Prudential Government Securities Trust?
Prudential Government Securities Trust is a mutual fund whose shares are
offered in three series, each of which operates as a separate 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 Trust is an open-end,
diversified management investment company. Only the Short-Intermediate Term
Series is offered through this Prospectus.
What is the Series' Investment Objective?
The Series' investment objective is to achieve a high level of income
consistent with providing reasonable safety. There can be no assurance that the
Series' investment objective will be achieved. See "How the Trust
Invests-Investment Objective and Policies" at page 6.
Risk Factors and Special Characteristics
In seeking to achieve its objective, the Series will under normal
circumstances invest at least 65% of its total assets in U.S. Government
securities, including U.S. Treasury Bills, Notes, Bonds and other debt
securities issued by the U.S. Treasury, and obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities. See "How the Trust
Invests-Investment Objective and Policies" at page 6. The Series may also
invest up to 35% of its assets in fixed-rate and adjustable rate mortgage-backed
securities, asset-backed securities, corporate debt securities (among other
privately issued instruments), rated A or better by Standard & Poor's Ratings
Group or Moody's Investors Service, Inc. or, if unrated, determined to be of
comparable quality by the Series' investment adviser, and money market
instruments of a comparable short-term rating. See "How the Trust Invests-Other
Investments and Policies" at page 8. The Series may also engage in various
strategies using derivatives, including the use of put and call options on
securities and financial indices, transactions involving futures contracts and
related options, short selling and use of leverage, including reverse repurchase
agreements and dollar rolls, which entail additional risks to the Series. See
"How the Trust Invests-Investment Objective and Policies-Other Investments and
Investment Techniques" at page 11.
Who Manages the Trust?
Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the Manager
of the Trust and is compensated for its services at an annual rate of .40 of 1%
of the Series' average daily net assets. As of June 30, 1995, PMF served as
manager or administrator to 68 investment companies, including 38 mutual funds,
with aggregate assets of approximately $49 billion. The Prudential Investment
Corporation (PIC or the Subadviser) furnishes investment advisory services in
connection with the management of the Trust under a Subadvisory Agreement with
PMF. See "How the Trust is Managed-Manager" at page 17.
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2
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Who Distributes the Series' Shares?
Prudential Securities Incorporated (PSI or the Distributor) acts as the
Distributor of the Series' shares and is paid an annual service fee at the rate
of up to .25 of 1% of the average daily net assets of the Series. See "How the
Trust is Managed-Distributor" at page 17.
What is the Minimum Investment?
The minimum initial investment is $1,000. The subsequent minimum investment
is $100. 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 Trust" at page 22 and "Shareholder Guide-Shareholder Services" at
page 26.
How Do I Purchase Shares?
You may purchase shares of the Series through Prudential Securities
Incorporated (Prudential Securities or PSI), Pruco Securities Corporation
(Prusec) or directly from the Trust, through its transfer agent, Prudential
Mutual Fund Services, Inc. (PMFS or the Transfer Agent) at the net asset value
per share (NAV) next determined after receipt of your purchase order by the
Transfer Agent or Prudential Securities. See "How the Trust Values its Shares"
at page 19 and "Shareholder Guide-How to Buy Shares of the Trust" at page 22.
How Do I Sell My Shares?
You may redeem shares of the Series at any time at the NAV next determined
after Prudential Securities or the Transfer Agent receives your sell order. See
"Shareholder Guide-How to Sell Your Shares" at page 24.
How Are Dividends and Distributions Paid?
The Series expects to declare daily and pay monthly dividends of net
investment income and make distributions annually of any net capital gains.
Dividends and distributions will be automatically reinvested in additional
shares of the Series at NAV unless you request that they be paid to you in cash.
See "Taxes, Dividends and Distributions" at page 20.
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3
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TRUST EXPENSES-SHORT-INTERMEDIATE TERM SERIES
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Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases ................................. None
Maximum Sales Load Imposed on Reinvested Dividends ...................... None
Deferred Sales Load ..................................................... None
Redemption Fees ......................................................... None
Exchange Fee ............................................................ None
Annual Series Operating Expenses
(as a percentage of average net assets)
Management Fees ....................................................... 0.40%
12b-1 Fees ............................................................ 0.21%
Other Expenses ........................................................ 0.23%
----
Total Series Operating Expenses ....................................... 0.84%
====
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<CAPTION>
Example 1 Year 3 Years 5 Years 10 Years
------- ------ ------- ------- ---------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period: $9 $27 $47 $104
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The above example is based on data for the Series' fiscal year ended
November 30, 1994. 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 an investor in understanding the
various costs and expenses that an investor in the Series will bear, whether
directly or indirectly. For more complete descriptions of the various costs and
expenses, see "How the Trust is Managed." "Other Expenses" include operating
expenses of the Series, such as Trustees' and professional fees, registration
fees, reports to shareholders and transfer agent and custodian fees.
</TABLE>
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4
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FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding
throughout each of the periods indicated)
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The following financial highlights with respect to the five-year period
ended November 30, 1994, for the Series have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
following financial highlights contain selected data for a share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for each of the periods indicated. The information is based on
data contained in the financial statements.
<TABLE>
<CAPTION>
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Short-Intermediate Term Series
----------------------------------------------------------------------------------------------------------------
Six Months
Ended Year Ended November 30,
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May 31,
1995
(unaudited) 1994 1993 1992 1991 1990 1989 1988(D) 1987 1986 1985
----------- ---- ---- ---- ---- ---- ---- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value,
beginning of period. $ 9.17 $10.06 $ 9.97 $10.00 $ 9.71 $ 9.96 $ 9.92 $10.24 $10.97 $10.48 $10.01
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment income .27 .64 .69 .75 .82 .84 .92 .92 .92 .96 .95
Net realized and
unrealized gain
(loss) on investment
transactions ....... .47 (.89) .11 (.03) .31 (.21) .12 (.29) (.71) .68 .54
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations ....... .74 (.25) .80 .72 1.13 .63 1.04 .63 .21 1.64 1.49
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions:
Dividends from net
investment income .. (.27) (.52) (.69) (.75) (.84) (.88) (1.00) (.95) (.78) (.99) (1.02)
Tax return of capital
distribution ....... - (.12) (.02) - - - - - - - -
Distributions of net
realized gains ..... - - - - - - - - (.16) (.16) -
Total distributions .. (.27) (.64) (.71) (.75) (.84) (.88) (1.00) (.95) (.94) (1.15) (1.02)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end
of period ........... $ 9.64 $ 9.17 $10.06 $ 9.97 $10.00 $ 9.71 $ 9.96 $ 9.92 $10.24 $10.97 $10.48
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN(DD) ..... 8.17% (2.58)% 8.26% 7.40% 12.19% 6.73% 11.12% 6.47% 1.87% 16.48% 15.67%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end
of period (000) .... $213,235 $241,980 $347,944 $303,451 $298,086 $328,458 $396,519 $473,982 $633,652 $866,218 $414,835
Average net assets
(000) .............. $219,835 $307,382 $321,538 $294,388 $301,643 $354,064 $424,386 $537,422 $903,473 $637,637 $121,991
Ratio to average net assets:
Expenses, including
distribution fees. .92%(DDD) .84% .80% .79% .79% .88% .86% .83% .72% .75% .67%
Expenses, excluding
distribution fees. .71%(DDD) .63% .59% .58% .63% .63% .63% .59% .55% . 52% .50%
Net investment
income ........... 5.66%(DDD)5.36% 6.80% 7.47% 8.36% 8.60% 9.16% 9.39% 8.30% 8.51% 8.04%
Portfolio turnover
rate ............... 121%(DDD) 431% 44% 60% 151% 68% 186% 28% 59% 139% 191%
<FN>
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(D)On August 9, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as investment adviser and since
then has acted as manager of the Trust. See "Manager" in the Statement of
Additional Information
(DD)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.
(DDD)Annualized.
</FN>
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</TABLE>
5
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HOW THE TRUST INVESTS
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INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Series is to achieve a high level of income
consistent with providing reasonable safety. There can be no assurance that this
objective will be achieved.
The Series' investment objective is a fundamental policy and, therefore, may
not be changed without the approval of the holders of a majority of the
outstanding voting securities of the Series, as defined in the Investment
Company Act of 1940, as amended (the Investment Company Act). Policies that are
not fundamental may be modified by the Trustees.
The Series seeks to achieve its objective by investing, under normal
circumstances, at least 65% of its total assets in U.S. Government securities,
including U.S. Treasury Bills, Notes, Bonds and other debt securities issued by
the U.S. Treasury, and obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities, including, but not limited to, Government
National Mortgage Association (GNMA), Federal National Mortgage Association
(FNMA) and Federal Home Loan Mortgage Corporation (FHLMC) securities. Neither
the value nor the yield of the Series' shares or of the U.S. Government
securities which may be invested in by the Series is guaranteed by the U.S.
Government. See "Investment Objective and Policies" in the Statement of
Additional Information.
With respect to the remaining 35% of its assets, the Series may invest in
fixed rate and adjustable rate mortgage-backed securities, asset-backed
securities and corporate debt securities (among other privately issued
instruments) rated A or better by Standard & Poor's Ratings Group (S&P) or
Moody's Investors Service, Inc. (Moody's) or, if unrated, determined to be of
comparable quality by the Series' investment adviser, and money market
instruments of a comparable short-term rating. For temporary defensive purposes
the Series may invest up to 100% of its assets in cash, U.S. Government
securities and high quality money market instruments. See "How the Trust
Invests-Other Investments and Policies" below. The Series may also engage in
various strategies using derivatives, including the use of put and call options
on securities and financial indices, transactions involving futures contracts
and related options, short selling and use of leverage, including reverse
repurchase agreements and dollar rolls, to attempt to increase return and/or
protect against interest rate changes. See "Other Investments and Investment
Techniques" below.
The Series' net asset value will vary with changes in the values of the
Series' portfolio securities. Such values will vary with changes in market
interest rates generally and the differentials in yields among various kinds of
United States Government securities. However, the Series seeks to achieve
reasonable safety by investing in a diversified portfolio of securities which
the investment adviser believes will, in the aggregate, be resistant to
significant fluctuations in market value. Various factors affect the volatility
of the Series' asset value, including the time to the next coupon reset date for
adjustable rate securities, payment characteristics of the security and the
dollar-weighted average life of the investment and, therefore, the Series will
seek to select particular securities for its portfolio which take into account
these factors.
It is currently anticipated that the Series will invest primarily in
securities with maturities ranging from 2 to 5 years, but depending on market
conditions and changing economic conditions, the Series may invest in securities
of any maturity of 10 years or less. Certain securities with maturities of ten
years or less which are purchased at auction or on a when-issued basis may
mature later than ten years from date of purchase and are eligible for purchase
by the Series. The dollar-weighted average maturity of the Series' investments
will be more than 2 but less than 5 years. For purposes of the Series' maturity
limitation, the maturity of a mortgage-backed security will be deemed to be
equal to its remaining maturity (i.e., the average maturity of the mortgages
underlying such security determined by the investment adviser on the basis of
assumed prepayment rates with respect to such mortgages).
6
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U.S. Government Securities
Under normal circumstances, the Series will invest at least 65% of its total
assets in U.S. Government securities, including U.S. Treasury securities,
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, and mortgage-related securities issued by U.S. Government
agencies or instrumentalities.
U.S. Treasury Securities
The Series may invest in U.S. Treasury securities, including Bills, Notes,
Bonds and other debt securities issued by the U.S. Treasury. These instruments
are direct obligations of the U.S. Government and, as such, are backed by the
"full faith and credit" of the United States. They differ primarily in their
interest rates, the lengths of their maturities and the dates of their
issuances.
Securities Issued or Guaranteed by U.S. Government
Agencies and Instrumentalities
The Series may invest in securities issued or guaranteed by agencies or
instrumentalities of the U.S. Government, including, but not limited to, GNMA,
FNMA and FHLMC securities. Obligations of GNMA, the Farmers Home Administration
and the Export-lmport Bank are backed by the "full faith and credit" of the
United States. In the case of securities not backed by the "full faith and
credit" of the United States, the Series must look principally to the agency
issuing or guaranteeing the obligation for ultimate repayment. Such securities
include obligations issued by the Student Loan Marketing Association (SLMA ),
FNMA and FHLMC, each of which may borrow from the U.S. Treasury to meet its
obligations, although the U.S. Treasury is under no obligation to lend to such
entities. GNMA, FNMA and FHLMC investments may also include collateralized
mortgage obligations. See "Other Investments and Policies-Collateralized
Mortgage Obligations and Multiclass Pass-Through Securities" below.
The Series may invest in component parts of U.S. Government securities,
namely either the corpus (principal) of such obligations or one or more of the
interest payments scheduled to be paid on such obligations. These obligations
may take the form of (i) obligations from which the interest coupons have been
stripped; (ii) the interest coupons that are stripped; (iii) book-entries at a
Federal Reserve member bank representing ownership of obligation components; or
(iv) receipts evidencing the component parts (corpus or coupons) of U.S.
Government obligations that have not actually been stripped. Such receipts
evidence ownership of component parts of U.S. Government obligations (corpus or
coupons) purchased by a third party (typically an investment banking firm) and
held on behalf of the third party in physical or book-entry form by a major
commercial bank or trust company pursuant to a custody agreement with the third
party. The Series may also invest in custodial receipts held by a third party
that are not U.S. Government securities. See "Investment Objectives and
Policies-Other Investments" in the Statement of Additional Information.
Mortgage-Related Securities Issued or Guaranteed by
U.S. Government Agencies and Instrumentalities
The Series may invest in mortgage-backed securities and other derivative
mortgage products, including those representing an undivided ownership interest
in a pool of mortgages, e.g., GNMA, FNMA and FHLMC Certificates where the U.S.
Government or its agencies or instrumentalities guarantees the payment of
interest and principal of these securities. However, these guarantees do not
extend to the securities' yield or value, which are likely to vary inversely
with fluctuations in interest rates, nor do these guarantees extend to the yield
or value of the Series' shares. See "Investment Objective and Policies-U.S.
Government Securities" in the Statement of Additional Information. These
certificates are in most cases "pass-through" instruments, through which the
holder receives a share of all interest and principal payments from the
mortgages underlying the certificate, net of certain fees. See "Other
Investments and Policies-Mortgage-Backed Securities" below.
In addition to GNMA, FNMA or FHLMC certificates through which the holder
receives a share of all interest and principal payments from the mortgages
underlying the certificate, the Series may also invest in certain mortgage
7
<PAGE>
pass-through securities issued by the U.S. Government or its agencies and
instrumentalities commonly referred to as mortgage-backed security strips or MBS
strips. MBS strips are usually structured with two classes that receive
different proportions of the interest and principal distributions on a pool of
mortgage assets. A common type of stripped mortgage security will have one class
receiving some of the interest and most of the principal from the mortgage
assets, while the other class will receive most of the interest and the
remainder of the principal. In the most extreme case, one class will receive all
of the interest (the interest-only or "IO" class), while the other class will
receive all of the principal (the principal-only or "PO" class). The yields to
maturity on IOs and POs are sensitive to the rate of principal payments
(including prepayments) on the related underlying mortgage assets, and principal
payments may have a material effect on yield to maturity. If the underlying
mortgage assets experience greater than anticipated prepayments of principal,
the Series may not fully recoup its initial investment in IOs. Conversely, if
the underlying mortgage assets experience less than anticipated prepayments of
principal, the yield on POs could be materially adversely affected.
OTHER INVESTMENTS AND POLICIES
Under normal circumstances, the Series may invest up to 35% of its total
assets in the following privately issued instruments rated A or better by S&P or
Moody's or, if unrated, determined to be of comparable quality by the Series'
investment adviser: (i) fixed rate and adjustable rate mortgage-backed
securities, including collateralized mortgage obligations, multi-class
pass-through securities and stripped mortgage-backed securities, (ii)
asset-backed securities, (iii) corporate debt securities and (iv) money market
instruments, including bank obligations, obligations of savings institutions,
fully insured certificates of deposit and commercial paper of a comparable
short-term rating.
Mortgage-Backed Securities
Mortgage-backed securities are securities that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
secured by real property. There are currently three basic types of
mortgage-backed securities: (i) those issued or guaranteed by the U.S.
Government or one of its agencies or instrumentalities, such as GNMA, FNMA and
FHLMC, described under "U.S. Government Securities" above; (ii) those issued by
private issuers that represent an interest in or are collateralized by
mortgage-backed securities issued or guaranteed by the U.S. Government or one of
its agencies or instrumentalities; and (iii) those issued by private issuers
that represent an interest in or are collateralized by whole mortgage loans or
mortgage-backed securities without a government guarantee but usually having
some form of private credit enhancement.
Adjustable Rate Mortgage Securities
The Series may invest in adjustable rate mortgage securities (ARMs), which
are pass-through mortgage securities collateralized by mortgages with adjustable
rather than fixed rates. ARMs eligible for inclusion in a mortgage pool
generally provide for a fixed initial mortgage interest rate for either the
first three, six, twelve, thirteen, thirty-six or sixty scheduled monthly
payments. Thereafter, the interest rates are subject to periodic adjustment
based on changes to a designated benchmark index.
ARMs contain maximum and minimum rates beyond which the mortgage interest
rate may not vary over the lifetime of the security. In addition, certain ARMs
provide for limitations on the maximum amount by which the mortgage interest
rate may adjust for any single adjustment period. Alternatively, certain ARMs
contain limitations on changes in the required monthly payment. In the event
that a monthly payment is not sufficient to pay the interest accruing on an ARM,
any such excess interest is added to the principal balance of the mortgage loan,
which is repaid through future monthly payments. If the monthly payment for such
an instrument exceeds the sum of the interest accrued at the applicable mortgage
interest rate and the principal payment required at such point to amortize the
outstanding principal balance over the remaining term of the loan, the excess is
utilized to reduce the then outstanding principal balance of the ARM.
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Private Mortgage Pass-Through Securities
Private mortgage pass-through securities are structured similarly to GNMA,
FNMA and FHLMC mortgage pass-through securities and are issued by originators of
and investors in mortgage loans, including depository institutions, mortgage
banks, investment banks and special purpose subsidiaries of the foregoing. These
securities usually are backed by a pool of conventional fixed rate or adjustable
rate mortgage loans. Since private mortgage pass-through securities typically
are not guaranteed by an entity having the credit status of GNMA, FNMA and
FHLMC, such securities generally are structured with one or more types of credit
enhancement. Types of credit enhancements are described under "Asset Backed
Securities" below.
Collateralized Mortgage Obligations and Multiclass Pass-Through Securities
Collateralized mortgage obligations or "CMOs" are debt obligations
collateralized by mortgage loans or mortgage pass-through securities. Typically,
CMOs are collateralized by GNMA, FNMA or FHLMC Certificates, but also may be
collateralized by whole loans or private mortgage pass-through securities (such
collateral collectively hereinafter referred to as "Mortgage Assets").
Multiclass pass-through securities are equity interests in a trust composed of
Mortgage Assets. Payments of principal of and interest on the Mortgage Assets,
and any reinvestment income thereon, provide the funds to pay debt service on
the CMOs or make scheduled distributions on the multiclass passthrough
securities. CMOs may be issued by agencies or instrumentalities of the U.S.
Government, or by private originators of, or investors in, mortgage loans,
including depository institutions, mortgage banks, investment banks and special
purpose subsidiaries of the foregoing. The issuer of a series of CMOs may elect
to be treated as a Real Estate Mortgage Investment Conduit (REMIC). All future
references to CMOs shall also be deemed to include REMICs.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause the CMOs to be
retired substantially earlier than their stated maturities or final distribution
dates. Interest is paid or accrues on all classes of CMOs on a monthly,
quarterly or semi-annual basis. The principal of and interest on the Mortgage
Assets may be allocated among the several classes of a CMO series in a number of
different ways. Generally, the purpose of the allocation of the cash flow of a
CMO to the various classes is to obtain a more predictable cash flow to the
individual tranches than exists with the underlying collateral of the CMO. As a
general rule, the more predictable the cash flow on a CMO tranche, the lower the
anticipated yield will be on that tranche at the time of issuance relative to
prevailing market yields on mortgage-backed securities.
The Series also may invest in, among other things, parallel pay CMOs and
Planned Amortization Class CMOs (PAC Bonds). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier. PAC Bonds generally require payments of a
specified amount of principal on each payment date. PAC Bonds always are
parallel pay CMOs with the required principal payment on such securities having
the highest priority after interest has been paid to all classes.
In reliance on rules and interpretations of the Securities and Exchange
Commission (SEC), the Series' investments in certain qualifying CMOs and REMICs
are not subject to the Investment Company Act's limitation on acquiring
interests in other investment companies. See "Additional Investment
Information-Collateralized Mortgage Obligations" in the Statement of Additonal
Information. CMOs and REMICs issued by an agency or instrumentality of the U.S.
Government are considered U.S. Government Securities for purposes of this
Prospectus.
Stripped Mortgage-Backed Securities
Stripped mortgage-backed securities or MBS strips are derivative multiclass
mortgage securities. In addition to MBS strips issued by agencies or
instrumentalities of the U.S. Government, the Series may purchase MBS strips
9
<PAGE>
issued by private originators of, or investors in, mortgage loans, including
depository institutions, mortgage banks, investment banks and special purpose
subsidiaries of the foregoing. See "How the Trust Invests-U.S. Government
Securities-Mortgage-Related Securities Issued by U.S. Government Agencies and
Instrumentalities" above.
Corporate and Other Debt Obligations
The Series may invest in corporate and other debt obligations rated at least
"A" by S&P or Moody's or, if unrated, deemed to be of comparable credit quality
by the Series' investment adviser. These debt securities may have adjustable or
fixed rates of interest and in certain instances may be secured by assets of the
issuer. Adjustable rate corporate debt securities may have features similar to
those of adjustable rate mortgage-backed securities, but corporate debt
securities, unlike mortgage-backed securities, are not subject to prepayment
risk other than through contractual call provisions which generally impose a
penalty for prepayment. Fixed rate debt securities may also be subject to call
provisions.
Asset-Backed Securities
The Series may invest in asset-backed securities. Through the use of trusts
and special purpose corporations, various types of assets, primarily automobile
and credit card receivables and home equity loans, have been securitized in
pass-through structures similar to the mortgage pass-through structures or in a
pay-through structure similar to the CMO structure. The Series may invest in
these and other types of asset-backed securities that may be developed in the
future. Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the benefit
of a security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, some of which may reduce the ability
to obtain full payment. In the case of automobile receivables, the security
interests in the underlying automobiles are often not transferred when the pool
is created, with the resulting possibility that the collateral could be resold.
In general, these types of loans are of shorter average life than mortgage loans
and are less likely to have substantial prepayments.
Types of Credit Enhancement
Mortgage-backed securities and asset-backed securities are often backed by a
pool of assets representing the obligations of a number of different parties. To
lessen the effect of failures by obligors on underlying assets to make payments,
those securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to seek to ensure that the receipt of
payments on the underlying pool occurs in a timely fashion. Protection against
losses resulting from default seeks to ensure ultimate payment of the
obligations on at least a portion of the assets in the pool. This protection may
be provided through guarantees, insurance policies or letters of credit obtained
by the issuer or sponsor from third parties, through various means of
structuring the transaction or through a combination of such approaches. The
degree of credit support provided for each issue is generally based on
historical information respecting the level of credit risk associated with the
underlying assets. Delinquencies or losses in excess of those anticipated could
adversely affect the return on an investment in a security. The Series will not
pay any additional fees for credit support, although the existence of credit
support may increase the price of a security.
Risk Factors Relating to Investing in
Mortgage-Backed and Asset-Backed Securities
The yield characteristics of mortgage-backed and asset-backed securities
differ from traditional debt securities. Among the major differences are that
interest and principal payments are made more frequently, usually monthly, and
that principal may be prepaid at any time because the underlying mortgage loans
or other assets generally may be
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prepaid at any time. As a result, if the Series purchases such a security at a
premium, a prepayment rate that is faster than expected will reduce yield to
maturity, while a prepayment rate that is slower than expected will have the
opposite effect of increasing yield to maturity. Alternatively, if the Series
purchases these securities at a discount, faster than expected prepayments will
increase, while slower than expected prepayments will reduce, yield to maturity.
The Series may invest a portion of its assets in derivative mortgage-backed
securities such as MBS strips which are highly sensitive to changes in
prepayment and interest rates. The investment adviser will seek to manage these
risks (and potential benefits) by diversifying its investments in such
securities and through hedging techniques.
In addition, mortgage-backed securities which are secured by manufactured
(mobile) homes and multi-family residential properties, such as GNMA and FNMA
certificates, are generally subject to a higher risk of default than are other
types of mortgage-backed securities. See "Investment Objective and Policies" in
the Statement of Additional Information. The investment adviser will seek to
minimize this risk by investing in mortgage-backed securities rated at least "A"
by Moody's or S&P. See "Asset-Backed Securities" above.
Although the extent of prepayments on a pool of mortgage loans depends on
various economic and other factors, as a general rule prepayments on fixed rate
mortgage loans will increase during a period of falling interest rates and
decrease during a period of rising interest rates. Accordingly, amounts
available for reinvestment by the Series are likely to be greater during a
period of declining interest rates and, as a result, likely to be reinvested at
lower interest rates than during a period of rising interest rates. Asset-backed
securities, although less likely to experience the same prepayment rates as
mortgage-backed securities, may respond to certain of the same factors
influencing prepayments, while at other times different factors will
predominate. Mortgage-backed securities and asset-backed securities may decrease
in value as a result of increases in interest rates and may benefit less than
other fixed income securities from declining interest rates because of the risk
of prepayment.
As noted above, asset-backed securities involve certain risks that are not
posed by mortgage-backed securities, resulting mainly from the fact that
asset-backed securities do not usually contain the complete benefit of a
security interest in the related collateral. For example, credit card
receivables generally are unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, some of which
may reduce the ability to obtain full payment. In the case of automobile
receivables, due to various legal and economic factors, proceeds from
repossessed collateral may not always be sufficient to support payments on these
securities.
Money Market Instruments
The Series may invest in high quality money market instruments, including
commercial paper of a U.S. or foreign company or foreign government;
certificates of deposit, bankers' acceptances and time deposits of domestic and
foreign banks; and obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities. These obligations will be U.S. dollar
denominated. Commercial paper will be rated, at the time of purchase, at least
"A-2" by S&P or "Prime-2" by Moody's, or, if not rated, issued by an entity
having an outstanding unsecured debt issue rated at least "A" or "A-2" by S&P or
"A" or "Prime-2" by Moody's.
OTHER INVESTMENTS AND INVESTMENT TECHNIQUES
The Series may also (i) engage in hedging and income enhancement techniques
through the purchase and sale of put and call options on securities and indices
and the purchase and sale of futures contracts and related options (including
futures contracts on U.S. Government securities and indices and options
thereon), (ii) enter into repurchase agreements, (iii) enter into reverse
repurchase agreements and dollar rolls, (iv) lend its securities, (v) make short
sales, (vi) purchase and sell securities on a when-issued and delayed delivery
basis, (vii) engage in interest rate swap transactions and (viii) borrow money
in all instances subject to the limitations described below and in the Statement
of Additional Information. See "Investment Objective and Policies" in the
Statement of Additional Information.
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Hedging and Income Enhancement Strategies
The Series may engage in various portfolio strategies to reduce certain
risks of its investments and to attempt to enhance income. These strategies
include the use of options and futures contracts and options on futures. The
Series' ability to use these strategies may be limited by market conditions,
regulatory limits and tax considerations and there can be no assurance that any
of these strategies will succeed. See "Investment Objective and Policies" in the
Statement of Additional Information.
Options Transactions
The Series may purchase and write (i.e., sell) put and call options on
securities and financial indices that are traded on national securities
exchanges or in the over-the-counter market to attempt to enhance income or to
hedge the Series' portfolio. These options will be on debt securities,
aggregates of debt securities, financial indices and U.S. Government securities
and may be traded on national securities exchanges or over-the-counter. See
"Investment Objective and Policies-Additional Risks-Options on Securities" in
the Statement of Additional Information. The Series 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 it intends to purchase.
The Series may also purchase put and call options to offset previously written
put and call options of the same series. See "Investment Objectives and
Policies-Additional Investment Policies-Options on Securities" in the Statement
of Additional Information. The Series may also purchase put and call options on
futures contracts.
A call option gives the purchaser, in exchange for a premium paid, the right
for a specified period of time to purchase the securities subject to the option
at a specified price (the "exercise price" or "strike price"). The writer of a
call option, in return for the premium, has the obligation, upon exercise of the
option, to deliver, depending upon the terms of the option contract, the
underlying securities or a specified amount of cash to the purchaser upon
receipt of the exercise price. When the Series writes a call option, the Series
gives up the potential for gain on the underlying securities in excess of the
exercise price of the option during the period that the option is open.
A put option gives the purchaser, in return for a premium, the right, for a
specified period of time, to sell the securities subject to the option to the
writer of the put at the specified exercise price. The writer of the put option,
in return for the premium, has the obligation, upon exercise of the option, to
acquire the securities underlying the option at the exercise price. The Series
might, therefore, be obligated to purchase the underlying securities for more
than their current market price.
The Series will write only "covered" options. An option is covered if, so
long as the Series is obligated under the option, it owns an offsetting position
in the underlying security or maintains cash, U.S. Government securities or
other liquid high-grade debt obligations with a value sufficient at all times to
cover its obligations in a segregated account. See "Investment Objective and
Policies" in the Statement of Additional Information.
There is no limitation on the amount of call options the Series may write.
The Series may only write covered put options to the extent that cover for such
options does not exceed 25% of the Series' net assets. The Series will not
purchase an option if, as a result of such purchase, more than 20% of its total
assets would be invested in premiums for options and options on futures
contracts.
Futures Contracts and Options Thereon
The Series may purchase and sell financial futures contracts and options
thereon which are traded on a commodities exchange or board of trade for certain
hedging, return enhancement and risk management purposes
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in accordance with regulations of the Commodity Futures Trading Commission.
These futures contracts and related options will be on debt securities,
aggregates of debt securities, financial indices and U.S. Government securities
and include futures contracts and options thereon which are linked to LIBOR. A
financial futures contract is an agreement to purchase or sell an agreed amount
of securities at a set price for delivery in the future.
The Series may not purchase or sell futures contracts and related options
for other than bona fide hedging purposes if immediately thereafter the sum of
the amount of initial margin deposits on the Series' existing futures and
options on futures and premiums paid for such related options would exceed 5% of
the liquidation value of the Series'total assets.
The Series' successful use of futures contracts and related options depends
upon the investment adviser's ability to predict the direction of the market and
is subject to various additional risks. The correlation between movements in the
price of a futures contract and the price of the securities being hedged is
imperfect and there is a risk that the value of the securities being hedged may
increase or decrease at a greater rate than a specified futures contract
resulting in losses to the Series.
The Series' ability to enter into futures contracts and options thereon may
also be 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 "Investment Objective and Policies-Additional Investment
Policies-Futures Contracts-Options on Futures Contracts" and "Taxes" in the
Statement of Additional Information.
Special Risks of Hedging and Income Enhancement Strategies
Participation in the options or futures markets involves investment risks
and transaction costs to which the Series would not be subject absent the use of
these strategies.If the investment adviser's prediction of movements in the
direction of the securities and interest rate markets is inaccurate, the adverse
consequences to the Series may leave the Series in a worse position than if such
strategies were not used. Risks inherent in the use of options and futures
contracts and options on futures contracts include (1) dependence on the
investment adviser's ability to predict correctly movements in the direction of
interest rates and securities prices; (2) imperfect correlation between the
price of options and futures contracts and options thereon and movements in the
prices of the securities being hedged; (3) the fact that skills needed to use
these strategies are different from those needed to select portfolio securities;
(4) the possible absence of a liquid secondary market for any particular
instrument at any time; (5) the possible need to defer closing out certain
hedged positions to avoid adverse tax consequences; and (6) the possible
inability of the Series to purchase or sell a portfolio security at a time that
otherwise would be favorable for it to do so, or the possible need for the
Series to sell the security at a disadvantageous time, due to the requirement
that the Series maintain "cover" or segregate securities in connection with
hedging transactions. See "Investment Objective and Policies" and "Taxes" in the
Statement of Additional Information.
Repurchase Agreements
The Series may enter into repurchase agreements, whereby the seller of a
security agrees to repurchase that security from the Series at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the security. The Series' repurchase agreements will at all times be
fully collateralized in an amount at least equal to the purchase price including
accrued interest earned on the underlying securities. The instruments held as
collateral are valued daily, and if the value of such instruments declines, the
Series will require additional collateral. If the seller defaults and the value
of the collateral securing the repurchase agreement declines, the Series may
incur a loss. The Series participates in a joint repurchase account with other
investment companies managed by Prudential Mutual Fund Management, Inc. pursuant
to an order of the SEC.
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Short Sales
The Series may sell a security it does not own in anticipation of a decline
in the market value of the security (short sales). To complete the transaction,
the Series will borrow the security to make delivery to the buyer. The Series is
then obligated to replace the security borrowed by purchasing it at the market
price at the time of replacement. The price at such time may be more or less
than the price at which the security was sold by the Series. Until the security
is replaced, the Series is required to pay to the lender any interest which
accrues during the period of the loan. To borrow the security, the Series may be
required to pay a premium which would increase the cost of the security sold.
The proceeds of the short sale will be retained by the broker to the extent
necessary to meet margin requirements until the short position is closed out.
Until the Series replaces the borrowed security, it will (a) maintain in a
segregated account cash, U.S. Government securities or other liquid high-grade
debt securities at such a level that the amount deposited in the account plus
the amount deposited with the broker as collateral will equal the current market
value of the security sold short and will not be less than the market value of
the security at the time it was sold short, or (b) otherwise cover its short
position.
The Series will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on which
the Series replaces the borrowed security. The Series will realize a gain if the
security declines in price between those dates. This result is the opposite of
what one would expect from a cash purchase of a long position in a security. The
amount of any gain will be decreased, and the amount of any loss will be
increased, by the amount of any premium or interest paid in connection with the
short sale. No more than 25% of the Series' net assets will be, when added
together: (i) deposited as collateral for the obligation to replace securities
borrowed to effect short sales and (ii) allocated to segregated accounts in
connection with short sales. The Series may also make short sales
"against-the-box", without regard to this limitation, for the purpose of
deferring realization of gain or loss for federal income tax purposes. A short
sale "against-the-box" is a short sale in which the Series owns an equal amount
of the securities sold short or securities convertible into or exchangeable,
without payment of any further consideration, for securities of the same issue
as, and equal in amount to, the securities sold short.
When-Issued and Delayed Delivery Securities
The Series 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 Series with payment and delivery taking
place as much as a month or more into the future in order to secure what is
considered to be an advantageous price and yield to the Series at the time of
entering into the transaction. The Trust's Custodian will maintain, in a
segregated account of the Series, cash, U.S. Government securities or other
liquid high-grade debt obligations having a value equal to or greater than the
Series' purchase commitments; the Custodian will likewise segregate securities
sold on a delayed delivery basis. The securities so purchased are subject to
market fluctuation and no interest accrues to the purchaser during the period
between purchase and settlement. At the time of delivery of the securities the
value may be more or less than the purchase price and an increase in the
percentage of the Series' assets committed to the purchase of securities on a
when-issued or delayed delivery basis may increase the volatility of the Series'
net asset value.
Securities Lending
The Series may lend its portfolio securities to brokers or dealers, banks or
other recognized institutional borrowers of securities, provided that the
borrower at all times maintains cash or equivalent collateral or secures a
letter of credit in favor of the Series in an amount equal to at least 100% of
the market value of the securities loaned. During the time portfolio securities
are on loan, the borrower will pay the Series an amount equivalent to any
dividend or interest paid on such securities and the Series 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
Series may not lend more than 30% of the value of its total assets.
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Reverse Repurchase Agreements and Dollar Rolls
Reverse repurchase agreements involve sales by the Series of portfolio
assets concurrently with an agreement by the Series to repurchase the same
assets at a later date at a fixed price. During the reverse repurchase agreement
period, the Series continues to receive principal and interest payments on these
securities.
The Series may enter into dollar rolls in which the Series sells securities
for delivery in the current month and simultaneously contracts to repurchase
substantially similar (same type and coupon) securities on a specified future
date from the same party. During the roll period, the Series forgoes principal
and interest paid on the securities. The Series is compensated by the difference
between the current sales price and the forward price for the future purchase
(often referred to as the "drop") as well as by the interest earned on the cash
proceeds of the initial sale.
The Series will establish a segregated account with its custodian in which
it will maintain cash, U.S. Government securities or other liquid high-grade
debt obligations equal in value to its obligations in respect of reverse
repurchase agreements and dollar rolls. Reverse repurchase agreements and dollar
rolls involve the risk that the market value of the securities retained by the
Series may decline below the price of the securities the Series has sold but is
obligated to repurchase under the agreement. In the event the buyer of
securities under a reverse repurchase agreement files for bankruptcy or becomes
insolvent, the Series' use of the proceeds of the agreement may be restricted
pending a determination by the other party, or its trustee or receiver, whether
to enforce the Series' obligation to repurchase the securities.
Whenever the Series enters into a reverse repurchase or dollar roll
transaction, it will maintain an offsetting cash position or a cash equivalent
security position which matures on or before the forward settlement date of the
transaction.
Reverse repurchase agreements and dollar rolls are considered borrowings by
the Series for purposes of the percentage limitation applicable to borrowings.
See "Borrowing" below.
Interest Rate Swap Transactions
The Series may enter into interest rate swaps. Interest rate swaps involve
the exchange by the Series with another party of their respective commitments to
pay or receive interest, for example, an exchange of floating rate payments for
fixed rate payments. The Series expects to enter into these transactions
primarily to preserve a return or spread on a particular investment or portion
of its portfolio or to protect against any increase in the price of securities
the Fund anticipates purchasing at a later date. The Series intends to use these
transactions as a hedge and not as a speculative investment. See "Investment
Objective and Policies-Other Investment Strategies" in the Statement of
Additional Information. The risk of loss with respect to interest rate swaps is
limited to the net amount of interest payments that the Series is contractually
obligated to make and will not exceed 5% of the Fund's net assets. The use of
interest rate swaps may involve investment techniques and risks different from
those associated with ordinary portfolio transactions. If the investment adviser
is incorrect in its forecast of market values, interest rates and other
applicable factors, the investment performance of the Series would diminish
compared to what it would have been if this investment technique was never used.
Borrowing
The Series may borrow an amount equal to no more than 33-1/3% of the value
of its total assets (computed at the time the loan is made) to take advantage of
investment opportunities, for temporary, extraordinary or emergency purposes, or
for the clearance of transactions. The Series may pledge up to 33-1/3% of its
total assets to secure these borrowings. If the Series' asset coverage for
borrowings falls below 300%, the Series will take prompt action to reduce its
borrowings. If the Series 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 Series' 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
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(including any interest paid on the money borrowed) to the Series, the net asset
value of the Series' shares will decrease faster than would otherwise be the
case. This is the speculative characteristic known as "leverage." Reverse
repurchase agreements, dollar rolls and short sales (other than short sales
"against-the-box") also include leverage and are considered borrowings by the
Series for purposes of the percentage limitations applicable to borrowings. See
"Reverse Repurchase Agreements and Dollar Rolls."
Illiquid Securities
The Series may invest 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. Restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, as amended (the Securities Act), privately placed commercial paper and
municipal lease obligations if in each case such investments 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 Trustees. Repurchase agreements subject to demand
are deemed to have a maturity equal to the applicable notice period.
The staff of the SEC has taken the position that purchased over-the-counter
options and the assets used as "cover" for written over-the-counter options are
illiquid securities unless the Series and the counterparty have provided for the
Series at the Series' option to unwind the over-the-counter option. The exercise
of such an option ordinarily would involve the payment by the Series of an
amount designed to reflect the counterparty's economic loss from an early
termination, but does allow the Series to treat the assets used as "cover" as
"liquid."
Portfolio Turnover
Although the Series has no fixed policy with respect to portfolio turnover,
it may sell portfolio securities without regard to the length of time that they
have been held in order to take advantage of new investment opportunities or
yield differentials, or because the Series desires to preserve gains or limit
losses due to changing economic conditions. Accordingly, it is possible that the
portfolio turnover rate of the Series may reach, or even exceed, 250%. The
portfolio turnover rate is computed by dividing the lesser of the amount of the
securities purchased or securities sold (excluding all securities whose
maturities at acquisiton were one year or less) by the average monthly value of
such securities owned during the year. A higher rate of turnover results in
increased transaction costs to the Series. See "Portfolio Turnover" in the
Statement of Additional Information.
INVESTMENT RESTRICTIONS
The Series 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
Series' outstanding securities, as defined in the Investment Company Act. See
"Investment Restrictions" in the Statement of Additional Information.
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HOW THE TRUST IS MANAGED
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The Trust has Trustees who, in addition to overseeing the actions of the
Trust's Manager, Subadviser and Distributor, as set forth below, decide upon
matters of general policy. The Trust's Manager conducts and supervises the daily
business operations of the Trust. The Trust's Subadviser furnishes daily
investment advisory services.
For the fiscal year ended November 30, 1994, total expenses of the Series as
a percentage of its average net assets were .84%. See "Financial Highlights."
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MANAGER
Prudential Mutual Fund Management, Inc. (PMF or the Manager), One Seaport
Plaza, New York, New York 10292, is the Manager of the Trust and is compensated
for its services at an annual rate of .40 of 1% of the Series' average daily net
assets. It was incorporated in May 1987 under the laws of the State of Delaware.
For the fiscal year ended November 30, 1994, the Trust paid management fees to
PMF of .40% of the average net assets of the Series. See "Manager" in the
Statement of Additional Information.
As of June 30, 1995, PMF served as the manager to 38 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 30 closed-end investment companies with aggregate assets of
approximately $49 billion.
Under the Management Agreement with the Trust, PMF manages the investment
operations of the Trust and also administers the Trust's corporate affairs. See
"Manager" in the Statement of Additional Information.
Under a Subadvisory Agreement between PMF and The Prudential Investment
Corporation (PIC or the Subadviser), PIC furnishes investment advisory services
in connection with the management of the Trust and is reimbursed by PMF for its
reasonable costs and expenses incurred in providing such services. Under the
Management Agreement, PMF continues to have responsibility for all investment
advisory services and supervises PIC's performance of such services.
The portfolio manager of the Series is Barbara L. Kenworthy, a managing
director and senior portfolio manager of Prudential Investment Advisors, a unit
of PIC. Ms. Kenworthy has had responsibility since May 1995 for the day-to-day
management of the Series' portfolio and is also responsible for the management
of a number of other portfolios advised by PIC. Ms. Kenworthy was previously
employed by The Dreyfus Corporation (June 1985-June 1994) and served as
president and portfolio manager for several Dreyfus fixed-income funds. Ms.
Kenworthy has 20 years of investment management experience in both U.S. and
foreign securities and investment grade and high yield quality bonds. She
actively manages the Series' portfolio according to the investment adviser's
interest rate outlook. Consistent with the Series' investment objective and
policies, she will, at times, invest in different sectors of the U.S. government
and other fixed-income markets seeking price discrepancies and more favorable
interest rates. The investment adviser conducts extensive analysis of U.S. and
overseas markets in an attempt to identify trends in interest rates, supply and
demand and economic growth. The portfolio manager then selects the sectors,
maturities and individual bonds she believes provide the best value under those
conditions.
PMF 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 Securities Incorporated (Prudential Securities, PSI or the
Distributor), One Seaport Plaza, New York, New York 10292, is a corporation
organized under the laws of the State of Delaware and serves as the Distributor
for the Series. It is an indirect, wholly-owned subsidiary of Prudential.
Under a Distribution and Service Plan (the Plan) adopted by the Series under
Rule 12b-1 under the Investment Company Act and a distribution and service
agreement (the Distribution Agreement), the Distributor incurs the expenses of
distributing shares of the Series. These expenses include commission credits to
Prudential Securities Incorporated (Prudential Securites or PSI) branch offices
for payments of commissions and account servicing fees to financial advisers and
an allocation of overhead and other branch office distribution-related expenses.
Such account servicing fees are paid based on the average balance of Series'
shares held in the account of the customers of financial advisers. The
Distributor also pays the cost of printing and mailing prospectuses to potential
investors and advertising expenses. In addition, the Distributor pays other
broker-dealers, including Pruco Securities Corporation (Prusec), an
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affiliated broker-dealer, for commissions and other expenses incurred by such
broker-dealers in distributing the Series' shares. The State of Texas requires
that shares of the Trust may be sold in that state only by dealers or other
financial institutions which are registered there as broker-dealers.
Under the Plan, the Trust is obligated to pay a service fee to the
Distributor as compensation for its distribution and service activities on
behalf of the Series, not as reimbursement for specific expenses incurred. If
the Distributor's expenses exceed its distribution and service fees, the Trust
will not be obligated to pay any additional expenses. If the Distributor's
expenses are less than such distribution and service fees, it will retain its
full fees and realize a profit.
Under the Plan, the Trust pays the Distributor for its distribution-related
activities with respect to the Series at the annual rate of the lesser of (a)
.25 of 1% per annum of the aggregate sales of the Series' shares, not including
shares issued in connection with reinvestment of dividends and capital gains
distributions, issued on or after July 1, 1985 (the effective date of the Plan)
less the aggregate net asset value of any such shares redeemed, or (b) .25 of 1%
per annum of the average daily net asset value of the shares issued after the
effective date of the Plan. Such amounts are accrued daily and paid monthly and
average daily net assets are calculated on the basis of the Series' fiscal year.
For the fiscal year ended November 30, 1994, the Distributor received
$665,503 from the Series under the Plan. It is estimated that the Distributor
spent $665,503 on behalf of the Series.
For the fiscal year ended November 30, 1994, the Series paid distribution
expenses under the Plan of .21 of 1% of its average net assets. The Trust
records all payments made under the Plan as expenses in the calculation of its
net investment income. Prior to the date of this Prospectus, the Plan operated
as a "reimbursement type" plan. See "Distributor" in the Statement of Additional
Information.
The Plan provides that it shall continue in effect from year to year
provided that a majority of the Trustees, including a majority of the Trustees
who are not interested persons of the Trust (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
Trustees), vote annually to continue the Plan. The Plan may be terminated at any
time by vote of a majority of the Rule 12b-1 Trustees or of a majority of the
outstanding shares of the Series. In the event of termination or noncontinuation
of the Plan, the Series would not be legally obligated to pay the Distributor
for any expenses incurred under the Plan.
In addition to distribution and service fees paid by the Series under the
Plan, 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 Series.
Such payments may be calculated by reference to the net asset value of shares
sold by such persons or otherwise.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the National
Association of Securities Dealers, Inc. to resolve allegations that from 1980
through 1990 PSI sold certain limited partnership interests in violation of
securities laws to persons for whom such securities were not suitable and
misrepresented the safety, potential returns and liquidity of these investments.
Without admitting or denying the allegations asserted against it, PSI consented
to the entry of an SEC Administrative Order which stated that PSI's conduct
violated the federal securities laws, directed PSI to cease and desist from
violating the federal securities laws, pay civil penalties, and adopt certain
remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of
a $10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action.
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In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling 1-800-225-1852.
The Trust is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Trust's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker for the Trust provided that the
commissions, fees or other remuneration it receives are fair and reasonable. See
"Portfolio Transactions and Brokerage" in the Statement of Additional
Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian of the Trust's portfolio securities
and, in that capacity, maintains certain financial and accounting books and
records pursuant to an agreement with the Trust. Its mailing address is P.O. Box
1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services, Inc., Raritan Plaza One, Edison, New Jersey
08837, serves as Transfer and Dividend Disbursing Agent and, in those
capacities, maintains certain books and records for the Trust. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
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HOW THE TRUST VALUES ITS SHARES
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The Series' net asset value per share or NAV is determined by subtracting
its liabilities from the value of its assets and dividing the remainder by the
number of outstanding shares. The Trustees have fixed the specific time of day
for the computation of the NAV of the Series to be as of 4:15 P.M., New York
time.
Portfolio securities are valued based on market quotations or, if not
readily available, at fair value as determined in good faith under procedures
established by the Trustees. See "Net Asset Value" in the Statement of
Additional Information.
The Series will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem Intermediate Term Series shares have been received or days on which
changes in the value of the Series' portfolio securities do not materially
affect the NAV. The New York Stock Exchange is closed on the following holidays:
New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day. See "Net Asset Value" in the
Statement of Additional Information.
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HOW THE TRUST CALCULATES PERFORMANCE
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The Series may from time to time advertise its "yield" and its total return
(including "average annual" total return and "aggregate" total return) in
advertisements or sales literature. These figures are based on historical
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earnings and are not intended to indicate future performance. The "yield" refers
to the income generated by an investment in the Series over a 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 "total return" shows how much an investment in the
Series would have increased (decreased) over a specified period of time (i.e.,
one, five or ten years or since inception of the Trust) assuming that all
distributions and dividends by the Series were reinvested on the reinvestment
dates during the period and less all recurring fees. The "aggregate" total
return reflects actual performance over a stated period of time. "Average
annual" total return is a hypothetical rate of return that, if achieved
annually, would have produced the same aggregate total return if performance had
been constant over the entire period. "Average annual" total return smooths out
variations in performance. Neither "average annual" nor "aggregate" total return
takes into account any federal or state income taxes which may be payable upon
redemption. The Series may include comparative performance information in
advertising or marketing its 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 Trust's annual report to
shareholders, which may be obtained without charge. See "Shareholder
Guide-Shareholder Services-Reports to Shareholders."
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TAXES, DIVIDENDS AND DISTRIBUTIONS
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Taxation of the Series
Each series of the Trust is treated as a separate entity for federal income
tax purposes and each has elected to qualify and intends to remain qualified as
a regulated investment company under the Internal Revenue Code. Accordingly, the
Series will not be subject to federal income taxes on the taxable income it
distributes to shareholders. The performance and tax qualification of one series
will have no effect on the federal income tax liability of shareholders of the
other series. See "Taxes" in the Statement of Additional Information.
Gains or losses on sales of securities by the Series are generally treated
as long-term capital gains or losses if the securities have been held by it for
more than one year and otherwise as 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 (assuming they do not qualify as "Section 1256 contracts"). If an
option written by the Series on securities lapses or is terminated through a
closing transaction, such as a repurchase by the Series of the option from its
holder, the Series should generally realize short-term capital gain or loss. If
securities are sold by the Series pursuant to the exercise of a call option
written by it, the Series will include the premium received in the sale proceeds
of the securities delivered in determining the amount of gain or loss on the
sale. Certain of the Series' transactions may be subject to wash sale and short
sale provisions of the Internal Revenue Code, which may, in general, disallow or
defer certain losses realized by the Series, recharacterize certain of the
Series' long-term capital gains as short-term capital gains (or short-term
capital losses as long-term capital losses), and toll the Series' holding period
in certain capital assets. In addition, debt securities acquired by the Series
may be subject to original issue discount and market discount rules.
"Regulated futures contracts" and certain listed options which are not
"equity options" constitute "Section 1256 contracts" and will be required to be
"marked to market" for federal income tax purposes at the end of the Series'
taxable year; that is, treated as having been sold at market value. 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.
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In addition, positions which are part of a "straddle" are subject to special
rules including modified wash sale and short sale rules. The Series generally
will be required to defer the recognition of losses on positions it holds as
part of a straddle to the extent of any unrecognized gain on offsetting
positions held by the Series, and will not be able to deduct net interest or
other charges incurred to purchase or carry straddle positions. Capital gains
realized by the Series in connection with a "conversion transaction" (generally,
a transaction the Series' return from which is attributable solely to the time
value of the Series' net investment) will generally be recharacterized as
ordinary income.
The Series' ability to enter into "Section 1256 contracts," straddles and
swaps may be limited by the income and asset requirements the Series must
satisfy to qualify as a regulated investment company. See "Taxes" in the
Statement of Additional Information.
Taxation of Shareholders
Distributions of net investment income and realized net short-term capital
gains (i.e., the excess of net short-term capital gains over net long-term
capital losses) of the Series, if any, are taxable to shareholders of the Series
as ordinary income, whether such distributions are received in cash or
reinvested in additional shares. Distributions of net long-term capital gains,
if any, are taxable as long-term capital gains, whether paid in cash or
reinvested in additional shares, regardless of how long the shareholder has held
the Series' shares. Because none of the income of the Series will consist of
dividends from domestic corporations, dividends of net investment income and
distributions of net short-term or long-term capital gains will not be eligible
for the dividends-received deduction for corporate shareholders.
Any gain or loss realized upon a sale, redemption or exchange of shares of
the Series 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 for more
than one year, and otherwise as short-term capital gain or loss. Any loss
realized by a shareholder upon the sale, redemption or exchange of Series shares
held six months or less will be treated as a long-term capital loss, however, to
the extent of any net long-term capital gain distributions received by the
shareholder with respect to those shares. Any loss realized on a sale,
redemption or exchange will be disallowed to the extent the shares disposed of
are replaced (including by reinvestment of dividends) within the 61-day period
ending 30 days after the shares are disposed of.
Shareholders are advised to consult their own tax advisers regarding
specific questions as to federal, state or local taxes.
Withholding Taxes
Under Treasury Regulations, the Series is required to withhold and remit to
the U.S. Treasury 31% of dividends, capital gain distributions and redemption
proceeds on the accounts of those shareholders who fail to furnish their tax
identification numbers on IRS Form W-9 (or IRS Form W-8 in the case of certain
foreign shareholders). 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 from net
investment income and short-term capital gains paid to a foreign shareholder
will generally be subject to U.S. withholding tax at the rate of 30% (or lower
treaty rate).
Dividends and Distributions
The Series declares dividends on a daily basis payable monthly in an amount
based on actual and projected net investment income determined in accordance
with generally accepted accounting principles.
Dividends and distributions will be paid in additional shares of the Series,
based on the NAV on the payment date, unless the shareholder elects in writing
not less than five business days prior to the payment date to receive such
dividends and distributions in cash. Such election should be submitted to
Prudential Mutual Fund Services, Inc., Attention: Account Maintenance, P.O. Box
15015, New Brunswick, New Jersey 08906-5015. If you hold shares through
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Prudential Securities, you should contact your financial adviser to elect to
receive dividends and distributions in cash. The Trust will notify each
shareholder after the close of the Trust's taxable year of both the dollar
amount and taxable status of that year's dividends and distributions on a per
share basis. Distributions may be subject to state and local taxes. See
"Taxation of Shareholders" above.
As of November 30, 1994, the Series had a capital loss carryforward for
federal income tax purposes of approximately $78,649,000. Accordingly, no
capital gains distribution is expected to be paid to shareholders until net
gains have been realized in excess of such carryforward.
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GENERAL INFORMATION
- --------------------------------------------------------------------------------
DESCRIPTION OF SHARES
The Trust, organized as an unincorporated business trust under the laws of
Massachusetts, is a trust fund of the type commonly known as a "Massachusetts
business trust." The Trust's activities are supervised by its Trustees. The
Declaration of Trust permits the Trustees to issue an unlimited number of full
and fractional shares in separate series and classes within such series.
The shareholders of the Money Market Series, the Short-Intermediate Term
Series and the U.S. Treasury Money Market Series are each entitled to a full
vote for each full share of beneficial interest (par value $.01 per share) held
(and fractional votes for fractional shares). Shares of each series are entitled
to vote as a class only to the extent required by the provisions of the
Investment Company Act or as otherwise permitted by the Trustees in their sole
discretion. Under the Investment Company Act, shareholders of each series have
to approve the adoption of any investment advisory agreement relating to such
series and of any changes in investment policies related thereto.
It is the intention of the Trust not to hold annual meetings of
shareholders. The Trustees may call special meetings of shareholders for action
by shareholder vote as may be required by the Investment Company Act or the
Declaration of Trust. Shareholders have certain rights, including the right to
call a meeting upon a vote of 10% of the Trust's outstanding shares for the
purpose of voting on the removal of one or more Trustees.
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 Trust with the SEC under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
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SHAREHOLDER GUIDE
- --------------------------------------------------------------------------------
HOW TO BUY SHARES OF THE TRUST
You may purchase shares of the Series through Prudential Securities or
through Prusec or directly from the Trust through its Transfer Agent, Prudential
Mutual Fund Services, Inc. (PMFS or the Transfer Agent), Attention: Investment
Services, P.O. Box 15020, New Brunswick, New Jersey 08906-5020. The minimum
initial investment is $1,000. The minimum subsequent investment is $100. All
minimum investment requirements are waived for certain retirement and employee
savings plans and for custodial accounts for the benefit of minors. For
purchases through the Automatic Savings Accumulation Plan, the minimum initial
and subsequent investment is $50. See "Shareholder Services" below.
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<PAGE>
Shares of the Series are sold, without a sales charge, at the NAV next
determined after receipt of an order by PMFS of a purchase order and payment in
proper form [i.e., a check or Federal Funds wired to State Street Bank and Trust
Company (State Street)]. See "How the Trust Values its Shares." When payment is
received by PMFS prior to 4:15 P.M., New York time, in proper form, a share
purchase order will be entered at the price determined as of 4:15 P.M., New York
time, on that day, and dividends on the shares purchased will begin on the
business day following such investment. See "Taxes, Dividends and
Distributions."
Application forms can be obtained from PMFS, Prudential Securities or
Prusec. If a stock certificate is desired, it must be requested in writing for
each transaction. Certificates are issued only for full shares. Shareholders who
hold their shares through Prudential Securities will not receive stock
certificates. Shareholders cannot utilize Expedited Redemption or have a
Systematic Withdrawal Plan if they have been issued share certificates.
The Trust reserves the right to reject any purchase order (including an
exchange into the Series) 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 Trust. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the fifth business day following the investment.
Transactions in Trust shares may be subject to postage and handling charges
imposed by your dealer.
Purchases through Prudential Securities. Shares of the Series may be
purchased through Prudential Securities at the net asset value next computed
after your order is received. Prudential Securities will transmit your order to
the Trust on the next business day for settlement that day and you will begin
earning dividends on the second business day after receipt of your order by
Prudential Securities. Prudential Securities will have the use of any free
credit balances (i.e., immediately available funds) held in your account until
they are delivered to the Trust in connection with your purchase.
Shares of the Series purchased by Prudential Securities on behalf of its
clients will be held by Prudential Securities as record holder. Prudential
Securities will thereafter receive statements and dividends directly from the
Trust and will in turn provide investors with Prudential Securities account
statements reflecting Series purchases, redemptions and dividend payments.
Prudential Securities clients wishing additional information concerning
investment in Series shares made through Prudential Securities should call their
Prudential Securities financial adviser.
Purchases through Prusec. You may purchase shares of the Series by placing
an order with your Prusec registered representative accompanied by payment for
the purchase price of such shares and, in the case of a new account, a completed
Application Form. You should also submit an IRS Form W-9. The Prusec registered
representative will then forward these items to the Transfer Agent. See
"Purchase by Mail" below.
Purchase by Wire. For an initial purchase of shares of the Series by wire,
you must first telephone PMFS at (800) 225-1852 to receive an account number.
The following information will be requested: your name, address, tax
identification number, dividend and distribution elections, amount being wired
and wiring bank. Instructions should then be given by you to your bank to
transfer funds by wire to State Street Bank and Trust Company, Boston,
Massachusetts, Custody and Shareholder Services Division, Attention: Prudential
Government Securities Trust, Intermediate Term Series, specifying on the wire
the account number assigned and your name.
If you arrange for receipt by State Street of Federal Funds prior to 4:15
P.M., New York time, on a business day, you may purchase Series shares as of
that day and earn dividends commencing on the next business day.
In making a subsequent purchase utilizing Federal Funds, you should wire
State Street directly and should be sure that the wire specifies Prudential
Government Securities Trust (Short-Intermediate Term Series) and your name and
individual account number. It is not necessary to call PMFS to make subsequent
purchase orders utilizing Federal Funds. The minimum amount which may be
subsequently invested by wire is $1,000.
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Purchase by Mail. Purchase orders for which remittance is to be made by
check must be submitted directly by mail to Prudential Mutual Fund Services,
Inc., Attention: Investment Services, P.O. Box 15020, New Brunswick, New Jersey
08906-5020, together with payment for the purchase price of such shares and, in
the case of a new account, a completed Application Form. You should also submit
an IRS Form W-9. If PMFS receives your order to purchase shares of the Trust and
payment in proper form prior to 4:15 P.M., New York time, the purchase order
will be effective on that day and you will begin earning dividends on the
following business day. See "Taxes, Dividends and Distributions." Checks should
be made payable to "Prudential Government Securities Trust, Short-Intermediate
Term Series." Certified checks are not necessary, but checks are accepted
subject to collection at full face value in United States funds and must be
drawn on a bank located in the United States. There are restrictions on the
redemption of shares purchased by check while the funds are being collected. See
"How to Sell Your Shares."
HOW TO SELL YOUR SHARES
You can redeem your shares at any time for cash at the NAV next determined
after the redemption request is received in proper form by the Transfer Agent or
Prudential Securities. See "How the Trust Values its Shares."
Shares for which a redemption request is received by PMFS prior to 4:15
P.M., New York time, are entitled to a dividend on the day on which the request
is received. By pre-authorizing Expedited Redemption, a shareholder may arrange
to have payment for redeemed shares made in Federal Funds wired to the
shareholder's bank, normally on the next bank business day following the date of
receipt of the redemption instructions. Should a shareholder redeem all of his
or her shares, he or she will receive the amount of all dividends declared for
the month-to-date on those shares. Any capital gain or loss realized by a
shareholder upon any redemption of Trust shares must be recognized for federal
income tax purposes. See "Taxes, Dividends and Distributions."
Prudential Securities clients for whom Prudential Securities has purchased
shares of the Trust may have their shares redeemed by calling their Prudential
Securities financial adviser.
If redemption is requested by a corporation, partnership, trust or
fiduciary, written evidence of authority acceptable to the Transfer Agent must
be submitted before such request will be accepted. All correspondence and
documents concerning redemptions should be sent to the Trust in care of its
Transfer Agent, Prudential Mutual Fund Services, Inc., Attention: Redemption
Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5020.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to
a person other than the record owner, (c) are to be sent to an address other
than the address on the Transfer Agent's records or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by
an "eligible guarantor institution." An "eligible guarantor institution"
includes any bank, broker, dealer or credit union. The Transfer Agent reserves
the right to request additional information from, and make reasonable inquiries
of, any eligible guarantor institution. For clients of Prusec, a signature
guarantee may be obtained from the agency or office manager of most Prudential
Insurance and Financial Services or Preferred Services offices.
Payment for shares presented for redemption will ordinarily be made by check
mailed to the shareholder's address within seven days after receipt of the
redemption request in proper order. 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 Trust of securities owned by it is not reasonably practicable or
it is not reasonably practicable for the Trust fairly to determine the value of
its net assets or (d) during any other period when the Securities and Exchange
Commission, by order, so permits; provided that applicable rules and regulations
of the Securities and Exchange 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 Trust or its Transfer Agent has been advised that the purchase check has
been honored, up to 10 calendar days from the time of receipt of the
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purchase check by the Transfer Agent. Such delay may be avoided if shares are
purchased by wire or by certified or official bank check.
Expedited Redemption. By pre-authorizing Expedited Redemption, you may
arrange to have payment for redeemed shares made in Federal Funds wired to your
bank, normally on the next business day following redemption. In order to use
Expedited Redemption, you may so designate at the time the initial investment is
made or at a later date. Once an Expedited Redemption authorization form has
been completed, the signature on the authorization form guaranteed as set forth
above and the form returned to PMFS, requests for redemption may be made by
telegraph, letter or telephone. To request Expedited Redemption by telephone,
you should call PMFS at (800) 225-1852. Calls must be received by PMFS before
4:15 P.M., New York time, to permit redemption as of such date. Requests by
letter should be addressed to Prudential Mutual Fund Services, Inc., Attention:
Redemption Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
A signature guarantee is not required under Expedited Redemption once the
authorization form is properly completed and returned. The Expedited Redemption
privilege may be used to redeem shares in an amount of $200 or more, except that
if an account for which Expedited Redemption is requested has a net asset value
of less than $200, the entire account must be redeemed. The proceeds of redeemed
shares in the amount of $1,000 or more are transmitted by wire to your account
at a domestic commercial bank which is a member of the Federal Reserve System.
Proceeds of less than $1,000 are forwarded by check to your designated bank
account.
During periods of severe market or economic conditions, Expedited
Redemptions may be difficult to implement and you should redeem your shares by
mail as described above.
Redemption in Kind. If the Trustees determine that it would be detrimental
to the best interests of the remaining shareholders of the Series to make
payment wholly or partly in cash, the Trust may pay the redemption price in
whole or in part by a distribution in kind of securities from the portfolio of
the Series, in lieu of cash in conformity with applicable rules of the
Securities and Exchange Commission. Securities will be readily marketable and
will be valued in the same manner as in a regular redemption. See "How the Trust
Values its Shares." If your shares are redeemed in kind, you would incur
transaction costs in converting the assets into cash. The Trust, however, has
elected to be governed by Rule 18f-1 under the Investment Company Act pursuant
to which the Trust is obligated to redeem shares solely in cash up to the lesser
of $250,000 or one percent of the net asset value of the Series during any
90-day period for any one shareholder.
Involuntary Redemption. In order to reduce the expenses of the Trust, the
Trustees may redeem all of the shares of any shareholder whose account has a net
asset value of less than $500 due to a redemption. The Trust would give
shareholders whose shares were being redeemed 60 days' prior written notice in
which to purchase sufficient additional shares to avoid such 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 Trust at the NAV next
determined after the order is received, which must be within 90 days after the
date of the redemption. You will receive pro rata credit for any contingent
deferred sales charge paid in connection with the redemption. You must notify
the Trust's Transfer Agent, either directly or through Prudential Securities or
Prusec, at the time the repurchase privilege is exercised, that you are entitled
to credit for any contingent deferred sales charge previously paid. Exercise of
the repurchase privilege will not affect the federal income tax treatment of any
gain realized upon the redemption. If the redemption resulted in a loss, some or
all of the loss, depending on the amount reinvested, will not be allowed for
federal income tax purposes.
Class B and Class C Purchase Privilege. You may direct that the proceeds of
the redemption of Fund shares be invested in Class B or Class C shares of any
Prudential Mutual Fund by calling your Prudential Securities financial adviser
or the Transfer Agent at (800) 225-1852. The transaction will be effected on the
basis of the relative NAV.
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HOW TO EXCHANGE YOUR SHARES
As a shareholder of the Series, you may exchange your shares for shares of
other series of the Trust and certain other Prudential Mutual Funds, including
money market funds and funds sold with an initial sales charge, subject to the
minimum investment requirements of such funds on the basis of relative NAV. You
may exchange your shares for Class A shares of the Prudential Mutual Funds on
the basis of the relative NAV plus the applicable sales charge. No additional
sales charge is imposed in connection with subsequent exchanges. You may not
exchange your shares for Class B shares of the Prudential Mutual Funds, except
that shares acquired prior to January 22, 1990 subject to a contingent deferred
sales charge can be exchanged for Class B shares. You may not exchange your
shares for Class C shares of the Prudential Mutual Funds. See "How to Sell Your
Shares-Class B and Class C Purchase Privilege" above and "Shareholder Investment
Account-Exchange Privilege" in the Statement of Additional Information. An
exchange will be treated as a redemption and purchase for tax purposes.
In order to exchange shares by telephone, you must authorize telephone
exchanges on your initial application form or by written notice to the Transfer
Agent and hold shares in non-certificate form. Thereafter, you may call the
Trust 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 fradulent 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 Trust 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 (or series) next determined after the request is
received in good order. The Exchange Privilege is available only in states where
the exchange may legally be made.
If you hold shares through Prudential Securities, you must exchange your
shares by contacting your Prudential Securities financial adviser. If you hold
certificates, the certificates, signed in the name(s) shown on the face of the
certificates, must be returned in order for the shares to be exchanged. See
"Purchase and Redemption of Trust Shares-How to Sell Your Shares" above.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
In periods of severe market or economic conditions, the telephone exchange
of shares may be difficult to implement and you should make exchanges by mail by
writing to Prudential Mutual Fund Services, Inc., at the address noted above.
The Exchange Privilege may be modified or terminated at any time on 60 days'
notice to shareholders.
SHAREHOLDER SERVICES
In addition to the exchange privilege, as a shareholder in the Trust, you
can take advantage of the following additional services and privileges:
* Automatic Reinvestment of Dividends and/or Distributions. For your
convenience, all dividends and distributions are automatically reinvested in
full and fractional shares of the Series at NAV. 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 your shares through Prudential Securities, you should
contact your financial adviser.
* Automatic Savings Accumulation Plan (ASAP). Under ASAP you may make
regular purchases of Series shares in amounts as little as $50 via an automatic
charge to a bank account or Prudential Securities account (including a Command
Account). For additional information about this service, you may contact your
Prudential Securities financial adviser, Prusec representative or the Transfer
Agent directly.
26
<PAGE>
* Tax-Deferred Retirement Plans. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code
are available through the Distributor. These plans are for use by both
self-employed individuals and corporate employers. These plans permit either
self-direction of accounts by participants, or a pooled account arrangement.
Information regarding the establishment of these plans, the administration,
custodial fees and other details is available from Prudential Securities or the
Transfer Agent. If you are considering adopting such a plan, you should consult
with your own legal or tax adviser with respect to the establishment and
maintenance of such a plan.
* Systematic Withdrawal Plan. A systematic withdrawal plan is available for
shareholders which provides for monthly or quarterly checks. For additional
information about this service, you may contact your Prudential Securities
financial adviser, Prusec representative or the Transfer Agent directly.
* Reports to Shareholders. The Trust 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 Trust will provide one annual report and semi-annual shareholder
report and annual prospectus per household. You may request additional copies of
such reports by calling (800) 225-1852 or by writing to the Trust at One Seaport
Plaza, New York, NY 10292. In addition, monthly unaudited financial data is
available upon request from the Trust.
* Shareholder Inquiries. Inquiries should be addressed to the Trust at One
Seaport Plaza, New York, New York 10292, or by telephone, at (800) 225-1852
(toll free) or, from outside the U.S.A., at (908) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
27
<PAGE>
- --------------------------------------------------------------------------------
THE PRUDENTIAL MUTUAL FUND FAMILY
- --------------------------------------------------------------------------------
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec registered representative or telephone
the Trust at (800) 225-1852 for a free prospectus. Read the prospectus carefully
before you invest or send money.
Left Column
- --------------------------------------------------------------------------------
Taxable Bond Funds
Prudential Adjustable Rate Securities Fund, Inc.
Prudential Diversified Bond Fund, Inc.
Prudential GNMA Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Prudential U.S. Government Fund
The BlackRock Government Income Trust
Tax-Exempt Bond Funds
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Modified Term Series
Prudential Municipal Series Fund
Arizona Series
Florida Series
Georgia Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
Global Funds
Prudential Europe Growth Fund, Inc.
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.
Right Column
Equity Funds
Prudential Allocation Fund
Conservatively Managed Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential IncomeVertible\'AE Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
Money Market Funds
Taxable Money Market Funds
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund
Money Market Series
Prudential MoneyMart Assets
Tax-Free Money Market Funds
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
Command Funds
Command Money Fund
Command Government Fund
Command Tax-Free Fund
Institutional Money Market Funds
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
- --------------------------------------------------------------------------------
A-1
<PAGE>
Left Column
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 Trust or the
Distributor. This Prospectus does not constitute
an offer by the Trust or by the Distributor to
sell or a solicitation of an offer to buy any of
the securities offered hereby in any
jurisdiction to any person to whom it is
unlawful to make such offer in such
jurisdiction.
________________________________________________
TABLE OF CONTENTS
Page
----
TRUST HIGHLIGHTS............................. 2
Risk Factors and Special Characteristics... 2
TRUST EXPENSES............................... 4
FINANCIAL HIGHLIGHTS......................... 5
HOW THE TRUST INVESTS........................ 6
Investment Objective and Policies.......... 6
Other Investments and Policies............. 8
Other Investments and Investment Techniques 11
Investment Restrictions.................... 16
HOW THE TRUST IS MANAGED..................... 16
Manager.................................... 17
Distributor................................ 17
Portfolio Transactions..................... 19
Custodian and Transfer and
Dividend Disbursing Agent................ 19
HOW THE TRUST VALUES ITS SHARES.............. 19
HOW THE TRUST CALCULATES PERFORMANCE......... 19
TAXES, DIVIDENDS AND DISTRIBUTIONS........... 20
GENERAL INFORMATION.......................... 22
Description of Shares...................... 22
Additional Information..................... 22
SHAREHOLDER GUIDE............................ 22
How to Buy Shares of the Trust............. 22
How to Sell Your Shares.................... 24
How to Exchange Your Shares................ 26
Shareholder Services....................... 26
THE PRUDENTIAL MUTUAL FUND FAMILY............A-1
________________________________________________
111A 4440381
________________________________________________
CUSIP #: 744342 10 6
________________________________________________
Right Column
Prudential
Government
Securities
Trust
(Short-Intermediate Term Series)
Prudential Mutual Funds (LOGO)
Building Your Future
On Our StrengthSM
PROSPECTUS
August 1, 1995
<PAGE>
Prudential Government Securities Trust
(Money Market Series)
- --------------------------------------------------------------------------------
Prospectus dated August 1, 1995
- --------------------------------------------------------------------------------
Prudential Government Securities Trust (the Trust) is a diversified, open-end
management investment company whose shares of beneficial interest are offered in
three series. Each series operates as a separate fund with its own investment
objectives and policies designed to meet its specific investment goals.
The investment objectives of the Money Market Series (the Series) are to obtain
high current income, preservation of capital and maintenance of liquidity by
investing principally in a diversified portfolio of short-term money-market
instruments issued or guaranteed by the United States Government or its agencies
or instrumentalities. There can be no assurance that the Series' investment
objective will be achieved. See "How the Trust Invests-Investment Objectives and
Policies."
An investment in the Series is neither insured nor guaranteed by the U.S.
Government and there can be no assurance that the Series will be able to
maintain a stable net asset value of $1.00 per share. See "How the Trust Values
its Shares."
The Trust's address is One Seaport Plaza, New York, New York 10292, and its
telephone number is (800) 225-1852.
- --------------------------------------------------------------------------------
This Prospectus sets forth concisely the information about the Trust and the
Series that a prospective investor should know before investing. Additional
information about the Trust has been filed with the Securities and Exchange
Commission in a Statement of Additional Information, dated August 1, 1995, which
information is incorporated herein by reference (is legally considered a part of
this Prospectus) and is available without charge upon request to the Trust at
the address or telephone number noted above.
- --------------------------------------------------------------------------------
Investors are advised to read this Prospectus and retain it for future
reference.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
- --------------------------------------------------------------------------------
TRUST 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 Government Securities Trust?
Prudential Government Securities Trust is a mutual fund whose shares are
offered in three series, each of which operates as a separate 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 Trust is an open-end,
diversified management investment company. Only the Money Market Series is
offered through this Prospectus.
What are the Series' Investment Objectives?
The Series' investment objectives are to obtain high current income,
preservation of capital and maintenance of liquidity by investing principally in
a diversified portfolio of short-term money-market instruments issued or
guaranteed by the United States Government or its agencies or instrumentalities.
There can be no assurance that the Series' investment objective will be
achieved. See "How the Trust Invests-Investment Objectives and Policies" at page
6.
Risk Factors and Special Characteristics
It is anticipated that the net asset value of the Series will remain
constant at $1.00 per share, although this cannot be assured. In order to
maintain such constant net asset value, the Series will value its portfolio
securities at amortized cost. While this method provides certainty in valuation,
it may result in periods during which the value of a security in its portfolio,
as determined by amortized cost, is higher or lower than the price the Series
would receive if it sold such security. See "How the Trust Values its Shares" at
page 10.
Who Manages the Trust?
Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the Manager
of the Trust and is compensated for its services at an annual rate of .40 of 1%
of the Series' average daily net assets up to $1 billion, .375 of 1% of the
Series' average daily net assets between $1 billion and $1.5 billion and .35 of
1% in excess of $1.5 billion. As of June 30, 1995, PMF served as manager or
administrator to 68 investment companies, including 38 mutual funds, with
aggregate assets of approximately $49 billion. The Prudential Investment
Corporation (PIC or the Subadviser) furnishes investment advisory services in
connection with the management of the Trust under a Subadvisory Agreement with
PMF. See "How the Trust is Managed-Manager" at page 8.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
Who Distributes the Series' Shares?
Prudential Mutual Fund Distributors, Inc. (PMFD or the Distributor) acts as
the Distributor of the Series' shares and is paid an annual service fee at the
rate of .125 of 1% of the average daily net assets of the Series. See "How the
Trust is Managed-Distributor" at page 9.
What is the Minimum Investment?
The minimum initial investment is $1,000. The subsequent minimum investment
is $100. 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 Trust" at page 12 and "Shareholder Guide-Shareholder Services" at
page 18.
How Do I Purchase Shares?
You may purchase shares of the Series through Prudential Securities
Incorporated (Prudential Securities or PSI), Pruco Securities Corporation
(Prusec) or directly from the Trust, through its transfer agent, Prudential
Mutual Fund Services, Inc. (PMFS or the Transfer Agent) at the net asset value
per share (NAV) next determined after receipt of your purchase order by the
Transfer Agent or Prudential Securities. See "How the Trust Values its Shares"
at page 10 and "Shareholder Guide-How to Buy Shares of the Trust" at page 12.
How Do I Sell My Shares?
You may redeem shares of the Series at any time at the NAV next determined
after Prudential Securities or the Transfer Agent receives your sell order. See
"Shareholder Guide-How to Sell Your Shares" at page 14.
How Are Dividends and Distributions Paid?
The Series expects to declare daily and pay monthly dividends of net
investment income and short-term capital gains, if any. Dividends and
distributions will be automatically reinvested in additional shares of the
Series at NAV unless you request that they be paid to you in cash. See "Taxes,
Dividends and Distributions" at page 11.
- --------------------------------------------------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
TRUST EXPENSES-MONEY MARKET SERIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases .............................. None
Maximum Sales Load Imposed on Reinvested Dividends ................... None
Deferred Sales Load .................................................. None
Redemption Fees ...................................................... None
Exchange Fee ......................................................... None
Annual Series Operating Expenses
(as a percentage of average net assets)
Management Fees ...................................................... 0.400%
12b-1 Fees ........................................................... 0.125%
Other Expenses ....................................................... 0.245%
-----
Total Series Operating Expenses ...................................... 0.770%
=====
<TABLE>
Example 1 Year 3 Years 5 Years 10 Years
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period: $8 $25 $43 $95
- ----------
The above example is based on data for the Series' fiscal year ended
November 30, 1994. 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 an investor in understanding the
various costs and expenses that an investor in the Series will bear, whether
directly or indirectly. For more complete descriptions of the various costs and
expenses, see "How the Trust is Managed." "Other Expenses" include operating
expenses of the Series, such as Trustees' and professional fees, registration
fees, reports to shareholders and transfer agent and custodian fees.
</TABLE>
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding
throughout each of the periods indicated)
- --------------------------------------------------------------------------------
The following financial highlights with respect to the five-year period
ended November 30, 1994 for the Series have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
following financial highlights contain selected data for a share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for each of the periods indicated. The information is based on
data contained in the financial statements.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Money Market Series
----------------------------------------------------------------------------------------------------------------
Six Months
Ended Year Ended November 30,
-------------------------------------------------------------------------------------------------
May 31,
1995
(unaudited) 1994 1993 1992 1991 1990 1989 1988(D) 1987 1986 1985
----------- ---- ---- ---- ---- ---- ---- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value,
beginning of period. $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net investment income .026 .033 .026 .035 .058 .076 .084 .067 .058 .061 .075
Dividends from net
investment income .. (.026) (.033) (.026) (.035) (.058) (.076) (.084) (.067) (.058) (.061) (.075)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end
of period ........... $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN(DD) ..... 2.59% 3.29% 2.62% 3.57% 5.96% 7.83% 8.77% 6.99% 6.01% 6.30% 7.73%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end
of period (000) .... $572,528 $637,343 $919,503$1,026,187$1,212,836$1,355,058 $667,571 $470,727 $445,761 $329,789 $268,046
Average net assets
(000) .............. $593,178 $732,867 $950,988$1,113,759$1,255,014 $857,385 $528,820 $480,598 $368,100 $315,520 $257,977
Ratio to average net assets:
Expenses, including
distribution fees. .81%(DDD) .77% .72% .72% .65% .66% .68% 65% .68% .70% .73%
Expenses, excluding
distribution fees. .68%(DDD) .64% .59% .60% .53% .53% .56% .52% .55% .57% .60%
Net investment
income ........... 5.12%(DDD)3.19% 2.56% 3.42% 5.78% 7.52% 8.30% 6.69% 5.78% 6.13% 7.39%
<FN>
- ----------
(D)On August 9, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as investment adviser and since
then has acted as manager of the Trust. See "Manager" in the Statement of
Additional Information
(DD)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.
(DDD)Annualized.
</FN>
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
- --------------------------------------------------------------------------------
CALCULATION OF YIELD
- --------------------------------------------------------------------------------
The Series calculates its "current yield" based on the net change, exclusive
of realized and unrealized gains or losses, in the value of a hypothetical
account over a seven calendar day base period. The Series also calculates its
"effective annual yield" assuming weekly compounding. The following is an
example of the yield calculations as of May 31, 1995:
Value of hypothetical account at end of period $ 1.00101570
Value of hypothetical account at beginning of period 1.00000000
------------
Base period return $ 0.00101570
============
Current yield (.00101570 x (365/7)) 5.30%
Effective annual yield, assuming weekly compounding 5.44%
The yield will fluctuate from time to time and is not necessarily
representative of future performance.
The weighted average life to maturity of the portfolio of the Series on
May 31, 1995 was 48 days.
Yield is computed in accordance with a standardized formula described in the
Statement of Additional Information. In addition, comparative performance
information may be used from time to time in advertising or marketing the
Trust's shares, including data from Lipper Analytical Services, Inc.,
Morningstar Publications, Inc., Donoghue's Money Fund Report, The Bank Rate
Monitor, other industry publications, business periodicals, and market indices.
- --------------------------------------------------------------------------------
HOW THE TRUST INVESTS
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives of the Series are to obtain high current income,
preserve capital and maintain liquidity. There can be no assurance that these
objectives will be achieved.
The Series' investment objectives are fundamental policies, and, therefore,
may not be changed without the approval of the holders of a majority of the
outstanding voting securities of the Money Market Series, as defined in the
Investment Company Act of 1940, as amended (the Investment Company Act).
Policies that are not fundamental may be modified by the Trustees.
The Series will invest at least 80% of its total assets in United States
Government securities. These securities may include securities issued or
guaranteed by the United States Treasury, by various agencies of the United
States Government or by various instrumentalities which have been established or
sponsored by the United States Government including repurchase agreements with
respect to such securities. The Series may also invest in fully insured
certificates of deposit issued by banks or savings and loan associations subject
to certain restrictions and obligations of the International Bank for
Reconstruction and Development (the World Bank). Obligations of the World Bank
are supported by appropriated but unpaid commitments of its member countries,
including the United States, and there is no assurance these commitments will be
undertaken or met in the future. See "Investment Restrictions" in the Statement
of Additional Information.
The Series may also purchase instruments of the types described above
together with the right to resell the instruments at an agreed-upon price or
yield within a specified period prior to the maturity date of the instrument,
commonly known as a "put." The aggregate price that the Series pays for
instruments with a put may be higher than the price that otherwise would be paid
for the instruments. See "Investment Objectives and Policies" in the Statement
of Additional Information.
6
<PAGE>
The Series may not invest in securities other than the types of securities
listed above and is subject to other specific investment restrictions as
detailed under "Investment Restrictions" in the Statement of Additional
Information.
The Series seeks to maintain a $1.00 share price at all times. To achieve
this, the Series purchases only securities with remaining maturities of thirteen
months or less and limits the dollar-weighted average maturity of its portfolio
to 90 days or less. There is no assurance that the Series will be able to
maintain a stable net asset value. See "How the Trust Values its Shares."
The Series utilizes the amortized cost method of valuation in accordance
with regulations issued by the Securities and Exchange Commission (SEC). See
"How the Trust Values its Shares." Accordingly, the Series will limit its
portfolio investments to those instruments which present minimal credit risks
and which are of "eligible quality" as determined by the Series' investment
adviser under the supervision of the Trustees. "Eligible quality," for this
purpose, means (i) a security rated in one of the two highest rating categories
by at least two major rating agencies assigning a rating to the security or
issuer (or, if only one agency assigned a rating, that agency) or (ii) an
unrated security deemed of comparable quality by the Series' investment adviser
under the supervision of the Trustees. The purchase by the Series of a security
of eligible quality that is rated by only one rating agency or is unrated must
be approved or ratified by the Trustees.
OTHER INVESTMENTS AND POLICIES
Repurchase Agreements
The Series may enter into repurchase agreements, whereby the seller of a
security agrees to repurchase that security from the Series at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the security. The Series' repurchase agreements will at all times be
fully collateralized in an amount at least equal to the purchase price including
accrued interest earned on the underlying securities. The instruments held as
collateral are valued daily, and if the value of such instruments declines, the
Series will require additional collateral. If the seller defaults and the value
of the collateral securing the repurchase agreement declines, the Series may
incur a loss. The Series participates in a joint repurchase account with other
investment companies managed by Prudential Mutual Fund Management, Inc. pursuant
to an order of the SEC.
When-Issued and Delayed Delivery Securities
The Series 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 Series with payment and delivery taking
place as much as a month or more into the future in order to secure what is
considered to be an advantageous price and yield to the Series at the time of
entering into the transaction. The Trust's Custodian will maintain, in a
segregated account of the Series, cash, U.S. Government securities or other
liquid high-grade debt obligations having a value equal to or greater than the
Series' purchase commitments; the Custodian will likewise segregate securities
sold on a delayed delivery basis. The securities so purchased are subject to
market fluctuation and no interest accrues to the purchaser during the period
between purchase and settlement. At the time of delivery of the securities the
value may be more or less than the purchase price and an increase in the
percentage of the Series' assets commited to the purchase of securities on a
when-issued or delayed delivery basis may increase the volatility of the Series'
net asset value.
Borrowing
The Series may borrow an amount equal to no more than 20% of the value of
its total assets (calculated when the loan is made) from banks for temporary,
extraordinary or emergency purposes. The Series may pledge up to 20% of its
total assets to secure these borrowings. Borrowing for purposes other than
meeting redemptions may not exceed 5% of the value of the Series' total assets.
Investment securities will not be purchased while borrowings are outstanding.
7
<PAGE>
Illiquid Securities
The Series may invest up to 10% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, as amended (the Securities Act), privately placed commercial paper and
municipal lease obligations if in each case such investments 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 Trustees. Repurchase agreements subject to demand
are deemed to have a maturity equal to the applicable notice period.
INVESTMENT RESTRICTIONS
The Series 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
Series' outstanding securities, as defined in the Investment Company Act. See
"Investment Restrictions" in the Statement of Additional Information.
- --------------------------------------------------------------------------------
HOW THE TRUST IS MANAGED
- --------------------------------------------------------------------------------
The Trust has Trustees who, in addition to overseeing the actions of the
Trust's Manager, Subadviser and Distributor, as set forth below, decide upon
matters of general policy. The Trust's Manager conducts and supervises the daily
business operations of the Trust. The Trust's Subadviser furnishes daily
investment advisory services.
For the fiscal year ended November 30, 1994, total expenses of the Series as
a percentage of its average net assets were .77%. See "Financial Highlights."
MANAGER
Prudential Mutual Fund Management, Inc. (PMF or the Manager), One Seaport
Plaza, New York, New York 10292, is the Manager of the Trust and is compensated
for its services at an annual rate of .40 of 1% of the Series' average daily net
assets up to $1 billion, .375 of 1% of the Series' average daily net assets
between $1 billion and $1.5 billion and .35 of 1% in excess of $1.5 billion. It
was incorporated in May 1987 under the laws of the State of Delaware. For the
fiscal year ended November 30, 1994, the Trust paid management fees to PMF of
.40% of the average net assets of the Series. See "Manager" in the Statement of
Additional Information.
As of June 30, 1995, PMF served as the manager to 38 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 30 closed-end investment companies with aggregate assets of
approximately $49 billion.
Under the Management Agreement with the Trust, PMF manages the investment
operations of the Trust and also administers the Trust's corporate affairs. See
"Manager" in the Statement of Additional Information.
Under a Subadvisory Agreement between PMF and The Prudential Investment
Corporation (PIC or the Subadviser), PIC furnishes investment advisory services
in connection with the management of the Trust and is reimbursed by PMF for its
reasonable costs and expenses incurred in providing such services. Under the
Management Agreement, PMF continues to have responsibility for all investment
advisory services and supervises PIC's performance of such services.
PMF and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America (Prudential), a major diversified insurance and
financial services company.
8
<PAGE>
DISTRIBUTOR
Prudential Mutual Fund Distributors, Inc. (PMFD or the Distributor), One
Seaport Plaza, New York, New York 10292, is a corporation organized under the
laws of the State of Delaware and serves as the Distributor for the Series. It
is a wholly-owned subsidiary of PMF.
Under a Distribution and Service Plan (the Plan) adopted by the Series under
Rule 12b-1 under the Investment Company Act and a distribution and service
agreement (the Distribution Agreement), the Distributor incurs the expenses of
distributing shares of the Series. These expenses include account servicing fees
paid to, or on account of, financial advisers of Prudential Securities
Incorporated (Prudential Securities or PSI) and representatives of Pruco
Securities Corporation (Prusec), an affiliated broker-dealer, account servicing
fees paid to, or on account of, other broker-dealers or financial institutions
(other than national banks) which have entered into agreements with the
Distributor, advertising expenses, the cost of printing and mailing prospectuses
to potential investors and indirect and overhead costs of Prudential Securities
and Prusec associated with the sale of the Series' shares, including lease,
utility, communications and sales promotion expenses. The State of Texas
requires that shares of the Trust may be sold in that state only by dealers or
other financial institutions which are registered there as broker-dealers.
Under the Plan, the Trust is obligated to pay a service fee 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 Trust will not be obligated to pay
any additional expenses. If the Distributor's expenses are less than such
distribution and service fees, it will retain its full fees and realize a
profit.
Under the Plan, the Trust pays the Distributor for its distribution-related
activities with respect to the Series at an annual rate of up to .125 of 1% of
the Series' average daily net assets. Account servicing fees are paid based on
the average balance of Series shares held in accounts of customers of financial
advisers. The entire distribution fee may be used to pay account servicing fees.
For the fiscal year ended November 30, 1994, PMFD incurred distribution
expenses in the aggregate of $916,084, all of which was recovered through the
distribution fee paid by the Series to PMFD. The Trust records all payments made
under the Plan as expenses in the calculation of its net investment income.
Prior to the date of this Prospectus, the Plan operated as a "reimbursement
type" plan. See "Distributor" in the Statement of Additional Information.
The Plan provides that it shall continue in effect from year to year
provided that each such continuance is approved annually by a majority vote of
the Trustees, including a majority of the Trustees who are not interested
persons of the Trust and who have no direct or indirect financial interest in
the operation of the Plan or any agreements related to the Plan (Rule 12b-1
Trustees). The Trustees are provided with and review quarterly reports of
expenditures under the Plan. The Plan may be terminated at any time by vote of a
majority of the Rule 12b-1 Trustees or of a majority of the Series' outstanding
shares. The Trust will not be obligated to pay expenses incurred under the Plan
if it is terminated or not continued.
In addition to distribution and service fees paid by the Series under the
Plan, 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 Series.
Such payments may be calculated by reference to the net asset value of shares
sold by such persons or otherwise.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the National
Association of Securities Dealers, Inc. (NASD) to resolve allegations that from
1980 through 1990 PSI sold certain limited partnership interests in violation of
securities laws to persons for whom such securities were not suitable and
misrepresented the safety, potential returns and liquidity of these investments.
Without admitting or denying the allegations asserted against it, PSI consented
to the entry of an SEC Administrative Order which stated that PSI's conduct
violated the federal securities laws, directed PSI to cease and desist from
violating the federal securities laws, pay civil penalties, and adopt certain
remedial measures to address the violations.
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Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of
a $10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action.
In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling 1-800-225-1852.
The Trust is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Trust's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker for the Trust, provided that the
commissions, fees or other remuneration it receives are fair and reasonable. See
"Portfolio Transactions and Brokerage" in the Statement of Additional
Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian of the Trust's portfolio securities
and, in that capacity, maintains certain financial and accounting books and
records pursuant to an agreement with the Trust. Its mailing address is P.O. Box
1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services, Inc., Raritan Plaza One, Edison, New Jersey
08837, serves as Transfer and Dividend Disbursing Agent and, in those
capacities, maintains certain books and records for the Trust. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
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HOW THE TRUST VALUES ITS SHARES
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The Series' net asset value per share or NAV is determined by subtracting
its liabilities from the value of its assets and dividing the remainder by the
number of outstanding shares. The Trustees have fixed the specific time of day
for the computation of the Series' NAV to be as of 4:30 P.M., New York time,
immediately after the daily declaration of dividends.
The Series will compute its NAV once daily on the days that the New York
Stock Exchange is open for trading, except on days on which no orders to
purchase, sell or redeem Series shares have been received or days on which
changes in the value of the Series' portfolio securities do not materially
affect the NAV. The New York Stock Exchange is closed on the following holidays:
New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
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The Series determines the value of its portfolio securities by the amortized
cost method. This method involves valuing a security at its cost at the time of
purchase and thereafter assuming a constant amortization to maturity of any
discount or premium regardless of the impact of fluctuating interest rates on
the market value of the instrument. While this method provides certainty in
valuation, it may result in periods during which value, as determined by
amortized cost, is higher or lower than the price the Series would receive if it
sold the instrument. During these periods, the yield to a shareholder may differ
somewhat from that which could be obtained from a similar fund which marks its
portfolio securities to the market each day. For example, during periods of
declining interest rates, if the use of the amortized cost method resulted in a
lower value of the Series' portfolio on a given day, a prospective investor in
the Series would be able to obtain a somewhat higher yield and existing
shareholders would receive correspondingly less income. The converse would apply
during periods of rising interest rates. The Trustees have established
procedures designed to stabilize, to the extent reasonably possible, the NAV of
the Series' shares at $1.00 per share. See "Net Asset Value" in the Statement of
Additional Information.
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TAXES, DIVIDENDS AND DISTRIBUTIONS
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Taxation of the Series
Each series of the Trust is treated as a separate entity for federal income
tax purposes and each has elected to qualify and intends to remain qualified as
a regulated investment company under the Internal Revenue Code. Accordingly, the
Series will not be subject to federal income taxes on its net investment income
and capital gain, if any, it distributes to shareholders. To the extent not
distributed by the Series, taxable net investment income and net capital gains
are taxable to the Series. The performance and tax qualification of one series
will have no effect on the federal income tax liability of shareholders of the
other series. See "Taxes" in the Statement of Additional Information.
Taxation of Shareholders
Distributions of net investment income and net short-term capital gains
(i.e., the excess of net short-term capital gains over net long-term capital
losses), if any, will be taxable to shareholders of the Series as ordinary
income, whether or not reinvested. The Series does not expect to realize
long-term capital gains or losses. Because none of the income of the Series will
consist of dividends from domestic corporations, dividends of net investment
income and distributions of net short-term capital gains will not be eligible
for the dividends-received deduction for corporate shareholders. Tax-exempt
shareholders will generally not be required to pay taxes on amounts distributed
to them.
Shareholders are advised to consult their own tax advisers regarding
specific questions as to federal, state or local taxes.
Withholding Taxes
Under Treasury Regulations, the Trust is required to withhold and remit to
the U.S. Treasury 31% of dividends, capital gain distributions and redemption
proceeds on the accounts of those shareholders who fail to furnish their tax
identification numbers on IRS Form W-9 (or IRS Form W-8 in the case of certain
foreign shareholders). 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 from net
investment income and short-term capital gains paid to a foreign shareholder
will generally be subject to U.S. withholding tax at the rate of 30% (or lower
treaty rate).
Dividends and Distributions
The Series expects to declare daily and pay monthly dividends of net
investment income and short-term capital gains, if any. A shareholder begins to
earn dividends on the first business day after the settlement date of his or her
order and continues to earn dividends through the day on which his or her shares
are redeemed.
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Dividends and distributions will be paid in additional shares of the Series
based on the net asset value of the Series' shares on the payment date, unless
the shareholder elects in writing not less than five business days prior to the
payment date to receive such dividends and distributions in cash. Such election
should be submitted to Prudential Mutual Fund Services, Inc., Att: Account
Maintenance, P.O. Box 15015, New Brunswick, New Jersey 08906-5015. If you hold
shares through Prudential Securities, you should contact your financial adviser
to elect to receive dividends and distributions in cash. The Trust will notify
each shareholder after the close of the Trust's taxable year of both the dollar
amount and taxable status of that year's dividends and distributions on a per
share basis. Distributions may be subject to state and local taxes. See
"Taxation of Shareholders" above.
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GENERAL INFORMATION
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DESCRIPTION OF SHARES
The Trust, organized as an unincorporated business trust under the laws of
Massachusetts, is a trust fund of the type commonly known as a "Massachusetts
business trust." The Trust's activities are supervised by its Trustees. The
Declaration of Trust permits the Trustees to issue an unlimited number of full
and fractional shares in separate series and classes within such series.
The shareholders of the Money Market Series, the Short-Intermediate Term
Series and the U.S. Treasury Money Market Series are each entitled to a full
vote for each full share of beneficial interest (par value $.01 per share) held
(and fractional votes for fractional shares). Shares of each series are entitled
to vote as a class only to the extent required by the provisions of the
Investment Company Act or as otherwise permitted by the Trustees in their sole
discretion. Under the Investment Company Act, shareholders of each series have
to approve the adoption of any investment advisory agreement relating to such
series and of any changes in the investment policies related thereto.
It is the intention of the Trust not to hold annual meetings of
shareholders. The Trustees may call special meetings of shareholders for action
by shareholder vote as may be required by the Investment Company Act or the
Declaration of Trust. Shareholders have certain rights, including the right to
call a meeting upon vote of 10% of the Trust's outstanding shares for the
purpose of voting on the removal of one or more Trustees.
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 Trust with the SEC under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
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SHAREHOLDER GUIDE
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HOW TO BUY SHARES OF THE TRUST
You may purchase shares of the Series through Prudential Securities or
through Prusec, or directly from the Trust through its Transfer Agent,
Prudential Mutual Fund Services, Inc. (PMFS or the Transfer Agent), Attention:
Investment Services, P.O. Box 15020, New Brunswick, New Jersey 08906-5020. The
minimum initial investment is $1,000. The minimum subsequent investment is $100.
All minimum investment requirements are waived for certain retirement and
employee savings plans and for custodial accounts for the benefit of minors. For
purchases through the Automatic Savings Accumulation Plan, the minimum initial
and subsequent investment is $50. See "Shareholder Services" below.
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Shares of the Series are sold, without a sales charge, at the NAV next
determined after receipt and acceptance by PMFS of a purchase order and payment
in proper form [i.e., a check or Federal Funds wired to State Street Bank and
Trust Company (State Street), the Trust's custodian]. See "How the Trust Values
its Shares." When payment is received by PMFS prior to 4:30 P.M., New York time,
in proper form, a share purchase order will be entered at the price determined
as of 4:30 P.M., New York time, on that day, and dividends on the shares
purchased will begin on the business day following such investment. See "Taxes,
Dividends and Distributions."
Application forms can be obtained from PMFS, Prudential Securities or
Prusec. If a stock certificate is desired, it must be requested in writing for
each transaction. Certificates are issued only for full shares. Shareholders who
hold their shares through Prudential Securities will not receive stock
certificates. Shareholders cannot utilize Expedited Redemption or Check
Redemption or have a Systematic Withdrawal Plan if they have been issued share
certificates.
The Trust reserves the right to reject any purchase order (including an
exchange into the Series) 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 Trust. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the fifth business day following the investment.
Transactions in Trust shares may be subject to postage and handling charges
imposed by your dealer.
Purchase through Prudential Securities
Shares of the Series may be purchased through Prudential Securities at the
net asset value next computed after your order is received. Prudential
Securities will transmit your order to the Trust on the next business day for
settlement that day and you will begin earning dividends on the second business
day after receipt of your order by Prudential Securities. Prudential Securities
will have the use of any free credit balances (i.e., immediately available
funds) held in your account until they are delivered to the Trust in connection
with your purchase.
Shares of the Series purchased by Prudential Securities on behalf of its
clients will be held by Prudential Securities as record holder. Prudential
Securities will thereafter receive statements and dividends directly from the
Series and will in turn provide investors with Prudential Securities account
statements reflecting purchases, redemptions and dividend payments. Although
Prudential Securities clients who purchase shares of the Series through
Prudential Securities may not redeem shares of the Series by check, Prudential
Securities may provide its clients with alternative forms of immediate access to
monies invested in shares of the Series.
Prudential Securities clients wishing additional information concerning
investment in Series shares made through Prudential Securities should call their
Prudential Securities financial adviser.
Automatic Investment. Prudential Securities has advised the Series that it
has instituted procedures pursuant to which, upon enrollment by a Prudential
Securities client, Prudential Securities will make automatic investments of free
credit cash balances of $1,000 or more ($1.00 for IRAs and Benefit Plans)
(Eligible Credit Balances) held in such client's account in shares of the Series
(Autosweep). Under these procedures, an order to purchase shares of the Series
is placed (i) in the case of Eligible Credit Balances resulting from the
proceeds of a securities sale, at the opening of business on the day following
the settlement of the securities sale, and (ii) in the case of Eligible Credit
Balances resulting from a non-trade related credit (e.g., receipt of a dividend
or interest payment, maturity of a bond or a cash payment into the securities
account), at the opening of business semi-monthly. Each time an order is placed
under these procedures resulting from the settlement of a securities sale, any
non-trade related credit in the client's account will also be automatically
invested. For the purposes of Autosweep, "Benefit Plans" include (i) employee
benefit plans as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974 (ERISA) other than governmental plans as defined in Section
3(32) of ERISA and church plans as defined in Section 3(33) of ERISA, (ii)
pension, profit-sharing or other employee benefit plans qualified under Section
401 of the Internal Revenue Code and (iii) deferred compensation and annuity
plans under Section 457 or 403(b)(7) of the Internal Revenue Code. "IRAs" are
Individual Retirement Accounts as defined in Section 408(a) of the Internal
Revenue Code. All shares purchased pursuant to these procedures will begin
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earning dividends on the business day after the order is placed. Prudential
Securities will have the use of Eligible Credit Balances until monies are
delivered to the Trust.
Self-directed Investment. Prudential Securities clients not electing
Autosweep may continue to place orders for the purchase of Series shares through
Prudential Securities, subject to minimum initial and subsequent investment
requirements as described above.
A Prudential Securities client who has not elected Autosweep (see "Automatic
Investment") and who does not place a purchase order promptly after funds are
credited to his or her Prudential Securities account will have a free credit
balance with Prudential Securities and will not begin earning dividends until
the business day after Prudential Securities has placed the client's purchase
order with the Trust to purchase shares of the Series. Accordingly, Prudential
Securities will have the use of such free credit balances during this period.
Purchase through Prusec
You may purchase shares of the Series by placing an order with your Prusec
registered representative accompanied by payment for the purchase price of such
shares and, in the case of a new account, a completed Application Form. You
should also submit an IRS Form W-9. The Prusec registered representative will
then forward these items to the Transfer Agent. See "Purchase By Mail" below.
Purchase by Wire
For an initial purchase of shares of the Series by wire, you must first
telephone PMFS at (800) 225-1852 (toll free) to receive an account number. The
following information will be requested: your name, address, tax identification
number, dividend distribution election, amount being wired and wiring bank.
Instructions should then be given by you to your bank to transfer funds by wire
to State Street Bank and Trust Company (State Street), Boston, Massachusetts
02205, Services Division, Attention: Prudential Government Securities Trust
(Money Market Series), specifying on the wire the account number assigned by
PMFS and your name.
If you arrange for receipt by State Street of Federal Funds prior to 4:30
P.M., New York time, on a business day, you may purchase Series shares as of
that day and earn dividends commencing on the next business day.
In making a subsequent purchase order by wire, you should wire State Street
directly, and should be sure that the wire specifies Prudential Government
Securities Trust (Money Market Series) and your name and individual account
number. It is not necessary to call PMFS to make subsequent purchase orders by
wire. The minimum amount which may be invested by wire is $1,000.
Purchase by Mail
Purchase orders for which remittance is to be made by check or money order
may be submitted directly by mail to Prudential Mutual Fund Services, Inc.,
Attention: Investment Services, P.O. Box 15020, New Brunswick, New Jersey
08906-5020, together with payment of the purchase price of such shares and, in
the case of a new account, a completed Application Form. You should also submit
an IRS Form W-9. If PMFS receives your order to purchase shares of the Trust and
payment in proper form prior to 4:30 P.M., New York time, the purchase order
will be effective on that day and you will begin earning dividends on the
following business day. See "Taxes, Dividends and Distributions." Checks should
be made payable to Prudential Government Securities Trust (Money Market Series).
Certified checks are not necessary, but checks are accepted subject to
collection at full face value in United States funds and must be drawn on a bank
located in the United States. There are restrictions on the redemption of shares
purchased by check while the funds are being collected. See "How to Sell Your
Shares."
HOW TO SELL YOUR SHARES
You can redeem your shares at any time for cash at the NAV next determined
after the redemption request is received in proper form by the Transfer Agent or
Prudential Securities. See "How the Trust Values its Shares." Orders are
received on each business day until 4:00 P.M., New York time.
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Shares for which a redemption request is received prior to 4:30 P.M., New
York time, are entitled to a dividend on the day the request is received. By
pre-authorizing Expedited Redemption, you may arrange to have payment for
redeemed shares made in Federal Funds wired to your bank, normally on the next
bank business day following the date of receipt of the redemption instructions.
Should you redeem all of your shares, you will receive the amount of all
dividends declared for the month-to-date on those shares. See "Taxes, Dividends
and Distributions."
If redemption is requested by a corporation, partnership, trust or
fiduciary, written evidence of authority acceptable to the Transfer Agent must
be submitted before such request will be accepted. All correspondence and
documents concerning redemptions should be sent to the Trust in care of its
Transfer Agent, Prudential Mutual Fund Services, Inc., Attention: Redemption
Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to
a person other than the record owner, (c) are to be sent to an address other
than the address on the Transfer Agent's records or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power, must be guaranteed by
an "eligible guarantor institution." An "eligible guarantor institution"
includes any bank, broker, dealer or credit union. The Transfer Agent reserves
the right to request additional information from, and make reasonable inquiries
of, any eligible guarantor institution. For clients of Prusec a signature
guarantee may be obtained from the agency or office manager of most Prudential
Insurance and Financial Services or Preferred Services offices.
Normally, the Trust makes payment on the next business day for all shares of
the Series redeemed, but in any event, payment will be made within seven days
after receipt by PMFS of share certificates and/or of a redemption request in
proper form. However, the Trust may suspend the right of redemption or postpone
the date of payment (a) for any periods during which the New York Stock Exchange
is closed (other than for customary weekend or holiday closings), (b) for any
periods when trading in the markets the Series normally utilizes is closed or
restricted or an emergency exists as determined by the SEC so that disposal of
the investments of the Series or determination of its NAV is not reasonably
practicable, or (c) for such other periods as the SEC may permit for protection
of the shareholders of the Money Market Series.
Payment for redemption of recently purchased shares will be delayed until
the Trust or its Transfer Agent has been advised that the purchase check has
been honored, up to 10 calendar days from the time of receipt of the purchase
check by the Transfer Agent. Such delay may be avoided if shares are purchased
by wire or by certified or official bank check.
Redemption of Shares Purchased Through Prudential Securities
Prudential Securities clients for whom Prudential Securities has purchased
shares of the Series may have such shares redeemed only by instructing their
Prudential Securities financial adviser orally or in writing.
Prudential Securities has advised the Series that it has established
procedures pursuant to which shares of the Series held by a Prudential
Securities client having a deficiency in his or her Prudential Securities
account will be redeemed automatically to the extent of that deficiency to the
nearest highest dollar, unless the client notifies Prudential Securities to the
contrary. The amount of the redemption will be the lesser of (a) the total NAV
of Series shares held in the client's Prudential Securities account or (b) the
deficiency in the client's Prudential Securities account at the close of
business on the date such deficiency is due. Accordingly, a Prudential
Securities client utilizing this automatic redemption procedure and who wishes
to pay for a securities transaction or meet any market action related deficiency
in his or her account must do so not later than the day of settlement for such
securities transaction or the date such market action related deficiency is
incurred. Prudential Securities clients who have elected to utilize Autosweep
will not be entitled to dividends declared on the date of redemption.
Redemption of Shares Purchased Through PMFS
If you purchase shares of the Series through PMFS, you may use Check
Redemption, Expedited Redemption or Regular Redemption. Prudential Securities
clients for whom Prudential Securities has purchased shares may not use such
services.
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Regular Redemption. You may redeem your shares of the Trust by sending a
written request to PMFS, Attention: Redemption Services, P.O. Box 15010, New
Brunswick, New Jersey 08906-5010. In this case, all share certificates must be
endorsed by you with signature guaranteed, as described above. PMFS may request
further documentation from corporations, executors, administrators, trustees or
guardians. Regular redemption is made by check mailed to the shareholder's
address.
Expedited Redemption. By pre-authorizing Expedited Redemption, you may
arrange to have payment for redeemed shares made in Federal Funds wired to your
bank, normally on the next business day following redemption. In order to use
Expedited Redemption, you may so designate at the time the initial investment is
made or at a later date. Once an Expedited Redemption authorization form has
been completed, the signature on the authorization form guaranteed as set forth
above and the form returned to PMFS, requests for redemption may be made by
telegraph, letter or telephone. To request Expedited Redemption by telephone,
you should call PMFS at (800) 225-1852. Calls must be received by PMFS before
4:30 P.M., New York time, to permit redemption as of such date. Requests by
letter should be addressed to Prudential Mutual Fund Services, Inc., Att:
Redemption Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
A signature guarantee is not required under Expedited Redemption once the
authorization form is properly completed and returned. The Expedited Redemption
privilege may be used to redeem shares in an amount of $200 or more, except that
if an account for which Expedited Redemption is requested has a net asset value
of less than $200, the entire account must be redeemed. The proceeds of redeemed
shares in the amount of $1,000 or more are transmitted by wire to your account
at a domestic commercial bank which is a member of the Federal Reserve System.
Proceeds of less than $1,000 are forwarded by check to your designated bank
account.
During periods of severe market or economic conditions, Expedited Redemption
may be difficult to implement and you should redeem your shares by mail as
described above.
Check Redemption. At your request, State Street will establish a personal
checking account for you. Checks drawn on this account can be made payable to
the order of any person in any amount greater than $500. When such check is
presented to State Street for payment, State Street presents the check to the
Trust as authority to redeem a sufficient number of shares of the Trust in your
account to cover the amount of the check. If insufficient shares are in the
account or, if the purchase was made by check within 10 calendar days, the check
will be returned marked "insufficient funds." Checks in an amount less than $500
will not be honored. Shares for which certificates have been issued cannot be
redeemed by check. PMFS reserves the right to impose a service charge to
establish a checking account and order checks.
Involuntary Redemption
Because of the relatively high cost of maintaining an account, the Trust
reserves the right to redeem, upon 60 days' written notice, an account which is
reduced to an NAV of $500 or less due to a redemption. You may avoid such
redemption by increasing the NAV of your account to an amount in excess of $500.
Redemption in Kind
If the Trustees determine that it would be detrimental to the best interests
of the remaining shareholders of the Series to make payment wholly or partly in
cash, the Trust may pay the redemption price in whole or in part by a
distribution in kind of securities from the investment portfolio of the Series
in lieu of cash, in conformity with applicable rules of the SEC. Securities will
be readily marketable and will be valued in the same manner as in a regular
redemption. See "How the Trust Values its Shares." If your shares are redeemed
in kind, you would incur transaction costs in converting the assets into cash.
The Trust, however, has elected to be governed by Rule 18f-1 under the
Investment Company Act, under which the Trust is obligated to redeem shares
solely in cash up to the lesser of $250,000 or one percent of the net asset
value of the Trust during any 90-day period for any one shareholder.
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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 Trust at the NAV next determined after the order is
received, which must be within 90 days after the date of the redemption. You
will receive pro rata credit for any contingent deferred sales charge paid in
connection with the redemption. You must notify the Trust's Transfer Agent,
either directly or through Prudential Securities or Prusec, at the time the
repurchase privilege is exercised, that you are entitled to credit for any
contingent deferred sales charge previously paid. Exercise of the repurchase
privilege will not affect the federal income tax treatment of any gain realized
upon the redemption. If the redemption resulted in a loss, some or all of the
loss, depending on the amount reinvested, will not be allowed for federal income
tax purposes.
Class B and Class C Purchase Privilege
You may direct that the proceeds of the redemption of your shares be
invested in Class B or Class C shares of any Prudential Mutual Fund by calling
your Prudential Securities financial adviser or the Transfer Agent at (800)
225-1852. The transaction will be effected on the basis of the relative NAV.
HOW TO EXCHANGE YOUR SHARES
As a shareholder of the Series you may exchange your shares for shares of
other series of the Trust and certain other Prudential Mutual Funds, including
money market funds and funds sold with an initial sales charge, subject to the
minimum investment requirements of such funds on the basis of the relative NAV.
You may exchange your shares for Class A shares of the Prudential Mutual Funds
on the basis of the relative NAV, plus the applicable sales charge. No
additional sales charge is imposed in connection with subsequent exchanges. You
may not exchange your shares for Class B shares of the Prudential Mutual Funds,
except that shares acquired prior to January 22, 1990 subject to a contingent
deferred sales charge can be exchanged for Class B shares. You may not exchange
your shares for Class C shares of the Prudential Mutual Funds. See "How to Sell
Your Shares-Class B and Class C Purchase Privilege" above and "Shareholder
Investment Account-Exchange Privilege" in the Statement of Additional
Information. An exchange will be treated as a redemption and purchase for tax
purposes.
In order to exchange shares by telephone, you must authorize telephone
exchanges on your initial application form or by written notice to the Transfer
Agent and hold shares in non-certificate form. Thereafter, you may call the
Trust 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 fradulent 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 Trust 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 (or series) next determined after the request is
received in good order. The Exchange Privilege is available only in states where
the exchange may legally be made.
If you hold shares through Prudential Securities, you must exchange your
shares by contacting your Prudential Securities financial adviser. If you hold
certificates, the certificates, signed in the name(s) shown on the face of the
certificates, must be returned in order for the shares to be exchanged. See "How
to Sell Your Shares" above.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
In periods of severe market or economic conditions the telephone exchange of
shares may be difficult to implement and you should make exchanges by mail by
writing to Prudential Mutual Fund Services, Inc., at the address noted above.
The Exchange Privilege may be modified or terminated at any time on 60 days'
notice to shareholders.
17
<PAGE>
SHAREHOLDER SERVICES
In addition to the exchange privilege, as a shareholder in the Series, you
can take advantage of the following additional services and privileges:
* Automatic Reinvestment of Dividends and/or Distributions. For your
convenience, all dividends and distributions are automatically reinvested in
full and fractional shares of the Series at NAV. 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 your shares through Prudential Securities, you should
contact your financial adviser.
* Automatic Savings Accumulation Plan (ASAP). Under ASAP you may make
regular purchases of Series shares in amounts as little as $50 via an automatic
charge to a bank account or Prudential Securities account (including a Command
Account). For additional information about this service, you may contact your
Prudential Securities financial adviser, Prusec representative or the Transfer
Agent directly.
* Tax-Deferred Retirement Plans. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code
are available through the Distributor. These plans are for use by both
self-employed individuals and corporate employers. These plans permit either
self-direction of accounts by participants, or a pooled account arrangement.
Information regarding the establishment of these plans, the administration,
custodial fees and other details is available from Prudential Securities or the
Transfer Agent. If you are considering adopting such a plan, you should consult
with your own legal or tax adviser with respect to the establishment and
maintenance of such a plan.
* Systematic Withdrawal Plan. A systematic withdrawal plan is available for
shareholders which provides for monthly or quarterly checks. For additional
information about this service, you may contact your Prudential Securities
financial adviser, Prusec representative or the Transfer Agent directly.
* Multiple Accounts. Special procedures have been designed for banks and
other institutions that wish to open multiple accounts. An institution may open
a single master account by filing an Application Form with Prudential Mutual
Fund Services, Inc. (PMFS or the Transfer Agent), Attention: Customer Service,
P.O. Box 15005, New Brunswick, New Jersey 08906, signed by personnel authorized
to act for the institution. Individual sub-accounts may be opened at the time
the master account is opened by listing them, or they may be added at a later
date by written advice or by filing forms supplied by the Trust. Procedures are
available to identify sub-accounts by name and number within the master account
name. The investment minimums set forth above are applicable to the aggregate
amounts invested by a group and not to the amount credited to each sub-account.
* Reports to Shareholders. The Trust 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 Trust will provide one annual report and semi-annual shareholder
report and annual prospectus per household. You may request additional copies of
such reports by calling (800) 225-1852 or by writing to the Trust at One Seaport
Plaza, New York, NY 10292.
* Shareholder Inquiries. Inquiries should be addressed to the Trust at One
Seaport Plaza, New York, New York 10292, or by telephone, at (800) 225-1852
(toll free) or, from outside the U.S.A., at (908) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
18
<PAGE>
- --------------------------------------------------------------------------------
THE PRUDENTIAL MUTUAL FUND FAMILY
- --------------------------------------------------------------------------------
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec registered representative or telephone
the Trust at (800) 225-1852 for a free prospectus. Read the prospectus carefully
before you invest or send money.
Left Column
- --------------------------------------------------------------------------------
Taxable Bond Funds
Prudential Adjustable Rate Securities Fund, Inc.
Prudential Diversified Bond Fund, Inc.
Prudential GNMA Fund, Inc.
Prudential Government Income Fund
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Prudential U.S. Government Fund
The BlackRock Government Income Trust
Tax-Exempt Bond Funds
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Modified Term Series
Prudential Municipal Series Fund
Arizona Series
Florida Series
Georgia Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
Global Funds
Prudential Europe Growth Fund, Inc.
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.
Right Column
Equity Funds
Prudential Allocation Fund
Conservatively Managed Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential IncomeVertible\'AE Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
Money Market Funds
Taxable Money Market Funds
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund
Money Market Series
Prudential MoneyMart Assets
Tax-Free Money Market Funds
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
Command Funds
Command Money Fund
Command Government Fund
Command Tax-Free Fund
Institutional Money Market Funds
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
- --------------------------------------------------------------------------------
A-1
<PAGE>
Left Column
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 Trust or the
Distributor. This Prospectus does not constitute
and offer by the Trust or by the Distributor to
sell or a solicitation of an offer to buy any of
the securities offered hereby in any
jurisdiction to any person to whom it is
unlawful to make such offer in such
jurisdiction.
________________________________________________
TABLE OF CONTENTS
Page
----
TRUST HIGHLIGHTS............................. 2
Risk Factors and Special Characteristics... 2
TRUST EXPENSES............................... 4
FINANCIAL HIGHLIGHTS......................... 5
CALCULATION OF YIELD......................... 6
HOW THE TRUST INVESTS........................ 6
Investment Objectives and Policies......... 6
Other Investments and Policies............. 7
Investment Restrictions.................... 8
HOW THE TRUST IS MANAGED..................... 8
Manager.................................... 8
Distributor................................ 9
Portfolio Transactions..................... 10
Custodian and Transfer and
Dividend Disbursing Agent................ 10
HOW THE TRUST VALUES ITS SHARES.............. 10
TAXES, DIVIDENDS AND DISTRIBUTIONS........... 11
GENERAL INFORMATION.......................... 12
Description of Shares...................... 12
Additional Information..................... 12
SHAREHOLDER GUIDE............................ 12
How to Buy Shares of the Trust............. 12
How to Sell Your Shares.................... 14
How to Exchange Your Shares................ 17
Shareholder Services....................... 18
THE PRUDENTIAL MUTUAL FUND FAMILY............A-1
________________________________________________
100A 430144C
________________________________________________
CUSIP #: 744342 20 5
________________________________________________
Right Column
Prudential
Government
Securities
Trust
(Money Market Series)
Prudential Mutual Funds (LOGO)
Building Your Future
On Our StrengthSM
PROSPECTUS
August 1, 1995
<PAGE>
Prudential Government Securities Trust
(U.S. Treasury Money Market Series)
- --------------------------------------------------------------------------------
Prospectus dated August 1, 1995
- --------------------------------------------------------------------------------
Prudential Government Securities Trust (the Trust) is a diversified, open-end
management investment company whose shares of beneficial interest are offered in
three series. Each series operates as a separate fund with its own investment
objectives and policies designed to meet its specific investment goals.
The investment objective of the U.S. Treasury Money Market Series (the Series)
is high current income consistent with the preservation of principal and
liquidity. The Series seeks to achieve its objective by investing exclusively in
U.S. Treasury obligations which have maturities of thirteen months or less.
Interest on U.S. Treasury obligations is specifically exempted from state and
local income taxes under federal law. All states allow the character of the
Series' income to pass through to the dividends distributed to its shareholders.
Interest on U.S. Treasury obligations is not exempt from federal income tax.
There can be no assurance that the Series' investment objective will be
achieved. See "How the Trust Invests-Investment Objective and Policies" and
"Taxes, Dividends and Distributions."
An investment in the Series is neither insured nor guaranteed by the U.S.
Government and there can be no assurance that the Series will be able to
maintain a stable net asset value of $1.00 per share. See "How the Trust Values
its Shares."
The Trust's address is One Seaport Plaza, New York, New York 10292, and its
telephone number is (800) 225-1852.
- --------------------------------------------------------------------------------
This Prospectus sets forth concisely the information about the Trust and the
Series that a prospective investor should know before investing. Additional
information about the Trust and the Series has been filed with the Securities
and Exchange Commission in a Statement of Additional Information, dated August
1, 1995, which information is incorporated herein by reference (is legally
considered a part of this Prospectus) and is available without charge upon
request to the Trust at the address or telephone number noted above.
- --------------------------------------------------------------------------------
Investors are advised to read this Prospectus and retain it for future
reference.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
- --------------------------------------------------------------------------------
TRUST 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 Government Securities Trust?
Prudential Government Securities Trust is a mutual fund whose shares are
offered in three series, each of which operates as a separate 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 Trust is an open-end,
diversified management investment company. Only the U.S. Treasury Money Market
Series is offered through this Prospectus.
What is the Series' Investment Objective?
The Series' investment objective is high current income consistent with the
preservation of principal and liquidity. The Series invests exclusively in U.S.
Treasury obligations which have effective maturities of thirteen months or less.
There can be no assurance that the Series' investment objective will be
achieved. See "How the Trust Invests-Investment Objective and Policies" at page
6.
Risk Factors and Special Characteristics
It is anticipated that the net asset value of the Series will remain
constant at $1.00 per share, although this cannot be assured. In order to
maintain such constant net asset value, the Series will value its portfolio
securities at amortized cost. While this method provides certainty in valuation,
it may result in periods during which the value of a security in the Series'
portfolio, as determined by amortized cost, is higher or lower than the price
the Series would receive if it sold such security. See "How the Trust Values its
Shares" at page 10.
Who Manages the Trust?
Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the Manager
of the Trust and is compensated for its services at an annual rate of .40 of 1%
of the Series' average daily net assets. As of June 30, 1995, PMF served as
manager or administrator to 68 investment companies, including 38 mutual funds,
with aggregate assets of approximately $49 billion. The Prudential Investment
Corporation (PIC or the Subadviser) furnishes investment advisory services in
connection with the management of the Trust under a Subadvisory Agreement with
PMF. See "How the Trust is Managed-Manager" at page 8.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
Who Distributes the Series' Shares?
Prudential Mutual Fund Distributors, Inc. (PMFD or the Distributor) acts as
the Distributor of the Series' shares and is paid an annual service fee at the
rate of .125 of 1% of the average daily net assets of the Series. See "How the
Trust is Managed-Distributor" at page 9.
What is the Minimum Investment?
The minimum initial investment is $2,500. The subsequent minimum investment
is $100. There is no minimum investment requirement for the Command Account
Program (if the Series is designated as your primary fund) and 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 Trust" at page 13 and "Shareholder Guide-Shareholder Services"
at page 19.
How Do I Purchase Shares?
You may purchase shares of the Series through Prudential Securities
Incorporated (Prudential Securities or PSI), Pruco Securities Corporation
(Prusec) or directly from the Trust, through its transfer agent, Prudential
Mutual Fund Services, Inc. (PMFS or the Transfer Agent) at the net asset value
per share (NAV) next determined after receipt of your purchase order by the
Transfer Agent or Prudential Securities. See "How the Trust Values its Shares"
at page 10 and "Shareholder Guide-How to Buy Shares of the Trust" at page 13.
How Do I Sell My Shares?
You may redeem shares of the Series at any time at the NAV next determined
after Prudential Securities or the Transfer Agent receives your sell order. See
"Shareholder Guide-How to Sell Your Shares" at page 16.
How Are Dividends and Distributions Paid?
The Series expects to declare daily and pay monthly dividends of net
investment income and short-term capital gains, if any. Dividends and
distributions will be automatically reinvested in additional shares of the
Series at NAV unless you request that they be paid to you in cash. See "Taxes,
Dividends and Distributions" at page 11.
- --------------------------------------------------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
TRUST EXPENSES-U.S. TREASURY MONEY MARKET SERIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases ...................... None
Maximum Sales Load Imposed on Reinvested Dividends ........... None
Deferred Sales Load .......................................... None
Redemption Fees .............................................. None
Exchange Fee ................................................. None
Annual Series Operating Expenses
(as a percentage of average net assets)
Management Fees .............................................. 0.400%
12b-1 Fees ................................................... 0.125%
Other Expenses ............................................... 0.095%
-----
Total Series Operating Expenses .............................. 0.620%
=====
<TABLE>
<CAPTION>
Example 1 Year 3 Years 5 Years 10 Years
------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period: $6 $20 $35 $77
- --------------
The above example is based on data for the Series' fiscal year ended
November 30, 1994. 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 Series will bear, whether
directly or indirectly. For more complete descriptions of the various costs and
expenses, see "How the Trust is Managed." "Other Expenses" include an estimate
of operating expenses of the Series, such as trustees' and professional fees,
registration fees, reports to shareholders and transfer agency and custodian
fees.
</TABLE>
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout
each period indicated)
- --------------------------------------------------------------------------------
The following financial highlights for the Series (except for the six months
ended May 31, 1995) have been audited by Price Waterhouse LLP, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and notes thereto, which
appear in the Statement of Additional Information. The following financial
highlights contain selected data for a share of beneficial interest outstanding,
total return, ratios to average net assets and other supplemental data for each
of the periods indicated. The information is based on data contained in the
financial statements.
- --------------------------------------------------------------------------------
U.S. Treasury Money Market Series
<TABLE>
<CAPTION>
Six Months
ended December 3, 1990*
May 31, Year ended November 30, through
1995 --------------------------- November 30,
(unaudited) 1994 1993 1992 1991
----------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------ ------ ------ ------ ------
Net investment income ................... .026 .033 .025 .034 .057(D)
Dividends from net investment income .... (.026) (.033) (.025) (.034) (.057)
------ ------ ------ ------ ------
Net asset value, end of period .......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ====== ====== ====== ======
TOTAL RETURN(DD) ........................ 2.59% 3.31% 2.54% 3.46% 5.84%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) ......... $284,874 $293,984 $284,978 $233,600 $288,922
Average net assets (000) ................ $354,695 $308,454 $273,313 $263,459 $273,203
Ratio to average net assets:
Expenses, including distribution fees ... .61%** .62% .66% .66% .50%(D)/**
Expenses, excluding distribution fees ... .49%** .50% .53% .54% .38%(D)/**
Net investment income ................... 5.09%** 3.21% 2.49% 3.29% 5.74%(D)/**
<FN>
- -----------
* Commencement of investment operations.
** Annualized.
(D) Net of expense subsidy and management fee waiver.
(DD) Total returns are 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 less than
one year are not annualized.
</FN>
</TABLE>
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
CALCULATION OF YIELD
- --------------------------------------------------------------------------------
The Series calculates its "current yield" based on the net change, exclusive
of realized and unrealized gains or losses, in the value of a hypothetical
account over a seven calendar day base period. The Series also calculates its
"effective annual yield" assuming weekly compounding. The following is an
example of the yield calculations as of May 31, 1995:
Value of hypothetical account at end of period $1.00102597
Value of hypothetical account at beginning of period 1.00000000
-----------
Base period return $0.00102597
===========
Current yield (.00102597 x (365/7)) 5.35%
Effective annual yield, assuming weekly compounding 5.49%
The yield will fluctuate from time to time and is not necessarily
representative of future performance.
The weighted average maturity of the portfolio of the Series on May 31, 1995
was 63 days.
Yield is computed in accordance with a standardized formula described in the
Statement of Additional Information. In addition, comparative performance
information may be used from time to time in advertising or marketing the
Series' shares, including data from Lipper Analytical Services, Inc.,
Morningstar Publications, Inc., Donoghue's Money Fund Report, other industry
publications, business periodicals, and market indices.
- --------------------------------------------------------------------------------
HOW THE TRUST INVESTS
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Series is high current income consistent
with the preservation of principal and liquidity. The Series invests exclusively
in U.S. Treasury obligations which have effective maturities of thirteen months
or less. There can be no assurance that this objective will be achieved.
The Series' investment objective is a fundamental policy and, therefore, may
not be changed without the approval of the holders of a majority of the Series'
outstanding voting securities, as defined in the Investment Company Act of 1940,
as amended (the Investment Company Act). Policies that are not fundamental may
be modified by the Trustees.
The Series will invest in the following instruments:
U.S. Treasury Securities. The Series will invest in U.S. Treasury
securities, including bills, notes and bonds. These instruments are direct
obligations of the U.S. Government and, as such, are backed by the "full faith
and credit" of the United States. They differ primarily in their interest rates
and the lengths of their maturities.
Components of U.S. Treasury Securities. The Series may also invest in
component parts of U.S. Treasury notes or bonds, namely, either the corpus
(principal) of such Treasury obligations or one of the interest payments
scheduled to be paid on such obligations. These obligations may take the form of
(i) Treasury obligations from which the interest coupons have been stripped,
(ii) the interest coupons that are stripped, or (iii) book-entries at a Federal
Reserve member bank representing ownership of Treasury obligation components.
6
<PAGE>
Interest on U.S. Treasury obligations is specifically exempted from state
and local taxes under federal law. While shareholders in the Series do not
directly receive interest on U.S. Treasury obligations, substantially all of the
dividends from the Series will be derived primarily from such interest. All
states allow the character of the Series' income to pass through to its
shareholders so that distributions from the Series derived from interest on U.S.
Treasury obligations will also be exempt from state and local income taxes when
earned by an individual shareholder through a distribution from the Trust. See
"Taxes, Dividends and Distributions."
The Series does not engage in repurchase agreements or lend its portfolio
securities because the income from such activities is generally not exempt from
state and local income taxes.
Interest income on U.S. Treasury obligations is not, however, exempt from
federal income tax. In addition, capital gains, if any, realized by the Series
upon the sale of U.S. Treasury obligations are not exempt from federal taxes or,
generally, from state and local taxes. See "Taxes, Dividends and Distributions."
The Series seeks to maintain a $1.00 share price at all times. To achieve
this, the Series purchases only securities with remaining maturities of thirteen
months or less and limits the dollar-weighted average maturity of its portfolio
to 90 days or less. There is no assurance that the Series will be able to
maintain a stable net asset value. See "How the Trust Values its Shares."
The Series utilizes the amortized cost method of valuation in accordance
with regulations issued by the Securities and Exchange Commission (SEC). See
"How the Trust Values its Shares." Accordingly, the Series will limit its
portfolio investments to those instruments which present minimal credit risks
and which are of "eligible quality" as determined by the Series' investment
adviser under the supervision of the Trustees. "Eligible quality," for this
purpose, means (i) a security rated in one of the two highest rating categories
by at least two major rating agencies assigning a rating to the security or
issuer (or, if only one agency assigned a rating, that agency) or (ii) an
unrated security deemed of comparable quality by the Series' investment adviser
under the supervision of the Trustees. The purchase by the Series of a security
of eligible quality that is rated by only one rating agency or is unrated must
be approved or ratified by the Trustees.
OTHER INVESTMENTS AND POLICIES
When-Issued and Delayed Delivery Securities
The Series 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 Series with payment and delivery taking
place as much as a month or more into the future in order to secure what is
considered to be an advantageous price and yield to the Series at the time of
entering into the transaction. The Trust's Custodian will maintain, in a
segregated account of the Series, cash or U.S. Treasury obligations having a
value equal to or greater than the Series' purchase commitments. The Custodian
will likewise segregate securities sold on a delayed delivery basis. The
securities so purchased are subject to market fluctuation and no interest
accrues to the purchaser during the period between purchase and settlement. At
the time of delivery of the securities the value may be more or less than the
purchase price and an increase in the percentage of the Series' assets committed
to the purchase of securities on a when-issued or delayed delivery basis may
increase the volatility of the Series' net asset value.
Borrowing
The Series may borrow an amount equal to no more than 20% of the value of
its total assets (calculated when the loan is made) for temporary, extraordinary
or emergency purposes. Such borrowings shall be made only from banks, unless the
Trust receives an order from the SEC to permit borrowing from entities other
than banks. The Series may pledge up to 20% of its total assets to secure these
borrowings. The Series will not purchase portfolio securities if its borrowings
exceed 5% of its assets.
7
<PAGE>
Illiquid Securities
The Series may invest up to 10% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, as amended (the Securities Act), 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 Trustees.
INVESTMENT RESTRICTIONS
The Series 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
Series' outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
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HOW THE TRUST IS MANAGED
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The Trust has Trustees who, in addition to overseeing the actions of the
Trust's Manager, Subadviser and Distributor, as set forth below, decide upon
matters of general policy. The Trust's Manager conducts and supervises the daily
business operations of the Trust. The Trust's Subadviser furnishes daily
investment advisory services.
For the fiscal year ended November 30, 1994, total expenses of the Series as
a percentage of its average net assets were .62%. See "Financial Highlights."
MANAGER
Prudential Mutual Fund Management, Inc. (PMF or the Manager), One Seaport
Plaza, New York, New York 10292, is the Manager of the Trust and is compensated
for its services at an annual rate of .40 of 1% of the Series' average daily net
assets. It was incorporated in May 1987 under the laws of the State of Delaware.
For the fiscal year ended November 30, 1994, the Trust paid management fees to
PMF of .40% of the average net assets of the Series. See "Manager" in the
Statement of Additional Information.
As of June 30, 1995, PMF served as the manager to 38 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 30 closed-end investment companies with aggregate assets of
approximately $49 billion.
Under the Management Agreement with the Trust, PMF manages the investment
operations of the Trust and also administers the Trust's business affairs. See
"Manager" in the Statement of Additional Information.
Under a Subadvisory Agreement between PMF and The Prudential Investment
Corporation (PIC or the Subadviser), PIC furnishes investment advisory services
in connection with the management of the Trust and is reimbursed by PMF for its
reasonable costs and expenses incurred in providing such services. Under the
Management Agreement, PMF continues to have responsibility for all investment
advisory services and supervises PIC's performance of such services.
PMF and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America (Prudential), a major diversified insurance and
financial services company.
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DISTRIBUTOR
Prudential Mutual Fund Distributors, Inc. (PMFD or the Distributor), One
Seaport Plaza, New York, New York 10292, is a corporation organized under the
laws of the State of Delaware and serves as the Distributor of the Series. It is
a wholly-owned subsidiary of PMF.
Under a Distribution and Service Plan (the Plan) adopted by the Series under
Rule 12b-1 under the Investment Company Act and a distribution and service
agreement (the Distribution Agreement), the Distributor incurs the expenses of
distributing the shares of the Series. These expenses include account servicing
fees paid to, or on account of, financial advisers of Prudential Securities
Incorporated (Prudential Securities or PSI) and representatives of Pruco
Securities Corporation (Prusec), affiliated broker-dealers, account servicing
fees paid to, or on account of, other broker-dealers or financial institutions
(other than national banks) which have entered into agreements with the
Distributor, advertising expenses, the cost of printing and mailing prospectuses
to potential investors and indirect and overhead costs of Prudential Securities
and Prusec associated with the sale of the Series' shares, including lease,
utility, communications and sales promotion expenses. The State of Texas
requires that shares of the Series may be sold in that State only by dealers or
other financial institutions which are registered there as broker-dealers.
Under the Plan, the Trust is obligated to pay a service fee 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 Trust will not be obligated to pay
any additional expenses. If the Distributor's expenses are less than such
distribution and service fees, it will retain its full fees and realize a
profit.
Under the Plan, the Trust pays the Distributor for its distribution-related
activities with respect to the Series at an annual rate of up to .125 of 1% of
the Series' average daily net assets. Account servicing fees are paid based on
the average balance of Series' shares held in the accounts of customers of
financial advisers. The entire distribution fee may be used to pay account
servicing fees.
For the fiscal year ended November 30, 1994, PMFD incurred distribution
expenses in the aggregate of $385,567, all of which was recovered through the
distribution fee paid by the Series to PMFD. The Trust records all payments made
under the Plan as expenses in the calculation of its net investment income.
Prior to the date of this Prospectus, the Plan operated as a "reimbursement
type" plan. See "Distributor" in the Statement of Additional Information.
The Plan provides that it shall continue in effect from year to year
provided that each such continuance is approved annually by a majority vote of
the Trustees, including a majority of the Trustees who are not interested
persons of the Trust and who have no direct or indirect financial interest in
the operation of the Plan or in any agreement related to the Plan (Rule 12b-1
Trustees). The Trustees are provided with and review quarterly reports of
expenditures under the Plan. The Plan may be terminated at any time by vote of a
majority of the Rule 12b-1 Trustees or of a majority of the Series' outstanding
shares. The Trust will not be obligated to pay expenses incurred under the Plan
if it is terminated or not continued.
In addition to service fees paid by the Series under the Plan, 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 Series. Such payments may be
calculated by reference to the net asset value of shares sold by such persons or
otherwise.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the National
Association of Securities Dealers, Inc. to resolve allegations that from 1980
through 1990 PSI sold certain limited partnership interests in violation of
securities laws to persons for whom such securities were not suitable and
misrepresented the safety, potential returns and liquidity of these investments.
Without admitting or denying the allegations asserted against it, PSI consented
to the entry of an SEC Administrative Order which stated that PSI's conduct
violated the federal securities laws, directed PSI to cease and desist from
violating the federal securities laws, pay civil penalties, and adopt certain
remedial measures to address the violations.
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Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of
a $10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action.
In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling 1-800-225-1852.
The Trust is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Trust's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker for the Trust, provided that the
commissions, fees or other remuneration it receives are fair and reasonable. See
"Portfolio Transactions and Brokerage" in the Statement of Additional
Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Trust's portfolio securities
and cash and, in that capacity, maintains certain financial and accounting books
and records pursuant to an agreement with the Trust. Its mailing address is P.O.
Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services, Inc., 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 Trust. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
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HOW THE TRUST VALUES ITS SHARES
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The Series' net asset value per share or NAV is determined by subtracting
its liabilities from the value of its assets and dividing the remainder by the
number of outstanding shares. The Trustees have fixed the specific time of day
for the computation of the Series' NAV to be as of 4:30 P.M., New York time,
immediately after the declaration of dividends.
The Series will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem Series shares have been received or days on which changes in the value
of the Series' portfolio securities do not materially affect the net asset
value. The New York Stock Exchange is closed on the following holidays: New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
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The Series determines the value of its portfolio securities by the amortized
cost method. This method involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Series would receive if it sold the
instrument. During these periods, the yield to a shareholder may differ somewhat
from that which could be obtained from a similar fund which marks its portfolio
securities to the market each day. For example, during periods of declining
interest rates, if the use of the amortized cost method resulted in a lower
value of the Series' portfolio on a given day, a prospective investor in the
Series would be able to obtain a somewhat higher yield and existing shareholders
would receive correspondingly less income. The converse would apply during
periods of rising interest rates. The Trustees have established procedures
designed to stabilize, to the extent reasonably possible, the NAV of the shares
of the Series at $1.00 per share. See "Net Asset Value" in the Statement of
Additional Information.
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TAXES, DIVIDENDS AND DISTRIBUTIONS
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Taxation of the Series
Each series of the Trust is treated as a separate entity for federal income
tax purposes and each has elected to qualify and intends to remain qualified as
a regulated investment company under the Internal Revenue Code. Accordingly, the
Series will not be subject to federal income taxes on its net investment income
and capital gains, if any, that it distributes to its shareholders. To the
extent not distributed by the Series, taxable net investment income and net
capital gains are taxable to the Series. The performance and tax qualification
of one series will have no effect on the federal income tax liability of
shareholders of the other series. See "Taxes" in the Statement of Additional
Information.
Taxation of Shareholders
Distributions of net investment income and realized net short-term capital
gains (i.e., the excess of net short-term capital gains over net long-term
capital losses), if any, are taxable to shareholders of the Series for U.S.
federal income tax purposes as ordinary income, whether or not reinvested. The
Series does not expect to realize long-term capital gains or losses. Because
none of the income of the Series will consist of dividends from domestic
corporations, dividends of net investment income and distributions of net
short-term capital gains will not be eligible for the dividends-received
deduction for corporate shareholders. Tax-exempt shareholders generally will not
be required to pay taxes on amounts distributed to them.
The Series will invest exclusively in U.S. Treasury obligations whose
interest is specifically exempted from state and local income taxes under
federal law. See "How the Trust Invests-Investment Objective and Policies" for a
discussion of the treatment of dividends from the Fund for state and local
income tax purposes. Investors should recognize that the state and local income
tax rules that apply to the Series and its shareholders may be subject to change
in the future and that such changes could have an adverse impact on the Series
and its shareholders.
Shareholders are advised to consult their own tax advisers regarding
specific questions as to federal, state or local taxes.
Withholding Taxes
Under U.S. Treasury Regulations, the Trust is required to withhold and remit
to the U.S. Treasury 31% of dividend, capital gain distributions and redemption
proceeds on the accounts of those shareholders who fail to furnish their tax
identification numbers on IRS Form W-9 (or IRS Form W-8 in the case of certain
foreign shareholders. Withholding at
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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 from net investment income and short-term capital
gains paid to a foreign shareholder will generally be subject to U.S.
withholding tax at the rate of 30% (or lower treaty rate).
Dividends and Distributions
The Series expects to declare daily and pay monthly dividends of net
investment income and short-term capital gains, if any. A shareholder begins to
earn dividends on the first business day after the settlement date of his or her
order and continues to earn dividends through the day on which his or her shares
are redeemed.
Dividends and distributions will be paid in additional shares of the Series
based on the net asset value of the Series' shares on the payment date, unless
the shareholder elects in writing not less than five business days prior to the
payment date to receive such dividends and distributions in cash. Such election
should be submitted to Prudential Mutual Fund Services, Inc., Att: Account
Maintenance, P.O. Box 15015, New Brunswick, New Jersey 08906-5015. If you hold
shares through Prudential Securities, you should contact your financial adviser
to elect to receive dividends and distributions in cash. The Trust will notify
each shareholder after the close of the Trust's taxable year of both the dollar
amount and taxable status of that year's dividends and distributions on a per
share basis. Distributions may be subject to state and local taxes. See
"Taxation of Shareholders" above.
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GENERAL INFORMATION
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DESCRIPTION OF SHARES
The Trust, organized as an unincorporated business trust under the laws of
Massachusetts, is a trust fund of the type commonly known as a "Massachusetts
business trust." The Trust's activities are supervised by its Trustees. The
Declaration of Trust permits the Trustees to issue an unlimited number of full
and fractional shares in separate series and classes within such series.
The shareholders of the U.S. Treasury Money Market Series, the Money Market
Series and the Short-Intermediate Term Series are each entitled to a full vote
for each full share of beneficial interest (par value $.01 per share) held (and
fractional votes for fractional shares). Shares of each series are entitled to
vote as a class only to the extent required by the provisions of the Investment
Company Act or as otherwise permitted by the Trustees in their sole discretion.
Under the Investment Company Act, shareholders of each series have to approve
the adoption of any investment advisory agreement relating to such series and of
any changes in the investment policies related thereto.
It is the intention of the Trust not to hold annual meetings of
shareholders. The Trustees may call special meetings of shareholders for action
by shareholder vote as may be required by the Investment Company Act or the
Declaration of Trust. Shareholders have certain rights, including the right to
call a meeting upon a vote of 10% of the Trust's outstanding shares for the
purpose of voting on the removal of one or more Trustees.
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 Trust with the SEC under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
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SHAREHOLDER GUIDE
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HOW TO BUY SHARES OF THE TRUST
You may purchase shares of the Series through Prudential Securities or
Prusec or directly from the Trust through its Transfer Agent, Prudential Mutual
Fund Services, Inc. (PMFS or the Transfer Agent), Attention: Investment
Services, P.O. Box 15020, New Brunswick, New Jersey 08906-5020. The minimum
initial investment is $2,500. The minimum subsequent investment is $100. All
minimum investment requirements are waived for the Command Account Program (if
the Series is designated as your primary fund) and 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."
Shares of the Series are sold, without a sales charge, at the NAV next
determined after receipt and acceptance by PMFS of a purchase order and payment
in proper form [i.e., a check or Federal Funds wired to State Street Bank and
Trust Company (State Street)]. See "How the Trust Values its Shares." When
payment is received by PMFS prior to 4:30 P.M., New York time, in proper form, a
share purchase order will be entered at the price determined as of 4:30 P.M.,
New York time, on that day, and dividends on the shares purchased will begin on
the business day following such investment. See "Taxes, Dividends and
Distributions."
Application forms can be obtained from PMFS, Prudential Securities or
Prusec. If a stock certificate is desired, it must be requested in writing for
each transaction. Certificates are issued only for full shares. Shareholders who
hold their shares through Prudential Securities will not receive stock
certificates. Shareholders cannot utilize Expedited Redemption or Check
Redemption or have a Systematic Withdrawal Plan if they have been issued share
certificates.
The Trust reserves the right to reject any purchase order (including an
exchange into the Series) 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 Trust. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the fifth business day following the investment.
Transactions in Trust shares may be subject to postage and other charges
imposed by your dealer.
Purchases through Prudential Securities
Shares of the Series may be purchased through Prudential Securities at the
net asset value next computed after your order is received. Prudential
Securities will transmit your order to the Trust on the next business day for
settlement that day and you will begin earning dividends on the second business
day after receipt of your order by Prudential Securities. Prudential Securities
will have the use of any free credit balances (i.e., immediately available
funds) held in your account until they are delivered to the Trust in connection
with your purchase.
Shares of the Series purchased by Prudential Securities on behalf of its
clients will be held by Prudential Securities as record holder. Prudential
Securities will therefore receive statements and dividends directly from the
Trust and will in turn provide investors with Prudential Securities account
statements reflecting purchases, redemptions and dividend payments. Although
Prudential Securities clients who purchase shares of the Series through
Prudential Securities may not redeem shares of the Series by check, Prudential
Securities provides its clients with alternative forms of immediate access to
monies invested in shares of the Series.
Prudential Securities clients wishing additional information concerning
investment in Series shares made through Prudential Securities should call their
Prudential Securities financial adviser.
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Automatic Investment. Prudential Securities has advised the Series that it
has instituted procedures pursuant to which, upon enrollment by a Prudential
Securities client, Prudential Securities will make automatic investments of free
credit cash balances of $1,000 or more ($1.00 for IRAs and Benefit Plans)
(Eligible Credit Balances) held in such client's account in shares of the Series
(Autosweep). Under these procedures, an order to purchase shares of the Series
is placed (i) in the case of Eligible Credit Balances resulting from the
proceeds of a securities sale, at the opening of business on the day following
the settlement of the securities sale, and (ii) in the case of Eligible Credit
Balances resulting from a non-trade related credit (e.g., receipt of a dividend
or interest payment, maturity of a bond or a cash payment into the securities
account), at the opening of business semi-monthly. Each time an order is placed
under these procedures resulting from the settlement of a securities sale, any
non-trade related credit in the client's account will also be automatically
invested. For the purposes of Autosweep, "Benefit Plans" include (i) employee
benefit plans as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974 (ERISA) other than governmental plans as defined in Section
3(32) of ERISA and church plans as defined in Section 3(33) of ERISA, (ii)
pension, profit-sharing or other employee benefit plans qualified under Section
401 of the Internal Revenue Code and (iii) deferred compensation and annuity
plans under Section 457 or 403(b)(7) of the Internal Revenue Code. "IRAs" are
Individual Retirement Accounts as defined in Section 408(a) of the Internal
Revenue Code. All shares purchased pursuant to these procedures will begin
earning dividends on the business day after the order is placed. Prudential
Securities will have the use of Eligible Credit Balances until monies are
delivered to the Trust.
Self-Directed Investment. Prudential Securities clients not electing
Autosweep may continue to place orders for the purchase of Series shares through
Prudential Securities, subject to minimum initial and subsequent investment
requirements as described above.
A Prudential Securities client who has not elected Autosweep (see "Automatic
Investment") and who does not place a purchase order promptly after funds are
credited to his or her Prudential Securities account will have a free credit
balance with Prudential Securities and will not begin earning dividends on
shares of the Fund until the second business day after receipt of the order by
Prudential Securities. Accordingly, Prudential Securities will have the use of
such free credit balances during this period.
Purchases through Prusec
You may purchase shares of the Series by placing an order with your Prusec
registered representative accompanied by payment for the purchase price of such
shares and, in the case of a new account, a completed Application Form. You
should also submit an IRS Form W-9. The Prusec registered representative will
then forward these items to the Transfer Agent. See "Purchase By Mail" below.
Purchase by Wire
For an initial purchase of shares of the Series by wire, you must first
telephone PMFS at (800) 225-1852 (toll-free) to receive an account number. The
following information will be requested: your name, address, tax identification
number, dividend distribution election, amount being wired and wiring bank.
Instructions should then be given by you or your bank to transfer funds by wire
to State Street Bank and Trust Company, Boston, Massachusetts, Custody and
Shareholder Services Division, Attention: Prudential Government Securities
Trust, U.S. Treasury Money Market Series, specifying on the wire the account
number assigned by PMFS and your name.
If you arrange for receipt by State Street of Federal Funds prior to 4:30
P.M., New York time, on a business day, you may purchase shares of the Series as
of that day and earn dividends commencing on the next business day.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Government
Securities Trust (U.S. Treasury Money Market Series) and your name and
individual account number. It is not necessary to call PMFS to make subsequent
purchase orders by wire. The minimum amount which may be invested by wire is
$1,000.
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Purchase by Mail
Purchase orders for which remittance is to be made by check or money order
may be submitted directly by mail to Prudential Mutual Fund Services, Inc.,
Attention: Investment Services, P.O. Box 15020, New Brunswick, New Jersey
08906-5020, together with payment of the purchase price of such shares and, in
the case of a new account, a completed Application Form. You should also submit
an IRS Form W-9. If PMFS receives an order to purchase shares of the Series and
payment in proper form prior to 4:30 P.M., New York time, the purchase order
will be effective on that day and you will begin earning dividends on the
following business day. See "Taxes, Dividends and Distributions." Checks should
be made payable to Prudential Government Securities Trust, U.S. Treasury Money
Market Series. Certified checks are not necessary, but checks must be drawn on a
bank located in the United States. There are restrictions on the redemption of
shares purchased by check while the funds are being collected. See "How to Sell
Your Shares."
The Prudential Advantage Account Program
Shares of the Series are offered to participants in the Prudential Advantage
Account Program (the Advantage Account Program), a financial services program
available to clients of Pruco Securities Corporation. Investors participating in
the Advantage Account Program may select the Series as their primary investment
vehicle. Such investors will have the free credit cash balances of $1.00 or more
in their Securities Account (Available Cash) (a component of the Advantage
Account Program carried through Prudential Securities) automatically invested in
shares of the Series. Specifically, an order to purchase shares of the Series is
placed (i) in the case of Available Cash resulting from the proceeds of
securities sales, on the settlement date of the securities sale, and (ii) in the
case of Available Cash resulting from non-trade related credits (i.e., receipt
of dividends and interest payments, or a cash payment by the participant into
his or her Securities Account), on the business day after receipt by Prudential
Securities of the non-trade related credit.
All shares purchased pursuant to these automatic purchase procedures will
begin earning dividends on the business day after the order is placed.
Prudential Securities will arrange for investment in shares of the Series at
4:30 P.M. on the day the order is placed and cause payment to be made in federal
funds for the shares prior to 4:30 P.M. on the next business day. Prudential
Securities will have the use of free credit cash balances until delivery to the
Trust.
Redemptions will be automatically effected by Prudential Securities to
satisfy debit balances in a Securities Account created by activity therein or
existing under the Advantage Account Program, such as those incurred by use of
the Visa(R) Account, including Visa purchases, cash advances and Visa Account
checks. Each Advantage Account Program Securities Account will be automatically
scanned for debits each business day as of the close of business on that day and
after application of any free credit cash balances in the account to such
debits, a sufficient number of shares of the Series (if selected as the primary
fund) and, if necessary, shares of other Advantage Account funds owned by the
Advantage Account Program participant which have not been selected as his or her
primary fund or shares of a participant's money market funds managed by PMF
which are not primary Advantage Account funds will be redeemed as of that
business day to satisfy any remaining debits in the Securities Account. Shares
may not be purchased until all debits, overdrafts and other requirements in the
Securities Account are satisfied.
Advantage Account Program charges and expenses are not reflected in the
table of Trust expenses. See "Trust Expenses."
For information on participation in the Advantage Account Program, you
should telephone (800) 235-7637 (toll-free).
Command AccountTM Program
Shares of the Series are offered to participants in the Prudential
Securities Command AccountTM program, an integrated financial services program
of Prudential Securities. Investors having a Command Account may select the
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Series as their primary fund. Such investors will have the free credit cash
balances of $1.00 or more in their Securities Account (Available Cash) (a
component of the Command Account program) automatically invested in shares of
the Series as described below. Specifically, an order to purchase shares of the
Series is placed (i) in the case of Available Cash resulting from the proceeds
of securities sales, on the settlement date of the securities sale, and (ii) in
the case of Available Cash resulting from non-trade related credits (i.e.,
receipt of dividends and interest payments, or a cash payment by the participant
into his or her Securities Account), on the business day after receipt by
Prudential Securities of the non-trade related credit. These automatic purchase
procedures are also applicable for Corporate Command Accounts.
All shares purchased pursuant to these automatic purchase procedures will
begin earning dividends on the business day after the order is placed.
Prudential Securities will arrange for investment in shares of the Series at
4:30 P.M. on the day the order is placed and cause payment to be made in federal
funds for the shares prior to 4:30 P.M. on the next business day. Prudential
Securities will have the use of free credit cash balances until delivery to the
Fund. There are no minimum investment requirements for participants in the
Command Account program.
Redemptions will be automatically effected by Prudential Securities to
satisfy debit balances in a Securities Account created by activity therein or
arising under the Command program, such as those incurred by use of the Visa
Gold Account, including Visa purchases, cash advances and Visa Account checks.
Each Command program Securities Account will be automatically scanned for debits
monthly for all Visa purchases incurred during the month and each business day
as of the close of business on that day for all cash advances and check charges
as incurred and after application of any free credit cash balances in the
account to such debits, a sufficient number of shares of the Series and, if
necessary, shares of other Command funds owned by the Command program
participant which have not been selected as his or her primary fund or shares of
a participant's money market funds managed by PMF which are not primary Command
funds will be redeemed as of that business day to satisfy any remaining debits
in the Securities Account. The single monthly debit for Visa purchases will be
made on the twenty-fifth day of each month, or the prior business day if the
twenty-fifth day falls on a weekend or holiday. Margin loans will be utilized to
satisfy debits remaining after the liquidation of all shares of the Series in a
Securities Account, and shares may not be purchased until all debits, margin
loans and other requirements in the Securities Account are satisfied. Command
Account participants will not be entitled to dividends declared on the date of
redemption.
For information on participation in the Command Account program, you should
telephone (800) 222-4321 (toll-free).
HOW TO SELL YOUR SHARES
You can redeem your shares at any time for cash at the NAV next determined
after the redemption request is received in proper form by the Transfer Agent or
Prudential Securities. See "How the Trust Values its Shares."
Shares for which a redemption request is received by PMFS prior to 4:30
P.M., New York time, are entitled to a dividend on the day on which the request
is received. By pre-authorizing Expedited Redemption, you may arrange to have
payment for redeemed shares made in Federal Funds wired to your bank, normally
on the next bank business day following the date of receipt of the redemption
instructions. Should you redeem all of your shares, you will receive the amount
of all dividends declared for the month-to-date on those shares. See "Taxes,
Dividends and Distributions."
If redemption is requested by a corporation, partnership, trust or
fiduciary, written evidence of authority acceptable to the Transfer Agent must
be submitted before such request will be accepted. All correspondence and
documents concerning redemptions should be sent to the Trust in care of its
Transfer Agent, Prudential Mutual Fund Services, Inc., Attention: Redemption
Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to
a person other than the record owner, (c) are to be sent to an address other
than the address on the Transfer Agent's records or (d) are to be paid to a
corporation,
16
<PAGE>
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.
Normally, the Trust makes payment on the next business day for all shares of
the Series redeemed, but in any event, payment will be made within seven days
after receipt by PMFS of share certificates and/or of a redemption request in
proper form. However, the Trust may suspend the right of redemption or postpone
the date of payment (a) for any periods during which the New York Stock Exchange
is closed (other than for customary weekend or holiday closings), (b) for any
periods when trading in the markets which the Trust normally utilizes is closed
or restricted or an emergency exists as determined by the SEC so that disposal
of the Series' investments or determination of its NAV is not reasonably
practicable or (c) for such other periods as the SEC may permit for protection
of the Series' shareholders.
Payment for redemption of recently purchased shares will be delayed until
the Trust or its Transfer Agent has been advised that the purchase check has
been honored, up to 10 calendar days from the time of receipt of the purchase
check by the Transfer Agent. Such delay may be avoided by purchasing shares by
wire or by certified or official bank check.
Redemption of Shares Purchased through Prudential Securities
Prudential Securities clients for whom Prudential Securities has purchased
shares of the Series may have these shares redeemed only by instructing their
Prudential Securities financial adviser orally or in writing.
Prudential Securities has advised the Trust that it has established
procedures pursuant to which shares of the Series held by a Prudential
Securities client having a deficiency in his or her Prudential Securities
account will be redeemed automatically to the extent of that deficiency to the
nearest highest dollar, unless the client notifies Prudential Securities to the
contrary. The amount of the redemption will be the lesser of (a) the total NAV
of the Series held in the client's Prudential Securities account or (b) the
deficiency in the client's Prudential Securities account at the close of
business on the date such deficiency is due. Accordingly, a Prudential
Securities client utilizing this automatic redemption procedure and who wishes
to pay for a securities transaction or meet any market action related deficiency
in his or her account other than through such automatic redemption procedure
must do so not later than the day of settlement for such securities transaction
or the date such market action related deficiency is incurred. Prudential
Securities clients who have elected to utilize Autosweep will not be entitled to
dividends declared on the date of redemption.
Redemption of Shares Purchased through PMFS
If you purchase shares of the Series through PMFS, you may use Check
Redemption, Expedited Redemption or Regular Redemption. Prudential Securities
clients for whom Prudential Securities has purchased shares may not use such
services.
Regular Redemption. You may redeem your shares by sending a written request,
accompanied by duly endorsed share certificates, if issued, to PMFS, Attention:
Redemption Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010. In
this case, all share certificates must be endorsed by you with signature
guaranteed, as described above. PMFS may request further documentation from
corporations, executors, administrators, trustees or guardians. Regular
redemption is made by check sent to the shareholder's address.
Expedited Redemption. By pre-authorizing Expedited Redemption, you may
arrange to have payment for redeemed shares made in Federal Funds wired to your
bank, normally on the next business day following redemption. In
17
<PAGE>
order to use Expedited Redemption, you may so designate at the time the initial
Application Form is filed or at a later date. Once the Expedited Redemption
authorization form has been completed, the signature on the authorization form
guaranteed as set forth above and the form returned to PMFS, requests for
redemption may be made by telegraph, letter or telephone. To request Expedited
Redemption by telephone, you should call PMFS at (800) 255-1852. Calls must be
received by PMFS before 4:30 P.M., New York time to permit redemption as of such
date. Requests by letter should be addressed to Prudential Mutual Fund Services,
Inc., Att: Redemption Services, P.O. Box 15010, New Brunswick, New Jersey
08906-5010.
A signature guarantee is not required under Expedited Redemption once the
authorization form is properly completed and returned. The Expedited Redemption
privilege may be used only to redeem shares in an amount of $200 or more, except
that, if an account for which Expedited Redemption is requested has a net asset
value of less than $200, the entire account must be redeemed. The proceeds of
redeemed shares in the amount of $1,000 or more are transmitted by wire to your
account at a domestic commercial bank which is a member of the Federal Reserve
System. Proceeds of less than $1,000 are forwarded by check to your designated
bank account.
During periods of severe market or economic conditions, Expedited Redemption
may be difficult to implement and you should redeem your shares by mail as
described above.
Check Redemption. At your request, State Street will establish a personal
checking account for you. Checks drawn on this account can be made payable to
the order of any person in any amount greater than $500. When such check is
presented to State Street for payment, State Street presents the check to the
Trust as authority to redeem a sufficient number of shares of the Series in your
account to cover the amount of the check. If insufficient shares are in the
account, or if the purchase was made by check within 10 calendar days, the check
will be returned marked "insufficient funds." Checks in an amount less than $500
will not be honored. Shares for which certificates have been issued cannot be
redeemed by check. PMFS reserves the right to impose a service charge to
establish a checking account and order checks.
Involuntary Redemption
Because of the relatively high cost of maintaining an account, the Trust
reserves the right to redeem, upon 60 days' written notice, an account which is
reduced by a shareholder to an NAV of $500 or less due to redemption. You may
avoid such redemption by increasing the NAV of your account to an amount in
excess of $500.
Redemption in Kind
If the Trustees determine that it would be detrimental to the best interests
of the remaining shareholders of the Series to make payment wholly or partly in
cash, the Trust may pay the redemption price in whole or in part by a
distribution in kind of securities from the portfolio of the Series, in lieu of
cash in conformity with applicable rules of the Securities and Exchange
Commission. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How the Trust Values its Shares." If
your shares are redeemed in kind, you would incur transaction costs in
converting the assets into cash. The Trust, however, has elected to be governed
by Rule 18f-1 under the Investment Company Act pursuant to which the Trust is
obligated to redeem shares solely in cash up to the lesser of $250,000 or one
percent of the net asset value of the Series during any 90-day period for any
one shareholder.
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 Series at the NAV next determined after the order is
received, which must be within 90 days after the date of the redemption. You
will receive pro rata credit for any contingent deferred
18
<PAGE>
sales charge paid in connection with the redemption. You must notify the Trust's
Transfer Agent, either directly or through Prudential Securities or Prusec, at
the time the repurchase privilege is exercised, that you are entitled to credit
for any contingent deferred sales charge previously paid. Exercise of the
repurchase privilege will not affect the federal income tax treatment of any
gain realized upon the redemption. If the redemption resulted in a loss, some or
all of the loss, depending on the amount reinvested, will not be allowed for
federal income tax purposes.
Class B and Class C Purchase Privilege
You may direct that the proceeds of the redemption of your shares be
invested in Class B or Class C shares of any Prudential Mutual Fund by calling
your Prudential Securities financial adviser or the Transfer Agent at (800)
225-1852. The transaction will be effected on the basis of the relative NAV.
HOW TO EXCHANGE YOUR SHARES
As a shareholder of the Series you may exchange your shares for shares of
other series of the Trust and certain other Prudential Mutual Funds, including
money market funds and funds sold with an initial sales charge, subject to the
minimum investment requirements of such funds on the basis of the relative NAV.
You may exchange your shares for Class A shares of the Prudential Mutual Funds
on the basis of the relative NAV, plus the applicable sales charge. No
additional sales charge is imposed in connection with subsequent exchanges. You
may not exchange your shares for Class B shares of the Prudential Mutual Funds,
except that shares acquired prior to January 22, 1990 subject to a contingent
deferred sales charge can be exchanged for Class B shares. You may not exchange
your shares for Class C shares of the Prudential Mutual Funds. See "How to Sell
Your Shares-Class B and Class C Purchase Privilege" above and "Shareholder
Investment Account-Exchange Privilege" in the Statement of Additional
Information. An exchange will be treated as a redemption and purchase for tax
purposes.
In order to exchange shares by telephone, you must authorize telephone
exchanges on your initial application form or by written notice to the Transfer
Agent and hold shares in non-certificate form. Thereafter, you may call the
Trust 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 Trust 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 (or series) next determined after the request is
received in good order. The Exchange Privilege is available only in states where
the exchange may legally be made.
If you hold shares through Prudential Securities, you must exchange your
shares by contacting your Prudential Securities financial adviser. If you hold
certificates, the certificates, signed in the name(s) shown on the face of the
certificates, must be returned in order for the shares to be exchanged. See "How
to Sell Your Shares" above.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
In periods of severe market or economic conditions the telephone exchange of
shares may be difficult to implement and you should make exchanges by mail in
writing to Prudential Mutual Fund Services, Inc., at the address noted above.
The Exchange Privilege may be modified or terminated at any time on 60 days'
notice to shareholders.
SHAREHOLDER SERVICES
In addition to the exchange privilege, as a shareholder in the Series, you
can take advantage of the following additional services and privileges:
19
<PAGE>
*Automatic Reinvestment of Dividends and/or Distributions. For your
convenience, all dividends and distributions are automatically reinvested in
full and fractional shares of the Series at NAV. You may direct the Transfer
Agent in writing not less than 5 full business days prior to the record date to
have subsequent dividends and/or distributions sent in cash rather than
reinvested. If you hold shares through Prudential Securities, you should contact
your financial adviser.
*Automatic Savings Accumulation Plan (ASAP). Under ASAP you may make regular
purchases of Series shares in amounts as little as $50 via an automatic charge
to a bank account or Prudential Securities account (including a Command
Account). For additional information about this service, you may contact your
Prudential Securities financial adviser, Prusec representative or the Transfer
Agent directly.
*Tax-Deferred Retirement Plans. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code
are available through the Distributor. These plans are for use by both
self-employed individuals and corporate employers. These plans permit either
self-direction of accounts by participants, or a pooled account arrangement.
Information regarding the establishment of these plans, the administration,
custodial fees and other details is available from Prudential Securities or the
Transfer Agent. If you are considering adopting such a plan, you should consult
with your own legal or tax adviser with respect to the establishment and
maintenance of such a plan.
*Systematic Withdrawal Plan. A systematic withdrawal plan is available for
shareholders having shares of the Series which provides for monthly or quarterly
checks. For additional information about this service, you may contact your
Prudential Securities financial adviser, Prusec representative or the Transfer
Agent directly.
*Multiple Accounts. Special procedures have been designed for banks and
other institutions that wish to open multiple accounts. An institution may open
a single master account by filing an Application Form with Prudential Mutual
Fund Services, Inc. (PMFS or the Transfer Agent), Attention: Customer Service,
P.O. Box 15005, New Brunswick, New Jersey 08906, signed by personnel authorized
to act for the institution. Individual sub-accounts may be opened at the time
the master account is opened by listing them, or they may be added at a later
date by written advice or by filing forms supplied by the Trust. Procedures are
available to identify sub-accounts by name and number within the master account
name. The investment minimums set forth above are applicable to the aggregate
amounts invested by a group and not to the amount credited to each sub-account.
*Reports to Shareholders. The Trust 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 Trust will provide one annual report and semi-annual shareholder
report and annual prospectus per household. You may request additional copies of
such reports by calling (800) 225-1852 or by writing to the Trust at One Seaport
Plaza, New York, NY 10292.
*Shareholder Inquiries. Inquiries should be addressed to the Trust at One
Seaport Plaza, New York, New York 10292, or by telephone, at (800) 225-1852
(toll free) or, from outside the U.S.A., at (908) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
20
<PAGE>
- --------------------------------------------------------------------------------
THE PRUDENTIAL MUTUAL FUND FAMILY
- --------------------------------------------------------------------------------
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec registered representative or telephone
the Trust at (800) 225-1852 for a free prospectus. Read the prospectus carefully
before you invest or send money.
Taxable Bond Funds
Prudential Adjustable Rate Securities Fund, Inc.
Prudential Diversified Bond Fund, Inc.
Prudential GNMA Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Prudential U.S. Government Fund
The BlackRock Government Income Trust
Tax-Exempt Bond Funds
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Modified Term Series
Prudential Municipal Series Fund
Arizona Series
Florida Series
Georgia Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
Global Funds
Prudential Europe Growth Fund, Inc.
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.
Equity Funds
Prudential Allocation Fund
Conservatively Managed Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential IncomeVertible(R) Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
Money Market Funds
Taxable Money Market Funds
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund
Money Market Series
Prudential MoneyMart Assets
Tax-Free Money Market Funds
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
Command Funds
Command Money Fund
Command Government Fund
Command Tax-Free Fund
Institutional Money Market Funds
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
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 Trust or the Distributor. This Prospectus
does not constitute an offer by the Trust or by the
Distributor to sell or a solicitation of an offer to buy
any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in
such jurisdiction.
___________________________________________________________
TABLE OF CONTENTS
Page
----
TRUST HIGHLIGHTS............................. 2
Risk Factors and Special Characteristics... 2
TRUST EXPENSES............................... 4
FINANCIAL HIGHLIGHTS......................... 5
CALCULATION OF YIELD......................... 6
HOW THE TRUST INVESTS........................ 6
Investment Objective and Policies.......... 6
Other Investments and Policies............. 7
Investment Restrictions.................... 8
HOW THE TRUST IS MANAGED..................... 8
Manager.................................... 8
Distributor................................ 9
Portfolio Transactions..................... 10
Custodian and Transfer and
Dividend Disbursing Agent................ 10
HOW THE TRUST VALUES ITS SHARES.............. 10
TAXES, DIVIDENDS AND DISTRIBUTIONS........... 11
GENERAL INFORMATION.......................... 12
Description of Shares...................... 12
Additional Information..................... 12
SHAREHOLDER GUIDE............................ 13
How to Buy Shares of the Trust............. 13
How to Sell Your Shares.................... 16
How to Exchange Your Shares................ 19
Shareholder Services....................... 19
THE PRUDENTIAL MUTUAL FUND FAMILY............A-1
________________________________________________
MF145A 4441280
________________________________________________
CUSIP #: 744342 30 4
________________________________________________
Prudential
Government
Securities
Trust
(U.S. Treasury Money Market Series)
- --------------------------------------------------------------------------------
Prudential Mutual Funds (LOGO)
Building Your Future
On Our StrengthSM
PROSPECTUS
August 1, 1995
<PAGE>
Prudential Government Securities Trust
Statement of Additional Information
dated August 1, 1995
Prudential Government Securities Trust (the Trust) is offered in three
series: the Money Market Series, the U.S. Treasury Money Market Series and the
Short-Intermediate Term Series. Each series operates as a separate fund with its
own investment objectives and policies designed to meet its specific investment
goals. The investment objectives of the Money Market Series and the U.S.
Treasury Money Market Series are to obtain high current income, preserve capital
and maintain liquidity. The investment objective of the Short-Intermediate Term
Series is to achieve a high level of income consistent with providing reasonable
safety. There can be no assurance that any series' investment objective will be
achieved.
The Trust's address is One Seaport Plaza, New York, New York 10292, and its
telephone number is (800) 225-1852.
This Statement of Additional Information sets forth information about each
of the series. This Statement of Additional Information is not a prospectus and
should be read in conjunction with the Trust's Money Market Series Prospectus,
U.S. Treasury Money Market Series Prospectus or Short-Intermediate Term Series
Prospectus, each dated August 1, 1995, copies of which may be obtained from the
Trust upon request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Cross-reference Cross-reference
Cross-reference to page in U.S. to page in
to page in Treasury Money Short-Intermediate
Money Market Market Series Term
Page Series Prospectus Prospectus Series Prospectus
---- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
General Information...................... B-2 12 12 22
Investment Objective(s) and Policies..... B-3 --
Money Market Series...................... B-4 6 --
U.S. Treasury Money Market Series........ B-5 -- 6 --
Short-Intermediate Term Series........... B-6 -- -- 6
Portfolio Turnover....................... B-15 -- -- --
Investment Restrictions.................. B-15 8 8 16
Trustees and Officers.................... B-17 8 8 16
Manager.................................. B-19 8 8 17
Distributor.............................. B-21 9 9 17
Portfolio Transactions and Brokerage..... B-23 10 10 19
Shareholder Investment Account........... B-23 18 19 26
Net Asset Value.......................... B-26 10 10 19
Performance Information.................. B-27
Money Market Series and U.S. Treasury
Money Market Series--Calculation of
Yield............................. B-27 6 6 --
Short-Intermediate Term
Series--Calculation of Yield and
Total Return...................... B-28 -- -- 19
Taxes.................................... B-28 11 11 20
Custodian and Transfer and Dividend
Disbursing Agent and Independent
Accountants............................ B-29 10 10 19
Financial Statements..................... B-30 -- -- --
Report of Independent Accountants........ B-57 -- -- --
Appendix A--General Investment
Information............................ A-1 -- --
Appendix B--Historical Performance
Data................................... B-1 -- -- --
</TABLE>
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111B 430145A
<PAGE>
GENERAL INFORMATION
The Trust is a trust fund of the type commonly known as a ``Massachusetts
business trust.'' The Declaration of Trust and the By-Laws of the Trust are
designed to make the Trust similar in most respects to a Massachusetts business
corporation. The principal distinction between the two forms relates to
shareholder liability: under Massachusetts law, shareholders of a business trust
may, in certain circumstances, be held personally liable as partners for the
obligations of the Trust, which is not the case with a corporation. The
Declaration of Trust of the Trust provides that shareholders shall not be
subject to any personal liability for the acts or obligations of the Trust and
that every written obligation, contract, instrument or undertaking made by the
Trust shall contain a provision to the effect that the shareholders are not
individually bound thereunder.
Massachusetts counsel for the Trust are of the opinion that no personal
liability will attach to the shareholders under any undertaking containing such
provision when adequate notice of such provision is given, except possibly in a
few jurisdictions. With respect to all types of claims in the latter
jurisdictions and with respect to tort claims, contract claims where the
provision referred to is omitted from the undertaking, claims for taxes and
certain statutory liabilities in other jurisdictions, a shareholder may be held
personally liable to the extent that claims are not satisfied by the Trust.
However, upon payment of any such liability the shareholder will be entitled to
reimbursement from the general assets of the Trust. The Trustees intend to
conduct the operations of the Trust, with the advice of counsel, in such a way
so as to avoid, as far as possible, ultimate liability of the shareholders for
liabilities of the Trust.
The Declaration of Trust further provides that no trustee, officer,
employee or agent of the Trust is liable to the Trust or to a shareholder, nor
is any trustee, officer, employee or agent liable to any third persons in
connection with the affairs of the Trust, except as such liability may arise
from his or its own bad faith, wilful misfeasance, gross negligence, or reckless
disregard of his or its duties. It also provides that all third persons shall
look solely to the Trust property for satisfaction of claims arising in
connection with the affairs of the Trust. With the exceptions stated, the
Declaration of Trust permits the Trustees to provide for the indemnification of
trustees, officers, employees or agents of the Trust against all liability in
connection with the affairs of the Trust.
Other distinctions between a corporation and a Massachusetts business trust
include the absence of a requirement that business trusts issue share
certificates.
The Trust shall continue without limitation of time subject to the
provisions in the Declaration of Trust concerning termination by action of the
shareholders or by the Trustees by written notice to the shareholders.
Pursuant to the Declaration of Trust, the Trustees initially authorized the
issuance of an unlimited number of full and fractional shares of a single class.
In connection with the establishment of the Short-Intermediate Term Series
(formerly the Intermediate Term Series) on July 1, 1982, the Trustees designated
the outstanding shares and shares that may thereafter be issued under previous
authority as the shares of the Money Market Series. On November 1, 1991, the
Trustees established the U.S. Treasury Money Market Series by designating it out
of the unissued shares of beneficial interest of the Trust. In so designating,
the Trustees did not change any of the existing shareholders' preferences,
privileges, limitations or voting rights. Each share of the Money Market Series,
the U.S. Treasury Money Market Series and the Short-Intermediate Term Series
represents an equal proportionate interest in the assets of the Trust
attributable to the respective series with each other share of the respective
series. The Declaration of Trust permits the Trustees to divide or combine the
shares of any series into a greater or lesser number of shares without thereby
changing the proportionate beneficial interests of the shares of any series in
the assets of the Trust attributable to such series. If the assets attributable
to one series of shares are insufficient to satisfy its liabilities, the assets
of other series could be subjected to such liabilities. Upon liquidation of the
Trust, shareholders are entitled to share pro rata in the net assets of the
Trust attributable to the series of which shares are held and available for
distribution to shareholders. Shares have no preemptive, appraisal or conversion
rights and, except as may be otherwise indicated hereby, no preference rights.
Shares are fully paid and nonassessable by the Trust.
Pursuant to the Declaration of Trust, the Trustees may authorize the
creation of additional series of shares and classes within such series (the
proceeds of which would be invested in separate, independently managed
portfolios with distinct investment objectives and policies and share purchase,
redemption and net asset valuation procedures) and additional classes of shares
within any series (which would be used to distinguish among the rights of
different categories of shareholders, as might be required by future regulations
or other unforeseen circumstances) with such preferences, privileges,
limitations and voting and dividend rights as the Trustees may determine. All
consideration received by the Trust for shares of any additional series or
class, and all assets in which such consideration is invested, would belong to
that series or class (subject only to the rights of creditors of the Trust) and
would be subject to the liabilities related thereto. Pursuant to the Investment
Company Act of 1940, as amended (the Investment Company Act), shareholders of
any additional series or class of shares would normally have to approve any
changes in the management contract relating to such series or class and of any
changes in the investment policies related thereto.
The Trustees themselves have the power to alter the number and the terms of
office of the Trustees, and they may at any time lengthen their own terms or
make their terms of unlimited duration (subject to certain removal procedures)
and appoint their own successors, provided that always at least a majority of
the Trustees have been elected by the shareholders of the Trust. The voting
rights
B-2
<PAGE>
of shareholders are not cumulative, so that holders of more than 50 percent of
the shares voting can, if they choose, elect all trustees being selected, while
the holders of the remaining shares would be unable to elect any trustees.
On April 22, 1983, the Trustees at a meeting of the Board of Trustees
approved an amendment to the Declaration of Trust to effect a name change from
Chancellor Government Securities Trust to Prudential-Bache Government Securities
Trust. On February 28, 1991, the Trustees approved an amendment to the Fund's
Declaration of Trust to change the Trust's name from Prudential-Bache Government
Securities Trust to Prudential Government Securities Trust. On May 2, 1995, the
Trustees approved a change in the name of the Intermediate Term Series to the
Short-Intermediate Term Series.
INVESTMENT OBJECTIVES AND POLICIES
The Money Market Series, the U.S. Treasury Money Market Series and the
Short-Intermediate Term Series operate as separate funds with their own
investment objectives and policies. The investment objectives of the Money
Market Series and the U.S. Treasury Money Market Series are to obtain high
current income, preserve capital and maintain liquidity. The investment
objective of the Short-Intermediate Term Series is to achieve a high level of
income consistent with providing reasonable safety. For a further description of
the investment objectives and policies for each series see ``How the Trust
Invests--Investment Objective and Policies'' in their respective Prospectuses.
There can be no assurance that any series' investment objective will be
achieved.
The investment adviser maintains a credit unit which provides credit
analysis and research on taxable fixed-income securities. The portfolio manager
routinely consults with the credit unit in managing the Fund's portfolio. The
credit unit reviews on an ongoing basis issuers of tax-exempt and taxable
fixed-income obligations, including prospective purchases and portfolio holdings
of the Fund. Credit analysts have broad access to research and financial
reports, data retrieval services and industry analysts. They review financial
statements supplied by corporate (and governmental) issuers to evaluate sales,
earnings, projected growth and seek to achieve an allocation among different
sectors, coupons and maturities to achieve each Series' investment goals. The
portfolio manager also seeks bonds with a high level of call protection.
In order to achieve their objectives, the Money Market Series, the U.S.
Treasury Money Market Series and the Short-Intermediate Term Series
(collectively referred to as the Series), each acting independently of the
other, may, when appropriate, invest in the types of instruments and use certain
strategies described below:
Repurchase Agreements. The Trust's repurchase agreements will be
collateralized by U.S. Government obligations. The Trust will enter into
repurchase transactions only with parties meeting creditworthiness standards
approved by the Trustees. The Trust's investment adviser will monitor the
creditworthiness of such parties, under the general supervision of the Trustees.
In the event of a default or bankruptcy by a seller, the Trust 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 Trust will suffer a loss.
The Trust participates in a joint repurchase account with other investment
companies managed by Prudential Mutual Fund Management, Inc. (PMF or the
Manager) pursuant to an order of the Securities and Exchange Commission (SEC).
On a daily basis, any uninvested cash balances of the Trust 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.
Illiquid Securities. The Trust may not invest more than 10% of the net
assets of any Series (15% in the case of the Short-Intermediate Term Series) 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 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 and corporate bonds and notes. Institutional investors
depend on an efficient institutional market in which the unregistered security
can be readily
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resold 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. (NASD).
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act, commercial paper and municipal lease obligations for which there
is a readily available market will not be deemed to be illiquid. The investment
adviser will monitor the liquidity of such restricted securities subject to the
supervision of the Trustees. 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 (e.g., the time needed to dispose of
the security, the method of soliciting offers and the mechanics of the
transfer). With respect to municipal lease obligations, the investment adviser
will also consider: (1) the willingness of the municipality to continue,
annually or biannually, to appropriate funds for payment of the lease; (2) the
general credit quality of the municipality and the essentiality to the
municipality of the property covered by the lease; (3) in the case of unrated
municipal lease obligations, an analysis of factors similar to that performed by
nationally recognized statistical rating organizations in evaluating the credit
quality of a municipal lease obligation, including (i) whether the lease can be
cancelled; (ii) if applicable, what assurance there is that the assets
represented by the lease can be sold; (iii) the strength of the lessee's general
credit (e.g., its debt, administrative, economic and financial characteristics);
(iv) the likelihood that the municipality will discontinue appropriating funding
for the leased property because the property is no longer deemed essential to
the operations of the municipality (e.g., the potential for an event of
nonappropriation); (v) the legal recourse in the event of failure to
appropriate; and (4) any other factors unique to municipal lease obligations as
determined by the investment adviser. With respect to commercial paper that is
issued in reliance on Section 4(2) of the Securities Act, (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.
Money Market Series
The Money Market Series seeks to achieve its objectives by investing in
United States Government securities that mature within thirteen months from date
of purchase, including a variety of securities which are issued or guaranteed by
the United States Treasury, by various agencies of the United States Government
or by various instrumentalities which have been established or sponsored by the
United States Government. These obligations, including those which are
guaranteed by Federal agencies or instrumentalities, may or may not be backed by
the ``full faith and credit'' of the United States. In the case of securities
not backed by the full faith and credit of the United States, the Trust must
look principally to the agency issuing or guaranteeing the obligation for
ultimate repayment and may not be able to assert a claim against the United
States itself in the event the agency or instrumentality does not meet its
commitments. Securities in which the Money Market Series may invest which are
not backed by the full faith and credit of the United States include, but are
not limited to, obligations of the Tennessee Valley Authority, the Federal
National Mortgage Association (FNMA) and the United States Postal Service, each
of which has the right to borrow from the United States Treasury to meet its
obligations, and obligations of the Federal Farm Credit System and the Federal
Home Loan Banks, whose obligations may only be satisfied by the individual
credits of each issuing agency. Treasury securities include Treasury bills,
Treasury notes and Treasury bonds, all of which are backed by the full faith and
credit of the United States, as are obligations of the Government National
Mortgage Association, the Farmers Home Administration and the Export-Import
Bank. The Money Market Series will invest at least 80% of its assets in such
types of government securities.
The Series may also invest in component parts of U.S. Treasury notes or
bonds, namely, either the corpus (principal) of such Treasury obligations or one
of the interest payments scheduled to be paid on such obligations. These
obligations may take the form of (i) Treasury obligations from which the
interest coupons have been stripped, (ii) the interest coupons that are
stripped, (iii) book-entries at a Federal Reserve member bank representing
ownership of Treasury obligation components, or (iv) receipts evidencing the
component parts (corpus or coupons) of Treasury obligations that have not
actually been stripped. Such receipts evidence ownership of component parts of
Treasury obligations (corpus or coupons) purchased by a third party (typically
an investment banking firm) and held on behalf of the third party in physical or
book-entry form by a major commercial bank or trust company pursuant to a
custody agreement with the third party. Treasury obligations, including those
underlying such receipts, are backed by the full faith and credit of the U.S.
Government.
The Money Market Series may also invest in fully insured certificates of
deposit. The Federal Deposit Insurance Corporation and the Federal Savings and
Loan Insurance Corporation, which are agencies of the United States Government,
insure the deposits of insured
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banks and savings and loan associations, respectively, up to $100,000 per
depositor. Current federal regulations also permit such institutions to issue
insured negotiable certificates of deposit (CDs) in amounts of $100,000 or more
without regard to the interest rate ceilings on other deposits. To remain fully
insured as to principal, such CDs must currently be limited to $100,000 per bank
or savings and loan association. Interest on such CDs is not insured. The Money
Market Series may invest in such CDs, limited to the insured amount of principal
($100,000) in each case and to 10% or less of the gross assets of the Money
Market Series in all such CDs in the aggregate. Such CDs may or may not have a
readily available market, and the investment of the Money Market Series in CDs
which do not have a readily available market is further limited by the
restriction on investment by the Money Market Series of not more than 10% of
assets in securities for which there is no readily available market. See
``Investment Restrictions.''
The Money Market Series will attempt to balance its objectives of high
income, capital preservation and liquidity by investing in securities of varying
maturities and risks. As a result, the Money Market Series may not necessarily
invest in securities with the highest available yield. The Money Market Series
will not, however, invest in securities with remaining maturities of more than
thirteen months or maintain a dollar-weighted average maturity which exceeds 90
days. The amounts invested in obligations of various maturities of thirteen
months or less will depend on management's evaluation of the risks involved.
Longer-term issues, while frequently paying higher interest rates, are subject
to greater fluctuations in value resulting from general changes in interest
rates than are shorter-term issues. Thus, when rates on new securities increase,
the value of outstanding longer-term securities may decline and vice versa. Such
changes may also occur, but to a lesser degree, with short-term issues. These
changes, if realized, may cause fluctuations in the amount of daily dividends
and, in extreme cases, could cause the net asset value per share to decline. See
``Net Asset Value.'' In the event of unusually large redemption demands,
securities may have to be sold at a loss prior to maturity or the Money Market
Series may have to borrow money and incur interest expense. Either occurrence
would adversely affect the amount of daily dividends and could result in a
decline in daily net asset value per share or the reduction by the Money Market
Series of the number of shares held in a shareholder's account. The Money Market
Series will attempt to minimize these risks by investing in longer-term
securities, subject to the foregoing limitations, when it appears to management
that yields on such securities are not likely to increase substantially during
the period of expected holding, and then only in securities which are readily
marketable. However, there can be no assurance that the Money Market Series will
be successful in achieving this objective.
Liquidity Puts. The Money Market Series may also purchase instruments of
the types described in this section together with the right to resell the
instruments at an agreed-upon price or yield within a specified period prior to
the maturity date of the instruments. Such a right to resell is commonly known
as a ``put,'' and the aggregate price which the Money Market Series pays for
instruments with puts may be higher than the price which otherwise would be paid
for the instruments. Consistent with the Money Market Series' investment
objective and applicable rules issued by the SEC and subject to the supervision
of the Trustees, the purpose of this practice is to permit the Money Market
Series to be fully invested while preserving the necessary liquidity to meet
unusually large redemptions and to purchase at a later date securities other
than those subject to the put. The Money Market Series may choose to exercise
puts during periods in which proceeds from sales of its shares and from recent
sales of portfolio securities are insufficient to meet redemption requests or
when the funds available are otherwise allocated for investment. In determining
whether to exercise puts prior to their expiration date and in selecting which
puts to exercise in such circumstances, the Money Market Series' investment
adviser considers, among other things, the amount of cash available to the Money
Market Series, the expiration dates of the available puts, any future
commitments for securities purchases, the yield, quality and maturity dates of
the underlying securities, alternative investment opportunities and the
desirability of retaining the underlying securities in the Money Market Series'
portfolio.
Since the value of the put is dependent on the ability of the put writer to
meet its obligation to repurchase, the Money Market Series' policy is to enter
into put transactions only with such brokers, dealers or financial institutions
which present minimal credit risks. There is a credit risk associated with the
purchase of puts in that the broker, dealer or financial institution might
default on its obligation to repurchase an underlying security. In the event
such a default should occur, the Money Market Series is unable to predict
whether all or any portion of any loss sustained could subsequently be recovered
from the broker, dealer or financial institution.
The Money Market Series values instruments which are subject to puts at
amortized cost; no value is assigned to the put. The cost of the put, if any, is
carried as an unrealized loss from the time of purchase until it is exercised or
expires.
U.S. Treasury Money Market Series
The U.S. Treasury Money Market Series seeks to achieve its objective by
investing in U.S. Treasury securities, including bills,notes and bonds. These
instruments are direct obligations of the U.S. Government and, as such, are
backed by the ``full faith and credit'' of the United States. They differ
primarily in their interest rates and the lengths of their maturities.
The U.S. Treasury Money Market Series may also invest in component parts of
U.S. Treasury notes or bonds, namely, either the corpus (principal) of such
Treasury obligations or one of the interest payments scheduled to be paid on
such obligations. These obligations may take the form of (i) Treasury
obligations from which the interest coupons have been stripped, (ii) the
interest coupons that are stripped, or (iii) book-entries at a Federal Reserve
member bank representing ownership of Treasury obligation components.
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The U.S. Treasury Money Market Series does not engage in repurchase
agreements or lend its portfolio securities because the income from such
activities is generally not exempt from state and local income taxes, but 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 Series with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous price and yield to the
Series at the time of entering into the transaction. The Trust's Custodian will
maintain, in a segregated account of the Series, cash or U.S. Treasury
obligations having a value equal to or greater than the Series' purchase
commitments. The Custodian will likewise segregate securities sold on a delayed
delivery basis.
Short-Intermediate Term Series
The Series' investment objective is to achieve a high level of income
consistent with providing reasonable safety. In seeking to achieve its
objective, the Series will under normal circumstances invest at least 65% of its
total assets in U.S. Government securities, including U.S. Treasury Bills,
Notes, Bonds and other debt securities issued by the U.S. Treasury, and
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. The Series may also invest up to 35% of its assets in
fixed-rate and adjustable rate mortgage-backed securities, asset-backed
securities, corporate debt securities (among other privately issued
instruments), rated A or better by Standard & Poor's Ratings Group or Moody's
Investors Service, Inc. or, if unrated, determined to be of comparable quality
by the Series' investment adviser, and money market instruments of a comparable
short-term rating. The Series may also engage in various strategies using
derivatives, including the use of put and call options on securities and
financial indices, transactions involving futures contracts and related options,
short selling and use of leverage, including reverse repurchase agreements and
dollar rolls, which entail additional risks to the Series. See ``How the Trust
Invests--Investment Objective and Policies'' in the Prospectus.
The Short-Intermediate Term Series intends to vary the proportion of its
holdings of longer-and shorter-term debt securities in order to reflect its
assessment of prospective changes in interest rates even if such action may
adversely affect current income. For example, if, in the opinion of the
Short-Intermediate Term Series' investment adviser, interest rates generally are
expected to decline, the Short-Intermediate Term Series may sell its
shorter-term securities and purchase longer-term securities in order to benefit
from greater expected relative price appreciation; the securities sold may have
a higher current yield than those being purchased. The success of this strategy
will depend on the investment adviser's ability to forecast changes in interest
rates. Moreover, the Short-Intermediate Term Series intends to manage its
portfolio actively by taking advantage of trading opportunities such as sales of
portfolio securities and purchases of higher yielding securities of similar
quality due to distortions in normal yield differentials. In addition, if, in
the opinion of the investment adviser market conditions warrant, the
Short-Intermediate Term Series may purchase U. S. Government securities at a
discount or trade securities in response to fluctuations in interest rates to
provide for the prospect of modest capital appreciation at maturity.
U.S. Government Securities
Mortgage-Related Securities Issued or Guaranteed by U.S. Government
Agencies and Instrumentalities. The Short-Intermediate Term Series may purchase
mortgage-related securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, including GNMA, FNMA and FHLMC certificates. See
``Mortgage-Backed Securities'' below. Mortgages backing the securities which may
be purchased by the Short-Intermediate Term Series include conventional
thirty-year fixed rate mortgages, graduated payment mortgages, fifteen-year
mortgages, adjustable rate mortgages and balloon payment mortgages. A balloon
payment mortgage-backed security is an amortized mortgage security with
installments of principal and interest, the last installment of which is
predominately principal. All of these mortgages can be used to create
pass-through securities. A pass-through security is formed when mortgages are
pooled together and undivided interests in the pool or pools are sold. The cash
flow from the mortgages is passed through to the holders of the securities in
the form of periodic payments of interest, principal and prepayments (net of a
service fee). Prepayments occur when the holder of an undivided mortgage prepays
the remaining principal before the mortgage's scheduled maturity date. As a
result of the pass-through of prepayments of principal on the underlying
securities, mortgage-backed securities are often subject to more rapid
prepayment of principal than their stated maturity would indicate. The remaining
expected average life of a pool of mortgage loans underlying a mortgage-backed
security is a prediction of when the mortgage loans will be repaid and is based
upon a variety of factors, such as the demographic and geographic
characteristics of the borrowers and the mortgaged properties, the length of
time that each of the mortgage loans has been outstanding, the interest rates
payable on the mortgage loans and the current interest rate environment.
During periods of declining interest rates, prepayment of mortgages
underlying mortgage-backed securities can be expected to accelerate. When
mortgage obligations are prepaid, the Short-Intermediate Term Series reinvests
the prepaid amounts in securities, the yields of which reflect interest rates
prevailing at that time. Therefore, the Short-Intermediate Term Series' ability
to maintain a portfolio of high-yielding mortgage-backed securities will be
adversely affected to the extent that prepayments of mortgages are reinvested in
securities which have lower yields than the prepaid mortgages. Moreover,
prepayments of mortgages which underlie securities purchased at a premium
generally will result in capital losses.
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Special Considerations. Fixed income U.S. Government securities are
considered among the most creditworthy of fixed income investments. The yields
available from U.S. Government securities are generally lower than the yields
available from corporate debt securities. The values of U.S. Government
securities will change as interest rates fluctuate. To the extent U.S.
Government securities are not adjustable rate securities, these changes in value
in response to changes in interest rates generally will be more pronounced.
During periods of falling interest rates, the values of outstanding long-term
fixed rate U.S. Government securities generally rise. Conversely, during periods
of rising interest rates, the values of such securities generally decline. The
magnitude of these fluctuations will generally be greater for securities with
longer maturities. Although changes in the value of U.S. Government securities
will not affect investment income from those securities, they may affect the net
asset value of the Short-Intermediate Term Series.
At a time when the Short-Intermediate Term Series has written call options
on a portion of its U.S. Government securities, its ability to profit from
declining interest rates will be limited. Any appreciation in the value of the
securities held in the portfolio above the strike price would likely be
partially or wholly offset by unrealized losses on call options written by the
Short-Intermediate Term Series. The termination of option positions under these
conditions would generally result in the realization of capital losses, which
would reduce the Short-Intermediate Term Series' capital gains distribution.
Accordingly, the Short-Intermediate Term Series would generally seek to realize
capital gains to offset realized losses by selling portfolio securities. In such
circumstances, however, it is likely that the proceeds of such sales would be
reinvested in lower yielding securities. See ``Additional Risks--Options
Transactions and Related Risks.''
Mortgage-Backed Securities
As discussed in the Prospectus, the mortgage-backed securities purchased by
the Short-Intermediate Term Series evidence an interest in a specific pool of
mortgages. Such securities may be issued by GNMA, FNMA and FHLMC.
GNMA Certificates. GNMA is a wholly-owned corporate instrumentality of the
United States within the Department of Housing and Urban Development. The
National Housing Act of 1934, as amended (the Housing Act), authorizes GNMA to
guarantee the timely payment of the principal of and interest on certificates
that are based on and backed by a pool of mortgage loans issued by the Federal
Housing Administration under the Housing Act, or Title V of the Housing Act of
1949 (FHA Loans), or guaranteed by the Veterans' Administration under the
Servicemen's Readjustment Act of 1944, as amended (VA Loans), or by pools of
other eligible mortgage loans. The Housing Act provides that the full faith and
credit of the U.S. Government is pledged to the payment of all amounts that may
be required to be paid under the guarantee. In order to meet its obligations
under such guarantee, GNMA is authorized to borrow from the U.S. Treasury with
no limitations as to amount.
The GNMA Certificates will represent a pro rata interest in one or more
pools of the following types of mortgage loans: (i) fixed rate level payment
mortgage loans; (ii) fixed rate graduated payment mortgage loans; (iii) fixed
rate growing equity mortgage loans; (iv) fixed rate mortgage loans secured by
manufactured (mobile) homes; (v) mortgage loans on multifamily residential
properties under construction; (vi) mortgage loans on completed multifamily
projects; (vii) fixed rate mortgage loans as to which escrowed funds are used to
reduce the borrower's monthly payments during the early years of the mortgage
loans (``buydown'' mortgage loans); (viii) mortgage loans that provide for
adjustments in payments based on periodic changes in interest rates or in other
payment terms of the mortgage loans; and (ix) mortgage-backed serial notes. All
of these mortgage loans will be FHA Loans or VA Loans and, except as otherwise
specified above, will be fully-amortizing loans secured by first liens on one-to
four-family housing units.
FNMA Certificates. FNMA is a federally chartered and privately owned
corporation organized and existing under the Federal National Mortgage
Association Charter Act. FNMA provides funds to the mortgage market primarily by
purchasing home mortgage loans from local lenders, thereby replenishing their
funds for additional lending. FNMA acquires funds to purchase home mortgage
loans from many capital market investors that may not ordinarily invest in
mortgage loans directly.
Each FNMA Certificate will entitle the registered holder thereof to receive
amounts, representing such holder's pro rata interest in scheduled principal
payments and interest payments (at such FNMA Certificate's pass-through rate,
which is net of any servicing and guarantee fees on the underlying mortgage
loans), and any principal prepayments on the mortgage loans in the pool
represented by such FNMA Certificate and such holder's proportionate interest in
the full principal amount of any foreclosed or otherwise finally liquidated
mortgage loan. The full and timely payment of principal and interest on each
FNMA Certificate will be guaranteed by FNMA, which guarantee is not backed by
the full faith and credit of the U.S. Government.
Each FNMA Certificate will represent a pro rata interest in one or more
pools of FHA Loans, VA Loans or conventional mortgage loans (i.e., mortgage
loans that are not insured or guaranteed by any governmental agency) of the
following types: (i) fixed rate level payment mortgage loans; (ii) fixed rate
growing equity mortgage loans; (iii) fixed rate graduated payment mortgage
loans; (iv) variable rate California mortgage loans; (v) other adjustable rate
mortgage loans; and (vi) fixed rate mortgage loans secured by multifamily
projects.
FHLMC Certificates. FHLMC is a corporate instrumentality of the United
States created pursuant to the Emergency Home Finance Act of 1970, as amended
(the FHLMC Act). The principal activity of FHLMC consists of the purchase of
first lien, conventional, residential
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mortgage loans and participation interests in such mortgage loans and the resale
of the mortgage loans so purchased in the form of mortgage securities, primarily
FHLMC Certificates.
FHLMC guarantees to each registered holder of the FHLMC Certificate the
timely payment of interest at the rate provided for by such FHLMC Certificate,
whether or not received. FHLMC also guarantees to each registered holder of a
FHLMC Certificate ultimate collection of all principal on the related mortgage
loans, without any offset or deduction, but does not, generally, guarantee the
timely payment of scheduled principal. FHLMC may remit the amount due on account
of its guarantee of collection of principal at any time after default on an
underlying mortgage loan, but not later than 30 days following (i) foreclosure
sale, (ii) payment of a claim by any mortgage insurer or (iii) the expiration of
any right of redemption, whichever occurs later, but in any event no later than
one year after demand has been made upon the mortgagor for accelerated payment
of principal. The obligations of FHLMC under its guarantee are obligations
solely of FHLMC and are not backed by the full faith and credit of the U.S.
Government.
FHLMC Certificates represent a pro rata interest in a group of mortgage
loans (a FHLMC Certificate group) purchased by FHLMC. The mortgage loans
underlying the FHLMC Certificates will consist of fixed rate or adjustable rate
mortgage loans with original terms to maturity of between ten and thirty years,
substantially all of which are secured by first liens on one-to four-family
residential properties or multifamily projects. Each mortgage loan must meet the
applicable standards set forth in the FHLMC Act. An FHLMC Certificate group may
include whole loans, participation interests in whole loans and undivided
interests in whole loans and participations comprising another FHLMC Certificate
group.
The market value of mortgage securities, like other securities, will
generally vary inversely with changes in market interest rates, declining when
interest rates rise and rising when interest rates decline. However, mortgage
securities, while having comparable risk of decline during periods of rising
rates, usually have less potential for capital appreciation than other
investments of comparable maturities due to the likelihood of increased
prepayments of mortgages as interest rates decline. In addition, to the extent
such mortgage securities are purchased at a premium, mortgage foreclosures and
unscheduled principal prepayments generally will result in some loss of the
holders' principal to the extent of the premium paid. On the other hand, if such
mortgage securities are purchased at a discount, an unscheduled prepayment of
principal will increase current and total returns and will accelerate the
recognition of income which when distributed to shareholders will be taxable as
ordinary income.
Adjustable Rate Mortgage Securities. The Short-Intermediate Term Series may
invest in adjustable rate mortgage securities (ARMs), which are pass-through
mortgage securities collateralized by mortgages with adjustable rather than
fixed rates. Generally, ARMs have a specified maturity date and amortize
principal over their life. In periods of declining interest rates, there is a
reasonable likelihood that ARMs will experience increased rates of prepayment of
principal. However, the major difference between ARMs and fixed rate mortgage
securities is that the interest rate and the rate of amortization of principal
of ARMs can and do change in accordance with movements in a particular,
pre-specified, published interest rate index.
The amount of interest on an ARM is calculated by adding a specified
amount, the ``margin,'' to the index, subject to limitations on the maximum and
minimum interest that can be charged to the mortgagor during the life of the
mortgage or to maximum and minimum changes to that interest rate during a given
period. Because the interest rate on ARMs generally moves in the same direction
as market interest rates, the market value of ARMs tends to be more stable than
that of long-term fixed rate securities.
There are two main categories of indices which serve as benchmarks for
periodic adjustments to coupon rates on ARMs; those based on U.S. Treasury
securities and those derived from a calculated measure such as a cost of funds
index or a moving average of mortgage rates. Commonly utilized indices include
the one-year and five-year constant maturity Treasury Note rates, the
three-month Treasury Bill rate, the 180-day Treasury Bill rate, rates on
longer-term Treasury securities, the 11th District Federal Home Loan Bank Cost
of Funds, the National Median Cost of Funds, the one-month or three-month London
Interbank Offered Rate (LIBOR), the prime rate of a specific bank, or commercial
paper rates. Some indices, such as the one-year constant maturity Treasury Note
rate, closely mirror changes in market interest rate levels. Others, such as the
11th District Home Loan Bank Cost of Funds index (often related to ARMs issued
by FNMA), tend to lag changes in market rate levels and tend to be somewhat less
volatile.
Collateralized Mortgage Obligations. Certain issuers of mortgage-backed
obligations (CMOs), including certain CMOs that have elected to be treated as
Real Estate Mortgage Investment Conduits (REMICs), are not considered investment
companies pursuant to a rule recently adopted by the Securities and Exchange
Commission (SEC), and the Short-Intermediate Term Series may invest in the
securities of such issuers without the limitations imposed by the Investment
Company Act of 1940, as amended (the Investment Company Act) on investments by
the Short-Intermediate Term Series in other investment companies. In addition,
in reliance on an earlier SEC interpretation, the Short-Intermediate Term
Series' investments in certain other qualifying CMOs, which cannot or do not
rely on the rule, are also not subject to the limitation of the Investment
Company Act on acquiring interests in other investment companies. In order to be
able to rely on the SEC's interpretation, these CMOs must be unmanaged, fixed
asset issuers, that (a) invest primarily in mortgage-backed securities, (b) do
not issue redeemable securities, (c) operate under general exemptive orders
exempting them from all provisions of the Investment Company Act and (d) are not
registered or regulated under the Investment Company Act as investment
companies.
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Other Investments. Obligations issued or guaranteed as to principal and
interest by the United States Government may be acquired by the
Short-Intermediate Term Series in the form of custodial receipts that evidence
ownership of future interest payments, principal payments or both on certain
United States Treasury notes or bonds. Such notes and bonds are held in custody
by a bank on behalf of the owners. These custodial receipts are known by various
names, including ``Treasury Receipts,'' ``Treasury Investment Growth Receipts''
(TIGRs) and ``Certificates of Accrual on Treasury Securities'' (CATS). The
Short-Intermediate Term Series will not invest more than 5% of its assets in
such custodial receipts.
Options Transactions and Related Risks
The Short-Intermediate Term Series may purchase put and call options and
sell covered put and call options which are traded on national securities
exchanges and may also engage in over-the-counter options transactions with
recognized United States securities dealers (OTC Options).
Options on Securities. The purchaser of a call option has the right, for a
specified period of time, to purchase the securities subject to the option at a
specified price (the ``exercise price'' or ``strike price''). By writing a call
option, the Short-Intermediate Term Series becomes obligated during the term of
the option, upon exercise of the option, to deliver the underlying securities or
a specified amount of cash to the purchaser against receipt of the exercise
price. When the Short-Intermediate Term Series writes a call option, the
Short-Intermediate Term Series loses the potential for gain on the underlying
securities in excess of the exercise price of the option during the period that
the option is open.
The purchaser of a put option has the right, for a specified period of
time, to sell the securities subject to the option to the writer of the put at
the specified exercise price. By writing a put option, the Short-Intermediate
Term Series becomes obligated during the term of the option, upon exercise of
the option, to purchase the securities underlying the option at the exercise
price. The Short-Intermediate Term Series might, therefore, be obligated to
purchase the underlying securities for more than their current market price.
The writer of an option retains the amount of any premium paid for the
writing of the option. The Series' maximum gain with respect to an option
written is the premium. In the case of a covered call option that is not
exercised, the amount of any premium may be offset or exceeded by a decline in
the value of the securities underlying the call option that the Series must
retain in order to maintain the ``cover'' on such option and, with respect to
put options written, the amount of any premium may be offset or exceeded by the
difference between the then current market price of the underlying security and
the strike price of the put option (the price at which the Series must purchase
the underlying security).
The Short-Intermediate Term Series may wish to protect certain portfolio
securities against a decline in market value at a time when put options on those
particular securities are not available for purchase. The Short-Intermediate
Term Series may therefore purchase a put option on other carefully selected
securities, the values of which the investment adviser expects will have a high
degree of positive correlation to the values of such portfolio securities. If
the investment adviser's judgment is correct, changes in the value of the put
options should generally offset changes in the value of the portfolio securities
being hedged. If the investment adviser's judgment is not correct, the value of
the securities underlying the put option may decrease less than the value of the
Short-Intermediate Term Series' investments and therefore the put option may not
provide complete protection against a decline in the value of the
Short-Intermediate Term Series' investments below the level sought to be
protected by the put option.
The Short-Intermediate Term Series may similarly wish to hedge against
appreciation in the value of debt securities that it intends to acquire at a
time when call options on such securities are not available. The
Short-Intermediate Term Series may, therefore, purchase call options on other
carefully selected debt securities the values of which the investment adviser
expects will have a high degree of positive correlation to the values of the
debt securities that the Short-Intermediate Term Series intends to acquire. In
such circumstances the Short-Intermediate Term Series will be subject to risks
analogous to those summarized above in the event that the correlation between
the value of call options so purchased and the value of the securities intended
to be acquired by the Short-Intermediate Term Series is not as close as
anticipated and the value of the securities underlying the call options
increases less than the value of the securities to be acquired by the
Short-Intermediate Term Series.
The Short-Intermediate Term Series may write options on securities in
connection with buy-and-write transactions; that is, the Short-Intermediate Term
Series may purchase a security and concurrently write a call option against that
security.
The exercise price of a call option may be below (``in-the-money''), equal
to (``at-the-money'') or above (``out-of-the-money'') the current value of the
underlying security at the time the option is written. Buy-and-write
transactions using in-the-money call options may be used when it is expected
that the price of the underlying security will remain flat or decline moderately
during the option period. Buy-and-write transactions using at-the-money call
options may be used when it is expected that the price of the underlying
security will remain fixed or advance moderately during the option period. A
buy-and-write transaction using an out-of-the-money call option may be used when
it is expected that the premium received from writing the call option plus the
appreciation in the market price of the underlying security up to the exercise
price will be greater than the appreciation in the price of the underlying
security alone. If the call option is
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exercised in such a transaction, the Short-Intermediate Term Series' maximum
gain will be the premium received by it for writing the option, adjusted upwards
or downwards by the difference between the Short-Intermediate Term Series'
purchase price of the security and the exercise price of the option. If the
option is not exercised and the price of the underlying security declines, the
amount of the decline will be offset in part, or entirely, by the premium
received.
Prior to being notified of exercise of the option, the writer of an
exchange-traded option that wishes to terminate its obligation may effect a
``closing purchase transaction'' by buying an option of the same series as the
option previously written. (Options of the same series are options with respect
to the same underlying security, having the same expiration date and the same
strike price.) The effect of the purchase is that the writer's position will be
cancelled by the exchange's affiliated clearing organization. Likewise, an
investor who is the holder of an exchange-traded option may liquidate a position
by effecting a ``closing sale transaction'' by selling an option of the same
series as the option previously purchased. There is no guarantee that either a
closing purchase or a closing sale transaction can be effected.
Exchange-traded options are issued by a clearing organization affiliated
with the exchange on which the option is listed which, in effect, gives its
guarantee to every exchange-traded option transaction. In contrast, OTC options
are contracts between the Short-Intermediate Term Series and its contra-party
with no clearing organization guarantee. Thus, when the Short-Intermediate Term
Series purchases an OTC option, it relies on the dealer from which it has
purchased the OTC option to make or take delivery of the securities underlying
the option. Failure by the dealer to do so would result in the loss of the
premium paid by the Short-Intermediate Term Series as well as the loss of the
expected benefit of the transaction. The Board of Trustees of the Trust will
approve a list of dealers with which the Short-Intermediate Term Series may
engage in OTC options.
When the Short-Intermediate Term Series writes an OTC option, it generally
will be able to close out the OTC options prior to its expiration only by
entering into a closing purchase transaction with the dealer to which the
Short-Intermediate Term Series originally wrote the OTC option. While the
Short-Intermediate Term Series will enter into OTC options only with dealers
which agree to, and which are expected to be capable of, entering into closing
transactions with the Short-Intermediate Term Series, there can be no assurance
that the Short-Intermediate Term Series will be able to liquidate an OTC option
at a favorable price at any time prior to expiration. Until the
Short-Intermediate Term Series is able to effect a closing purchase transaction
in a covered OTC call option the Short-Intermediate Term Series has written, it
will not be able to liquidate securities used as cover until the option expires
or is exercised or different cover is substituted. In the event of insolvency of
the contra-party, the Short-Intermediate Term Series may be unable to liquidate
an OTC option.
OTC options purchased by the Short-Intermediate Term Series will be treated
as illiquid securities subject to any applicable limitation on such securities.
Similarly, the assets used to ``cover'' OTC options written by the
Short-Intermediate Term Series will be treated as illiquid unless the OTC
options are sold to qualified dealers who agree that the Short-Intermediate Term
Series may repurchase any OTC options it writes for a maximum price to be
calculated by a formula set forth in the option agreement. The ``cover'' for an
OTC option written subject to this procedure would be considered illiquid only
to the extent that the maximum repurchase price under the formula exceeds the
intrinsic value of the option.
The Short-Intermediate Term Series may write only ``covered'' options. This
means that so long as the Short-Intermediate Term Series is obligated as the
writer of a call option, it will own the underlying securities subject to the
option or an option to purchase the same underlying securities, having an
exercise price equal to or less than the exercise price of the ``covered''
option, or will establish and maintain with the Trust's Custodian for the term
of the option a segregated account consisting of cash, U.S. Government
securities or other liquid high-grade debt obligations having a value equal to
or greater than the exercise price of the option. In the case of a straddle
written by the Short-Intermediate Term Series, the amount maintained in the
segregated account will equal the amount, if any, by which the put is
``in-the-money.''
Options on Securities Indices. The Short-Intermediate Term Series also may
purchase and write put and call options on securities indices in an attempt to
hedge against market conditions affecting the value of securities that the
Short-Intermediate Term Series owns or intends to purchase, and not for
speculation. Through the writing or purchase of index options, the
Short-Intermediate Term Series can achieve many of the same objectives as
through the use of options on individual securities. Options on securities
indices are similar to options on a security except that, rather than the right
to take or make delivery of a security at a specified price, an option on a
securities index gives the holder the right to receive, upon exercise of the
option, an amount of cash if the closing level of the securities index upon
which the option is based is greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the option. This amount of cash is
equal to such difference between the closing price of the index and the exercise
price of the option. The writer of the option is obligated, in return for the
premium received, to make delivery of this amount. Unlike security options, all
settlements are in cash and gain or loss depends upon price movements in the
market generally (or in a particular industry or segment of the market), rather
than upon price movements in individual securities. Price movements in
securities that the Short-Intermediate Term Series owns or intends to purchase
will probably not correlate perfectly with movements in the level of an index
and, therefore, the Short-Intermediate Term Series bears the risk that a loss on
an index option would not be completely offset by movements in the price of such
securities.
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When the Short-Intermediate Term Series writes an option on a securities
index, it will be required to deposit with the Trust's Custodian, and
mark-to-market, eligible securities equal in value to 100% of the exercise price
in the case of a put, or the contract value in the case of a call. In addition,
where the Short-Intermediate Term Series writes a call option on a securities
index at a time when the contract value exceeds the exercise price, the
Short-Intermediate Term Series will segregate and mark-to-market, until the
option expires or is closed out, cash or cash equivalents equal in value to such
excess.
Options on a securities index involve risks similar to those risks relating
to transactions in financial futures contracts described below. Also, an option
purchased by the Short-Intermediate Term Series may expire worthless, in which
case the Short-Intermediate Term Series would lose the premium paid therefor.
Options On GNMA Certificates. Options on GNMA Certificates are not
currently traded on any Exchange. However, the Short-Intermediate Term Series
may purchase and write such options should they commence trading on any Exchange
and may purchase or write OTC Options on GNMA Certificates.
Since the remaining principal balance of GNMA Certificates declines each
month as a result of mortgage payments, the Short-Intermediate Term Series as a
writer of a covered GNMA call holding GNMA Certificates as ``cover'' to satisfy
its delivery obligation in the event of assignment of an exercise notice, may
find that its GNMA Certificates no longer have a sufficient remaining principal
balance for this purpose. Should this occur, the Short-Intermediate Term Series
will enter into a closing purchase transaction or will purchase additional GNMA
Certificates from the same pool (if obtainable) or replacement GNMA Certificates
in the cash market in order to remain covered.
A GNMA Certificate held by the Short-Intermediate Term Series to cover an
option position in any but the nearest expiration month may cease to represent
cover for the option in the event of a decline in the GNMA coupon rate at which
new pools are originated under the FHA/VA loan ceiling in effect at any given
time. Should this occur, the Short-Intermediate Term Series will no longer be
covered, and the Short-Intermediate Term Series will either enter into a closing
purchase transaction or replace the GNMA Certificate with a GNMA Certificate
which represents cover. When the Short-Intermediate Term Series closes its
position or replaces the GNMA Certificate, it may realize an unanticipated loss
and incur transaction costs.
Risks of Options Transactions. An exchange-traded option position may be
closed out only on an Exchange which provides a secondary market for an option
of the same series. Although the Short-Intermediate Term Series will generally
purchase or write only those options for which there appears to be an active
secondary market, there is no assurance that a liquid secondary market on an
Exchange will exist for any particular option at any particular time, and for
some exchange-traded options, no secondary market on an Exchange may exist. In
such event, it might not be possible to effect closing transactions in
particular options, with the result that the Short-Intermediate Term Series
would have to exercise its exchange-traded options in order to realize any
profit and may incur transaction costs in connection therewith. If the
Short-Intermediate Term Series as a covered call option writer is unable to
effect a closing purchase transaction in a secondary market, it will not be able
to sell the underlying security until the option expires or it delivers the
underlying security upon exercise.
Reasons for the absence of a liquid secondary market on an Exchange include
the following: (a) insufficient trading interest in certain options; (b)
restrictions on transactions imposed by an Exchange; (c) trading halts,
suspensions or other restrictions imposed with respect to particular classes or
series of options or underlying securities; (d) interruption of the normal
operations on an Exchange; (e) inadequacy of the facilities of an Exchange or
The Options Clearing Corporation (the OCC) to handle current trading volume; or
(f) a decision by one or more Exchanges to discontinue the trading of options
(or a particular class or series of options), in which event the secondary
market on that Exchange (or in that class or series of options) would cease to
exist, although outstanding options on that Exchange that had been issued by the
OCC as a result of trades on that Exchange would generally continue to be
exercisable in accordance with their terms.
In the event of the bankruptcy of a broker through which the
Short-Intermediate Term Series engages in options transactions, the
Short-Intermediate Term Series could experience delays and/or losses in
liquidating open positions purchased or sold through the broker and/or incur a
loss of all or part of its margin deposits with the broker. Similarly, in the
event of the bankruptcy of the writer of an OTC option purchased by the
Short-Intermediate Term Series, the Short-Intermediate Term Series could
experience a loss of all or part of the value of the option. Transactions are
entered into by the Short-Intermediate Term Series only with brokers or
financial institutions deemed creditworthy by the investment adviser.
The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the option markets
close before the markets for the underlying securities, significant price and
rate movements can take place in the underlying markets that cannot be reflected
in the option markets.
Futures Contracts. As a purchaser of a futures contract (futures contract),
the Short-Intermediate Term Series incurs an obligation to take delivery of a
specified amount of the obligation underlying the futures contract at a
specified time in the future for a specified price. As a seller of a futures
contract, the Short-Intermediate Term Series incurs an obligation to deliver the
specified amount of the
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underlying obligation at a specified time in return for an agreed upon price.
The Short-Intermediate Term Series may purchase futures contracts on debt
securities, aggregates of debt securities, financial indices and U.S. Government
securities including futures contracts or options linked to the London Interbank
Offered Rate (LIBOR).
The Short-Intermediate Term Series will purchase or sell futures contracts
for the purpose of hedging its portfolio (or anticipated portfolio) securities
against changes in prevailing interest rates. If the investment adviser
anticipates that interest rates may rise and, concomitantly, the price of the
Short-Intermediate Term Series' portfolio securities may fall, the
Short-Intermediate Term Series may sell a futures contract. If declining
interest rates are anticipated, the Short-Intermediate Term Series may purchase
a futures contract to protect against a potential increase in the price of
securities the Short-Intermediate Term Series intends to purchase. Subsequently,
appropriate securities may be purchased by the Short-Intermediate Term Series in
an orderly fashion; as securities are purchased, corresponding futures positions
would be terminated by offsetting sales of contracts. In addition, futures
contracts will be bought or sold in order to close out a short or long position
in a corresponding futures contract.
Although most futures contracts call for actual delivery or acceptance of
securities, the contracts usually are closed out before the settlement date
without the making or taking of delivery. A futures contract sale is closed out
by effecting a futures contract purchase for the same aggregate amount of the
specific type of security and the same delivery date. If the sale price exceeds
the offsetting purchase price, the seller would be paid the difference and would
realize a gain. If the offsetting purchase price exceeds the sale price, the
seller would pay the difference and would realize a loss. Similarly, a futures
contract purchase is closed out by effecting a futures contract sale for the
same aggregate amount of the specific type of security and the same delivery
date. If the offsetting sale price exceeds the purchase price, the purchaser
would realize a gain, whereas if the purchase price exceeds the offsetting sale
price, the purchaser would realize a loss. There is no assurance that the
Short-Intermediate Term Series will be able to enter into a closing transaction.
When the Short-Intermediate Term Series enters into a futures contract it
is initially required to deposit with the Trust's Custodian, in a segregated
account in the name of the broker performing the transaction, an ``initial
margin'' of cash or U.S. Government securities equal to approximately 2-3% of
the contract amount. Initial margin requirements are established by the
Exchanges on which futures contracts trade and may, from time to time, change.
In addition, brokers may establish margin deposit requirements in excess of
those required by the Exchanges.
Initial margin in futures transactions is different from margin in
securities transactions in that initial margin does not involve the borrowing of
funds by a broker's client but is, rather, a good faith deposit on a futures
contract which will be returned to the Short-Intermediate Term Series upon the
proper termination of the futures contract. The margin deposits made are
marked-to-market daily and the Short-Intermediate Term Series may be required to
make subsequent deposits into the segregated account, maintained at the Trust's
Custodian for that purpose, of cash or U.S. Government securities, called
``variation margin'', in the name of the broker, which are reflective of price
fluctuations in the futures contract.
Options on Futures Contracts. The Short-Intermediate Term Series may
purchase and sell call and put options on futures contracts which are traded on
an Exchange and enter into closing transactions with respect to such options to
terminate an existing position. An option on a futures contract gives the
purchaser the right (in return for the premium paid), and the writer the
obligation, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the term of the option. Upon exercise of the
option, the assumption of an offsetting futures position by the writer and
holder of the option will be accompanied by delivery of the accumulated cash
balance in the writer's futures margin account which represents the amount by
which the market price of the futures contract at exercise exceeds, in the case
of a call, or is less than, in the case of a put, the exercise price of the
option on the futures contract.
The Short-Intermediate Term Series may only write ``covered'' put and call
options on futures contracts. The Short-Intermediate Term Series will be
considered ``covered'' with respect to a call option it writes on a futures
contract if the Short-Intermediate Term Series owns the assets which are
deliverable under the futures contract or an option to purchase that futures
contract having a strike price equal to or less than the strike price of the
``covered'' option and having an expiration date not earlier than the expiration
date of the ``covered'' option, or if it segregates and maintains with the
Custodian for the term of the option cash, U.S. Government securities or other
liquid high-grade debt obligations equal to the fluctuating value of the
optioned future. The Short-Intermediate Term Series will be considered
``covered'' with respect to a put option it writes on a futures contract if it
owns an option to sell that futures contract having a strike price equal to or
greater than the strike price of the ``covered'' option, or if it segregates and
maintains with the Custodian for the term of the option cash, U.S. Government
securities or liquid high-grade debt obligations at all times equal in value to
the exercise price of the put (less any initial margin deposited by the
Short-Intermediate Term Series with the Trust's Custodian with respect to such
option). There is no limitation on the amount of the Short-Intermediate Term
Series' assets which can be placed in the segregated account.
The Short-Intermediate Term Series may purchase options on futures
contracts for identical purposes to those set forth above for the purchase of a
futures contract (purchase of a call option or sale of a put option) and the
sale of a futures contract (purchase of a put option or sale of a call option),
or to close out a long or short position in futures contracts. If, for example,
the investment adviser wished to protect against an increase in interest rates
and the resulting negative impact on the value of a portion of its U.S.
Government securities
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portfolio, it might purchase a put option on an interest rate futures contract,
the underlying security of which correlates with the portion of the portfolio
the investment adviser seeks to hedge.
Risks of Transactions in Futures Contracts and Related Options. The
Short-Intermediate Term Series may sell a futures contract to protect against
the decline in the value of securities held by the Short-Intermediate Term
Series. However, it is possible that the futures market may advance and the
value of securities held in the Short-Intermediate Term Series' portfolio may
decline. If this were to occur, the Short-Intermediate Term Series would lose
money on the futures contracts and also experience a decline in value in its
portfolio securities.
If the Short-Intermediate Term Series purchases a futures contract to hedge
against the increase in value of securities it intends to buy, and the value of
such securities decreases, then the Short-Intermediate Term Series may determine
not to invest in the securities as planned and will realize a loss on the
futures contract that is not offset by a reduction in the price of the
securities.
In order to assure that the Short-Intermediate Term Series is entering into
transactions in futures contracts for hedging purposes as such term is defined
by the Commodities Futures Trading Commission, either: (1) a substantial
majority (i.e., approximately 75%) of all anticipatory hedge transactions
(transactions in which the Short-Intermediate Term Series does not own at the
time of the transaction, but expects to acquire, the securities underlying the
relevant futures contract) involving the purchase of futures contracts will be
completed by the purchase of securities which are the subject of the hedge, or
(2) the underlying value of all long positions in futures contracts will not
exceed the total value of (a) all short-term debt obligations held by the
Short-Intermediate Term Series; (b) cash held by the Short-Intermediate Term
Series; (c) cash proceeds due to the Short-Intermediate Term Series on
investments within thirty days; (d) the margin deposited on the contracts; and
(e) any unrealized appreciation in the value of the contracts.
If the Short-Intermediate Term Series maintains a short position in a
futures contract, it will cover this position by holding, in a segregated
account maintained at the Custodian, cash, U.S. Government securities or other
liquid high-grade debt obligations equal in value (when added to any initial or
variation margin on deposit) to the market value of the securities underlying
the futures contract. Such a position may also be covered by owning the
securities underlying the futures contract, or by holding a call option
permitting the Short-Intermediate Term Series to purchase the same contract at a
price no higher than the price at which the short position was established.
In addition, if the Short-Intermediate Term Series holds a long position in
a futures contract, it will hold cash, U.S. Government securities or other
liquid high-grade debt obligations equal to the purchase price of the contract
(less the amount of initial or variation margin on deposit) in a segregated
account maintained for the Short-Intermediate Term Series by the Trust's
Custodian. Alternatively, the Short-Intermediate Term Series could cover its
long position by purchasing a put option on the same futures contract with an
exercise price as high or higher than the price of the contract held by the
Short-Intermediate Term Series.
Exchanges limit the amount by which the price of a futures contract may
move on any day. If the price moves equal the daily limit on successive days,
then it may prove impossible to liquidate a futures position until the daily
limit moves have ceased. In the event of adverse price movements, the
Short-Intermediate Term Series would continue to be required to make daily cash
payments of variation margin on open futures positions. In such situations, if
the Short-Intermediate Term Series has insufficient cash, it may be
disadvantageous to do so. In addition, the Short-Intermediate Term Series may be
required to take or make delivery of the instruments underlying futures
contracts it holds at a time when it is disadvantageous to do so. The ability to
close out options and futures positions could also have an adverse impact on the
Short-Intermediate Term Series' ability to effectively hedge its portfolio.
In the event of the bankruptcy of a broker through which the
Short-Intermediate Term Series engages in transactions in futures or options
thereon, the Short-Intermediate Term Series could experience delays and/or
losses in liquidating open positions purchased or sold through the broker and/or
incur a loss of all or part of its margin deposits with the broker. Transactions
are entered into by the Short-Intermediate Term Series only with brokers or
financial institutions deemed creditworthy by the investment adviser.
There are risks inherent in the use of futures contracts and options
transactions for the purpose of hedging the Short-Intermediate Term Series'
portfolio securities. One such risk which may arise in employing futures
contracts to protect against the price volatility of portfolio securities is
that the prices of securities subject to futures contracts (and thereby the
futures contract prices) may correlate imperfectly with the behavior of the cash
prices of the Short-Intermediate Term Series' portfolio securities. Another such
risk is that prices of futures contracts may not move in tandem with the changes
in prevailing interest rates against which the Short-Intermediate Term Series
seeks a hedge. A correlation may also be distorted by the fact that the futures
market is dominated by short-term traders seeking to profit from the difference
between a contract or security price objective and their cost of borrowed funds.
Such distortions are generally minor and would diminish as the contract
approached maturity.
There may exist an imperfect correlation between the price movements of
futures contracts purchased by the Short-Intermediate Term Series and the
movements in the prices of the securities which are the subject of the hedge. If
participants in the futures market elect to close out their contracts through
offsetting transactions rather than meet margin deposit requirements,
distortions in the normal relationships between the debt securities and futures
market could result. Price distortions could also result if investors in futures
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contracts elect to make or take delivery of underlying securities rather than
engage in closing transactions due to the resultant reduction in the liquidity
of the futures market. In addition, due to the fact that, from the point of view
of speculators, the deposit requirements in the futures markets are less onerous
than margin requirements in the cash market, increased participation by
speculators in the futures markets could cause temporary price distortions. Due
to the possibility of price distortions in the futures market and because of the
imperfect correlation between movements in the prices of securities and
movements in the prices of futures contracts, a correct forecast of interest
rate trends by the investment adviser may still not result in a successful
hedging transaction.
Compared to the purchase or sale of futures contracts, the purchase and
sale of call or put options on futures contracts involves less potential risk to
the Short-Intermediate Term Series because the maximum amount at risk is the
premium paid for the options (plus transaction costs). However, there may be
circumstances when the purchase of a call or put option on a futures contract
would result in a loss to the Short-Intermediate Term Series notwithstanding
that the purchase or sale of a futures contract would not result in a loss, as
in the instance where there is no movement in the prices of the futures
contracts or underlying U.S. Government securities.
Securities Lending
Consistent with applicable regulatory requirements, the Short-Intermediate
Term Series may lend its portfolio securities to brokers, dealers and other
financial institutions, provided that such loans are callable at any time by the
Short-Intermediate Term Series and are at all times secured by cash or cash
equivalents, which are maintained in a segregated account pursuant to applicable
regulations that are equal to at least the market value, determined daily, of
the loaned securities. The advantage of such loans is that the
Short-Intermediate Term Series continues to receive the income on the loaned
securities while at the same time earning interest on the cash amounts deposited
as 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 Short-Intermediate Term Series on two business days' notice. If the
borrower fails to deliver the loaned securities within two days after receipt of
notice, the Short-Intermediate Term Series could use the collateral to replace
the securities while holding the borrower liable for any excess of replacement
cost over collateral. As with any extensions of credit, there are risks of delay
in recovery and in some cases even 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 deemed by the Short-Intermediate Term
Series' investment adviser to be creditworthy and when the income which can be
earned from such loans justifies the attendant risks. Upon termination of the
loan, the borrower is required to return the securities to the
Short-Intermediate Term Series. Any gain or loss in the market price during the
loan period would inure to the Short-Intermediate Term Series. The
creditworthiness of firms to which the Short-Intermediate Term Series lends its
portfolio securities will be monitored on an ongoing basis by the investment
adviser pursuant to procedures adopted and reviewed, on an ongoing basis, by the
Board of Trustees of the Trust.
When voting or consent rights which accompany loaned securities pass to the
borrower, the Short-Intermediate Term Series will follow the policy of calling
the loaned securities, to be delivered within one day after notice, to permit
the exercise of such rights if the matters involved would have a material effect
on the Short-Intermediate Term Series' investment in such loaned securities. The
Short-Intermediate Term Series may pay reasonable finders', administrative and
custodial fees in connection with a loan of its securities.
Interest Rate Swap Transactions
The Short-Intermediate Term Series may enter into either asset-based
interest rate swaps or liability-based interest rate swaps, depending on whether
it is hedging its assets or its liabilities. The Short-Intermediate Term Series
will usually enter into interest rate swaps on a net basis, i.e., the two
payment streams are netted out, with the Short-Intermediate Term Series
receiving or paying, as the case may be, only the net amount of the two
payments. Inasmuch as these hedging transactions are entered into for good faith
hedging purposes, the investment adviser and the Short-Intermediate Term Series
believe such obligations do not constitute senior securities and, accordingly,
will not treat them as being subject to its borrowing restrictions. The net
amount of the excess, if any, of the Short-Intermediate Term Series' obligations
over its entitlements with respect to each interest rate swap will be accrued on
a daily basis and an amount of cash, U.S. Government securities or other liquid
high-grade debt securities having an aggregate net asset value at least equal to
the accrued excess will be maintained in a segregated account by the Trust's
Custodian. To the extent that the Short-Intermediate Term Series enters into
interest rate swaps on other than a net basis, the amount maintained in the
segregated account will be the full amount of the Short-Intermediate Term
Series' obligations, if any, with respect to such interest rate swaps, accrued
on a daily basis. If there is a default by the other party to such a
transaction, the Short-Intermediate Term Series will have contractual remedies
pursuant to the agreement related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid.
The use of interest rate swaps is highly speculative activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the investment adviser is
incorrect in its forecast of market values, interest rates and other applicable
factors, the investment performance of the Short-Intermediate Term Series would
diminish compared to what it would have been if this investment technique was
never used.
B-14
<PAGE>
The Short-Intermediate Term Series may only enter into interest rate swaps
to hedge its portfolio. Interest rate swaps do not involve the delivery of
securities or other underlying assets or principal. Accordingly, the risk of
loss with respect to interest rate swaps is limited to the net amount of
interest payments that the Short-Intermediate Term Series is contractually
obligated to make. If the other party to an interest rate swap defaults, the
Short-Intermediate Term Series' risk of loss consists of the net amount of
interest payments, if any, that the Short-Intermediate Term Series is
contractually entitled to receive. Since interest rate swaps are individually
negotiated, the Short-Intermediate Term Series expects to achieve an acceptable
degree of correlation between its rights to receive interest on its portfolio
securities and its rights and obligations to receive and pay interest pursuant
to interest rate swaps. The Short-Intermediate Term Series will enter into
interest rate swaps only with parties meeting creditworthiness standards
approved by the Trust's Board of Trustees. The investment adviser will monitor
the creditworthiness of such parties under the supervision of the Trust's Board
of Trustees.
PORTFOLIO TURNOVER
The Money Market Series and the U.S. Treasury Money Market Series intend
normally to hold their portfolio securities to maturity. The Money Market Series
and the U.S. Treasury Money Market Series do not normally expect to trade
portfolio securities although they may do so to take advantage of short-term
market movements. The Money Market Series and the U.S. Treasury Money Market
Series will make purchases and sales of portfolio securities with a government
securities dealer on a net price basis; brokerage commissions are not normally
charged on the purchase or sale of U.S. Treasury Securities. See ``Portfolio
Transactions and Brokerage.''
Although the Short-Intermediate Term Series has no fixed policy with
respect to portfolio turnover, it may sell portfolio securities without regard
to the length of time that they have been held in order to take advantage of new
investment opportunities or yield differentials, or because the
Short-Intermediate Term Series desires to preserve gains or limit losses due to
changing economic conditions. Accordingly, it is possible that the portfolio
turnover rate of the Short-Intermediate Term Series may reach, or even exceed,
250%. The portfolio turnover rate is computed by dividing the lesser of the
amount of the securities purchased or securities sold (excluding all securities
whose maturities at acquisition were one year or less) by the average monthly
value of such securities owned during the year. A 100% turnover rate would
occur, for example, if all of the securities held in the portfolio of the
Short-Intermediate Term Series were sold and replaced within one year. However,
when portfolio changes are deemed appropriate due to market or other conditions,
such turnover rate may be greater than anticipated. A higher rate of turnover
results in increased transaction costs to the Short-Intermediate Term Series.
The portfolio turnover rate for the Short-Intermediate Term Series for the
fiscal years ended November 30, 1993 and 1994 was 44% and 431%, respectively.
The increase in the Short-Intermediate Term Series' portfolio turnover rate
resulted in part from a repositioning of its portfolio. It also resulted from
efforts to take advantage of yield differentials which existed between mortgage
``pass-through'' securities and U.S. Treasury securities during a year when
short-term interest rates were particularly volatile. These efforts, which
involved sales of pass-through securities in order to buy Treasury securities
and vice versa, added significantly to the Short-Intermediate Term Series'
higher turnover rate.
INVESTMENT RESTRICTIONS
The Trust's fundamental policies as they affect a particular Series cannot
be changed without the approval of the outstanding shares of such Series by a
vote which is the lesser of (i) 67% or more of the voting securities of such
Series represented at a meeting at which more than 50% of the outstanding voting
securities of such Series are present in person or represented by proxy or (ii)
more than 50% of the outstanding voting securities of such Series. With respect
to the submission of a change in fundamental policy or investment objective to a
particular Series, such matters shall be deemed to have been effectively acted
upon with respect to all Series of the Trust if a majority of the outstanding
voting securities of the particular Series votes for the approval of such
matters as provided above, notwithstanding (1) that such matter has not been
approved by a majority of the outstanding voting securities of any other Series
affected by such matter and (2) that such matter has not been approved by a
majority of the outstanding voting securities of the Trust.
Money Market Series
The following investment restrictions are fundamental policies of the Trust
with respect to the Money Market Series of the Trust and may not be changed
except as described above.
The Trust may not:
1. Borrow money, except from banks for temporary or emergency purposes,
including the meeting of redemption requests which might otherwise require the
untimely disposition of securities; borrowing in the aggregate may not exceed
20%, and borrowing for purposes other than meeting redemptions may not exceed
5%, of the value of the Trust's total assets (including the amount borrowed),
less liabilities (not including the amount borrowed) at the time the borrowing
is made; investment securities will not be purchased while borrowings are
outstanding.
2. Pledge, hypothecate, mortgage or otherwise encumber its assets, except
in an amount up to 10% of the value of its net assets but only to secure
permitted borrowings of money.
B-15
<PAGE>
3. Make loans to others, except through the purchase of the debt
obligations and the repurchase agreements covering government securities and the
lending of portfolio securities (limited to thirty percent of the Series' total
assets).
4. Purchase or sell real estate or real estate mortgage loans.
5. Purchase securities on margin or sell short.
6. Purchase or sell commodities or commodity futures contracts, or oil,
gas, or mineral exploration or development programs.
7. Underwrite securities of other issuers.
8. Purchase the securities of any other investment company, except in
connection with a merger, consolidation, reorganization or acquisition of
assets.
9. Issue senior securities as defined in the Investment Company Act except
insofar as the Trust may be deemed to have issued a senior security by reason
of: (a) entering into any repurchase agreement; (b) permitted borrowings of
money; or (c) purchasing securities on a when-issued or delayed delivery basis.
10. Purchase securities on a when-issued basis if, as a result, more than
15% of the Trust's net assets would be committed.
Short-Intermediate Term Series
The following investment restrictions are fundamental policies of the Trust
with respect to the Short-Intermediate Term Series of the Trust and may not be
changed except as described above.
The Trust may not:
1. Issue senior securities, borrow money or pledge its assets, except that
the Series may borrow from banks or through dollar rolls or reverse repurchase
agreements up to 33 1/3% of the value of its total assets (calculated when the
loan is made) for temporary, extraordinary or emergency purposes, to take
advantage of investment opportunities or for the clearance of transactions and
may pledge up to 33 1/3% of the value of its total assets to secure such
borrowings. For purposes of this restriction, the purchase or sale of securities
on a ``when-issued'' or delayed delivery basis, collateral arrangements with
respect to interest rate swap transactions reverse repurchase agreements or
dollar rolls or the purchase and sale of futures contracts are not deemed to be
a pledge of assets and neither such arrangements nor the purchase or sale of
futures contracts nor the purchase and sale of related options, nor obligations
of the Series to the Trustees of the Trust pursuant to deferred compensation
arrangements are deemed to be the issuance of a senior security.
2. Make loans to others, except through the purchase of the debt
obligations and the repurchase agreements covering government securities and the
lending of portfolio securities (limited to thirty percent of the Series' total
assets).
3. Purchase or sell real estate or real estate mortgage loans, except that
the Series may purchase and sell mortgaged-backed securities, securities
collateralized by mortgages, 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 Series may not purchase
interests in real estate limited partnerships which are not readily marketable.
4. Purchase securities on margin (but the Series may obtain such
short-term credits as may be necessary for the clearance of transactions);
provided that the deposit or payment by the Series of initial or variation
margin in connection with options or futures contracts is not considered the
purchase of a security on margin.
5. Make short sales of securities, or maintain a short position if, when
added together, more than 25% of the value of the Series' net assets would be
(i) deposited as collateral for the obligation to replace securities borrowed to
effect short sales and (ii) allocated to segregated accounts in connection with
short sales. Short sales ``against-the-box'' are not subject to this limitation.
6. Purchase or sell commodities or commodity futures contracts, or oil,
gas, or mineral exploration or development programs, except that the Fund may
purchase and sell financial futures contracts and options thereon.
7. Purchase the securities of any other investment company, except in
connection with a merger, consolidation, reorganization or acquisition of
assets.
8. Purchase securities on a when-issued basis if, as a result, more than
15% of the Series' net assets would be committed.
U.S. Treasury Money Market Series
In connection with its investment objective and policies as set forth in
the Prospectus, the U.S. Treasury Money Market Series has adopted the following
investment restrictions.
The U.S. Treasury Money Market Series may not:
B-16
<PAGE>
1. Invest in any securities other than U.S. Treasury obligations.
2. Purchase securities on margin (but the Series may obtain such short-term
credits as may be necessary for the clearance of transactions).
3. Make short sales of securities or maintain a short position.
4. Issue senior securities, borrow money or pledge its assets, except that
the Series may borrow up to 20% of the value of its total assets (calculated
when the loan is made) from banks and from entities other than banks if so
permitted pursuant to an order of the Securities and Exchange Commission for
temporary, extraordinary or emergency purposes. The Series may pledge up to 20%
of the value of its total assets to secure such borrowings.
5. Buy or sell real estate or interests in real estate.
6. 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 laws.
7. Make investments for the purpose of exercising control or management.
8. Invest in interests in oil, gas or other mineral exploration or
development programs.
9. Buy or sell commodities or commodity contracts (including futures
contracts and options thereon).
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of any Series' assets, it is intended that if the
percentage limitation is met at the time the investment is made, a later change
in percentage resulting from changing total or net asset values will not be
considered a violation of such policy. However, in the event that a Series'
asset coverage for borrowings falls below 300%, the Series will take prompt
action to reduce its borrowings, as required by applicable law.
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
Position with Principal Occupations
Name, Address and Age Trust During Past 5 Years
- ---------------------- -------------- ----------------------------------------------------------
<S> <C> <C>
</TABLE>
<TABLE>
<S> <C> <C>
Delayne Dedrick Gold Trustee Marketing and Management Consultant.
(57)
c/o Prudential Mutual
Fund
Management, Inc.
One Seaport Plaza
New York, NY
Arthur Hauspurg (69) Trustee Trustee and former President, Chief Executive Officer and
c/o Prudential Mutual Chairman of the Board of Consolidated Edison Company of
Fund New York, Inc.; Director of COMSAT Corp.
Management, Inc.
One Seaport Plaza
New York, NY
Stephen P. Munn (53) Trustee Chairman (since January 1994), Director and President
101 South Salina (since 1988) and Chief Executive Officer (1988-December
Street 1993) of Carlisle Companies Incorporated.
Syracuse, NY
Louis A. Weil, III Trustee Publisher and Chief Executive Officer, Phoenix Newspapers,
(54) Inc. (since August 1991); Director of Central
120 E. Van Buren Newspapers, Inc. (since September 1991); prior thereto,
Phoenix, AZ Publisher of Time Magazine (May 1989-March 1991);
formerly President, Publisher and Chief Executive
Officer of The Detroit News (February 1986-August 1989);
formerly member of the Advisory Board, Chase Manhattan
Bank-Westchester; Director of The Global Government Plus
Fund, Inc.
</TABLE>
B-17
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupations
Name, Address and Age Trust During Past 5 Years
- ---------------------- -------------- ----------------------------------------------------------
<S> <C> <C>
*Richard A. Redeker Director President, Chief Executive Officer and Director (since
(51) October 1993); Prudential Mutual Fund Management, Inc.
One Seaport Plaza (PMF); Executive Vice President, Director and Member of
New York, NY the Operating Committee (since October 1993) of
Prudential Securities; Director (since October 1993) of
Prudential Securities Group, Inc. (PSG); Executive Vice
President, The Prudential Investment Corporation (since
July 1994); Director of Prudential Mutual Fund
Distributors, Inc. (PMFD) (since January 1994) and
Prudential Mutual Fund Services, Inc. (PMFS); Formerly
Senior Executive Vice President and Director of Kemper
Financial Services, Inc. (September 1978-September
1993); Director of The Global Government Plus Fund,
Inc., The Global Total Return Fund, Inc. and The High
Yield Income Fund, Inc.
Robert F. Gunia (48) Vice President Chief Administrative Officer (since July 1990), Director
One Seaport Plaza (since January 1989), Executive Vice President,
New York, NY Treasurer and Chief Financial Officer (since June 1987)
of PMF; Senior Vice President (since March 1987) of
Prudential Securities; Executive Vice President,
Treasurer and Comptroller (since March 1991) of
Prudential Mutual Fund Distributors, Inc. and Director
(since June 1987) of Prudential Mutual Fund Services,
Inc., Vice President and Director of The Asia Pacific
Fund, Inc. (since May 1989).
Eugene S. Stark (37) Treasurer and First Vice President (since January 1990) of PMF.
One Seaport Plaza Principal
New York, NY Financial and
Accounting
Officer
Stephen M. Ungerman Assistant First Vice President of Prudential Mutual Fund Management,
(42) Treasurer Inc. (since February 1993). Prior thereto, Senior Tax
One Seaport Plaza Manager at Price Waterhouse (since 1981).
New York, NY
S. Jane Rose (49) Secretary Senior Vice President (since January 1991), Senior Counsel
One Seaport Plaza (since June 1987) and First Vice President (June
New York, NY 1987-December 1990) of PMF; Senior Vice President and
Senior Counsel of Prudential Securities (since July
1992); formerly Vice President and Associate General
Counsel of Prudential Securities.
Ronald Amblard (37) Assistant First Vice President (since January 1994), and Associate
One Seaport Plaza Secretary General Counsel (since January 1992) of PMF; Vice
New York, NY President and Associate General Counsel of Prudential
Securities (since January 1992); formerly, Assistant
General Counsel (August 1988-December 1991), Associate
Vice President (January 1989-December 1990) and Vice
President (January 1991-December 1993) of PMF.
</TABLE>
- ------------------
* ``Interested'' Trustee, as defined in the Investment Company Act.
Trustees of the Trust are elected by the holders of the shares of all
Series of the Trust, and not separately by holders of each Series voting as a
class.
Trustees and officers of the Trust are also trustees, directors and
officers of some or all of the other investment companies distributed by
Prudential Securities or Prudential Mutual Fund Distributors, Inc.
The officers conduct and supervise the daily business operations of the
Trust, while the Trustees, in addition to their functions set forth under
``Manager,'' and ``Distributor,'' review such actions and decide on general
policy.
The Trust pays each of its directors who is not an affiliated person of PMF
or The Prudential Investment Corporation (PIC) annual compensation of $9,000, in
addition to certain out-of-pocket expenses. The Chairman of the Audit Committee
receives an additional $200 per year.
B-18
<PAGE>
Trustees may receive their Trustee's fee pursuant to a deferred fee
agreement with the Trust. Under the terms of the agreement, the Trust accrues
daily the amount of such Trustee's fee which accrues 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 Trust (the Trust Rate). Payment of the
interest so accrued is also deferred and accruals become payable at the option
of the Trustee. The Trust's obligation to make payments of deferred Trustees'
fees, together with interest thereon, is a general obligation of the Trust.
The Trustees have adopted a retirement policy which calls for the
retirement of Trustees on December 31 of the year in which they reach the age of
72, except that retirement is being phased in for Trustees who were age 68 or
older as of December 31, 1993. Under this phase-in provision, Mr. Hauspurg
is scheduled to retire on December 31, 1999.
Pursuant to the terms of the Management Agreement with the Trust, the
Manager pays all compensation of officers and employees of the Trust as well as
the fees and expenses of all Trustees of the Trust who are affiliated persons of
the Manager.
The following table sets forth the aggregate compensation paid by the Trust
for the fiscal year ended November 30, 1994 to the Trustees who are not
affiliated with the Manager and the aggregate compensation paid to such Trustees
for service on the Trust's board and that of all other funds managed by
Prudential Mutual Fund Management, Inc. (Fund Complex) for the calendar year
ended December 31, 1994.
Compensation Table
<TABLE>
<CAPTION>
Total
Pension or Compensation
Retirement From Trust
Aggregate Benefits Accrued Estimated Annual and Fund
Compensation As Part of Trust Benefits Upon Complex Paid
Name and Position From Trust Expenses Retirement to Trustees
- ------------------------------------- ------------ ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Delayne Dedrick Gold--Trustee $9,200 None N/A $185,000 (24/43)*
Arthur Hauspurg--Trustee $9,000 None N/A $ 37,500 (5/7)*
Stephen P. Munn--Trustee $9,000 None N/A $ 40,000 (6/8)*
Louis A. Weil, III--Trustee $9,000 None N/A $ 97,500 (12/17)*
- ------------------
* Indicates number of funds/portfolios in Fund Complex (including the Trust) to which aggregate compensation
relates.
</TABLE>
As of May 12, 1995, the Trustees and officers of the Trust, as a group,
owned less than 1% of the outstanding shares of beneficial interest of each of
the Money Market Series, U.S. Treasury Money Market Series and the
Short-Intermediate Term Series of the Trust.
As of May 12, 1995, Prudential Securities was the record holder for other
beneficial owners of 11,743,363 Short-Intermediate Term Series Shares (or 52% of
such shares outstanding), 429,043,462 Money Market Series Shares (or 76% of such
shares outstanding) and 282,260,940 U.S. Treasury Money Market Series Shares (or
94% of such shares outstanding). In the event of any meetings of shareholders,
Prudential Securities will forward, or cause the forwarding of, proxy materials
to the beneficial owners for which it is the record holder.
MANAGER
The Manager of the Trust is Prudential Mutual Fund Management, Inc. (PMF or
the Manager), One Seaport Plaza, New York, New York 10292. PMF serves as manager
of all of the investment companies that, together with the Trust, comprise the
Prudential Mutual Funds. See ``How the Trust is Managed--Manager'' in the
Prospectus of each Series. As of June 30, 1995, PMF managed and/or administered
open-end and closed-end management investment companies with assets of
approximately $49 billion. According to the Investment Company Institute, as of
December 31, 1994, the Prudential Mutual Funds were the 12th largest family of
mutual funds in the United States.
PMF is a subsidiary of Prudential Securities Incorporated and The
Prudential Insurance Company of America (Prudential). PMF has three wholly-owned
subsidiaries: Prudential Mutual Fund Distributors, Inc., Prudential Mutual Fund
Services, Inc. (PMFS or the Transfer Agent) and Prudential Mutual Fund
Investment Management, Inc. PMFS serves as the transfer agent for the Prudential
Mutual Funds and, in addition, provides customer service, recordkeeping and
management and administration services to qualified plans.
Pursuant to a management agreement with the Trust (the Management
Agreement), PMF, subject to the supervision of the Trustees and in conformity
with the stated policies of the Trust, manages both the investment operations of
the Trust and the composition of the Trust's portfolio, including the purchase,
retention, disposition and loan of securities and other investments. PMF is
obligated to keep certain books and records of the Trust in connection
therewith. PMF is also obligated to provide research and statistical analysis
and to pay costs of certain clerical and administrative services involved in the
portfolio management. The management services of PMF to the
B-19
<PAGE>
Trust are not exclusive under the terms of the Management Agreement and PMF is
free to, and does, render management services to others.
PMF has authorized any of its directors, officers and employees who have
been elected as trustees or officers of the Trust to serve in the capacities in
which they have been elected. Services furnished by PMF under the Management
Agreement may be furnished by any such directors, officers or employees of PMF.
In connection with the services it renders, PMF bears the following expenses:
(a) the salaries and expenses of all personnel of the Trust and the
Manager, except the fees and expenses of Trustees who are not affiliated
persons of the Manager;
(b) all expenses incurred by the Manager or by the Trust in connection
with managing the ordinary course of the Trust's business, other than those
assumed by the Trust, as described below; and
(c) the costs and expenses payable to The Prudential Investment
Corporation (PIC) pursuant to a subadvisory agreement between PMF and PIC
(the Subadvisory Agreement).
Under the terms of the Management Agreement, the Trust is responsible for
the payment of the following expenses, including (a) the fee payable to the
Manager, (b) the fees and expenses of Trustees who are not affiliated with PMF
or PIC, (c) the fees and certain expenses of the Trust's 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
Trust and of pricing the Trust's shares, (d) the fees and expenses of the
Trust's legal counsel and independent accountants, (e) brokerage commissions and
any issue or transfer taxes chargeable to the Trust in connection with its
securities transactions, (f) all taxes and corporate fees payable by the Trust
to governmental agencies, (g) the fees of any trade association of which the
Trust is a member, (h) the cost of share certificates representing shares of the
Trust, (i) the cost of fidelity, directors and officers and errors and omissions
insurance, (j) the fees and expenses involved in registering and maintaining
registration of the Trust and of its shares with the SEC and registering the
Trust as a broker or dealer and qualifying its shares under state securities
laws, including the preparation and printing of the Trust's registration
statements and prospectuses for such purposes, (k) allocable communications
expenses with respect to investor services and all expenses of shareholders' and
Trustees' meetings and of preparing, printing and mailing reports to
shareholders, (l) litigation and indemnification expenses and other
extraordinary expenses not incurred in the ordinary course of the Trust's
business and (m) distribution fees.
The Trust pays a fee to PMF for the services performed and the facilities
furnished by PMF, computed daily and payable monthly, at an annual rate of .40
of 1% of the Short-Intermediate Term Series' and the U.S. Treasury Money Market
Series' average daily net assets and at an annual rate of .40 of 1% of the
average daily net assets up to $1 billion, .375 of 1% on assets between $1
billion and $1.5 billion and .35 of 1% on assets in excess of $1.5 billion of
the average daily net assets of the Money Market Series. The Management
Agreement also provides that in the event the expenses of a Series (including
the fees of the Manager but excluding interest, taxes, brokerage commissions,
distribution fees, litigation and indemnification expenses and other
extraordinary expenses) for any fiscal year exceed the lowest applicable annual
expense limitation established and enforced pursuant to the statute or
regulations of any jurisdictions in which shares of the Series are then
qualified for offer and sale, PMF will reduce its fee by the amount of such
excess. Reductions in excess of the total compensation payable to PMF will be
paid by PMF to the Series. Any such reductions are subject to readjustment
during the year. Currently, the Trust believes that the most restrictive expense
limitation of state securities commissions is 2 1/2% of the average daily net
assets of each Series up to $30 million, 2% of the average daily net assets of
each Series from $30 million to $100 million and 1 1/2% of any excess over $100
million. The Management Agreement provides that the Manager shall not be liable
to the Trust for any error of judgment by the Manager or for any loss sustained
by the Trust except in the case of a breach of fiduciary duty with respect to
the receipt of compensation for services (in which case any award of damages
will be limited as provided in the Investment Company Act) or of wilful
misfeasance, bad faith, gross negligence or reckless disregard of duty.
The Management Agreement provides that it shall 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 was last approved by the Trustees, including all of the Trustees who
are not interested persons as defined in the Investment Company Act, on May 2,
1995 and by a majority of the outstanding shares of the Money Market Series and
the Short-Intermediate Term Series on April 28, 1988 and a majority of the
outstanding shares of the U.S. Treasury Money Market Series on November 26,
1991.
For the fiscal year ended November 30, 1994 the Trust paid management fees
to PMF of $2,931,469, $1,229,526 and $1,233,814 relating to the Money Market
Series, Short-Intermediate Term Series and U.S. Treasury Money Market Series,
respectively. For the fiscal year ended November 30, 1993, the Trust paid
management fees to PMF of $3,803,950, $1,286,150 and $1,093,251 relating to the
Money Market Series, Short-Intermediate Term Series and U.S. Treasury Money
Market Series, respectively. For the fiscal year ended November 30, 1992, the
Trust paid management fees to PMF of $4,455,034, $1,177,548 and $1,053,834
relating to the Money Market Series, Short-Intermediate Term Series and U.S.
Treasury Money Market Series, respectively.
PMF has entered into the Subadvisory Agreement with PIC (the Subadviser).
The Subadvisory Agreement provides that PIC furnish investment advisory services
in connection with the management of the Trust. In connection therewith, PIC is
obligated to keep certain
B-20
<PAGE>
books and records of the Trust. PMF continues to have responsibility for all
investment advisory services pursuant to the Management Agreement and supervises
PIC's performance of those services. PIC is reimbursed by PMF for the reasonable
costs and expenses incurred by PIC in furnishing those services.
The Subadvisory Agreement was last approved by the Trustees, including all
of the Trustees who are not interested persons as defined in the Investment
Company Act, on May 2, 1995, and by the shareholders of each of the Money Market
Series and the Short-Intermediate Term Series on April 28, 1988 and the
shareholders of the U.S. Treasury Money Market Series on November 26, 1991.
The Subadvisory Agreement provides that it will terminate in the event of
its assignment or upon the termination of the Management Agreement. The
Subadvisory Agreement may be terminated by the Trust, PMF or PIC upon not less
than 30 days' nor more than 60 days' written notice. The Subadvisory Agreement
provides that it will continue in effect for a period of more than two years
only so long as such continuance is specifically approved at least annually in
accordance with the requirements of the Investment Company Act applicable to
continuance of investment advisory contracts.
The Manager and the Subadviser 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, 1994. Its primary business is to offer a full range of products and
services in three areas: insurance, investments and home ownership for
individuals and families; health-care management and other benefit programs for
employees of companies and members of groups; and asset management for
institutional clients and their associates. Prudential (together with its
subsidiaries) employs nearly 100,000 persons worldwide, and maintains a sales
force of approximately 19,000 agents, 3,400 insurance brokers and 6,000
financial advisors. It insures or provides other financial services to more than
50 million people worldwide. 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
has been engaged in the insurance business since 1875. In July 1994,
Institutional Investor ranked Prudential the second largest institutional money
manager of the 300 largest money management organizations in the United States
as of December 31, 1993.
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 and other media. Additionally, individual
mutual fund portfolios are frequently mentioned 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.
DISTRIBUTOR
Prudential Securities Incorporated (Prudential Securities or PSI), One
Seaport Plaza, New York, New York 10292, has entered into an agreement with the
Trust under which Prudential Securities acts as distributor for the
Short-Intermediate Term Series. Prudential Securities is engaged in the
securities underwriting and securities and commodities brokerage business and is
a member of the New York Stock Exchange, other major securities and commodities
exchanges and the NASD. Prudential Securities is also engaged in the investment
advisory business. Prudential Securities is a wholly-owned subsidiary of
Prudential Securities Group Inc., which is an indirect, wholly-owned subsidiary
of Prudential. The services it provides to the Trust are discussed in the
Short-Intermediate Term Series' Prospectus. See ``How the Trust is
Managed--Distributor.''
Prudential Mutual Fund Distributors, Inc. (PMFD), One Seaport Plaza, New
York, New York 10292, has entered into an agreement with the Trust pursuant to
which PMFD serves as distributor for the Money Market Series and the U.S.
Treasury Money Market Series. PMFD is a wholly-owned subsidiary of PMF. The
services it provides to the Trust are described in the Money Market Series' and
the U.S. Treasury Money Market Series' Prospectuses. See ``How the Trust is
Managed--Distributor.''
Distribution and Service Plans. See ``How the Trust is Managed--Distributor'' in
the Prospectus of each Series.
During the fiscal year ended November 30, 1994, PMFD incurred distribution
expenses in the aggregate of $916,084 and $385,567 with respect to the Money
Market Series and the U.S. Treasury Money Market Series, respectively, all of
which was recovered through the distribution fee paid by each Series to PMFD. It
is estimated that of these amounts approximately $714,500 (78%) and $297,300
(77.1%) was spent on payment of account servicing fees to financial advisers for
the Money Market Series and U.S. Treasury Money Market Series, respectively, and
$201,500 (22%) and $88,300 (22.9%) on allocation of overhead and other branch
office distribution-related expenses for the Money Market Series and U.S.
Treasury Money Market Series, respectively. The term ``overhead and other branch
office distribution-related expenses'' represents (a) the expenses of operating
Prudential Securities' branch offices in connection with the sale of shares of
the series, 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) travel expenses of mutual fund sales coordinators to promote the sale of
shares of the series, and (d) other incidental expenses relating to branch
promotion of sales of the series. Reimbursable distribution expenses do not
include any direct interest or carrying charges.
B-21
<PAGE>
For the fiscal year ended November 30, 1994, Prudential Securities received
$665,503 from the Short-Intermediate Term Series under the Plan all of which was
spent on behalf of the Short-Intermediate Term Series for the payment of account
servicing fees to financial advisers.
On May 2, 1995, the Trustees, including a majority of the Trustees who are
not interested persons of the Trust and have no direct or indirect financial
interest in the operating of the Plans (Rule 12b-1 Trustees) at a meeting called
for the purpose of voting on each Plan, approved amendments to the plans
changing them from reimbursement type plans to compensation type plans. The
Plans were last approved by the Trustees, including a majority of the Rule 12b-1
Trustees, on May 2, 1995. The Plans were last approved by the Trustees,
including a majority of the Trustees who are not interested persons of the Trust
and who have no direct or indirect financial interest in the operation of the
Plans or in any agreements related to the Plans (the Rule 12b-1 Trustees), cast
in person at a meeting called for the purpose of voting on such Plans on May 2,
1995 and, as amended, were approved by the shareholders of each Series on July
19, 1995.
In each Distribution and Service Agreement, the Trust has agreed to
indemnify Prudential Securities or PMFD to the extent permitted by applicable
law against certain liabilities under the Securities Act.
Pursuant to the Plans, the Trustees are provided at least quarterly with
written reports of the amounts expended under the Plans and the purposes for
which such expenditures were made. The Trustees review such reports on a
quarterly basis.
The Plans provide that they will continue in effect from year to year,
provided each such continuance is approved annually by a vote of the Trustees in
the manner described above. The Plans may not be amended to increase materially
the amount to be spent for the services described therein without approval of
the shareholders of the applicable Series, and all material amendments of the
Plans must also be approved by the Trustees in the manner described above. Each
Plan may be terminated at any time, without payment of any penalty, by vote of a
majority of the Rule 12b-1 Trustees, or by a vote of a majority of the
outstanding voting securities of the applicable Series (as defined in the
Investment Company Act). Each Plan will automatically terminate in the event of
its assignment (as defined in the Investment Company Act).
So long as the Plans are in effect, the selection and nomination of
Trustees who are not interested persons of the Trust shall be committed to the
discretion of the Trustees who are not interested persons. The Trustees have
determined that, in their judgment, there is a reasonable likelihood that the
Plans will benefit the Trust and its shareholders. In the Trustees' quarterly
review of the Plans, they consider the continued appropriateness and the level
of payments provided therein.
The Distribution Agreements provide that each shall terminate automatically
if assigned and that each may be terminated without penalty by either party upon
not more than 60 days' nor less than 30 days' written notice.
Each Distribution Agreement was last approved by the Trustees, including
all of the 12b-1 Trustees on May 2, 1995.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators in 51 jurisdictions and the NASD to resolve
allegations that PSI sold interests in more than 700 limited partnerships (and a
limited number of other types of securities) from January 1, 1980 through
December 31, 1990, in violation of securities laws to persons for whom such
securities were not suitable in light of the individuals' financial condition or
investment objectives. It was also alleged that the safety, potential returns
and liquidity of the investments had been misrepresented. The limited
partnerships principally involved real estate, oil and gas producing properties
and aircraft leasing ventures. The SEC Order (i) included findings that PSI's
conduct violated the federal securities laws and that an order issued by the SEC
in 1986 requiring PSI to adopt, implement and maintain certain supervisory
procedures had not been complied with; (ii) directed PSI to cease and desist
from violating the federal securities laws and imposed a $10 million civil
penalty; and (iii) required PSI to adopt certain remedial measures including the
establishment of a Compliance Committee of its Board of Directors. Pursuant to
the terms of the SEC settlement, PSI established a settlement fund in the amount
of $330,000,000 and procedures, overseen by a court approved Claims
Administrator, to resolve legitimate claims for compensatory damages by
purchasers of the partnership interests. PSI has agreed to provide additional
funds, if necessary, for that purpose. PSI's settlement with the state
securities regulators included an agreement to pay a penalty of $500,000 per
jurisdiction. PSI consented to a censure and to the payment of a $5,000,000 fine
in settling the NASD action. In settling the above referenced matters, PSI
neither admitted nor denied the allegations asserted against it.
On January 18, 1994, PSI agreed to the entry of a Final Consent Order and a
Parallel Consent Order by the Texas Securities Commissioner. The firm also
entered into a related agreement with the Texas Securities Commissioner. The
allegations were that the firm had engaged in improper sales practices and other
improper conduct resulting in pecuniary losses and other harm to investors
residing in Texas with respect to purchases and sales of limited partnership
interests during the period of January 1, 1980 through December 31, 1990.
Without admitting or denying the allegations, PSI consented to a reprimand,
agreed to cease and desist from future violations, and to provide voluntary
donations to the State of Texas in the aggregate amount of $1,500,000. The firm
agreed to suspend the creation of new customer accounts, the general
solicitation of new accounts, and the offer for sale of securities in or from
PSI's North Dallas office to new customers during a period of twenty consecutive
business days, and agreed that its other Texas offices would be subject to the
same restrictions for a period of five consecutive business days. PSI also
agreed to institute training programs for its securities salesmen in Texas.
B-22
<PAGE>
On October 27, 1994, Prudential Securities Group, Inc. and PSI entered into
agreements with the United States Attorney deferring prosecution (provided PSI
complies with the terms of the agreement for three years) for any alleged
criminal activity related to the sale of certain limited partnership programs
from 1983 to 1990. In connection with these agreements, PSI agreed to add the
sum of $330,000,000 to the fund established by the SEC and executed a
stipulation providing for a reversion of such funds to the United States Postal
Inspection Service. PSI further agreed to obtain a mutually acceptable outside
director to sit on the Board of Directors of PSG and the Compliance Committee of
PSI. The new director will also serve as an independent ``ombudsman'' whom PSI
employees can call anonymously with complaints about ethics and compliance.
Prudential Securities shall report any allegations or instances of criminal
conduct and material improprieties to the new director. The new director will
submit compliance reports which shall identify all such allegations or instances
of criminal conduct and material improprieties every three months for a
three-year period.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager and PIC are responsible for decisions to buy and sell
securities for the Money Market Series, Short-Intermediate Term Series and U.S.
Treasury Money Market Series, arranging the execution of portfolio security
transactions on each Series' behalf, and the selection of brokers and dealers to
effect the transactions. Purchases of portfolio securities are made from
dealers, underwriters and issuers; sales, if any, prior to maturity, are made to
dealers and issuers. Each Series does not normally incur any brokerage
commission expense on such transactions. The instruments purchased by the Series
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. Securities purchased in
underwritten offerings include a fixed amount of compensation to the
underwriter, generally referred to as the underwriter's concession or discount.
When securities are purchased or sold directly from or to an issuer, no
commissions or discounts are paid.
The policy of each of the Series regarding purchases and sales of
securities is that primary consideration will be given to obtaining the most
favorable price and efficient execution of transactions.
The Trust paid no brokerage commissions for the fiscal years ended November
30, 1992, 1993 and 1994.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of shares of the Trust, a Shareholder Investment
Account is established for each investor under which a record of the shares held
is maintained by the Transfer Agent. If a share 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. Whenever a transaction
takes place in the Shareholder Investment Account, the shareholder will be
mailed a statement showing the transaction and the status of such account.
Procedure for Multiple Accounts
Special procedures have been designed for banks and other institutions that
wish to open multiple accounts. An institution may open a single master account
by filing an Application Form with Prudential Mutual Fund Services, Inc. (PMFS
or the Transfer Agent), Attention: Customer Service, P.O. Box 15005, New
Brunswick, New Jersey 08906, signed by personnel authorized to act for the
institution. Individual sub-accounts may be opened at the time the master
account is opened by listing them, or they may be added at a later date by
written advice or by filing forms supplied by the Trust. Procedures are
available to identify sub-accounts by name and number within the master account
name. The investment minimums set forth above are applicable to the aggregate
amounts invested by a group and not to the amount credited to each sub-account.
PMFS provides each institution with a written confirmation for each
transaction in sub-accounts. Further, PMFS provides, to each institution on a
monthly basis, a statement which sets forth for each master account its share
balance and income earned for the month. In addition, each institution receives
a statement for each individual account setting forth transactions in the
sub-account for the year-to-date, the total number of shares owned as of the
dividend payment date and the dividends paid for the current month, as well as
for the year-to-date.
Further information on the sub-accounting system and procedures is
available from the Transfer Agent, Prudential Securities or Prusec.
Automatic Reinvestment of Dividends and Distributions
For the convenience of investors, all dividends and distributions are
automatically invested in full and fractional shares of the applicable Series at
net asset value. An investor may direct the Transfer Agent in writing not less
than 5 full business days prior to the payable date to have subsequent dividends
and/or distributions sent in cash rather than invested. In the case of recently
purchased shares for which registration instructions have not been received on
the record date, cash payment will be made directly to the dealer. Any
shareholder who receives a cash payment representing a dividend or distribution
may reinvest such dividend or distribution at net
B-23
<PAGE>
asset value by returning the check or the proceeds to the Transfer Agent within
30 days after the payment date. Such investment will be made at the net asset
value per share next determined after receipt of the check or proceeds by the
Transfer Agent.
Exchange Privilege
The Trust makes available to its Money Market Series, Short-Intermediate
Term Series and U.S. Treasury Money Market Series shareholders the privilege of
exchanging their shares for shares of either of the other Series and 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. Class A shares of such other Prudential Mutual Funds may also be
exchanged for Money Market Series, Short-Intermediate Term Series and U.S.
Treasury Money Market Series shares. All exchanges are made on the basis of
relative net asset value next determined after receipt of an order in proper
form. An exchange will be treated as a redemption and purchase for tax purposes.
Shares may be exchanged for shares of another fund only if shares of such fund
may legally be sold under applicable state laws.
It is contemplated that the exchange privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
Shareholders of the Trust may exchange their shares for Class A shares of
the Prudential Mutual Funds, and shares of the money market funds specified
below. No fee or sales load will be imposed upon the exchange.
The following money market funds participate in the Class A Exchange
Privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New York Money Market Series)
(New Jersey Money Market Series)
Prudential MoneyMart Assets
Prudential Tax-Free Money Fund, Inc.
Shareholders of the Trust may not exchange their shares for Class B or
Class C shares of the Prudential Mutual Funds or shares of Prudential Special
Money Market Fund, a money market fund, except that shares acquired prior to
January 22, 1990 subject to a contingent deferred sales charge can be exchanged
for Class B shares.
Additional details about the Exchange Privilege and prospectuses for each
of the Prudential Mutual Funds are available from the Trust's Transfer Agent,
Prudential Securities or Prusec. The Exchange Privilege may be modified,
terminated or suspended on sixty days notice, and any fund, including the Trust,
or the Distributor, has the right to reject any exchange application relating to
such fund's shares.
Dollar Cost Averaging--Short-Intermediate Term Series
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 overall cost
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
B-24
<PAGE>
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 1993-94 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.
Automatic Savings Accumulation Plan (ASAP)
Under ASAP, an investor may arrange to have a fixed amount automatically
invested in any Series' shares each month by authorizing his or her bank account
or Prudential Securities Account (including a Command Account) to be debited to
invest specified dollar amounts in shares of that Series. The investor's bank
must be a member of the Automatic Clearing House System. Share certificates are
not issued to ASAP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, Prudential Securities or Prusec.
Systematic Withdrawal Plan
A systematic withdrawal plan is available for shareholders having shares of
the Trust held through Prudential Securities or the Transfer Agent. Such
withdrawal plan provides for monthly or quarterly checks in any amount, except
as provided below, up to the value of the shares in the shareholder's account.
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 of the
applicable series at net asset value on shares held under this plan. See
``Shareholder Investment Account-Automatic Reinvestment of Dividends and
Distributions.''
Prudential Securities and the Transfer Agent act as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may be
terminated at any time, and the Distributor reserves the right to initiate a fee
of up to $5 per withdrawal, upon 30 days' written notice to the shareholder.
Withdrawal payments should not generally be considered as dividends, yield
or income. If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted. Furthermore, each withdrawal constitutes a
redemption of shares, and any gain or loss realized must generally be recognized
for federal income tax purposes. Each shareholder should consult his or her own
tax adviser with regard to the tax consequences of the plan, particularly if
used in connection with a retirement plan.
Tax-Deferred Retirement Plans
Various 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 are available from Prudential Securities or the Transfer Agent.
B-25
<PAGE>
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.
Individual Retirement Accounts
An individual retirement account (IRA) permits the deferral of federal
income tax on income earned in the account until the earnings are withdrawn. The
following chart represents a comparison of the earnings in a personal savings
account with those in an IRA, assuming a $2,000 annual contribution, an 8% rate
of return and a 39.6% federal income tax bracket and shows how much more
retirement income can accumulate within an IRA as opposed to a taxable
individual savings account.
<TABLE>
<CAPTION>
Tax-Deferred Compounding1
<S> <C> <C>
Contributions Personal
Made Over: Savings IRA
- -------------- -------- --------
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>
- ------------------
1The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated. Earnings in
the IRA account will be subject to tax when withdrawn from the account.
Mutual Fund Programs
From time to time, a Series of 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 promoted collectively. Typically,
these programs are created with an investment theme, e.g., to seek greater
diversification, protection from interest rate movements or access to different
management styles. In the event such a program is instituted, there may be a
minimum investment requirement for the program as a whole. A Series may waive or
reduce the minimum initial investment requirements in connection with such a
program.
The mutual funds in the program may be purchased individually or as a part
of the program. Since the allocation of portfolios included in the program may
not be appropriate for all investors, investors should consult their Prudential
Securities Financial Adviser or Prudential/Pruco Securities Representative
concerning the appropriate blend of portfolios for them. If investors elect to
purchase the individual mutual funds that constitute the program in an
investment ratio different from that offered by the program, the standard
minimum investment requirements for the individual mutual funds will apply.
NET ASSET VALUE
Money Market Series and U.S. Treasury Money Market Series
Amortized Cost Valuation. The Money Market Series and the U.S. Treasury
Money Market Series use the amortized cost method to determine the value of
their portfolio securities in accordance with regulations of the Securities and
Exchange Commission. The amortized cost method involves valuing a security at
its cost and amortizing any discount or premium over the period until maturity.
The method does not take into account unrealized capital gains and losses which
may result from the effect of fluctuating interest rates on the market value of
the security.
With respect to the Money Market Series and the U.S. Treasury Money Market
Series, the Trustees have determined to maintain a dollar-weighted average
maturity of 90 days or less, to purchase instruments having remaining maturities
of thirteen months or less and to invest only in securities determined by the
investment adviser under the supervision of the Trustees to present minimal
credit risks and to be of eligible quality in accordance with the provisions of
Rule 2a-7 of the Investment Company Act. The Trustees have adopted procedures
designed to stabilize, to the extent reasonably possible, both Series' price per
share as computed for the purpose of sales and redemptions at $1.00. Such
procedures will include review of the Series' portfolio holdings by the
Trustees, at such intervals as they may deem appropriate, to determine whether
the Series' net asset value calculated by using available market quotations
deviates from $1.00 per share based on amortized cost. The extent of any
deviation will be examined by the Trustees. If such deviation exceeds 1/2 of 1%,
the Trustees will promptly consider what action, if any, will be initiated. In
the event the Trustees determine that a deviation exists which may result in
material dilution or other unfair results to prospective investors or existing
shareholders, the Trustees will take such corrective action as they consider
necessary and appropriate, including the sale of portfolio instruments prior to
maturity to realize capital gains or
B-26
<PAGE>
losses or to shorten average portfolio maturity, the withholding of dividends,
redemptions of shares in kind, or the use of available market quotations to
establish a net asset value per share.
Short-Intermediate Term Series
Under the Investment Company Act, the Trustees are responsible for
determining in good faith the fair value of the Short-Intermediate Term Series'
securities. In accordance with procedures adopted by the Trustees, the value of
each U.S. Government security for which quotations are available will be based
on the valuation provided by an independent pricing service. Pricing services
consider such factors as security prices, yields, maturities, call features,
ratings and developments relating to specific securities in arriving at
securities valuations. Securities for which market quotations are not readily
available are valued by appraisal at their fair value as determined in good
faith by the Manager under procedures established under the general supervision
and responsibility of the Trustees.
Short-term investments which mature in 60 days or less are valued at
amortized cost, if their term to maturity from date of purchase was 60 days or
less, or by amortizing their value on the 61st day prior to maturity if their
term to maturity when acquired by the Intermediate Series was more than 60 days,
unless this is determined not to represent fair value by the Trustees.
Time Net Asset Value is Calculated
The Trust will calculate its net asset value at 4:15 P.M., New York time,
for the Short-Intermediate Term Series and at 4:30 P.M. for the Money Market
Series and U.S. Treasury Money Market Series, on each day the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem series shares have been received or days on which changes in the value
of a series' securities do not affect net asset value. In the event the New York
Stock Exchange closes early on any business day, the net asset value of the
Short-Intermediate Term Series' shares shall be determined at a time between
such closing and 4:15 P.M. New York time.
PERFORMANCE INFORMATION
Money Market Series and U.S. Treasury Money Market Series--Calculation of Yield
The Money Market Series and U.S. Treasury Money Market Series will each
prepare a current quotation of yield from time to time. The yield quoted will be
the simple annualized yield for an identified seven calendar day period. The
yield calculation will be based on a hypothetical account having a balance of
exactly one share at the beginning of the seven-day period. The base period
return will be the change in the value of the hypothetical account during the
seven-day period, including dividends declared on any shares purchased with
dividends on the shares but excluding any capital changes. The yield will vary
as interest rates and other conditions affecting money market instruments
change. Yield also depends on the quality, length of maturity and type of
instruments in the Money Market Series and U.S. Treasury Money Market Series'
portfolios and their operating expenses. The Money Market Series and U.S.
Treasury Money Market Series may also each prepare an effective annual yield
computed by compounding the unannualized seven-day period return as follows: by
adding 1 to the unannualized seven-day period return, raising the sum to a power
equal to 365 divided by 7, and subtracting 1 from the result.
Effective yield = [(base period return + 1)365/7] -1
The U.S. Treasury Money Market Series may also calculate the tax equivalent
yield over a 7-day period. The tax equivalent yield will be determined by first
computing the current yield as discussed above. The Series will then determine
what portion of the yield is attributable to securities, the income of which is
exempt for state and local income tax purposes. This portion of the yield will
then be divided by one minus the maximum state tax rate of individual taxpayers
and then added to the portion of the yield that is attributable to other
securities.
Comparative performance information may be used from time to time in
advertising or marketing the Money Market Series' and U.S. Treasury Money Market
Series' shares, including data from Lipper Analytical Services, Inc., Donoghue's
Money Fund Report, The Bank Rate Monitor, other industry publications, business
periodicals, rating services and market indices.
The Money Market Series' and U.S. Treasury Money Market Series' yields
fluctuate, and annualized yield quotations are not a representation by the Money
Market Series or U.S. Treasury Money Market Series as to what an investment in
the Money Market Series and U.S. Treasury Money Market Series will actually
yield for any given period. Yield for the Money Market Series and U.S. Treasury
Money Market Series will vary based on a number of factors including changes in
market conditions, the level of interest rates and the level of each series'
income and expenses.
B-27
<PAGE>
Short-Intermediate Term Series--Calculation of Yield and Total Return
Yield. The Short-Intermediate Term Series may from time to time advertise
its yield as calculated over a 30-day period. Yield will be computed by dividing
the Short-Intermediate Term Series' net investment income per share earned
during this 30-day period by the net asset value per share on the last day of
this period. Yield is calculated according to the following formula:
<TABLE>
<C> <C> <S>
YIELD = 2 [ a - b +1)6 - 1
( cd ]
</TABLE>
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 net asset value per share on the last day of the period.
Yield fluctuates and an annualized yield quotation is not a representation
by the Trust as to what an investment in the Intermediate Term Series will
actually yield for any given period.
The Short-Intermediate Term Series' 30-day yield for the period ended May
31, 1995 was 5.67%.
Average Annual Total Return. The Short-Intermediate Term Series may from
time to time advertise its average annual total return. See ``How the Trust
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 does not take into account any federal or state
income taxes that may be payable upon redemption.
The Intermediate Term Series' average annual total return for the one, five
and ten year periods ended May 31, 1995 was 8.1%, 7.7% and 8.1%, respectively.
Aggregate Total Return. The Short-Intermediate Term Series may also
advertise its aggregate total return. See ``How the Trust 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
investment 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.
The Short-Intermediate Term Series' aggregate total return for the one,
five and ten year periods ended May 31, 1995 was 8.1%, 44.9% and 117.2%,
respectively.
TAXES
Each series of the Trust is treated as a separate entity for federal income
tax purposes and each has elected to qualify and intends to remain qualified as
a regulated investment company under the Internal Revenue Code of 1986, as
amended (the Internal Revenue Code). If each series qualifies as a regulated
investment company, it will not be subject to federal income taxes on the
taxable income it distributes to shareholders, provided at least 90% of its net
investment income and net short-term capital gains earned in the taxable year is
so distributed. To qualify for this treatment, each series must, among other
things, (a) derive at least 90% of its gross income (without offset for losses
from the sale or other disposition of securities or foreign currencies) from
dividends, interest, payments with respect to securities loans, gains from the
sale or other disposition of securities or foreign currencies and certain
financial futures, options and forward contracts; (b) derive less than 30% of
its gross income (without offset for losses from the sale or other disposition
of
B-28
<PAGE>
securities or foreign currencies) from the gains on the sale or other
disposition of securities held for less than three months; and (c) diversify its
holdings so that, at the end of each quarter of the taxable year, (i) at least
50% of the value of its assets is represented by cash, U.S. Government
securities and other securities limited in respect of any one issuer to an
amount no greater than 5% of its assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its assets
is invested in the securities of any one issuer (other than U.S. Government
securities). The performance and tax qualification of one series will have no
effect on the federal income tax liability of shareholders of the other series.
The Internal Revenue Code imposes a 4% nondeductible excise tax to the
extent any series fails to meet certain minimum distribution requirements by the
end of each calendar year. For this purpose, dividends declared in October,
November and December payable to shareholders of record on a specified date in
October, November and December and paid in the following January will be treated
as having been paid by the Trust and received by shareholders in such prior
year. Under this rule, a shareholder may be taxed in one year on dividends or
distributions actually received in January of the following year.
See ``Taxes, Dividends and Distributions'' in the Prospectus of each
series.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT AND
INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, has been retained to act as Custodian of the Trust's
investments and in such capacity maintains certain financial and accounting
books and records pursuant to an agreement with the Trust.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison,
New Jersey 08837, serves as Transfer and Dividend Disbursing Agent and in those
capacities maintains certain books and records for the Trust. PMFS is a
wholly-owned subsidiary of PMF. PMFS provides customary transfer agency services
to the Trust, including the handling of shareholder communications, the
processing of shareholder transactions, the maintenance of shareholder account
records, payment of dividends and distributions and related functions. For these
services, PMFS receives an annual fee per shareholder account, a new account
set-up fee for each manually established account and a monthly inactive zero
balance account fee per shareholder account. PMFS is also reimbursed for its
out-of-pocket expenses, including but not limited to postage, stationery,
printing, allocable communications and other costs. For the fiscal year ended
November 30, 1994, the Short-Intermediate Term Series, Money Market Series and
U.S. Treasury Money Market Series incurred fees of $267,000, $1,066,000 and
$79,000, respectively, for the services of PMFS.
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York,
serves as the Trust's independent accountants and in that capacity audits the
Trust's annual financial statements.
B-29
<PAGE>
Portfolio of Investments May 31, PRUDENTIAL GOVERNMENT SECURITIES
1995 (Unaudited) TRUST MONEY MARKET SERIES
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
------------------------------------------------------------
Federal Farm Credit Bank--10.8%
$19,000 5.375%, 8/1/95 $ 18,996,058
16,250 6.65%, 8/1/95 16,251,842
9,900 6.56%, 11/14/95 9,893,616
16,600 5.97%, 2/23/96, F.R.N. 16,593,928
------------
61,735,444
- ------------------------------------------------------------
Federal Home Loan Bank--17.1%
12,000 5.78%, 6/5/95, F.R.N. 11,999,700
10,100 5.625%, 8/23/95 10,098,852
14,150 6.07%, 9/1/95 13,930,502
2,500 5.92%, 10/13/95 2,444,911
4,500 5.92%, 10/19/95 4,396,400
10,000 5.98%, 11/1/95 9,745,850
6,000 6.787%, 2/15/96 5,992,380
6,930 6.85%, 2/28/96 6,935,991
15,000 5.97%, 3/8/96, F.R.N. 14,980,487
6,000 6.22%, 3/22/96 5,694,183
9,000 6.015%, 6/3/96 8,985,750
2,500 6.11%, 6/3/96, F.R.N. 2,498,775
------------
97,703,781
- ------------------------------------------------------------
Federal Home Loan Mortgage Corporation--2.1%
5,145 8.70%, 7/6/95 5,156,117
7,375 5.80%, 2/1/96 7,083,892
------------
12,240,009
- ------------------------------------------------------------
Federal National Mortgage Association--18.6%
28,000 5.80%, 6/1/95 28,000,000
4,000 11.15%, 6/12/95 4,005,228
3,150 5.25%, 6/30/95 3,146,909
13,075 5.90%, 8/14/95 12,916,429
15,000 5.90%, 8/17/95 14,810,709
15,000 6.02%, 8/25/95, F.R.N. 15,000,000
Federal National Mortgage Association (cont'd.)
$4,050 6.05%, 9/1/95 $ 3,987,382
10,000 5.9125%, 10/30/95 9,996,902
3,750 8.80%, 11/10/95 3,781,460
8,685 5.825%, 11/13/95 8,453,129
2,590 6.24%, 12/8/95 2,504,703
------------
106,602,851
- ------------------------------------------------------------
Student Loan Marketing Association--9.5%
9,000 6.12%, 6/2/95, F.R.N. 9,000,060
17,000 6.17%, 8/7/95, F.R.N. 17,009,166
6,600 6.17%, 3/20/96, F.R.N. 6,610,596
10,000 6.04%, 4/16/96, F.R.N. 10,000,000
12,000 5.48%, 6/1/96, F.R.N. 11,984,396
------------
54,604,218
- ------------------------------------------------------------
Repurchase Agreements(a)--42.7%
93,981 Joint Repurchase Agreement Account
6.137%, 6/1/95 (Note 5) 93,981,000
11,017 Morgan Stanley & Co., Inc., 5.97%,
dated 5/25/95, due 6/1/95 in the
amount of $11,029,789 (cost
$11,017,000; the value of the
collateral including accrued
interest is $12,050,822) 11,017,000
35,469 Morgan Stanley & Co., Inc., 6.01%,
dated 5/30/95, due 6/1/95 in the
amount of $35,480,843 (cost
$35,469,000; the value of the
collateral including accrued
interest is $37,029,278) 35,469,000
26,000 Bear, Stearns & Co., 6.00%, dated
5/30/95, due 6/2/95 in the amount
of $26,013,000 (cost $26,000,000;
the value of the collateral
including accrued interest is
$26,630,741) 26,000,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-30
<PAGE>
PRUDENTIAL GOVERNMENT SECURITIES TRUST
MONEY MARKET SERIES
Portfolio of Investments May 31, 1995 (Unaudited)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
------------------------------------------------------------
Repurchase Agreements(a) (cont'd.)
$50,000 Nomura Securities International,
Inc., 6.00%, dated 5/30/95, due
6/6/95 in the amount of
$50,058,333 (cost $50,000,000; the
value of the collateral including
accrued interest is $51,000,079) $ 50,000,000
18,000 Smith Barney, Inc., 6.00%, dated
5/30/95, due 6/6/95 in the amount
of $18,021,000 (cost $18,000,000;
the value of the collateral
including accrued interest is
$18,360,015) 18,000,000
10,000 Smith Barney, Inc., 5.99%, dated
5/17/95, due 6/19/95 in the amount
of $10,054,908 (cost $10,000,000;
the value of the collateral
including accrued interest is
$10,200,009) 10,000,000
------------
244,467,000
- ------------------------------------------------------------
Total Investments--100.8%
(amortized cost $577,353,303(b)) 577,353,303
Liabilities in excess of other
assets--(0.8%) (4,824,904)
------------
Net Assets--100% $572,528,399
------------
------------
</TABLE>
- ---------------
F.R.N.--Floating Rate Note.
(a) Repurchase Agreements are collateralized by U.S.
Treasury or Federal agency obligations.
(b) Federal income tax basis of portfolio securities is the
same as for financial reporting purposes.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-31
<PAGE>
Portfolio of Investments May 31, PRUDENTIAL GOVERNMENT SECURITIES
1995 (Unaudited) TRUST INTERMEDIATE TERM SERIES
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
------------------------------------------------------------
LONG-TERM INVESTMENTS--97.3%
------------------------------------------------------------
Federal Home Loan Mortgage Corporation--1.8%
$3,638 7.184%, 10/1/23 $ 3,763,932
- ------------------------------------------------------------
Federal National Mortgage Association--15.6%
9,760 6.50%, 2/1/25 10,077,475
4,978 6.50%, 3/1/25 5,134,921
6,570 6.75%, 3/1/25 6,763,845
10,786 9.00%, 4/1/25 11,237,122
------------
33,213,363
- ------------------------------------------------------------
Government National Mortgage Association--4.8%
9,789 9.00%, 6/15/98-9/15/09 10,247,686
- ------------------------------------------------------------
United States Treasury Notes--75.1%
25,000(c) 4.00%, 1/31/96 24,691,500
5,000 7.50%, 12/31/96 5,123,450
17,000(c) 4.75%, 2/15/97 16,689,240
16,000(c) 8.50%, 4/15/97 16,737,440
10,000 7.375%, 11/15/97 10,328,100
7,000 6.125%, 5/15/98 7,036,120
6,000 7.50%, 10/31/99 6,329,040
7,000 7.75%, 11/30/99 7,458,290
6,000(c) 7.25%, 8/15/04 6,378,720
35,000(d) 7.875%, 11/15/04 38,784,200
5,000 7.50%, 2/15/05 5,420,300
15,000 6.50%, 5/15/05 15,229,650
------------
160,206,050
------------------------------------------------------------
Total long-term investments
(cost $201,061,179) 207,431,031
SHORT-TERM INVESTMENT--0.4%
Joint Repurchase Agreement Account,
$965 6.137%, 6/1/95 (Note 5)
(cost $965,000) $ 965,000
- ------------------------------------------------------------
Total Investments--97.7%
(cost $202,026,179; Note 4) 208,396,031
Other assets in excess of
liabilities--2.3% 4,838,534
------------
Net Assets--100% $213,234,565
------------
------------
- ---------------
(c) Asset segregated for dollar rolls.
(d) Security on loan.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-32
<PAGE>
PRUDENTIAL GOVERNMENT SECURITIES TRUST
U.S. TREASURY MONEY MARKET SERIES
Portfolio of Investments May 31, 1995 (Unaudited)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C> <C> <C>
------------------------------------------------------------
United States Treasury Bills--65.5%
$50,000 5.79%, 6/15/95 $ 49,895,458
25,000 5.80%, 6/15/95 24,947,639
22,500 5.84%, 6/15/95 22,452,550
2,897 5.81%, 6/22/95 2,883,658
25,000 5.82%, 6/22/95 24,915,125
50,000 5.695%, 8/24/95 49,335,583
5,426 5.64%, 8/31/95 5,348,643
6,907 5.64%, 11/16/95 6,725,208
------------
186,503,864
- ------------------------------------------------------------
United States Treasury Bond--18.3%
51,908 8.375%, 8/15/95 52,160,722
- ------------------------------------------------------------
United States Treasury Notes--13.8%
9,050 4.625%, 8/15/95 9,024,084
5,000 3.875%, 9/30/95 4,963,529
5,000 8.625%, 10/15/95 5,043,800
10,000 4.25%, 11/30/95 9,906,408
5,500 4.625%, 2/15/96 5,425,592
5,000 5.125%, 3/31/96 4,938,946
------------
39,302,359
- ------------------------------------------------------------
Total Investments--97.6%
(amortized cost $277,966,945(b)) 277,966,945
Other assets in excess of
liabilities--2.4% 6,907,217
------------
Net Assets--100% $284,874,162
------------
------------
- ---------------
(b) Federal income tax basis of portfolio securities is the same as for
financial reporting purposes.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-33
<PAGE>
Statement of Assets and Liabilities
May 31, 1995 (Unaudited) PRUDENTIAL GOVERNMENT SECURITIES TRUST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S.
Treasury
Money Money
Market Intermediate Market
Assets Series Term Series Series
<S> <C> <C> <C>
------------ ------------ ------------
Investments, at value (cost $577,353,303, $202,026,179 and $277,966,945,
respectively)............................................................. $577,353,303 $208,396,031 $277,966,945
Cash........................................................................ 147,712 378 263,301
Collateral for securities on loan, at value................................. -- 39,583,000 --
Receivable for investments sold............................................. -- 10,385,938 136,070,446
Receivable for Series shares sold........................................... 8,521,653 55,336 3,393,512
Interest receivable......................................................... 3,397,048 2,078,786 1,602,783
Fees receivable on securities loaned........................................ -- 16,347 --
Deferred expenses and other assets.......................................... 21,855 7,285 16,256
------------ ------------ ------------
Total assets............................................................. 589,441,571 260,523,101 419,313,243
------------ ------------ ------------
Liabilities
Payable upon return of securities loaned.................................... -- 39,583,000 --
Payable for investments purchased........................................... 8,985,750 7,046,912 113,714,894
Payable for Series shares reacquired........................................ 6,638,353 111,968 20,118,365
Dividends payable........................................................... 666,591 298,697 370,231
Accrued expenses and other liabilities...................................... 397,648 156,127 119,462
Due to Manager.............................................................. 191,779 72,282 98,947
Due to Distributors......................................................... 33,051 19,550 17,182
------------ ------------ ------------
Total liabilities........................................................ 16,913,172 47,288,536 134,439,081
------------ ------------ ------------
Net Assets.................................................................. $572,528,399 $213,234,565 $284,874,162
------------ ------------ ------------
Net assets were comprised of:
Shares of beneficial interest, at par ($.01 per share)...................... $ 5,725,284 $ 221,250 $ 2,848,742
Paid-in capital in excess of par............................................ 566,803,115 286,721,205 282,025,420
------------ ------------ ------------
572,528,399 286,942,455 284,874,162
Undistributed net investment income......................................... -- 2,044,481 --
Accumulated net realized losses............................................. -- (82,122,223) --
Net unrealized appreciation of investments.................................. -- 6,369,852 --
------------ ------------ ------------
Net assets, May 31, 1995.................................................... $572,528,399 $213,234,565 $284,874,162
------------ ------------ ------------
------------ ------------ ------------
Shares of beneficial interest issued and outstanding........................ 572,528,399 22,125,052 284,874,162
------------ ------------ ------------
------------ ------------ ------------
Net asset value............................................................. $1.00 $9.64 $1.00
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-34
<PAGE>
Statement of Operations
Six Months Ended May 31, 1995 (Unaudited) PRUDENTIAL GOVERNMENT SECURITIES TRUST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Money U.S. Treasury
Market Intermediate Money
Net Investment Income Series Term Series Market Series
<S> <C> <C> <C>
----------- ------------ -------------
Income
Interest................................................................. $17,541,172 $ 7,027,370 $ 9,995,058
Income from securities loaned............................................ -- 188,846 --
----------- ------------ -------------
17,541,172 7,216,216 9,995,058
----------- ------------ -------------
Expenses
Management fee........................................................... 1,183,106 438,466 707,447
Distribution fee......................................................... 369,721 227,698 221,077
Transfer agent's fees and expenses....................................... 656,000 163,000 41,000
Custodian's fees and expenses............................................ 71,000 83,000 31,000
Registration fees........................................................ 25,000 30,000 25,000
Reports to shareholders.................................................. 47,000 33,000 19,500
Audit fee................................................................ 19,000 17,500 17,500
Insurance expense........................................................ 12,000 4,000 6,000
Trustees' fees........................................................... 6,000 6,000 6,000
Legal fees............................................................... 3,000 2,000 2,500
Amortization of deferred organization expenses........................... -- -- 3,955
Miscellaneous............................................................ 1,161 3,321 1,655
----------- ------------ -------------
Total expenses........................................................... 2,392,988 1,007,985 1,082,634
----------- ------------ -------------
Net investment income....................................................... 15,148,184 6,208,231 8,912,424
----------- ------------ -------------
Realized and Unrealized Gain on Investments
Net realized gain on investment transactions................................ 17,325 856,522 82,090
Net change in unrealized appreciation of investments........................ -- 9,971,050 --
----------- ------------ -------------
Net gain on investments..................................................... 17,325 10,827,572 82,090
----------- ------------ -------------
Net Increase in Net Assets Resulting from Operations........................ $15,165,509 $ 17,035,803 $ 8,994,514
----------- ------------ -------------
----------- ------------ -------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-35
<PAGE>
Statement of Changes in Net Assets
(Unaudited) PRUDENTIAL GOVERNMENT SECURITIES TRUST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S. Treasury
Money Market Intermediate Money Market
Series Term Series Series
------------------------------- ------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Six months Six months Six months
ended Year ended ended Year ended ended Year ended
Increase (Decrease) May 31, November 30, May 31, November 30, May 31, November 30,
in Net Assets 1995 1994 1995 1994 1995 1994
-------------- -------------- -------------- -------------- -------------- --------------
Operations
Net investment income.... $ 15,148,184 $ 23,366,223 $ 6,208,231 $ 16,852,611 $ 8,912,424 $ 9,891,712
Net realized gain (loss)
on investment
transactions.......... 17,325 84,741 856,522 (15,205,293) 82,090 55,159
Net change in unrealized
appreciation/
depreciation of
investments........... -- -- 9,971,050 (10,351,690) -- --
-------------- -------------- -------------- -------------- -------------- --------------
Net increase (decrease)
in net assets
resulting from
operations............ 15,165,509 23,450,964 17,035,803 (8,704,372) 8,994,514 9,946,871
-------------- -------------- -------------- -------------- -------------- --------------
Net equalization debits..... -- -- (97,842) (3,335) -- --
-------------- -------------- -------------- -------------- -------------- --------------
Dividends and distributions
to shareholders:
Dividends to
shareholders.......... (15,165,509) (23,450,964) (6,292,553) (16,669,920) (8,994,514) (9,946,871)
Tax return of capital
distribution.......... -- -- -- (3,852,402) -- --
-------------- -------------- -------------- -------------- -------------- --------------
Total dividends and
distributions to
shareholders............. (15,165,509) (23,450,964) (6,292,553) (20,522,322) (8,994,514) (9,946,871)
-------------- -------------- -------------- -------------- -------------- --------------
Series share transactions*
Net proceeds from shares
subscribed............ 890,312,487 1,978,695,920 5,764,181 86,065,731 1,606,210,817 1,582,592,660
Net asset value of shares
issued to shareholders
in reinvestment of
dividends and
distributions......... 14,257,843 22,318,739 4,091,646 14,086,719 7,841,587 9,338,121
Cost of shares
reacquired............ (969,385,378) (2,283,173,810) (49,246,777) (176,886,461) (1,623,162,489) (1,582,924,124)
-------------- -------------- -------------- -------------- -------------- --------------
Net increase (decrease)
in net assets from
Series share
transactions.......... (64,815,048) (282,159,151) (39,390,950) (76,734,011) (9,110,085) 9,006,657
-------------- -------------- -------------- -------------- -------------- --------------
Total increase (decrease)... (64,815,048) (282,159,151) (28,745,542) (105,964,040) (9,110,085) 9,006,657
Net Assets
Beginning of period...... 637,343,447 919,502,598 241,980,107 347,944,147 293,984,247 284,977,590
-------------- -------------- -------------- -------------- -------------- --------------
End of period............ $ 572,528,399 $ 637,343,447 $ 213,234,565 $ 241,980,107 $ 284,874,162 $ 293,984,247
-------------- -------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- -------------- --------------
</TABLE>
- ---------------
*At $1.00 per share for the Money Market Series and the U.S. Treasury Money
Market Series.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-36
<PAGE>
Notes to Financial Statements (Unaudited) PRUDENTIAL GOVERNMENT SECURITIES TRUST
- --------------------------------------------------------------------------------
Prudential Government Securities Trust (the ``Fund'') is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. The Fund consists of three series--the Money Market Series, the
Intermediate Term Series and the U.S. Treasury Money Market Series; the monies
of each series are invested in separate, independently managed portfolios.
- ------------------------------------------------------------
Note 1. Significant Accounting Policies
The following is a summary of the significant accounting policies followed by
the Fund in the preparation of its financial statements.
Securities Valuations: The Money Market Series and U.S. Treasury Money Market
Series value portfolio securities at amortized cost, which approximates market
value. The amortized cost method of valuation involves valuing a security at its
cost on the date of purchase and thereafter assuming a constant amortization to
maturity of any discount or premium.
For the Intermediate Term Series, the Trustees have authorized the use of an
independent pricing service to determine valuations. The pricing service
considers such factors as security prices, yields, maturities, call features,
ratings and developments relating to specific securities in arriving at
securities valuations. When market quotations are not readily available, a
security is valued by appraisal at its fair value as determined in good faith
under procedures established under the general supervision and responsibility of
the Trustees. Short-term securities which mature in more than 60 days are valued
at current market quotations. Short-term securities which mature in 60 days or
less are valued at amortized cost.
In connection with transactions in repurchase agreements, the Fund's custodian
or designated subcustodians, as the case may be under triparty repurchase
agreements, takes 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.
Securities Lending: The Intermediate Term Series may lend its U.S. Government
securities to broker-dealers or government securities dealers. The Fund's policy
is to receive collateral on each loan at least equal, at all times, to the
market value of the securities loaned. The Series may bear the risk of delay in
recovery of, or even loss of rights in, the collateral should the borrower of
the securities fail financially. The Series receives compensation for lending
its securities in the form of fees or it retains a portion of interest on the
investment of any cash received as collateral. The Series also continues to
receive interest on the securities loaned, and any gain or loss in the market
price of the securities loaned that may occur during the term of the loan will
be for the account of the Series.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of portfolio
securities are calculated on the identified cost basis. Interest income is
recorded on the accrual basis. The Money Market and the U.S. Treasury Money
Market Series' amortize discounts and premiums on purchases of portfolio
securities as adjustments to income. For the Intermediate Term Series, gains or
losses resulting from discounts or premiums on purchased securities are treated
as capital gains or losses when realized upon disposal.
Dollar Rolls: The Intermediate Term Series enters into dollar roll transactions
in which the Series sells securities for delivery in the current month,
realizing a gain or loss, and simultaneously contracts to repurchase somewhat
similar (same type, coupon and maturity) securities on a specified future date.
During the roll period the Intermediate Term Series forgoes principal and
interest paid on the securities. The Series is compensated by the interest
earned on the cash proceeds of the initial sale and by the lower repurchase
price at the future date. The difference between the sale proceeds and the lower
repurchase price is taken into income. The Intermediate Term Series maintains a
segregated account, the dollar value of which is equal to its obligations in
respect of dollar rolls.
Federal Income Taxes: For federal income tax purposes, each series of the Fund
is treated as a separate taxable entity. It is each Series' policy to continue
to meet the requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of its taxable net income to its
shareholders. Therefore, no federal income tax provision is required.
Equalization: The Intermediate Term Series follows the accounting practice known
as equalization by which a portion of the proceeds from sales and costs of
reacquisitions of its shares, equivalent on a per share basis to the amount of
distributable net investment income on the date of the transaction, is credited
or charged to undistributed net investment income. As a result, undistributed
net investment income per share is unaffected by sales or reacquisitions of the
shares.
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with A.I.C.P.A. Statement of
Position 93-2: Determination, Disclosure, and Financial Statement Presentation
of Income, Capital Gain, and Return of Capital Distributions by Investment
Companies. For the Intermediate Term Series, the effect of applying this
statement was to increase undistributed net investment income and increase
accumulated net realized losses by $92,902 for market discount recognized on
securities sold. Current year net investment income, net realized losses and net
assets were not affected by this change.
Deferred Organization Expenses: Approximately $49,000 of expenses were incurred
in connection with the organization and initial registration of
- --------------------------------------------------------------------------------
B-37
<PAGE>
Notes to Financial Statements (Unaudited) PRUDENTIAL GOVERNMENT SECURITIES TRUST
- --------------------------------------------------------------------------------
the U.S. Treasury Series and such amount has been deferred and is being
amortized over a period of 60 months ending December, 1995.
Dividends and Distributions: The Money Market Series and U.S. Treasury Money
Market Series declare daily dividends from net investment income and net
short-term capital gains and losses. Dividends are paid monthly.
The Intermediate Term Series declares dividends from net investment income
daily; payment of dividends is made monthly. Distributions of net capital gains,
if any, are made annually.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual Fund Management, Inc.
(``PMF''). Pursuant to this agreement, PMF has responsibility for all investment
advisory services and supervises the subadviser's performance of such services.
PMF has entered into a subadvisory agreement with The Prudential Investment
Corporation (``PIC''); PIC furnishes investment advisory services in connection
with the management of the Fund. PMF pays for the cost of the subadviser's
services, the compensation of officers of the Fund, occupancy and certain
clerical and bookkeeping costs of the Fund. The Fund bears all other costs and
expenses.
The management fee paid to PMF is computed daily and payable monthly, at an
annual rate of .40 of 1% of the average daily net assets of the Intermediate
Term Series and the U.S. Treasury Money Market Series. With respect to the Money
Market Series, the management fee is payable as follows: .40 of 1% of average
daily net assets up to $1 billion, .375 of 1% of average daily net assets
between $1 billion and $1.5 billion and .35 of 1% in excess of $1.5 billion.
To reimburse Prudential Mutual Fund Distributors, Inc. (``PMFD'') as distributor
of the shares of the Money Market Series and the U.S. Treasury Money Market
Series, each series has entered into a distribution agreement pursuant to which
each series pays PMFD a reimbursement, accrued daily and payable monthly, at an
annual rate of .125% of each of the series' average daily net assets. PMFD pays
various broker-dealers, including Prudential Securities Incorporated (``PSI'')
and Pruco Securities Corporation (``Pruco''), affiliated broker-dealers, for
account servicing fees and for the expenses incurred by such broker-dealers.
To reimburse PSI for its expenses as distributor of the Intermediate Term
Series, the Intermediate Term Series has entered into a distribution agreement
and a plan of distribution pursuant to which it pays PSI a fee, accrued daily
and payable monthly, at an annual rate of .25 of 1% of the lesser of (a) the
aggregate sales of shares issued (not including reinvestment of dividends and
distributions) on or after July 1, 1985 (the effective date of the plan) less
the aggregate net asset value of any such shares redeemed, or (b) the average
net asset value of the shares issued after the effective date of the plan.
Distribution expenses include commission credits to PSI branch offices for
payments of commissions and account servicing fees to financial advisers and an
allocation on account of overhead and other distribution-related expenses, the
cost of printing and mailing prospectuses to potential investors and of
advertising incurred in connection with the distribution of series shares. In
addition, PSI pays other broker-dealers, including Pruco, an affiliated
broker-dealer, for account servicing fees and other expenses incurred by such
broker-dealers in distributing these shares.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are (indirect)
wholly-owned subsidiaries of The Prudential Insurance Company of America.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the six months ended May 31,
1995, the Fund incurred fees of approximately $495,000, $111,000, and $34,000,
respectively, for the Money Market Series, Intermediate Term Series, and U.S.
Treasury Money Market Series. As of May 31, 1995, approximately $85,000,
$18,000, and $8,000 of such fees were due to PMFS from the Money Market Series,
Intermediate Term Series and U.S. Treasury Money Market Series, respectively.
Transfer agent fees and expenses in the Statement of Operations includes certain
out-of-pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities other than short-term investments,
for the Intermediate Term Series for the six months ended May 31, 1995 were
$255,432,969 and $253,120,731, respectively.
For the Intermediate Term Series, the cost basis of investments for federal
income tax purposes was $202,128,718 and, accordingly, as of May 31, 1995, net
unrealized appreciation of investments for federal income tax purposes was
$6,267,313 (gross urealized appreciation $7,127,061; gross unrealized
depreciation--$859,748).
For federal income tax purposes, the Intermediate Term Series has a capital loss
carryforward as of November 30, 1994 of approximately $79,007,000 of which
$25,173,000 expires in 1995, $11,426,000 expires in 1996, $19,180,000 expires in
1997, $6,864,000 expires in 1998,
- --------------------------------------------------------------------------------
B-38
<PAGE>
Notes to Financial Statements (Unaudited) PRUDENTIAL GOVERNMENT SECURITIES TRUST
- --------------------------------------------------------------------------------
$4,746,000 expires in 1999, $235,000 expires in 2001, and $11,383,000 expires in
2002. Accordingly, no capital gains distribution is expected to be paid to
shareholders until net gains have been realized in excess of such carryforward.
The Intermediate Term Series will elect to treat net capital losses of
approximately $3,428,300 incurred in the one month period ended November 30,
1994 as having incurred in the following fiscal year.
- ------------------------------------------------------------
Note 5. Joint Repurchase Agreement Account
The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Treasury or federal agency obligations. As of May 31, 1995, the Money
Market Series and the Intermediate Term Series had 9.69% and .10%, respectively,
undivided interests in the repurchase agreements in the joint account. These
undivided interests represented $93,981,000 and $965,000, respectively, in
principal amount. As of such date, the repurchase agreements in the joint
account and the value of the collateral therefor were as follows:
Bear, Stearns & Co., 6.125%, in the principal amount of $280,000,000, repurchase
price $280,047,639, due 6/1/95. The value of the collateral including accrued
interest is $285,803,012.
CS First Boston Corp., 6.14%, in the principal amount of $280,000,000,
repurchase price $280,047,756, due 6/1/95. The value of the collateral including
accrued interest is $285,702,358.
Goldman, Sachs & Co., 6.14%, in the principal amount of $310,000,000, repurchase
price $310,052,872, due 6/1/95. The value of the collateral including accrued
interest is $316,254,589.
UBS Securities Inc., 6.15%, in the principal amount of $100,000,000, repurchase
price $100,017,083, due 6/1/95. The value of the collateral including accrued
interest is $102,000,930.
- ------------------------------------------------------------
Note 6. Capital
Each series has authorized an unlimited number of shares of beneficial interest
at $.01 par value. Transactions in shares of beneficial interest for the
Intermediate Term Series for the fiscal year ended November 30, 1994 and six
months ended May 31, 1995 were as follows:
<TABLE>
<CAPTION>
Six months
ended Year ended
May 31, November 30,
1995 1994
---------- ------------
<S> <C> <C>
Shares sold.................. 619,879 8,712,001
Shares issued in reinvestment
of dividends and
distributions.............. 440,792 1,465,698
Shares reacquired............ (5,325,953) (18,375,629 )
---------- ------------
Net decrease................. (4,265,282) (8,197,930 )
---------- ------------
---------- ------------
</TABLE>
- ------------------------------------------------------------
Note 7. Proposed Reorganization
On May 4, 1995, the Trustees of the Fund approved an Agreement and Plan of
Reorganization (the ``Plan'') which provides for the transfer of substantially
all of the assets and liabilities of the Prudential Adjustable Rate Securities
Fund, Inc. (``Adjustable Rate'') to the Fund. Class A and Class B shares of
Adjustable Rate would be exchanged at net asset value for shares of equivalent
value of the Fund.
It is expected that the reogranization will take place in late August 1995. The
Fund and Adjustable Rate will each bear their pro-rata share of the costs of the
reorganization, including costs of proxy solicitation.
- ------------------------------------------------------------
Note 8. Proposed Name Change
The Trustees have recommended that the Intermediate Term Series change its name
to ``Short-Intermediate Term Series'' effective August 1, 1995.
- --------------------------------------------------------------------------------
B-39
<PAGE>
PRUDENTIAL GOVERNMENT SECURITIES
Financial Highlights (Unaudited) TRUST MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended Year Ended November 30,
May 31, ------------------------------------------------------------------
1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
---------- -------- -------- ---------- ---------- ----------
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Net investment income.......... 0.026 0.033 0.026 0.035 0.058 0.076
Dividends from net investment
income....................... (0.026) (0.033) (0.026) (0.035) (0.058) (0.076)
---------- -------- -------- ---------- ---------- ----------
Net asset value, end of
period....................... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
---------- -------- -------- ---------- ---------- ----------
---------- -------- -------- ---------- ---------- ----------
TOTAL RETURN(b):............... 2.59% 3.29% 2.62% 3.57% 5.96% 7.83%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $572,528 $637,343 $919,503 $1,026,187 $1,212,836 $1,355,058
Average net assets (000)....... $593,178 $732,867 $950,988 $1,113,759 $1,255,014 $ 857,385
Ratios to average net assets:
Expenses, including
distribution fees........ 0.81%(a) 0.77% 0.72% 0.72% 0.65% 0.66%
Expenses, excluding
distribution fees........ 0.68%(a) 0.64% 0.59% 0.60% 0.53% 0.53%
Net investment income....... 5.12%(a) 3.19% 2.56% 3.42% 5.78% 7.52%
</TABLE>
- ---------------
(a) Annualized.
(b) Total return is calculated assuming a purchase of shares on the first
day and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total return for a period
of less than one year is not annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-40
<PAGE>
PRUDENTIAL GOVERNMENT SECURITIES
Financial Highlights (Unaudited) TRUST INTERMEDIATE TERM SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended Year Ended November 30,
May 31, ------------------------------------------------------------------
1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
---------- -------- -------- ---------- ---------- ----------
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $ 9.17 $ 10.06 $ 9.97 $ 10.00 $ 9.71 $ 9.96
---------- -------- -------- ---------- ---------- ----------
Income from investment
operations
Net investment income.......... 0.27 0.64 0.69 0.75 0.82 0.84
Net realized and unrealized
gain (loss) on investment
transactions................. 0.47 (0.89) 0.11 (0.03) 0.31 (0.21)
---------- -------- -------- ---------- ---------- ----------
Total from investment
operations............... 0.74 (0.25) 0.80 0.72 1.13 0.63
---------- -------- -------- ---------- ---------- ----------
Less distributions
Dividends from net investment
income....................... (0.27) (0.52) (0.69) (0.75) (0.84) (0.88)
Tax return of capital
distribution................. -- (0.12) (0.02) -- -- --
---------- -------- -------- ---------- ---------- ----------
Total distributions............ (0.27) (0.64) (0.71) (0.75) (0.84) (0.88)
---------- -------- -------- ---------- ---------- ----------
Net asset value, end of
period....................... $ 9.64 $ 9.17 $ 10.06 $ 9.97 $ 10.00 $ 9.71
---------- -------- -------- ---------- ---------- ----------
---------- -------- -------- ---------- ---------- ----------
TOTAL RETURN(b):............... 8.17% (2.58)% 8.26% 7.40% 12.19% 6.73%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $213,235 $241,980 $347,944 $ 303,451 $ 298,086 $ 328,458
Average net assets (000)....... $219,835 $307,382 $321,538 $ 294,388 $ 301,643 $ 354,064
Ratios to average net assets:
Expenses, including
distribution fees........ 0.92%(a) 0.84% 0.80% 0.79% 0.79% 0.88%
Expenses, excluding
distribution fees........ 0.71%(a) 0.63% 0.59% 0.58% 0.63% 0.63%
Net investment income....... 5.66%(a) 5.48% 6.80% 7.47% 8.36% 8.60%
Portfolio turnover rate........ 121% 431% 44% 60% 151% 68%
</TABLE>
<TABLE>
<C> <S>
- ---------------
(a) Annualized.
(b) Total return is calculated assuming a purchase of shares on the first day and a sale on the last day of each period
reported and includes reinvestment of dividends and distributions. Total return for a period of less than one year is not
annualized.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-41
<PAGE>
PRUDENTIAL GOVERNMENT SECURITIES
Financial Highlights (Unaudited) TRUST U.S. TREASURY MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 3,
Six Months 1990(d)
Ended Year Ended November 30, Through
May 31, ---------------------------------- November 30,
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
---------- -------- -------- -------- ------------
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Net investment income.......... 0.026 0.033 0.025 0.034 0.057(c)
Dividends from net investment
income....................... (.026) (0.033) (0.025) (0.034) (0.057)
---------- -------- -------- -------- ------------
Net asset value, end of
period....................... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
---------- -------- -------- -------- ------------
---------- -------- -------- -------- ------------
TOTAL RETURN(b)................ 2.59% 3.31% 2.54% 3.46% 5.84%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $284,874 $293,984 $284,978 $233,600 $288,922
Average net assets (000)....... $354,695 $308,454 $273,313 $263,459 $273,203
Ratios to average net assets:
Expenses, including
distribution fees........ 0.61%(a) 0.62% 0.66% 0.66% 0.50%(a)/(c)
Expenses, excluding
distribution fees........ 0.49%(a) 0.50% 0.53% 0.54% 0.38%(a)/(c)
Net investment income....... 5.09%(a) 3.21% 2.49% 3.29% 5.74%(a)/(c)
</TABLE>
<TABLE>
<C> <S>
- ---------------
(a) Annualized.
(b) Total return is calculated assuming a purchase of shares on the first day and a sale on the last day of each period
reported and includes reinvestment of dividends and distributions. Total return for a period of less than one year is not
annualized.
(c) Net of expense subsidy.
(d) Commencement of investment operations.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-42
<PAGE>
PRUDENTIAL GOVERNMENT SECURITIES TRUST Portfolio of Investments
MONEY MARKET SERIES November 30, 1994
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
Federal Agricultural Mortgage
Corporation--1.0%
$ 6,600 5.32%, 1/3/95................ $ 6,567,814
------------
Federal Farm Credit Bank--10.9%
4,000 8.30%, 1/20/95............... 4,013,696
5,735 5.65%, 1/24/95............... 5,686,396
1,000 5.60%, 2/14/95............... 1,003,184
16,600 5.62%, 2/23/95, F.R.N........ 16,589,790
1,500 5.22%, 3/22/95............... 1,475,857
2,000 5.27%, 3/22/95............... 1,967,502
3,150 5.35%, 3/24/95............... 3,097,102
6,700 5.85%, 5/1/95................ 6,700,000
19,000 5.375%, 8/1/95............... 18,984,296
9,900 6.56%, 11/14/95.............. 9,886,616
------------
69,404,439
------------
Federal Home Loan Bank--9.3%
15,000 4.72%, 12/8/94, F.R.N........ 14,967,849
1,000 8.05%, 12/26/94.............. 1,003,019
3,945 5.32%, 1/5/95................ 3,924,596
13,200 5.32%, 1/12/95............... 13,118,072
7,300 8.40%, 1/25/95............... 7,351,684
8,500 3.46%, 2/3/95................ 8,497,243
10,100 5.625%, 8/23/95.............. 10,096,333
------------
58,958,796
------------
Federal Home Loan Mortgage
Corporation--9.0%
12,000 4.75%, 12/9/94............... 11,987,333
14,000 5.32%, 1/4/95................ 13,929,658
7,000 5.30%, 1/5/95................ 6,963,931
10,000 5.64%, 1/23/95............... 9,916,967
5,000 5.55%, 2/2/95................ 4,951,437
10,000 5.54%, 2/3/95................ 9,901,511
------------
57,650,837
------------
Federal National Mortgage
Association--14.4%
$ 2,340 8.65%, 12/12/94.............. $ 2,341,927
1,300 9.00%, 1/10/95............... 1,304,139
5,125 5.17%, 1/25/95............... 5,084,520
11,000 11.50%, 2/10/95.............. 11,131,883
7,700 5.105%, 3/9/95............... 7,592,993
8,000 5.22%, 3/20/95............... 7,873,560
15,000 5.60%, 4/18/95, F.R.N........ 14,678,000
27,000 5.57%, 6/1/95, F.R.N......... 26,994,303
15,000 5.72%, 8/25/95............... 15,000,000
------------
92,001,325
------------
Student Loan Marketing
Association--11.2%
10,500 5.59%, 12/8/94, F.R.N........ 10,499,959
3,105 5.35%, 12/30/94, F.R.N....... 3,105,682
9,790 5.89%, 12/30/94, F.R.N....... 9,792,054
9,000 5.89%, 1/16/95, F.R.N........ 9,010,953
5,000 6.19%, 3/23/95, F.R.N........ 5,008,293
6,750 6.19%, 3/27/95, F.R.N........ 6,760,843
10,000 5.81%, 4/16/95, F.R.N........ 10,000,000
17,000 5.94%, 8/7/95, F.R.N......... 17,034,305
------------
71,212,089
------------
Repurchase Agreements(D)--46.4%
9,908 Joint Repurchase Agreement
Account
5.692%, 12/1/94 (Note 5)... 9,908,000
</TABLE>
See Notes to Financial Statements.
B-43
<PAGE>
PRUDENTIAL GOVERNMENT SECURITIES TRUST
MONEY MARKET SERIES
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
Repurchase Agreements(D)--cont'd
$ 8,000 Merrill Lynch, Pierce, Fenner
& Smith, Inc., 5.625%,
dated 11/29/94, due 12/1/94
in the amount of $8,002,500
(cost $8,000,000; the value
of the collateral including
accrued interest is
$8,160,353)................ $ 8,000,000
5,000 Nomura Securities
International, Inc., 5.60%,
dated 11/30/94, due 12/2/94
in the amount of $5,001,556
(cost $5,000,000; the value
of the collateral including
accrued interest is
$5,097,150)................ 5,000,000
57,503 Goldman Sachs & Co., 5.55%,
dated 11/28/94, due 12/5/94
in the amount of
$57,565,055 (cost
$57,503,000; the value of
the collateral including
accrued interest is
$58,653,060)............... 57,503,000
56,000 Merrill Lynch, Pierce, Fenner
& Smith, Inc., 5.55%, dated
11/28/94, due 12/5/94 in
the amount of $56,060,433
(cost $56,000,000; the
value of the collateral
including accrued interest
is $57,140,688)............ 56,000,000
17,000 Bear, Stearns & Co., 5.60%,
dated 11/28/94, due 12/5/94
in the amount of
$17,018,511 (cost
$17,000,000; the value of
the collateral including
accrued interest is
$17,288,501)............... 17,000,000
$ 36,234 Bear, Stearns & Co., 5.57%,
dated 11/29/94, due 12/6/94
in the amount of
$36,273,243 (cost
$36,234,000; the value of
the collateral including
accrued interest is
$36,905,875)............... $ 36,234,000
58,000 Nomura Securities
International, Inc., 5.63%,
dated 11/30/94, due 12/7/94
in the amount of
$58,063,494 (cost
$58,000,000; the value of
the collateral including
accrued interest is
$59,160,000)............... 58,000,000
10,000 CS First Boston Corp., 5.02%,
dated 9/12/94, due 12/30/94
in the amount of
$10,151,994 (cost
$10,000,000; the value of
the collateral including
accrued interest is
$10,302,617)............... 10,000,000
7,810 CS First Boston Corp., 5.17%,
dated 10/3/94, due 12/30/94
in the amount of $7,908,701
(cost $7,810,000; the value
of the collateral including
accrued interest is
$8,039,946)................ 7,810,000
14,946 Lehman, Inc., 5.50%, dated
11/3/94, due 1/3/95 in the
amount of $15,085,288 (cost
$14,946,000; the value of
the collateral including
accrued interest is
$15,248,035)............... 14,946,000
</TABLE>
See Notes to Financial Statements.
B-44
<PAGE>
PRUDENTIAL GOVERNMENT SECURITIES TRUST
MONEY MARKET SERIES
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
Repurchase Agreements(D)--cont'd
$ 15,000 Lehman, Inc., 5.55%, dated
10/6/94, due 1/6/95 in the
amount of $15,212,750 (cost
$15,000,000; the value of
the collateral including
accrued interest is
$15,300,621)............... $ 15,000,000
------------
295,401,000
------------
Total Investments--102.2%
(amortized cost
$651,196,300*)............. 651,196,300
Liabilities in excess of
other
assets--(2.2%)............. (13,852,853)
------------
Net Assets--100%............. $637,343,447
------------
------------
</TABLE>
- ---------------
F.R.N.--Floating Rate Note.
* Federal income tax basis of portfolio securities
is the same as for financial reporting purposes.
(D) Repurchase Agreements are collateralized by U.S.
Treasury or Federal agency obligations.
See Notes to Financial Statements.
B-45
<PAGE>
PRUDENTIAL GOVERNMENT SECURITIES TRUST Portfolio of Investments
INTERMEDIATE TERM SERIES November 30, 1994
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
LONG-TERM INVESTMENTS--85.2%
Federal Home Loan Mortgage
Corporation
$ 73 8.00%, 6/1/24................ $ 69,521
------------
Federal National Mortgage
Association
21 7.50%, 10/1/01............... 20,019
------------
Government National Mortgage
Association--7.6%
6,671 6.00%, 7/20/24............... 6,372,996
4,052 6.00%, 8/20/24............... 3,870,503
8,478 6.00%, 9/20/24............... 8,099,204
------------
18,342,703
------------
United States Treasury Notes--77.6%
41,000* 4.00%, 1/31/96............... 39,603,540
17,000* 4.75%, 2/15/97............... 16,057,010
16,000* 8.50%, 4/15/97............... 16,329,920
99,000 5.125%, 11/30/98............. 90,120,690
6,000 7.25%, 8/15/04............... 5,725,320
20,000 7.875%, 11/15/04............. 19,867,969
------------
187,704,449
------------
Total long-term investments
(cost $209,737,890)........ 206,136,692
------------
SHORT-TERM INVESTMENT--0.6%
Joint Repurchase Agreement Account,
1,439 5.692%, 12/1/94 (Note 5)
(cost $1,439,000).......... 1,439,000
------------
Total Investments--85.8%
(cost $211,176,890; Note
4)......................... 207,575,692
Other assets in excess of
liabilities--14.2%......... 34,404,415
------------
Net Assets--100%............. $241,980,107
------------
------------
</TABLE>
- --------------
* Asset segregated for dollar rolls.
See Notes to Financial Statements.
B-46
<PAGE>
PRUDENTIAL GOVERNMENT SECURITIES TRUST Portfolio of Investments
U.S. TREASURY MONEY MARKET SERIES November 30, 1994
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
United States Treasury Bills--69.2%
$ 6,918 4.91%, 12/22/94.............. $ 6,898,186
22,325 4.95%, 12/22/94.............. 22,260,536
14,816 4.97%, 12/22/94.............. 14,773,046
50,000 5.06%, 12/22/94.............. 49,852,417
850 5.075%, 12/22/94............. 847,484
5,890 5.08%, 12/22/94.............. 5,872,546
13,565 5.09%, 12/22/94.............. 13,524,723
53,697 5.11%, 12/22/94.............. 53,536,938
3,000 5.13%, 12/22/94.............. 2,991,022
8,681 5.135%, 12/22/94............. 8,654,997
3,319 5.165%, 12/22/94............. 3,309,000
11,111 5.125%, 2/16/95.............. 10,989,204
10,000 4.975%, 4/6/95............... 9,825,875
------------
203,335,974
------------
United States Treasury Notes--31.1%
26,345 4.625%, 12/31/94............. 26,327,730
28,500 5.50%, 2/15/95............... 28,506,087
1,033 7.75%, 2/15/95............... 1,037,824
24,020 3.875%, 2/28/95.............. 23,930,750
11,763 5.875%, 5/15/95.............. 11,753,357
------------
91,555,748
------------
Total Investments--100.3%
(amortized cost
$294,891,722*)............. 294,891,722
Liabilities in excess of
other
assets--(0.3%)............. (907,475)
------------
Net Assets--100%............. $293,984,247
------------
------------
</TABLE>
- ---------------
* Federal income tax basis of portfolio securities is the same as for financial
reporting purposes.
See Notes to Financial Statements.
B-47
<PAGE>
PRUDENTIAL GOVERNMENT SECURITIES TRUST
Statement of Assets and Liabilities
November 30, 1994
<TABLE>
<CAPTION>
US TREASURY
MONEY MONEY
MARKET INTERMEDIATE MARKET
Assets SERIES TERM SERIES SERIES
<S> <C> <C> <C>
------------ ------------ ------------
Investments, at value (cost $651,196,300, $211,176,890 and
$294,891,722, respectively)................................... $651,196,300 $207,575,692 $294,891,722
Cash............................................................ -- -- 4,828
Interest receivable............................................. 3,328,495 1,507,746 1,260,514
Receivable for investments sold................................. -- 54,380,133 --
Receivable for Series shares sold............................... 2,580,434 37,209 1,231,273
Fees receivable on securities loaned............................ -- 17,196 --
Deferred expenses and other assets.............................. 13,457 10,022 15,725
------------ ------------ ------------
Total assets................................................ 657,118,686 263,527,998 297,404,062
------------ ------------ ------------
Liabilities
Payable for investments purchased............................... -- 19,989,792 --
Payable for Series shares reacquired............................ 18,798,972 1,061,352 2,974,191
Dividends payable............................................... 507,646 355,635 231,861
Due to Manager.................................................. 211,049 81,260 92,141
Accrued expenses and other liabilities.......................... 222,306 29,452 105,759
Due to Distributors............................................. 35,266 30,400 15,863
------------ ------------ ------------
Total liabilities........................................... 19,775,239 21,547,891 3,419,815
------------ ------------ ------------
Net Assets...................................................... $637,343,447 $241,980,107 $293,984,247
------------ ------------ ------------
------------ ------------ ------------
Net assets were comprised of:
Shares of beneficial interest, at par ($.01 per share).......... $ 6,373,434 $ 263,903 $ 2,939,842
Paid-in capital in excess of par................................ 630,970,013 326,069,502 291,044,405
------------ ------------ ------------
637,343,447 326,333,405 293,984,247
Undistributed net investment income............................. -- 2,133,743 --
Accumulated net realized losses................................. -- (82,885,843) --
Net unrealized depreciation of investments...................... -- (3,601,198) --
------------ ------------ ------------
Net assets, November 30, 1994................................... $637,343,447 $241,980,107 $293,984,247
------------ ------------ ------------
------------ ------------ ------------
Shares of beneficial interest issued and outstanding............ 637,343,447 26,390,334 293,984,247
------------ ------------ ------------
------------ ------------ ------------
Net asset value................................................. $1.00 $9.17 $1.00
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See Notes to Financial Statements.
B-48
<PAGE>
PRUDENTIAL GOVERNMENT SECURITIES TRUST
Statement of Operations
Year Ended November 30, 1994
<TABLE>
<CAPTION>
US TREASURY
MONEY MONEY
MARKET INTERMEDIATE MARKET
Net Investment Income SERIES TERM SERIES SERIES
<S> <C> <C> <C>
----------- ------------ -----------
Income
Interest...................................................... $28,983,835 $19,425,626 $11,818,912
Income from securities loaned................................. -- 22,315 --
----------- ------------ -----------
28,983,835 19,447,941 11,818,912
----------- ------------ -----------
Expenses
Management fee................................................ 2,931,469 1,229,526 1,233,814
Distribution fee.............................................. 916,084 665,503 385,567
Transfer agent's fees and expenses............................ 1,303,000 384,000 92,000
Custodian's fees and expenses................................. 163,000 120,000 41,000
Registration fees............................................. 112,000 61,000 69,000
Reports to shareholders....................................... 105,000 57,000 28,000
Audit fee..................................................... 38,000 35,000 35,000
Trustees' fees................................................ 15,200 15,200 15,200
Insurance expense............................................. 23,000 8,000 13,000
Legal fees.................................................... 7,000 16,000 4,000
Amortization of deferred organization expenses................ -- -- 7,932
Miscellaneous................................................. 3,859 4,101 2,687
----------- ------------ -----------
Total expenses.............................................. 5,617,612 2,595,330 1,927,200
----------- ------------ -----------
Net investment income........................................... 23,366,223 16,852,611 9,891,712
----------- ------------ -----------
Realized and Unrealized Gain (Loss) on Investments
Net realized gain (loss) on investment transactions............. 84,741 (15,205,293) 55,159
Net change in unrealized depreciation of investments............ -- (10,351,690) --
----------- ------------ -----------
Net gain (loss) on investments.................................. 84,741 (25,556,983) 55,159
----------- ------------ -----------
Net Increase (Decrease) in Net Assets Resulting from
Operations...................................................... $23,450,964 $(8,704,372) $9,946,871
----------- ------------ -----------
----------- ------------ -----------
</TABLE>
See Notes to Financial Statements.
B-49
<PAGE>
PRUDENTIAL GOVERNMENT SECURITIES TRUST
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
US TREASURY
MONEY MARKET INTERMEDIATE MONEY MARKET
SERIES TERM SERIES SERIES
--------------------------------- ----------------------------- ---------------------------------
Year Ended November 30,
Increase (Decrease) -----------------------------------------------------------------------------------------------------
in Net Assets 1994 1993 1994 1993 1994 1993
--------------- --------------- ------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Operations
Net investment income... $ 23,366,223 $ 24,381,889 $ 16,852,611 $ 21,862,611 $ 9,891,712 $ 6,812,533
Net realized gain (loss)
on investment
transactions.......... 84,741 240,813 (15,205,293) (234,826) 55,159 141,643
Net change in unrealized
appreciation/depreciation
of investments........ -- -- (10,351,690) 3,085,195 -- --
--------------- --------------- ------------- ------------- --------------- ---------------
Net increase (decrease)
in net assets
resulting from
operations............ 23,450,964 24,622,702 (8,704,372) 24,712,980 9,946,871 6,954,176
--------------- --------------- ------------- ------------- --------------- ---------------
Net equalization (debits)
credits................. -- -- (3,335) 4,795 -- --
--------------- --------------- ------------- ------------- --------------- ---------------
Dividends and
distributions to
shareholders:
Dividends to
shareholders.......... (23,450,964) (24,622,702) (16,669,920) (21,877,946) (9,946,871) (6,954,176)
Tax return of capital
distribution.......... -- -- (3,852,402) (702,835) -- --
--------------- --------------- ------------- ------------- --------------- ---------------
Total dividends and
distributions to
shareholders............ (23,450,964) (24,622,702) (20,522,322) (22,580,781) (9,946,871) (6,954,176)
--------------- --------------- ------------- ------------- --------------- ---------------
Series share transactions*
Net proceeds from shares
subscribed............ 1,978,695,920 2,705,725,541 86,065,731 191,340,556 1,582,592,660 1,255,246,290
Net asset value of
shares issued to
shareholders in
reinvestment of
dividends and
distributions......... 22,318,739 23,600,594 14,086,719 14,618,822 9,338,121 6,581,355
Cost of shares
reacquired............ (2,283,173,810) (2,836,010,964) (176,886,461) (163,603,524) (1,582,924,124) (1,210,449,881)
--------------- --------------- ------------- ------------- --------------- ---------------
Net increase (decrease)
in net assets from
Series share
transactions.......... (282,159,151) (106,684,829) (76,734,011) 42,355,854 9,006,657 51,377,764
--------------- --------------- ------------- ------------- --------------- ---------------
Total increase
(decrease)................ (282,159,151) (106,684,829) (105,964,040) 44,492,848 9,006,657 51,377,764
Net Assets
Beginning of year....... 919,502,598 1,026,187,427 347,944,147 303,451,299 284,977,590 233,599,826
--------------- --------------- ------------- ------------- --------------- ---------------
End of year............. $ 637,343,447 $ 919,502,598 $ 241,980,107 $ 347,944,147 $ 293,984,247 $ 284,977,590
--------------- --------------- ------------- ------------- --------------- ---------------
--------------- --------------- ------------- ------------- --------------- ---------------
</TABLE>
- ---------------
*At $1.00 per share for the Money Market Series and the U.S. Treasury Money
Market Series.
See Notes to Financial Statements.
B-50
<PAGE>
PRUDENTIAL GOVERNMENT SECURITIES TRUST
Notes to Financial Statements
Prudential Government Securities Trust (the ``Fund'') is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. The Fund consists of three series--the Money Market Series, the
Intermediate Term Series and the U.S. Treasury Money Market Series; the monies
of each series are invested in separate, independently managed portfolios.
Note 1. Significant The following is a summary
Accounting Policies of the significant accounting
policies followed by the Fund in the preparation
of its financial statements.
Securities Valuations: The Money Market Series and U.S. Treasury Money Market
Series value portfolio securities at amortized cost, which approximates market
value. The amortized cost method of valuation involves valuing a security at its
cost on the date of purchase and thereafter assuming a constant amortization to
maturity of any discount or premium.
For the Intermediate Term Series, the Trustees have authorized the use of an
independent pricing service to determine valuations. The pricing service
considers such factors as security prices, yields, maturities, call features,
ratings and developments relating to specific securities in arriving at
securities valuations. When market quotations are not readily available, a
security is valued by appraisal at its fair value as determined in good faith
under procedures established under the general supervision and responsibility of
the Trustees. Short-term securities which mature in more than 60 days are valued
at current market quotations. Short-term securities which mature in 60 days or
less are valued at amortized cost.
In connection with transactions in repurchase agreements, the Fund's
custodian or designated subcustodians, as the case may be under triparty
repurchase agreements, takes 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.
Securities Lending: The Intermediate Term Series may lend its U.S. Government
securities to broker-dealers or government securities dealers. The Fund's policy
is to receive collateral on each loan at least equal, at all times, to the
market value of the securities loaned. The Series may bear the risk of delay in
recovery of, or even loss of rights in, the collateral should the borrower of
the securities fail financially. The Series receives compensation for lending
its securities in the form of fees or it retains a portion of interest on the
investment of any cash received as collateral. The Series also continues to
receive interest on the securities loaned, and any gain or loss in the market
price of the securities loaned that may occur during the term of the loan will
be for the account of the Series.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of portfolio
securities are calculated on the identified cost basis. Interest income is
recorded on the accrual basis. The Money Market and the U.S. Treasury Money
Market Series' amortize discounts and premiums on purchases of portfolio
securities as adjustments to income. For the Intermediate Term Series, gains or
losses resulting from discounts or premiums on purchased securities are treated
as capital gains or losses when realized upon disposal.
Dollar Rolls: The Intermediate Term Series enters into dollar roll transactions
in which the Series sells securities for delivery in the current month,
realizing a gain or loss, and simultaneously contracts to repurchase somewhat
similar (same type, coupon and maturity) securities on a specified future date.
During the roll period the Intermediate Term Series forgoes principal and
interest paid on the securities. The Series is compensated by the interest
earned on the cash proceeds of the initial sale and by the lower repurchase
price at the future date. The difference between the sale proceeds and the lower
repurchase price is taken into income. The Intermediate Term Series maintains a
segregated account, the dollar value of which is equal to its obligations in
respect of dollar rolls.
Federal Income Taxes: For federal income tax purposes, each series of the Fund
is treated as a separate taxable entity. It is each Series' policy to continue
to meet the requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of its taxable net income to its
shareholders. Therefore, no federal income tax provision is required.
Equalization: The Intermediate Term Series follows the accounting practice known
as equalization by which a portion of the proceeds from sales and costs of
reacquisitions of its shares, equivalent on a per share basis to the amount of
distributable net investment income on the date of the transaction, is credited
or charged to undistributed net investment
B-51
<PAGE>
income. As a result, undistributed net investment income per share is unaffected
by sales or reacquisitions of the shares.
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies. For
the Intermediate Term Series, the effect of applying this statement was to
increase undistributed net investment income by $3,909,174, increase accumulated
net realized losses by $56,772 for market discount recognized on securities sold
and decrease paid-in capital in excess of par by $3,852,402 for tax return of
capital distributions. Current year net investment income, net realized losses
and net assets were not affected by this change.
Deferred Organization Expenses: Approximately $49,000 of expenses were incurred
in connection with the organization and initial registration of the U.S.
Treasury Series and such amount has been deferred and is being amortized over a
period of 60 months ending December, 1995.
Dividends and Distributions: The Money Market Series and U.S. Treasury Money
Market Series declare daily dividends from net investment income and net
short-term capital gains and losses. Dividends are paid monthly.
The Intermediate Term Series declares dividends from net investment income
daily; payment of dividends is made monthly. Distributions of net capital gains,
if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
Note 2. Agreements The Fund has a management
agreement with Prudential Mutual Fund Management,
Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PMF has entered into a subadvisory agreement with The Prudential
Investment Corporation (``PIC''); PIC furnishes investment advisory services in
connection with the management of the Fund. PMF pays for the cost of the
subadviser's services, the compensation of officers of the Fund, occupancy and
certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid to PMF is computed daily and payable monthly, at an
annual rate of .40 of 1% of the average daily net assets of the Intermediate
Term Series and the U.S. Treasury Money Market Series. With respect to the Money
Market Series, the management fee is payable as follows: .40 of 1% of average
daily net assets up to $1 billion, .375 of 1% of average daily net assets
between $1 billion and $1.5 billion and .35 of 1% in excess of $1.5 billion.
To reimburse Prudential Mutual Fund Distributors, Inc. (``PMFD'') as
distributor of the shares of the Money Market Series and the U.S. Treasury Money
Market Series, each series has entered into a distribution agreement pursuant to
which each series pays PMFD a reimbursement, accrued daily and payable monthly,
at an annual rate of .125% of each of the series' average daily net assets. PMFD
pays various broker-dealers, including Prudential Securities Incorporated
(``PSI'') and Pruco Securities Corporation (``Pruco''), affiliated
broker-dealers, for account servicing fees and for the expenses incurred by such
broker-dealers.
To reimburse PSI for its expenses as distributor of the Intermediate Term
Series, the Intermediate Term Series has entered into a distribution agreement
and a plan of distribution pursuant to which it pays PSI a fee, accrued daily
and payable monthly, at an annual rate of .25 of 1% of the lesser of (a) the
aggregate sales of shares issued (not including reinvestment of dividends and
distributions) on or after July 1, 1985 (the effective date of the plan) less
the aggregate net asset value of any such shares redeemed, or (b) the average
net asset value of the shares issued after the effective date of the plan.
Distribution expenses include commission credits to PSI branch offices for
payments of commissions and account servicing fees to financial advisers and an
allocation on account of overhead and other distribution-related expenses, the
cost of printing and mailing prospectuses to potential investors and of
advertising incurred in connection with the distribution of series shares. In
addition, PSI pays other broker-dealers, including Pruco, an affiliated
broker-dealer, for account servicing fees and other expenses incurred by such
broker-dealers in distributing these shares.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are (indirect)
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund Ser-
Transactions vices, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the year ended November 30, 1994, the Fund incurred fees of approximately
$1,066,000, $267,000, and $79,000, respectively, for the Money Market Series,
Intermediate Term Series, and U.S. Treasury Money Market Series. As of November
30, 1994, approximately $79,000, $20,000, and $6,000 of such fees were due to
PMFS from the Money Market Series, Intermediate
B-52
<PAGE>
Term Series and U.S. Treasury Money Market Series, respectively. Transfer agent
fees and expenses in the Statement of Operations includes certain out-of-pocket
expenses paid to non-affiliates.
Note 4. Portfolio Purchases and sales of port-
Securities folio securities other than
short-term investments, for
the Intermediate Term Series, for the year ended November 30, 1994 were
$1,226,973,317 and $1,333,353,540, respectively.
For the Intermediate Term Series the cost basis of investments for federal
income tax purposes was $211,627,944 and, accordingly, as of November 30, 1994,
net and gross unrealized depreciation of investments for federal income tax
purposes was $4,052,252.
For federal income tax purposes, the Intermediate Term Series has a capital
loss carryforward as of November 30, 1994 of approximately $79,007,000 of which
$25,173,000 expires in 1995, $11,426,000 expires in 1996, $19,180,000 expires in
1997, $6,864,000 expires in 1998, $4,746,000 expires in 1999, $235,000 expires
in 2001, and $11,383,000 expires in 2002. Accordingly, no capital gains
distribution is expected to be paid to shareholders until net gains have been
realized in excess of such carryforward.
The Intermediate Term Series will elect to treat net capital losses of
approximately $3,428,300 incurred in the one month period ended November 30,
1994 as having incurred in the following fiscal year.
Note 5. Joint The Fund, along with other
Repurchase affiliated registered invest-
Agreement Account ment companies, transfers
uninvested cash balances into a single joint
account, the daily aggregate balance of which is invested in one or more
repurchase agreements collateralized by U.S. Treasury or federal agency
obligations. As of November 30, 1994, the Money Market Series and the
Intermediate Term Series had 1.3% and 0.2%, respectively, undivided interests in
the repurchase agreements in the joint account. These undivided interests
represented $9,908,000 and $1,439,000, respectively, in principal amount. As of
such date, the repurchase agreements in the joint account and the value of the
collateral therefor were as follows:
Goldman, Sachs & Co., 5.70%, in the principal amount of $250,000,000,
repurchase price $250,039,583, due 12/1/94. The value of the collateral
including accrued interest is $255,000,187.
Morgan (J.P.) Securities Inc., 5.68%, in the principal amount of
$200,000,000, repurchase price $200,031,556, due 12/1/94. The value of the
collateral including accrued interest is $204,329,069.
Morgan Stanley & Co. Inc., 5.68%, in the principal amount of $200,000,000,
repurchase price $200,031,556, due 12/1/94. The value of the collateral
including accrued interest is $204,148,271.
Smith Barney, Inc., 5.72%, in the principal amount of $100,000,000,
repurchase price $100,015,889, due 12/1/94. The value of the collateral
including accrued interest is $102,000,653.
Note 6. Capital Each series has authorized an
unlimited number of shares
of beneficial interest at $.01 par value. Transactions in shares of beneficial
interest for the Intermediate Term Series for the fiscal years ended November
30, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
Year Ended November 30,
--------------------------------
1994 1993
-------------- --------------
<S> <C> <C>
Shares sold................... 8,712,001 18,902,083
Shares issued in reinvestment
of dividends and
distributions............... 1,465,698 1,439,530
Shares reacquired............. (18,375,629) (16,203,923)
-------------- --------------
Net increase (decrease)....... (8,197,930) 4,137,690
-------------- --------------
-------------- --------------
</TABLE>
B-53
<PAGE>
PRUDENTIAL GOVERNMENT SECURITIES TRUST
MONEY MARKET SERIES
Financial Highlights
<TABLE>
<CAPTION>
Year Ended November 30,
----------------------------------------------------------
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
-------- -------- ---------- ---------- ----------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year........................ $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Net investment income..................................... 0.033 0.026 0.035 0.058 0.076
Dividends from net investment income...................... (0.033) (0.026) (0.035) (0.058) (0.076)
-------- -------- ---------- ---------- ----------
Net asset value, end of year.............................. $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- ---------- ---------- ----------
-------- -------- ---------- ---------- ----------
TOTAL RETURN#:............................................ 3.29% 2.62% 3.57% 5.96% 7.83%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)............................. $637,343 $919,503 $1,026,187 $1,212,836 $1,355,058
Average net assets (000).................................. $732,867 $950,988 $1,113,759 $1,255,014 $ 857,385
Ratios to average net assets:
Expenses, including distribution fees................... 0.77% 0.72% 0.72% 0.65% 0.66%
Expenses, excluding distribution fees................... 0.64% 0.59% 0.60% 0.53% 0.53%
Net investment income................................... 3.19% 2.56% 3.42% 5.78% 7.52%
</TABLE>
- ---------------
# 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-54
<PAGE>
PRUDENTIAL GOVERNMENT SECURITIES TRUST
INTERMEDIATE TERM SERIES
Financial Highlights
<TABLE>
<CAPTION>
Year Ended November 30,
----------------------------------------------------
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
-------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............................ $ 10.06 $ 9.97 $ 10.00 $ 9.71 $ 9.96
-------- -------- -------- -------- --------
Income from investment operations
Net investment income......................................... 0.64 0.69 0.75 0.82 0.84
Net realized and unrealized gain (loss) on investment
transactions................................................ (0.89) 0.11 (0.03) 0.31 (0.21)
-------- -------- -------- -------- --------
Total from investment operations............................ (0.25) 0.80 0.72 1.13 0.63
-------- -------- -------- -------- --------
Less distributions
Dividends from net investment income.......................... (0.52) (0.69) (0.75) (0.84) (0.88)
Tax return of capital distribution............................ (0.12) (0.02) -- -- --
-------- -------- -------- -------- --------
Total distributions........................................... (0.64) (0.71) (0.75) (0.84) (0.88)
-------- -------- -------- -------- --------
Net asset value, end of year.................................. $ 9.17 $ 10.06 $ 9.97 $ 10.00 $ 9.71
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN#................................................. (2.58)% 8.26% 7.40% 12.19% 6.73%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................................. $241,980 $347,944 $303,451 $298,086 $328,458
Average net assets (000)...................................... $307,382 $321,538 $294,388 $301,643 $354,064
Ratios to average net assets:
Expenses, including distribution fees....................... 0.84% 0.80% 0.79% 0.79% 0.88%
Expenses, excluding distribution fees....................... 0.63% 0.59% 0.58% 0.63% 0.63%
Net investment income....................................... 5.48% 6.80% 7.47% 8.36% 8.60%
Portfolio turnover rate....................................... 431% 44% 60% 151% 68%
</TABLE>
- ---------------
# 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-55
<PAGE>
PRUDENTIAL GOVERNMENT SECURITIES TRUST
U.S. TREASURY MONEY MARKET SERIES
Financial Highlights
<TABLE>
<CAPTION>
December 3,
1990*
Year Ended November 30, Through
------------------------------------------ November 30,
1994 1993 1992 1991
<S> <C> <C> <C> <C>
------------ ------------ ------------ ------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................ $ 1.000 $ 1.000 $ 1.000 $ 1.000
Net investment income........................................... 0.033 0.025 0.034 0.057(D)(D)
Dividends from net investment income............................ (0.033) (0.025) (0.034) (0.057)
------------ ------------ ------------ ------------
Net asset value, end of period.................................. $ 1.000 $ 1.000 $ 1.000 $ 1.000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
TOTAL RETURN#................................................... 3.31% 2.54% 3.46% 5.84%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................................. $293,984 $284,978 $233,600 $288,922
Average net assets (000)........................................ $308,454 $273,313 $263,459 $273,203
Ratios to average net assets:
Expenses, including distribution fees......................... 0.62% 0.66% 0.66% 0.50%(D)/(D)(D)
Expenses, excluding distribution fees......................... 0.50% 0.53% 0.54% 0.38%(D)/(D)(D)
Net investment income......................................... 3.21% 2.49% 3.29% 5.74%(D)/(D)(D)
</TABLE>
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* Commencement of investment operations.
(D) Annualized.
(D)(D) Net of expense subsidy.
# Total return is calculated assuming a purchase of shares on the first
day and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total return for a period
of less than one year is not annualized.
See Notes to Financial Statements.
B-56
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Trustees of
Prudential Government Securities Trust:
In our opinion, the accompanying statements of assets and liabilities,
including the schedules 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 Money Market Series, Intermediate
Term Series and U.S. Treasury Money Market Series (constituting Prudential
Government Securities Trust, hereafter referred to as the ``Fund'') at November
30, 1994, the results of each of their operations for the year then ended, the
changes in each of their 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
November 30, 1994 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
January 16, 1995
B-57
<PAGE>
APPENDIX A
GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
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 and 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 (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 off-set
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.
A-1
<PAGE>
APPENDIX B
HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
This chart shows the long-term performance of various asset classes and the
rate of inflation.
(CHART-Long-Term Performance of Small Stocks, Common Stocks, Long-Term
Government Bonds, Treasury Bills and Inflation [1925-1994])
Source: Stocks, Bonds, Bills and Inflation 1995 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. This chart is for illustrative
purposes only and is not indicative of the past, present, or future performance
of any asset class or any Prudential Mutual Fund.
Generally, stock returns are attributable to capital appreciation and the
reinvestment of distributions. Bond returns are attributable mainly to the
reinvestment of distributions. Also, stock prices are usually more volatile than
bond prices over the long-term.
Small stock returns for 1926-1989 are those of stocks comprising the 5th
quintile of the New York Stock Exchange. Thereafter, returns are those of the
Dimensional Fund Advisors (DFA) Small Company Fund. Common stock returns are
based on the S&P Composite Index, a market-weighted, unmanaged index of 500
stocks (currently) in a variety of industries. It is often used as a broad
measure of stock market performance.
Long-term government bond returns are represented by a portfolio that contains
only one bond with a maturity of roughly 20 years. At the beginning of each year
a new bond with a then-current coupon replaces the old bond. Treasury bill
returns are for a one-month bill. Treasuries are guaranteed by the government as
to the timely payment of principal and interest; equities are not. Inflation by
the consumer price index (CPI).
B-1
<PAGE>
Set forth below is historical performance data relating to various sectors of
the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1987 to
May 1995. The total returns of the indices include accrued interest, plus the
price changes (gains or losses) of the underlying securities during the period
mentioned. The data is provided to illustrate the varying historical total
returns and investors should not consider this performance data as an indication
of the future performance of the Trust or of any sector in which the Trust
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 ``Trust Expenses'' in the prospectus. The net effect of the
deduction of the operating expenses of a mutual fund on the historical total
returns, including the compounded effect over time, could be substantial.
(CHART-Historical Total Returns of Different Bond Market Sectors)
1Lehman 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.
2Lehman Brothers Mortgage-Backed Securities Index is an unmanaged index that
includes over 600 15-and 30-year fixed-rate mortgaged-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
3Lehman 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.
4Lehman 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.
5Salomon Brothers World Government Index (Non U.S.) includes 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.
B-2
<PAGE>
The chart below shows the historical volatility of general interest rates as
measured by the long U.S. Treasury Bond.
(CHART-Long U.S. Treasury Bond Yield in Percent [1926-1994])
- ------------------
Source: Stocks, Bonds, Bills and Inflation 1995 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. This chart illustrates the historical
yield of the long-term U.S. Treasury Bond from 1926-1994. Yields represent that
of an annually renewed one-bond portfolio with a remaining maturity of
approximately 20 years. This chart is for illustrative purposes only and should
not be construed to represent the yields of any Prudential Mutual Fund.
B-3
